The Role of Investor Relations in the Next Economic Downturn
15 September 2018 | Oliver Schutzmann, CEO
The next downturn is on the horizon. Get ready now.
Investors need nerves of steel in 2019. All the current economic, business and social commentary is of warning lights, canaries in coal mines and omens of doom; and the evidence of a hard landing is mounting: The US yield curve has inverted, whereby it is cheaper to lend short term to the US government than long – historically an uncannily accurate predictor of recession. The price of gold, that most traditional of safe havens, has spiked. The war of words between China and the USA has become a full blown trade war and is starting to look ominously like a new Cold War. Fully 25% of all outstanding sovereign and corporate debt – some $16 trillion – is now paying negative rates.
Meanwhile, back in the real world, France, Germany, China and Japan have all recently reported markedly slowing economies. Hong Kong remains on a political and social knife edge. The UK lurches from one Brexit shambles to the next. In emerging markets, the outlook is just as gloomy: India and Pakistan remain at loggerheads over Kashmir. Brazil’s president was forced into a humiliating climbdown over fires in the Amazon by the G7, and, closer to home, the Gulf economies remain at the mercy of a stubbornly low oil price.
Given this relentless stream of negative news and indicators, and the growing crescendo of predictions of a global recession, what is the Investor Relations Officer to do? How should companies think about IR when their investors seem to be running for the hills?
Here are ten tips to keep your head when all around are losing theirs:
- Trust your investment story. A compelling, credible and powerfully-supported narrative of your company’s story, and why investors should believe and buy into it, serves very well in good times. It builds credibility and value. In bad times, nothing changes about this dynamic. Invest in strengthening the investor story, and continue to deliver it at every opportunity.
- Seek Opportunity. Scan the market for competitor signals of weakness (or strength) and war-game various possible outcomes with the senior team. Discuss the M&A landscape with the team. Plan prudently for an uncertain future in terms of strength of balance sheet, cost base and potential revenue shocks. Banks are obliged to”stress test” their balance sheets under extreme scenarios. All companies should think about doing the same.
- Get closer than ever to your investors. They enjoyed their rewards when the sun was shining – in terms of dividends and valuation. Discuss the future with them. Nominate the risks on the horizon, and explain your mitigation strategies. Reassure them that management is in control and is competent to navigate away from stormy waters.
- Take external soundings. Sometimes the greatest fault of companies is their inability to see themselves as others see them. In worst-case scenarios this can lead to sanctions and reputational damage: Most corporate scandals have been preceded by periods of management hubris. Instead of “believing your own PR”, invite analysts in to voice their negative outlook scenarios. Get to understand the downside risks of owning your stock. Only then can you judge if the upside potential outweighs them.
- Encourage senior management to face challenges head-on. At times of stress, when the business school playbook has no answers, managers can become fearful and irrational. Keep them plugged in to your investors. Keep their focus on the strategy and the investment story. Help them to keep their heads cool.
- Don’t draw conclusions from short-term share price movements. Timing the market is an inexact science, and one that frequently goes wrong. Selling high and buying low is near impossible for professional investors, let alone for amateurs. Your firm’s share price reflects the perceived value of your future profits, not a chip in a casino. After all, the worst days in the market are often followed by the best days, and people who sell out tend to miss the bounce. For example, investors who sold out of the market when the inverted yield curve caused US equities to fall sharply would have missed out on the subsequent rally that occurred the following week. And companies which continue to do regular business in uncertain times will be valued in the long run.
- Investors seek risk mitigation, and when risk is ubiquitous, they look to quality and diversification. You must learn to see your company as part of a portfolio, rather than a standalone investment. No institution is going to own your stock and no other. Instead, you must position your story in as compelling way as possible to help convince the investor to add your stock to their portfolio.
- Keep sight of the real prize: No company has a mission statement “to enrich our investors”. Instead, most companies strive for excellence, for sustainable growth and broad-based wealth creation, and for a benign relationship with society, the environment and the community. These notions are increasingly important to investors, and if your firm is applying greenwash to these factors, you will be found out.
- In the event of a proper economic downturn, there will be victims. Unemployment rises. Savings diminish. Company valuations shrink. It is important to keep a sense of perspective at these times. Any firm in difficulty will be judged on how it manages those headwinds. And the firm that manages best, that has a well-grounded vision of the future, and that is nimble enough to re-purpose and re-imagine its business for new circumstances, is the one that will take investor sentiment with it.
- Finally, trust in the power of investor relations. Those earnings calls and stock exchange announcements, analysts visits and roadshows can seem such a chore in normal times. In tough times they can be a beacon of stability for analysts and investors, for management, for customers, for employees.