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

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.

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.

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.When 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%).”