Low interest rates and massive stimulus-fueled debt raise investor concerns about potential long-term fallout. But when the cost of capital is this low, it revs up funding for innovation that ultimately fills the pipeline with robust opportunities, especially in technology.
Many investors are concerned what near-zero interest rates and the global economic fallout that aggressive stimulus measures may bring. Some concerns are understandable. But in fact, we see a silver lining in the lower cost of capital created by this environment. First, it helps generate ample, low-cost funding for innovative businesses and auspicious startups. Moreover, it can reward companies that proactively invest in research and development (R&D) to expand their growth opportunities.
Today’s low rates favor future growth initiatives, like R&D and venture capital (VC), especially in the innovation-charged technology sector. Beyond technology, areas like retail, healthcare, and even industrials and materials are also benefiting from innovation. As technological innovation continues to lower entry barriers, we have seen companies investing more heavily in forward-looking initiatives that can fuel growth as well as fortify their competitive moat.
Venture Capital and R&D Are Flashing Green
Equity investors with an innovation focus have been rewarded this year. There are many examples of how the pandemic accelerated innovation themes that were already on a success path before the crisis (digital migration and fintech come to mind). But the pandemic also worked to spotlight innovative startups with long-term potential.
With the cost of capital support so historically low, VC providers are more than eager to invest in promising enterprises. And in technology, healthcare and other R&D-intensive sectors, VC flows are approaching record highs (Display). This helps provide a bigger and promising pipeline of potential future winners for investors in publicly traded companies.
The low-rate environment also supports R&D investing—a bare necessity for any technology leader committed to staying relevant. Making smart investments helps enhance their outlook, generates opportunities and adds tangible long-term value, especially in investors’ minds.
In fact, companies that invest in R&D are being rewarded by the market, much more than those that resort to financial engineering, according to our research. We sampled 1,500 global companies across technology, healthcare, capital goods, autos and materials and consumer-discretionary sectors. Results showed R&D intensity, as measured by R&D/Sales, to be a significant positive contributor to future stock price performance. This especially bodes well for technology’s outlook, because more tech leaders are rightfully spending on R&D to stay ahead of consumer needs and other market forces that can shift on a dime.