As the year-end approaches, corporate leaders will take the opportunity to look into the future and make strategic decisions for 2020 and beyond. Corporate planning cycles, budget preparation and business projections take center stage, occupying executive time and sometimes taking on a life of their own. But one thing is certain: the outlook at the end of 2019 will be characterized by more uncertainty and risk than companies are accustomed to.
Wherever they look, they will see storm clouds on the horizon. Whether it is global trade, geopolitics, emerging markets, capital markets, regulation or the economic outlook, these times are defined by uncertainty and lack of clarity, and 2020 does not appear to hold any relief.
The mark of a strong and successful leadership is the ability to navigate uncertainty, to pursue business strategy through tough times as well as in benign conditions, and through it all to deliver value to stakeholders. That will not be an easy feat in 2020.
General sentiment among investors is decidedly bearish: Bank of America Merrill Lynch’s monthly Fund Manager Survey in October found that 31 percent of respondents expect a recession in the next 12 months, and have positioned portfolios accordingly, moving into cash and defensive stocks at a record rate. Trade battles between the world’s two biggest economies – the US and China – are serving to further sour sentiment for the rest of the world. In Europe, the central bank is reaching for more quantitative easing tools in another attempt to revive moribund corporate activity in the eurozone. The UK continues to stumble around in the dark nightmare that is Brexit. In emerging markets, trade disputes, political unrest and climate change are serving to add more wariness to investor appetite.
Here in the Gulf, as we await the imminent IPO of Saudi Aramco, a lack of clarity around its valuation and impact on market liquidity is defining market sentiment. The global oil price remains stubbornly low, and it is fair to say that all Gulf Cooperation Council economies are feeling the challenge.
One victim of this mood of uncertainty is the trend of returning cash to shareholders via share buybacks and special dividends. Throughout the market boom of the past 10 years or so, companies have thrown cash at their shareholders at record levels. Now Goldman Sachs has predicted a 15 percent decline in share buybacks among US-listed firms in 2019, followed by a further 5 percent fall in 2020. While dividend-hungry shareholders may lament the trend, others see it as positive.
When companies return cash to shareholders at such high levels, it can betray a lack of ambition or strategic intent to invest in R&D, capital expenditure or acquisitions. Some argue buybacks are a quick way for executives to get rich, raising share prices to ensure targets are met and bonuses are paid. The trend has been significant and global – including here in the Arabian Gulf markets, where companies across sectors have bought their own shares.
Now, in these uncertain times, the buyback trend seems to be slowing, and companies must find new uses for spare cash. Those impending future planning sessions taking place in boardrooms around the world will take on a new significance. Returning cash to shareholders is a perfectly legitimate strategy, driving shareholder returns and managing balance sheets efficiently. But in uncertain times, the strategy looks to be misplaced.
Markets hate uncertainty. When earnings and revenues become less predictable, share price volatility follows, and life gets much tougher for investors. Listed companies need to be aware of the environment in which they are operating: investors are nervous, macro signals and global trends are confusing, and gloomy predictions abound.
In this atmosphere, CEOs should be looking into the future and seeking to use surplus capital to drive their business and protect it from the risks of future uncertainty. Strategic acquisitions, prudent investment and long-term thinking are what shareholders want to hear right now. CEOs would be wise to deliver some certainty in uncertain times.
And the best place to begin that process is in a dialogue with their investors. Trading updates should acknowledge the uncertainty, and should detail company analysis and strategy to address it. Strategic outlooks need to be shared and explained, giving investors a clear picture of what to expect. And dividend and buyback policies need to be elucidated, so that shareholders are not surprised by any change in approach.
Bringing clarity to uncertainty is probably going to be the biggest service companies can deliver to the markets in 2020. That effort needs to begin immediately.
This article first appeared in IR Magazine (Link).