Investor sentiment is more bearish than bullish for the first time since 2009, following turmoil across China and other emerging markets. Investors too are weary that TSR is set to fall farther. Many of the respondents are keen on companies seeking strategies that improve long term performance while reducing debt burdens.
Investor sentiment regarding the direction of the global economy, remains shaky at best. A conflux of factors have resulted in an environment in which relative stability remains uncertain. Growth in Europe is still relatively flat, while geopolitical concerns, from Brexit to Russia, remain on the radar. The US too, while seeing relatively robust growth, may continue to increase rates, with as yet unknown consequences for global investment strategy. Emerging markets, for a long time part of the global growth engine, have fallen on harder times – and into political turmoil, like, for instance, in Brazil.
Against this backdrop of geopolitical and economic uncertainty, the Boston Consulting Group sought to better understand investor sentiments, as well as their wider expectations about where companies are going in the future. The survey, titled ‘In a tough market investors seek new ways to create value’, involves responses from more than 700 portfolio managers and buy-side and sell-side analysts, representing firms that are collectively responsible for approximately $2.5 trillion in assets under management.
The sentiment among respondents has, for the first time since 2009, fallen on the side of the bearish. The trend has been ticking up since 2013 when barely 10% held a bearish attitude while 51% were bullish. By 2015, bearishness increased to 18%, while 44% remained bullish. This year the bearishness has increased to 30%, while extreme bearishness has hit 2%. Neutral investors make up 37% of respondents, while bullish respondents total 31%.
The research highlights however that sentiment differs considerably by region. Asia, with China its largest player, has suffered a crisis in confidence, with the start of the year bringing with it several shocks to Chinese stocks and a currency crisis. Bearishness in Asia has, for instance, hit 39%, while in other emerging markets it has hit 35% while extreme bearishness hit 5%. In Europe and the US, a sentiment of bullishness outshines bearishness.
While a sentiment of bearishness surrounds emerging markets, the long-term trend remains bullish on the back of expectations that the slowdown in China will be overcome. By 2018 for instance, only 16% of respondents project they will be bearish, while 48% bullish and 3% extremely bullish.
The bearish sentiment is also reflected by an expectation that TSR will continue its recent downward trend to hit 5.5% through 2016. Earnings growth too, is likely to increase less sharply than the year previous, at 4.1% vs 4.5%. The expected dividend yield and expected buyback yield have both reached the highest level since 2010, at 1.9% and 2.5% respectively.
The research also considers what investors think should be the focus of the company across a number of vital areas. In terms of growth, investors seem to place emphasis more on strategic M&A activity relative to the mid-term average, at 48% and 41% respectively. In addition, the respondents believe less focus needs be placed on growth through organic investment. The respondents were also seemingly less interested in seeing dividends increase compared to the previous period, at 26% vs 37%, or share repurchases, at 17% vs 20%. In terms of balance sheet focus, respondents are keen to see companies work on the retirement of debt, at 35% vs 22%.
According to the analysts, after a period in which companies returned record amounts of cash to shareholders, investors may be looking for companies to use that cash to improve the fundamental value of their businesses. In this regard, it is striking that despite a slight relative decline, investment in organic growth remains a top priority for a majority of investors and is chosen by more respondents than any other area.
The survey also asked investors about what they believe should be the priority of companies in the near term. At the top of the list are equity related considerations, including management credibility and track record, at 32%, and business strategy and vision, also at 32%. TSR related drivers also continue to be seen as important by respondents, with 32% of respondents indicating undervaluation and potential for P/E rebound, 29% cite the need for a three-to-five-year revenue growth plan and 27% for free cash flow yield. Improving dividend yield was cited as important by 14% of respondents.
The report suggests that the strategies that have been in place to deal with slow economic growth, such as cost cutting and borrowing at low interest rates to increase leverage, are beginning to reach their limits – as a result, they expect companies to reduce TSR whilst investing in the long term sustainability of the respective companies in the face of an as yet, uncertain future.
“Margins are currently at or near their peak, making additional improvements increasingly difficult,” says Tim Nolan, a partner in the firm’s New York office. “Returning cash to shareholders will continue to constitute a large percentage of TSR, on average, and provide a floor for valuation; but cash payouts alone won’t deliver superior value. Finally, although interest rates have been low, they are likely to increase in the near future. All these factors mean that valuations will likely be under continued pressure.”