Intangible Assets Take Center Stage
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In 2018, intangible assets for S&P 500 companies hit a record value of $21 trillion. These assets, which are not physical in nature and include things like intellectual property, have rapidly risen in importance compared to tangible assets like cash.
Today’s infographic from Raconteur highlights the growth of intangible asset valuations, and how senior decision-makers view intangibles when making investment decisions.
Tracking the Growth of Intangibles
Intangibles used to play a much smaller role than they do now, with physical assets comprising the majority of value for most enterprise companies. However, an increasingly competitive and digital economy has placed the focus on things like intellectual property, as companies race to out-innovate one another.
To measure this historical shift, Aon and the Ponemon Institute analyzed the value of intangible and tangible assets over nearly four and a half decades on the S&P 500. Here’s how they stack up:
In just 43 years, intangibles have evolved from a supporting asset into a major consideration for investors – today, they make up 84% of all enterprise value on the S&P 500, a massive increase from just 17% in 1975.
The Largest Companies by Intangible Value
Digital-centric sectors, such as internet & software and technology & IT, are heavily reliant on intangible assets.
Brand Finance, which produces an annual ranking of companies based on intangible value, has companies in these sectors taking the top five spots on the 2019 edition of their report.
|Rank||Company||Sector||Total Intangible Value||Share of Enterprise Value|
|1||Microsoft||Internet & Software||$904B||90%|
|2||Amazon||Internet & Software||$839B||93%|
|3||Apple||Technology & IT||$675B||77%|
|4||Alphabet||Internet & Software||$521B||65%|
|5||Internet & Software||$409B||79%|
|7||Tencent||Internet & Software||$365B||88%|
|8||Johnson & Johnson||Pharma||$361B||101%|
|10||Alibaba||Internet & Software||$344B||86%|
|12||Procter & Gamble||Cosmetics & Personal Care||$305B||101%|
Note: Percentages may exceed 100% due to rounding.
Microsoft overtook Amazon for the top spot in the ranking for 2019, with $904B in intangible assets. The company has the largest commercial cloud business in the world.
Pharma and healthcare companies are also prominent on the list, comprising four of the top 20. Their intangible value is largely driven by patents, as well as mergers and acquisitions. Johnson & Johnson, for example, reported $32B in patents and trademarks in their latest annual report.
A Lack of Disclosure
It’s important to note that Brand Finance’s ranking is based on both disclosed intangibles—those that are reported on a company’s balance sheet—and undisclosed intangibles. In the ranking, undisclosed intangibles were calculated as the difference between a company’s market value and book value.
The majority of intangibles are not reported on balance sheets because accounting standards do not recognize them until a transaction has occurred to support their value. While many accounting managers see this as a prudent measure to stop unsubstantiated asset values, it means that many highly valuable intangibles never appear in financial reporting. In fact, 34% of the total worth of the world’s publicly traded companies is made up of undisclosed value.
“It is time for CEOs, CFOs, and CMOs to start a long overdue reporting revolution.”
—David Haigh, CEO of Brand Finance
Brand Finance believes that companies should regularly value each intangible asset, including the key assumptions management made when deriving their value. This information would be extremely useful for managers, investors, and other stakeholders.
A Key Consideration
Investment professionals certainly agree on the importance of intangibles. In a survey of institutional investors by Columbia Threadneedle, it was found that 95% agreed that intangible assets contain crucial information about the future strength of a company’s business model.
Moreover, 98% agree that more transparency would be beneficial to their assessment of intangible assets. In the absence of robust reporting, Columbia Threadneedle believes active managers are well equipped to understand intangible asset values due to their access to management, relationships with key opinion leaders, and deep industry expertise.
By undertaking rigorous analysis, managers may uncover hidden competitive advantages—and generate higher potential returns in the process.
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Interest Rate Hikes vs. Inflation Rate, by Country
Inflation rates are reaching multi-decade highs in some countries. How aggressive have central banks been with interest rate hikes?
Interest Rate Hikes vs. Inflation Rate, by Country
Imagine today’s high inflation like a car speeding down a hill. In order to slow it down, you need to hit the brakes. In this case, the “brakes” are interest rate hikes intended to slow spending. However, some central banks are hitting the brakes faster than others.
This graphic uses data from central banks and government websites to show how policy interest rates and inflation rates have changed since the start of the year. It was inspired by a chart created by Macrobond.
How Do Interest Rate Hikes Combat Inflation?
To understand how interest rates influence inflation, we need to understand how inflation works. Inflation is the result of too much money chasing too few goods. Over the last several months, this has occurred amid a surge in demand and supply chain disruptions worsened by Russia’s invasion of Ukraine.
In an effort to combat inflation, central banks will raise their policy rate. This is the rate they charge commercial banks for loans or pay commercial banks for deposits. Commercial banks pass on a portion of these higher rates to their customers, which reduces the purchasing power of businesses and consumers. For example, it becomes more expensive to borrow money for a house or car.
Ultimately, interest rate hikes act to slow spending and encourage saving. This motivates companies to increase prices at a slower rate, or lower prices, to stimulate demand.
Rising Interest Rates and Inflation
With inflation rates hitting multi-decade highs in some countries, many central banks have announced interest rate hikes. Below, we show how the inflation rate and policy interest rate have changed for select countries and regions since January 2022. The jurisdictions are ordered from highest to lowest current inflation rate.
|Jurisdiction||Jan 2022 Inflation||May 2022 Inflation||Jan 2022 Policy Rate||Jun 2022 Policy Rate|
The Euro area has 3 policy rates; the data above represents the main refinancing operations rate. Inflation data is as of May 2022 except for New Zealand and Australia, where the latest quarterly data is as of March 2022.
The U.S. Federal Reserve has been the most aggressive with its interest rate hikes. It has raised its policy rate by 1.5% since January, with half of that increase occurring at the June 2022 meeting. Jerome Powell, the Federal Reserve chair, said the committee would like to “do a little more front-end loading” to bring policy rates to normal levels. The action comes as the U.S. faces its highest inflation rate in 40 years.
On the other hand, the European Union is experiencing inflation of 8.1% but has not yet raised its policy rate. The European Central Bank has, however, provided clear forward guidance. It intends to raise rates by 0.25% in July, by a possibly larger increment in September, and with gradual but sustained increases thereafter. Clear forward guidance is intended to help people make spending and investment decisions, and avoid surprises that could disrupt markets.
Pacing Interest Rate Hikes
Raising interest rates is a fine balancing act. If central banks raise rates too quickly, it’s like slamming the brakes on that car speeding downhill: the economy could come to a standstill. This occurred in the U.S. in the 1980’s when the Federal Reserve, led by Chair Paul Volcker, raised the policy rate to 20%. The economy went into a recession, though the aggressive monetary policy did eventually tame double digit inflation.
However, if rates are raised too slowly, inflation could gather enough momentum that it becomes difficult to stop. The longer high price increases linger, the more future inflation expectations build. This can result in people buying more in anticipation of prices rising further, perpetuating high demand.
“There’s always a risk of going too far or not going far enough, and it’s going to be a very difficult judgment to make.” — Jerome Powell, U.S. Federal Reserve Chair
It’s worth noting that while central banks can influence demand through policy rates, this is only one side of the equation. Inflation is also being caused by supply chain issues, a problem that is more or less outside of the control of central banks.
3 Insights From the FED’s Latest Economic Snapshot
Stay up to date on the U.S. economy with this infographic summarizing the most recent Federal Reserve data released.
3 Insights From the Latest U.S. Economic Data
Each month, the Federal Reserve Bank of New York publishes monthly economic snapshots.
To make this report accessible to a wider audience, we’ve identified the three most important takeaways from the report and compiled them into one infographic.
1. Growth figures in Q2 will make or break a recession
Generally speaking, a recession begins when an economy exhibits two consecutive quarters of negative GDP growth. Because U.S. GDP shrank by -1.5% in Q1 2022 (January to March), a lot rests on the Q2 figure (April to June) which should be released on July 28th.
Referencing strong business activity and continued growth in consumer spending, economists predict that U.S. GDP will grow by +2.1% in Q2. This would mark a decisive reversal from Q1, and put an end to recessionary fears for the time being.
Unfortunately, inflation is the top financial concern for Americans, and this is dampening consumer confidence. Shown below, the consumer confidence index reflects the public’s short-term outlook for income, business, and labor conditions.
Falling consumer confidence suggests that more people will delay big purchases such as cars, major appliances, and vacations.
2. The COVID-era housing boom could be over
Housing markets have been riding high since the beginning of the COVID-19 pandemic, but this run is likely coming to an end. Here’s a summary of what’s happened since 2020:
- Lockdowns in early 2020 created lots of pent-up demand for homes
- Greater household savings and record-low mortgage rates pushed demand even further
- Supply chain disruptions greatly increased the cost of materials like lumber
- Construction of new homes couldn’t keep up, and housing supply fell to historic lows
Today, home prices are at record highs and the cost of borrowing is rapidly rising. For evidence, look no further than the 30-year fixed mortgage rate, which has doubled to more than 6% since the beginning of 2022.
Given these developments, the drop in the number of home sales could be a sign that many Americans are being priced out of the market.
3. Don’t expect groceries to become any cheaper
Inflation has been a hot topic this year, especially with gas prices reaching $5 a gallon. But there’s one category of goods that’s perhaps even more alarming: food.
The following table includes food inflation over the past three years, as the percent change over the past 12 months.
|Date||CPI Food Component (%)|
From this data, we can see that food inflation really picked up speed in April 2020, jumping to +3.5% from +1.9% in the previous month. This was due to supply chain disruptions and a sudden rebound in global demand.
Fast forward to today, and food inflation is running rampant at 10.1%. A contributing factor is the impending fertilizer shortage, which stems from the Ukraine war. As it turns out, Russia is not only a massive exporter of oil, but wheat and fertilizer as well.
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