Chart of the Week - Corporate Interest Expense
Interesting charts on interest expense...
n.b. Check out the full archives of the Chart Of The Week for more charts.
Chart of the Week - Corporate Interest Expense
Of Interest: The chart below shows trailing 12-months effective funding costs for (non-financial) listed companies. Specifically it takes interest expense and divides it by net-debt. Basically it’s the actual effective interest rate that corporates are paying.
What is interesting is the fact that across all the major chunks of global equities, this metric is trending higher.
Emerging markets (EM) rose earlier and sharper as EM central banks were first to pivot to rate hikes and basically went earlier and harder than developed markets (DM). But interest expense is headed higher across the board.
As highlighted in the latest report, total interest expense has surged (up more than 20% across most countries/regions), and while this along with surging costs in general has put a dampener on profit margins globally, but so far corporates have managed to absorb higher interest expense.
The chart below shows the trend in interest coverage ratios (EBIT divided by net interest expense — how well a company can service the interest on its borrowings). The chart displays the metric in quartiles (upper quartile, lower quartile, median) across 45 countries.
As noted, and as is clear in the chart, companies have been able to absorb the surge in interest expense so far — with interest coverage tracking at solid levels across most countries.
That may change if borrowing costs increase further, and if the top-line comes under pressure — which until recently had been going strong, thanks to a boost in nominal GDP …recall: businesses basically bank inflation (at least to extent they can pass higher costs through).
In terms of the top line though, we’ve observed a steadily weakening macro pulse (slowing growth of hard data and generally weak survey data) — this is starting to be echoed in slower sales growth rates, which makes for a steadily deteriorating outlook for global equities.
Key point: Corporate interest expense is on the rise (an increasing headwind).
Aside from the free Chart Of The Week, this email gives you a brief overview of what was covered in our latest Weekly Insights Report (which is a key part of the Topdown Charts entry-level service on Substack)
Topics covered in the latest Weekly Insights Report
Aside from the charts above, we looked at a several other charts across some important and interesting macro/asset allocation issues:
Market Update: key developments across global markets
Global Equity Technicals: tracking the correction + outlook
Global Equity Fundamentals: notable developments in financial stats
Global vs US Equities: when will the turning point come?
US Dollar: charts mapping the medium-term outlook
REITs: risk vs opportunity in listed real estate
EM Sovereign: an increasingly attractive corner of the market
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Thanks for your interest. Feedback and thoughts welcome.
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Callum Thomas
Head of Research and Founder at Topdown Charts
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