This is an article portfolio manager Christopher Joye published on Livewire recently.
Our thesis is simple: capitalism is dying and the myopic public policy statism replacing it is breeding a new wave of zombie companies that cannot survive in a normalised interest rate world. These zombies have loaded up on debt they can only just service at the lowest recorded interest rates in modern human history. When I first published this zombie research, I was somewhat surprised by the attention it garnered. I roll out different elements of our quant analysis every so often, and ordinarily this stuff flies through to the keeper. But it was evident that there was a visceral interest in who the zombies actually are – I got numerous requests to reveal the names. In this column I have had my data scientists update the numbers and also extend the definition of what a zombie is. Read the full column here (or AFR subs can click here). Excerpt enclosed:
Interestingly, our results for Australia are almost identical in terms of both the directional trend and the actual share of zombies to the BIS’s findings for developed countries, which suggests that the rise of zombies is a global phenomenon.
We conclude that almost 15 per cent of all ASX stocks are zombies based on our broader definition, which shrinks to about 7.5 per cent if we impose the extra requirement of low expected growth.
Crucially, these shares are both rising fast: the number of observed zombies on both definitions has increased 50 per cent since 2010.
The emergence of an expanding cohort of zombies casts into sharp relief the trade-offs of hyper-stimulatory monetary policy.
As the BIS notes, reducing interest rates boosts employment, investment and economic growth in the short term. But to the extent that this is generating fake growth, and capitalism’s creative destruction is being thwarted by allowing bad businesses to survive when they would otherwise die, central banks could be undermining future productivity and growth outcomes.
Or, in the words of the BIS’s authors, “the survival of zombie firms may crowd out investment in and employment at healthy firms”. “Our findings confirm these effects for more countries and a longer period.”
