As we continue to speed through 2022, signs of a potential recession are increasing. On May 3rd, the US Federal Reserve raised its benchmark interest rate by 50 basis points. This is the biggest increase they’ve implemented in over 20 years. The Fed is moving to proactively address inflation and create a “soft landing” rather than a severe recession. In April, the annual inflation rate in the US for 2022 was reported at 8.5%, a level not seen in over 40 years.
Bloomberg’s April 4, 2022 Market Live weekly survey showed that almost half of the investors surveyed expect a recession in 2023 with another 20% expecting it in 2024. And even though investor opinions may be divided, the stock market is already showing signs of concern. The major indices have shown sharp declines with volatility. The S&P 500 was down nearly 20% year-to-date at the end of April and has since recovered to be down only ~13% by the end of May. The Nasdaq Composite was down over 25% and has recovered slightly to now being down almost 23%.
Investor Relations teams need to understand how their shareholder base can shift during these volatile times. Kevin Herraiz, Q4’s Head of Market Intelligence observes that, “Some institutions will look to cut exposure to an entire sector or broader equities in general. Others will view these pullbacks as an opportunity to buy the dip and build a position. Meanwhile, hedge funds and fast money traders will become extremely active and cause trading volumes to spike and prices to swing dramatically. All these factors can have a major impact on the mix of your shareholder base and your stock’s performance. A surveillance analyst can help with identifying these key buyers and sellers and help determine what is driving their decision making. This will play a critical role in a team’s outreach strategy and targeting efforts for the second half of the year.”
Another side effect of a potential recession and a major concern for investor relations teams is the potential for an activist investor to get involved. Kevin adds, “these depressed prices and indiscriminate selling across the markets open the doors for activists to take a large position at attractive valuations. Furthermore, with the heightened trading volume and liquidity, it is easier for them to purchase shares quickly and under the radar. We have seen activity from activist investors spike in the last year now that we are emerging from the pandemic. We expect them to continue to be involved the rest of the year.”
Implications for IR Teams
In this environment, IR teams need to prepare for the potential of a recession so they can influence their companies’ actions and the communications of those actions to investors. Here are a few key factors to consider as you plan for the next 6-18 months.
IR teams should encourage their company to treat a recessionary economic environment just as they would any other crisis. First and foremost, this includes the identification of a crisis management team (and documenting the criteria for activation of that team). IROs should understand any scenario planning that may already be underway. It is critical to work with internal business partners in the Financial Planning & Analysis group to establish operating assumptions for the scenarios addressing various levels of impact to your business.
“Ensuring your company is adequately prepared to respond to a recessionary environment will better position you to be attractive to investors looking for safe havens,” said Karen Greene, SVP of Client Experience for Q4.” Assuming the data tells a good story, refer investors to prior downturns and recessions in which the company continued to operate well, demonstrating the company’s ability to weather a challenging macro environment. Point to how and why the company’s performance and its immediate opportunities are somewhat impervious to economic conditions. If that is not applicable, then own where the challenges lie and the plans to address them. Finally, if you are a new company that doesn’t have the benefit of history to reference, highlight the experience the C-suite brings to bear in leading businesses through a recession or protracted downturn. Be sure to take investors through the company’s plans to counter recessionary pressures a s well.”
As you begin to address the impacts of a recession, company messaging should focus on near-term visibility and actions the company is taking. John Nunziati, IR Partner at Q4 points out, “In recessions and downturns, the first insight companies should provide is to clarify what the problem is and how long it could last.” This might include details on what the management team is doing to address the environment, such as implementing cost controls, job cuts, shutdowns or closures. The key is to communicate steps you are taking in areas you can control. Early communications may also address impacts or potential impacts, although this should be focused on highly likely outcomes.
Mike Coffey, VP of Global Partnerships and Alliances indicates, “In this new environment, what worked over the last few years is no longer working. When interest rates were near zero, investors were focused on top line growth. Companies who could provide that were rewarded with a much higher valuation. As rates have risen and fears of recession have materialized, investors have shifted focus towards earnings and have punished those high growth names.” Higher interest rates mean a higher cost of capital for companies that rely on financing, and companies that are expected to earn their profits in the future are worth less today using that higher discount rate. As a result, IROs should be prepared for more questions around profitability and fewer questions on revenue growth. Investors are likely to focus more of their attention on more defensive sectors such as healthcare, consumer staples and utilities.
In an extended recessionary environment, consistency in messaging is critical. Thierry Elmaleh, Head of Q4 Capital Market Events reminds IR teams to, “Stick to your story. You have to be able to reiterate the compelling, credible investment thesis that drew investors to the company.”
This ongoing messaging should help investors understand why the environment doesn’t jeopardize the company’s ability to achieve its longer term objectives. As with any other crisis, there should be ongoing contingency planning for the possibility of the situation worsening. Even if implications are not shared externally, explaining that the company has activated a crisis management team focused on a cross-organizational response can alleviate any “panic” that investors may be experiencing. It also allows you to shift messaging to how the company will perform coming out of the recession or downturn.
Weathering the Storm
With clouds of recession on the horizon, investor relations teams have to be vigilant. In current dialogues with investors, companies should acknowledge the changes in the environment. Sharing how the company is prepared to handle a shift in the economic landscape demonstrates transparency, awareness, agility, and the experience of the management team. Keeping investors close, ensuring the market is well informed, and maintaining a consistent presence is essential. In difficult times, solid investor relations practices will emphasize the company’s unique differentiation and will signal to investors that the company is in capable hands, inspiring confidence across your entire base of stakeholders.
For more of Q4 thought leadership on this and other topics, stay tuned to our blog.