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Who’s Afraid of the
Big Bad Bear?

28 October 2018  |  Oliver Schutzmann, CEO

This article originally appeared in IR Magazine (Link)

Investors around the world are nursing their wounds. In the month of October, the MSCI World Index has fallen 6.5 percent, the US and UK indices have both retreated by 6.7 percent, and emerging markets are a whopping 7.8 percent lower than at the start of the month. On October 24, the decline in US exchanges wiped out all the gains of 2018. The next day, the Nasdaq suffered its biggest one-day fall for seven years.

Investors are pivoting forcefully into ‘risk-off’ mode, seeking the safe haven of rising US treasuries and spurning asset classes such as equities. Suddenly, the recent bull market seems a distant memory.

Several factors are driving this trend.

Geopolitics: Three aggressive and assertive superpowers are now dominating global geopolitics. The US, Russia and China are not only participating in increasingly noisy brinkmanship with each other (sanctions, trade tariffs and near-misses with warships, for example) but have also reverted to the Cold War norm of fighting proxy battles around the world. Syria, Yemen, Libya and Iraq are countries on our UAE doorstep that are riven by superpower-backed battles – both economic and military.

Trade: The spat between America and China over trade is the most visible battle in a global phenomenon that sees governments flexing their muscles with trading partners. India, South Africa, Mexico and Brazil are all engaged in cross-border trade arguments, while in Europe the fallout from Brexit retains the potential to be highly damaging to both the Eurozone and UK economies.

Emerging markets: The year-long sell-off in Chinese stocks has proved contagious. Showing a decline of almost 30 percent year to date, China is being buffeted by negative macro news, corporate results and economic indicators. Add to this the widely-held suspicion that corporate debt in China is a hidden time bomb and the slide in confidence is explained. China’s relationship with other emerging markets is now so umbilical that when China sneezes, emerging markets the world over catch a cold.

Monetary policy: Led by the US, central banks across the developed world have called the beginning of the end of the great financial crisis by tightening monetary policy, in the form of the withdrawal of quantitative easing measures and the gradual normalization of interest rates. Combined, these measures have added risk to investors’ portfolios.

Whichever way you view it, the world seems more complex and unpredictable, with risks arising from all angles. Many of the old certainties seem to have disappeared. Commentators are divided as to how to interpret the signs, and investors are receiving conflicting advice from many quarters. A recent note from JP Morgan (global equity strategy, October 15) is typical, advising clients that equities are still a good bet, pointing out that when shocks and volatility have arisen in the past, equities have outperformed over the subsequent six to 12 months. Others sound just as convincing, talking up the attractions of the debt markets, and advising a switch out of overvalued equities.

Investors have every right to be confused. 

What are IR teams to make of these turbulent times? How should they soothe their anxious boardrooms? And what can first class IR do to add value in such choppy markets? 

The first principles of excellent IR are to tell the truth, and to focus remorselessly on company strategy. It can be easy to be swayed off this course by market fluctuations, many of which – as pointed out above – are beyond the control of any company. 

Instead, investor communication should focus on the resilience of the firm, the quality and experience of management, long-term strategic business objectives, and the demonstrable progress made towards them. Too many IR professionals, as well as senior management, allow their conversations with investors to be hijacked by short-term market concerns and waste valuable time explaining quarterly earnings numbers through a short-term lens. The best investors – those buy-and-hold investors who believe your equity story and share your long-term vision, those who you really want on the register – are looking much further ahead. 

And these ideal investors require more communication and more honesty than the hot money characterized by hedge funds, short sellers and algo-traders. Of course, these short-termists have every right to buy your stock, and every right to sell it, short it, or hold it. The mission of the IR team should be to convert those short-termists into long-term stockholders, because they buy into the vision of management, the investment case and the long-term prospects of the stock. 

An often-cited Warren Buffet quote is a useful guide to investors and IR teams: ‘If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.’ 

His point is that investing is not trading, and has a vastly different goal. Investing is about minimizing risk to generate wealth over the long term, something that first-class IR can help to achieve through developing a fully-open relationship between investors and the invested company. 

IR teams would be wise to remind senior management of this when markets turn choppy. The fact is that, over the long term, well-managed firms with excellent management, a robust strategy and clear market differentiation will thrive, and so will those who invest in them. 

For all those research houses sifting past market movements for clues to the future, Buffet has another analogy: ‘If past history was all that is needed to play the game of money, the richest people would be librarians.’ 

Markets rise and markets fall. Good IR can help to flatten these peaks and troughs, and can deliver real value over the long term.