>GLOBAL EQUITY STRATEGIST: Margins Migrate West, Sales Migrate East

■ Margin Highs, Margin Lows — Non-financial corporate profit margins in the US and Europe are near pre-crisis highs. Investors worry this is unsustainable. By contrast, Asia ex Japan margins are close to their lowest levels in two decades.


■ Globalisation At Work — Asian companies have pursued a sales-maximising business strategy, which is consistent with lower margins. At the same time, US and European companies have adopted a margin-maximising strategy, which is consistent with lower turnover. Margins have migrated from East to West.


■ Competitive Advantages — A sales-maximising business model allows Asian companies to exploit their competitive advantage of cheap labour. While US and European margins have been rising, there hasn’t been much new capex to compete away these super-normal profits.


■ Margin Outlook — Those waiting for the mean-reversion of US/European margins may be disappointed. We believe high Western margins are sustainable. Asia’s wafer-thin margins make it sensitive to swings in global growth. The region should remain high beta until business models reverse. We believe Japanese companies
are neither margin nor sales maximisers so the region deserves a discount rating.


To read full report: GLOBAL STRATEGY
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