When notorious US bank robber Willie Sutton was asked why he repeatedly robbed banks, he allegedly replied “That’s where the money is.” This approach evolved into Sutton’s Law, which states that when analysing a problem, one should first consider the most obvious, or likely solution.
Sutton’s Law is often applied in medicine, where it suggests doctors should first test for the most obvious diagnosis, rather than waste time and money on less likely conditions. It is also relevant to other fields of expertise, including business and investment. It helps investors to focus on the obvious facts and not become distracted by irrelevant details or unlikely scenarios.
The investment landscape is rarely clear. This year, we have tried to navigate the impact of the ongoing war in Ukraine, rising energy costs, Middle Eastern conflict, in addition to the more usual factors such as the resilience of inflation and the timing and direction of the next move in interest rates.
It is important for investors to differentiate between what they know, but also to think about the consequences of what they don’t know. In our experience, this means focussing on fundamentals, rather than timing. A good starting point is to find where the money is!
Recovery: Corporates are in good shape
One healthy dynamic has been the rise in corporate cash balances (chart below). Businesses, conserved cash through the Covid pandemic to ensure their survival. They also used attractive lending rates to term out their debt (Chart below). As a result, businesses are frequently enjoying the benefit of higher short-term interest rates on their cash, while their borrowings are still secured at attractive levels.