SOURCE: The Boston Consulting Group

The Boston Consulting Group

July 14, 2010 00:01 ET

Investors Anticipate Recovery but Foresee an Extended Period of Below-Average Growth, According to Survey by the Boston Consulting Group

BCG Investor Survey Suggests That Investors Focused on U.S. Markets Are More Optimistic Than Those Covering Other Developed Economies

BOSTON, MA--(Marketwire - July 14, 2010) -  Global investors are anticipating economic recovery -- although opinions vary widely as to when that recovery will be fully sustainable, according to a recent survey conducted by The Boston Consulting Group. But no matter when the recovery finally kicks in, there is a consensus that developed economies face an extended period of below-average growth.

Investors' Views on Economic Recovery and Growth

The BCG survey polled a broad cross section of U.S. and European investment professionals responsible for more than $1 trillion in assets under management. Among the key findings:

  • Thirty percent of respondents said they expect a recovery (defined as 2.5 to 3 percent sustainable annual GDP growth in the world's developed economies) to happen by the end of 2010. And more than half (55 percent) expect it to be in full gear by July 2011. 
  • However, investors and analysts covering European and other global markets were considerably more pessimistic about when the recovery will occur than those covering the United States. Nearly 40 percent of the U.S.-focused respondents see developed economies reaching the 2.5 percent GDP growth threshold by the end of 2010 and 60 percent by July 2011. By contrast, the equivalent numbers for those respondents not focused on U.S. markets are 19 percent and 50 percent, respectively. And 31 percent of these respondents don't see the recovery happening until January 2013 -- or later.
  • Most respondents foresee an extended period when corporate earnings growth will remain below the long-term historical average for developed markets of approximately 5 percent. A plurality (46 percent) estimate that annual net-income growth rates in the next few years could be as low as 2 to 4 percent. Another 40 percent were slightly more optimistic, seeing net-income growth in the neighborhood of 4 to 6 percent. Only 9 percent expect earnings growth to be 6 percent or higher.

The Implications for Companies

Precisely because finding opportunities for growth will be more difficult, investors are looking to invest in companies with credible plans for profitable organic growth based on sustainable competitive advantage. "As the recovery gathers steam, investors are becoming relatively less concerned about a company's liquidity and near-term financial survival and more concerned about its ability to take advantage of even a modest renewal in economic growth rates," said Jeff Kotzen, a senior partner in BCG's New York office and a coauthor of the study.

But that doesn't mean companies can pursue "growth for growth's sake." Investors also want companies to deploy their capital prudently, returning excess cash to investors once profitable growth has been funded. What's more, survey respondents generally prefer that cash in the form of dividends rather than share repurchases for the simple reason that most (76 percent) believe that companies do a poor job of timing share buybacks.

"Alignment of a company's business, financial, and investor strategies is critical to attracting investors and managing their expectations," said Eric Olsen, a senior partner in BCG's Chicago office and study coauthor. Companies still have a long way to go to achieve that alignment. A full 67 percent of respondents said that the companies in which they invest are either poorly or only partly aligned on these three dimensions.

An Action Plan

In addition to reporting on the survey findings, the BCG article "Investors' Priorities in the Postdownturn Economy" outlines four key steps companies can take to respond to current investor sentiment.

  • Revisit growth strategies. At a time when companies can no longer rely on macroeconomic trends to fuel growth, it is critical to review growth strategies and pursue only those that rest on a foundation of competitive advantage. 
  • Reevaluate deployment of excess cash. After a period in which many companies have been extremely conservative about protecting liquidity by preserving cash on the balance sheet and paying down debt, they now need to carefully develop the best plan for deploying that cash and their ongoing free cash flow. 
  • Understand the key drivers of relative valuation multiples. Expansion in a company's valuation multiple will be an important contributor to total shareholder return (TSR) in the years to come. BCG research shows that it is possible to identify and actively manage the factors that determine roughly 80 percent of the differences in valuation multiples across a company's peer group.
  • Take a fresh look at the company's investor base. Given the evolution of investor priorities since the downturn, it is especially important for a company to reengage with its investors and share an up-to-date view on the company's business strategy, competitive positioning, and financial results. 

To receive a copy of the article or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

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