Increasingly Bearish Investors Believe Companies Are Too Focused on the Short Term

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The FINANCIAL — Investor sentiment appears to be at its most bearish level since the great financial crisis, and investors want management teams to focus more strongly on creating long-term value over near-term EPS growth, according to the ninth annual survey of investor sentiment by The Boston Consulting Group (BCG).

Investors are giving priority to increased investments in organic and M&A-driven growth over other uses of capital.

Nearly half of survey respondents (46%) are pessimistic about equity markets for the next year, a substantial jump from 32% in 2016 and 19% in 2015, and the highest level of bearishness that BCG has encountered since 2009. More than a third of investors (36%) are bearish about the market’s potential for the next three years, more than doubling the 2016 survey’s percentage of self-described bears (16%).

Overall, 68% of respondents think the market is overvalued—by an average of 15 percentage points. This is more than twice the 29% of investors in last year’s survey who thought the market was overvalued. Among self-described bears in 2017, 79% cited market overvaluation as the reason for their pessimism.

Investors’ concerns are not limited to valuation levels. Almost a decade after the financial crisis, nearly 80% of investors expect a recession to start within the next three years, and more than half of all respondents expect one to occur within the next two years. Among the most frequently cited reasons for the pessimistic outlook are macro factors such as rising interest rate levels (45% of bears), the US political climate (40%), and geopolitical instability (31%).

Investors’ average three-year expectation for total shareholder return remains at last year’s record low level of 5.5% a year—the lowest percentage BCG has recorded since it began tracking this statistic in 2010, and close to half the long-term average TSR of 10% that companies have achieved over the past 90 years. Although expectations for the TSR contribution of dividends and share buybacks are consistent with what BCG found in prior surveys, the projected earnings-growth contribution this year is 1.2 percentage points lower than the average of 4.3% that investors projected in the surveys from 2009 through 2016.

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Against this bearish backdrop, investors want management to adopt a longer-term approach to running the business. They are looking for sustained value creation: 88% of survey respondents indicated that they did not want corporate management teams to focus on delivering short-term results at the expense of investing for the long term, a 26-percentage-point increase from 2016.

“Fewer than 10% of investors consider near-term EPS growth a key investment criterion; it barely makes their top-ten list,” said Jeffrey Kotzen, a BCG senior partner. “The vast majority of investors would rather see companies invest in future growth, both organic and through M&A, than have companies use their free cash flow for other value-creating purposes such as additional dividend payouts, share buybacks, or debt reduction.”

The percentage of investors citing investment in organic growth as one of their top two priorities increased by 8 percentage points in the past year to 66%.

The reasons behind investors’ thinking are clear. The 3% earnings growth that they expect over the next three years is the lowest earnings growth expectation in the nine-year history of the survey. Investors believe that companies need to address accelerating change and industry disruption with investment in new growth opportunities. The data, along with the opinions of investors that BCG has solicited throughout the year, indicates that the shift in capital allocation priorities toward organic and M&A growth investments reflects the view that growth will continue to be the most important driver of top-quartile TSR over the next five to ten years.

Investors are also looking for strong management teams with robust strategies and compelling equity stories based on strong fundamentals and intelligent capital allocation. Asked to rank the three most important metrics or characteristics they consider in deciding whether to invest in, or give a buy recommendation on, a company, 51% of respondents, the most in the survey, cited business strategy and vision, a jump of 19 percentage points over 2016. Almost half (47%) pointed to management credibility and track record—an increase of 15 percentage points over the 2016 figure.

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“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,” said Tim Nolan, a BCG senior partner. “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%).”

The survey also found that 45% of respondents would welcome the presence of activist investors at companies they own or follow.

BCG surveyed 250 investors who oversee approximately $500 billion in assets over a two-week period spanning late October and early November 2017. The survey solicited their outlook on and expectations for the global macroeconomic environment, equity markets, and the continued ability of companies they invest in or follow to create value. Almost three-quarters of the survey respondents were portfolio managers, and 63% were focused on the US, while most others invest globally.


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