Cautious investors eye long-term vision and strategy over short-term risks

02 January 2018 Consultancy.uk

Investors are increasingly bearish on the back of equity market overvaluations and, among others, low TSR expectations, according to new research. Executives are concerned about short-termism in the face of a possible recession, as investors are in favour of a long-term strategy in order to shield profits from a potential economic crisis.

A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism.

Short-termism has been shown to have a major impact on the long-term performance of companies. Companies that stick to a long-term strategy have improved indicators almost across the board, including, over a fifteen-year period for large- and mid-cap US companies, generating 47% higher total revenues, 36% higher average company earnings, 81% higher average company economic profit, and creating total market capitalisation of $7 billion more on average.

As a result, a new report from the Boston Consulting Group has shown investors to have become increasingly bearish. The document from the researchers examines the firm’s ninth survey into the matter. The research, titled ‘Increasingly Bearish Investors Seek Long-term Value Creation’, involved 250 respondents with combined assets of $500 billion.

Investor bearishness

46% of surveyed investors were found to be pessimistic about asset markets for the year ahead, up from 36% in last year’s survey. A large number of investors (68%) said that equity markets are overvalued by at least 15 points, up from 29% last year, with 79% of the group saying that overvaluation is their primary concern.

The research also finds that concern around medium term economic conditions has also increased. The number of respondents who believe the next economic recession is 1-2 years out stood at 37%, with 16% expecting it to begin within the next year, while just 18%  said that it is more than 3 years out. Bullish respondents were found to be generally more positive about the situation than bears.

The respondents’ concerns extend into expectations around earnings, which has resulted in three-year TSR expectations falling to 5.5% - the lowest recorded since 2010 and well below the 90-year average of 10%. Earnings growth has fallen by around 1 percentage point to 3.1% of total TSR, while the strongly negative implied multiple change and decrease in earnings growth are both countered by share buybacks and dividend yields.

TSR expectations

According to the study, this bearish outlook has investors keen for management teams to increase their focus on the long-term. However, the research also found that most (88%) of respondents, believe that management teams are excessively focused on the short-term, an increase of 26 percentage points on last year’s study. There is detachment here, in-so-far as 9% of investors see short-termism (near-term EPS growth) as a top three investment criteria.

Across the board, investors have considerably ramped up their investment criteria in strategy and vision (51%; +19 pp on last year) and management credibility / track record (47%; +15 pp on last year). Three to five-year revenue growth, valuation multiples and free cash flow, meanwhile, came in at 33% , 28% and 20% respectively.Investment criteriaWhen it comes to leveraging cash, the majority of respondents 65%) suggested the money is invested on organic expansion, up 8% from last year; strategic M&A, static on 48% of respondents; and dividend increases up 2 percentage points from last year to 30%. Few (11%) are keen to see cash build up, while 19% cited stock buybacks as desirable.

Commenting on the results, Tim Nolan, a BCG Senior Partner, said, “Management teams face a constant tension between meeting short-term expectations for EPS performance and taking steps, including making thoughtful investments that set a foundation for strong and sustainable value creation over time. In today’s climate, investors are clearly looking for companies willing to make long-term growth- and value-oriented moves their focus and priority. They point to specific areas in which they see room for improvement, such as a company’s capital allocation (40% of survey respondents), compensation and incentives (38%), strategy development and planning (37%), and value management (35%).”

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Late payment culture cripples productivity of SMEs

29 March 2019 Consultancy.uk

UK SMEs are seeing their efforts to grow stifled by late payments, causing thousands to enter insolvency proceedings each year. According to experts from Duff & Phelps, this also has a major impact on the UK’s economy, meaning late payment culture must be tackled if the country is to dodge yet more economic stagnation in the shadow of Brexit.

Small and mid-sized enterprises in the UK face a myriad of pressures at present. Brexit anxieties are keenly felt by SMEs, with more than nine in 10 suggesting recently that economic conditions have worsened in the last 12 months. 66% of SME leaders also expect conditions to further worsen in the coming year.

At the same time, firms are keen to see value for money from investing in external expertise. Consulting fees which weight much more heavily on smaller firms, who spend £60 billion per year on professional services, but feel that more than £12 billion of that figure is wasted on unnecessary or bad advice.

Late payment culture cripples productivity of SMEs

Above all, however, SMEs are extremely vulnerable to late payments, and, according to a new study, the situation is only getting worse at present. According to corporate rescue consultancy Duff & Phelps, small businesses in the UK are facing a collective bill of £6.7 billion per annum due to late payments by other companies, while the average value of each late payment now stands at £6,142. This has risen from £2.6 billion in 2017, illustrating the plight of SMEs, particularly with uncertain economic times ahead.

Indeed, the spike in late payments has already caused significant productivity issues for SMEs, which in turn compromises their financial stability. With staff wasting hours chasing down late payments and businesses becoming preoccupied with short-term cash flow problems, they are less able to concentrate on creating new value for the firm, which in many cases gradually slides toward insolvency.

Small businesses across the UK are facing major cash flow pressure, leading to increased financial instability as a direct result of a late payments culture. This is likely a big driver of the UK’s 20% boom in insolvencies over the last three years, especially as it has a knock-on effect on other SMEs within the supply chain of those struggling firms. Approximately 50,000 small businesses fail each year because of late payments, amounting to a shortfall of more than £2.5 billion for the UK economy. 

Commenting on the findings, Paul Williams, Managing Director, Duff & Phelps, said, “In this modern era of technology, which is designed to enable business agility, late payments are particularly galling as there are no excuses. The day of the ‘cheque is in the post’ is long over!... More can be done to avoid businesses reaching this situation in the first place. SMEs underpin the economy, so prioritising timely payments will help allow business owners to focus their time and energy on providing good quality products and services and adding value to the customer experience, rather than chasing outstanding payments.”

The UK Government currently promotes its voluntary Prompt Payment Code to encourage good practice, but late payments by larger companies remain a common pain point for many SMEs. There may be hope for an end to late payments, however, following an announcement in the Spring Statement from Chancellor Philip Hammond. The Government aims to crack down on the practice, with Hammond stating big companies should hire a Non-Executive Director to be responsible for reducing late payments to small suppliers. The statement also advises that organizations publish payment practices in their annual reports.