Steps to Effectively Manage Investor Relations During a Recession

In our last article, we discussed the key elements that IR teams should focus on to build a compelling investor deck. In this bulletin, we focus on the recessionary fears facing investors and the corporate world, and the steps IR teams can take to manage their company’s shareholder base in the present market environment.

Fears of a recession driven by high inflation and interest rate hikes are stoking negative sentiment among investors and corporates. The U.S. economy is experiencing a slowdown after a robust 2021, contracting 1.4% in 1Q22 and 0.9% in 2Q22 – hitting the rule-of-thumb recession definition of two consecutive quarters of negative GDP readings. This is in line with a survey conducted in June 2022 by The Wall Street Journal where economists raised the probability of recession at 44% in the next 12 months, a level usually seen only on the brink of or during actual recessions. In addition, some other major macroeconomic indicators such as ISM PMI, consumer spending, and labor market are also cooling off, further strengthening the recession narrative. The economic slowdown is also pushing some industries like Technology to mass lay off workers and retract job offers. The beginning and end of a recession in the U.S. is semi-officially decided by the National Bureau of Economic Research, which typically waits as much as a year to declare that a recession has begun, long after most independent economists have reached that conclusion. In the meantime, however, investors are already treating recession like a foregone conclusion. The S&P 500 had the worst first half of a year since 1970 and is down nearly 18% YTD as of July 27. Recessionary fears are visible among corporates, too – over 60% of the CEOs expect a recession in their geographic region in the next 12 to 18 months, according to a survey of 750 CEOs and other C-suite executives released by The Conference Board. Moreover, per a FactSet report, 21% of the companies in the S&P 500 reported 2Q22 results through July 22, of which 68% reported actual EPS above estimates – below the five-year average of 77%. In aggregate, companies are reporting earnings that are 3.6% above estimates – down from the five-year average of 8.8%. Looking ahead, analysts expect 9.2% earnings growth in 3Q22 and 8.7% in 4Q22, suggesting a slowdown in corporate earnings in coming quarters.

Managing investors relations during times of an economic downturn becomes an important priority for IROs. As a result, we believe they should keep the following points in mind to effectively handle their shareholder base:

·        Proactively disclose the impact of the economic downturn on your business. In a thriving economy, investors may choose not to analyse every development that takes place in their portfolio companies. During a recession, however, the situation is different, and investors typically seek clarity on all aspects of the business. As a result, IROs must disclose the impact of the downturn on their company’s business in a proactive and transparent manner. They should quantify, wherever possible, the extent to which these developments will affect the company’s top line, profitability, and asset base (both human and physical). For example, companies in times of recession must disclose whether they are facing a reduction in profit, decrease in consumer demand for their products, credit crunch, contraction in cash flows, decline in product quality, etc. IROs and managements should avoid downplaying risks since a transparent acknowledgment of the issues not only helps reduce uncertainty but also goes a long way in building investor confidence as well as gain credibility among other stakeholders.

·        Update your company’s investment thesis based on interactions with senior management. Given that senior managers are responsible for establishing their firm’s vision, goals, and objectives, it is important for IROs to engage with their management team who can knowledgeably discuss pressing matters and work toward designing solutions to emerge out of the economic downturn. This is important in assessing the readiness of the organization to withstand the impact of a recession. After discussing with the management team, IROs must convey to investors the measures being taken by their companies, and the rationale behind those actions. This will help calm the nerves of investors, who are eager to hear about what the company is doing to navigate challenging economic conditions. Wherever required, IROs should revisit their investment thesis and identify parts that merits a change, such as revenue and EPS estimates, scaling plans, future product releases, etc. Once IROs have updated the investment thesis, they must communicate it to their shareholders and keep them updated on any changes as they take place.

·        Keep communication line open with investors and analysts to understand their concerns and sentiment. “Recession” is an ominous word for investors focused on growth; therefore, a company’s first instinct might be to halt communications with the Street until the economy begins to recover. However, avoiding communication during an economic downturn could turn investors and analysts to seek the recessionary impact on your business from unreliable and unverified third-party sources, which could be detrimental to your company’s stock prices. Worst yet, suspending communication with your investors altogether will be very expensive and will be difficult to win them back amid better circumstances. Therefore, not only should IR teams keep their communication lines open with investors and analysts during the recessionary phase, they should also acknowledge the concerns of these stakeholders and address them as best as possible. It is important to remember that since investors interact with companies across the board, they bring a valuable perspective to the discuss by observing patterns and trends across industries and economies. This can help IROs understand if there is a disconnect between the company’s and investor’s growth expectations, and then bridge that gap effectively.

·        Regularly monitor your shareholder base and be in touch with your top shareholders to minimize liquidity risk. A company’s shareholder base can undergo significant change in the current macro environment. Some big institutions may seek to reduce their exposure to an entire industry or broader equities in general, bringing down stock prices across the board, while others may see these corrections as an opportunity to purchase the dip and build a position. Moreover, a company’s stock can be highly vulnerable to massive price swings and liquidity risk driven by increased activity of hedge funds and other big market movers. While IROs can only do as much about their company’s stock price amid a broad-based market correction, they can combat stock liquidity risk by deploying a strong stock shareholder surveillance tool, as well as Big Data-driven platforms to understand an investor’s behavior and sensitivity to different types of data and predict their trading and investment moves. Once IROs identify shareholders that could make a material position change in the stock, they should get in touch with them to understand their buying, holding, or selling interest that is necessary to stabilize the stock price.

·        Leverage experience from past economic downturns but be flexible and tailor your approach to the current situation. Experienced IR professional should leverage their learnings from the past recession to manage their communication strategy. At the same time, IROs who are new and are tasked with the responsibilities of managing the IR function in the current scenario can either learn from past actions of their peer groups or perform stress tests considering realistic scenarios to devise their plan. This can help companies and IR departments save time and effort for building a response plan from scratch and readily evaluate their preparedness for a range of potential impacts on key company metrics arising from the challenging economic environment. However, given the evolving nature of the current macroeconomic events, we believe IROs must ensure they are continuously making assessments of new developments and modifying their strategy accordingly.

About Intro-act

Intro-act optimizes corporate access in the post-MiFID II era. Intro-act’s machine learning prediction engine targets the most likely institutional buyers and sellers of a stock in the next 90 days and offers independent research to promote efficiency and transparency throughout the corporate access and investment process.

Intro-act’s services facilitate higher-quality meetings based on superior preparation for both investors and corporate executives because of centralized access to critical materials, including video, models, commissioned research, and agenda materials. The result is converting more investor meetings into shareholders and improving the ROI on corporate access.

Intro-act’s founders have over 50 years of experience (DLJ, Fidelity, First Call, OTR, Thompson Reuters) in capital markets, corporate access, and building investment research businesses. They realized that a regulatory change (MiFID II) would compel corporate investor relations to become increasingly responsible for servicing and growing their investor pool but would need to do so with fewer resources. Intro-act was created to help corporations fill this void. We use machine learning to predict investor behavior, analyze factors influencing investment decisions, and provide independent research services for investors and corporate IR officers. 

For more information: www.intro-act.com