Thinking Ahead Post the Pandemic: Adopting a Modular Approach to your Investment Story to Succeed in the Competition for Capital
In recent weeks, the institutional investment community has been adopting a protective and defensive portfolio management strategy on the back of expectations of significant earnings downgrades, coupled with the risk of recession in the periods to come. Compared to other crises in recent memory, the current situation is likely to last for longer and will have a broader impact across the business community. Issuers that understand and proactively address investor concerns will benefit in the inevitable battle for capital.
Whilst it is difficult to estimate a realistic timeframe for recovery, investors with a long investment horizon are already sizing up opportunities to enter into quality names which were trading at levels deemed unattractive in the past. Further to this, they are also naturally casting a particularly close eye on the sectors most affected by COVID-19, in order to ascertain the reasons for the dislocations affecting these stocks. In other words, whoever is harnessing the potential of alpha generation is currently trying to dissect the technical from the fundamental, to eliminate the least efficient models and to spot the most defensive and resilient ones. On the flip side, as consumer behaviour adjusts to the enforced lockdowns around much of the world, it will create opportunities for certain issuers, resulting in increased attention from investors.
To help investors in price discovery mode, as well as addressing the evolving questions of the existing investor base, it would be beneficial for IROs, Management and Boards to take a prospective stance on the inevitable shift in their investment story resulting from this unprecedented crisis. Some will argue that this is an impossible exercise at this stage, given the many variables linked to the spread of the disease, the government responses, global financial stimuli and a day-to-day assessment of the impact across the organisation on its employees, customers and all other stakeholders.
However, identifying the specific building blocks of the investment story which the markets will focus on at different stages of the crisis (spread, peak, flatten and normality) will be critical in carrying the investment community along. It will enable issuers to build a messaging framework that will be modular, easier to refine over time whilst maintaining consistency in the narrative, and ultimately more efficient in its dissemination. It will also illustrate how strategic priorities have shifted, crystallising the reallocation of resources in terms of future returns.
Whilst each sector has its own particular nuances, below are some considerations for these building blocks based on the focus of investors over the short, medium and long term as they assess their investment decisions. As with any exercise of this nature, it is difficult to put a strict timeline on what short, medium and even long term might be, as this will vary across industries and countries. Depending on the sources and assessment of the variables, a recovery is expected to take anywhere between 6 months to 2 years and it will be gradual, a dynamic which will consequently be mirrored by the investor focus on the various building blocks of the investment proposition.
Equity story building blocks