Andrew Williams | Consequences make a comeback as 'free money' era ends

What if there were no tomorrow?" wonders Phil Connors, the misanthropic weatherman played by Bill Murray in Groundhog Day. "No tomorrow?" replies Gus, one of two passengers Phil is driving home after a very long night at a local bar. "That would mean there would be no consequences. There would be no hangovers. We could do whatever we wanted!" "That is true," agrees Phil. "We could do whatever we want ..."

At some point after the global financial crisis of 2008/09, a similar realisation must have hit the managers of countless businesses as quantitative easing brought interest rates close to zero across the world's major markets. If money is effectively free, then there are no consequences to poor decisions. Spent borrowed money unwisely? Just go back and borrow some more. "There would be no hangovers. We could do whatever we wanted!"

Confident (or hating the fact) he was reliving the same day over and over, Phil's way of testing this 'no consequences' theory was to drive the car onto the railway tracks and into the path of an oncoming train – duly waking up unscathed the next day, as did his passengers. Nevertheless, Murray's character was destined, eventually, to see another tomorrow – and interest rates, eventually, were always destined to rise.

Changed environment

A significant – if not the most significant – impact of rising interest rates is that the era of unlimited free money would seem to be over. Whether we actively register it or not, we can all intuitively feel the changed environment around us. The chances, for example, of an Uber arriving in the time it takes to stand up from your restaurant table and put on your coat, before travelling across your hometown for £5, are now vanishingly thin.

In the last five years alone, Uber spent more than $30bn (£23.3bn) of investors' cash subsidising your trip home – happy to lose money chasing market share, in a bid to squeeze out competitors, before focusing on profits. But what if a company achieves scale, as surely Uber has – operating across 10,500 cities in 72 countries, with 118m monthly users and 6.3bn rides – yet still cannot make an economic return on capital? What then?

WeWork is the highest-profile casualty so far. Having got one call right in a row, Softbank CEO Masayoshi Son then decided to bet the house on disruption, burning through the equivalent of the GDP of Jamaica by becoming WeWork's biggest investor. In the end, just short of $17bn of investors' money was wasted. Unfortunately, WeWork will not be the last casualty of this more normalised economic environment.

As consumers, we have been spoiled. Investors have subsidised our Spotify listening, our Netflix bingeing (creating along the way the golden age of TV content) and the deliveries of all manner of goods bought on the internet. Uneconomic pricing has been used as a Trojan horse into our life across many different business models, disrupting markets and allowing start-ups to capture significant market share.

Again, when interest rates are zero, it is easy for private equity and venture capital investors to be generous. It is easy to disrupt too – but the 'not-for-profit' tech sector is now under pressure as higher rates bite. According to US start-up tracker PitchBook, 3,200 private venture-backed enterprises went out of business in 2023. Nor were these two-person garage-start-ups, having raised a combined $27.2bn – this time, the GDP of Iceland.

Reduced pressure on value

This dose of economic reality should, in turn, mean less pressure from start-ups on incumbent businesses. Traditional office companies are squeezed less when WeWork folds. Black cab drivers grow busier when there are fewer subsidised Uber drivers competing. Bricks-and-mortar retailers face less competition for every e-tailer that collapses.

And this should serve to ease the pressure on the profits of 'traditional' businesses, which tend to be more value-oriented than growth. And if we consider the significant valuation dispersion between these two investment styles, the prospects of value stocks enjoying both profit growth and re-rating look strong. That can offer value investors significant confidence that recent good performance can continue over the medium term.

In an ironic twist of fate, the disruptors are being disrupted by a return to the 'old normal' level of interest rates and those who misallocated capital while believing in a consequence-free tomorrow are realising the light up ahead is an oncoming train. "It's the same thing your whole life," moans Phil. "'Clean up your room. Stand up straight. Pick up your feet. Take it like a man. Be nice to your sister. Don't mix beer and wine, ever.' And, oh yeah: 'Don't drive on the railroad track.'" "Well, Phil," says Gus uneasily. "That's one I happen to agree with."

*Andrew Williams is Investment Director in the Value Team at Schroders.