Companies Should Prepare for a Recession While Also Investing for the Future, BCG Investor Survey Finds

BOSTON—After an impressive equity market rebound in 2019 (the MSCI World Index rose by 24%, for example), investors are cautious and have low expectations for total shareholder return (TSR) over the next three years, according to Boston Consulting Group’s eleventh annual survey of investor sentiment. Record-high valuation levels and persistent macroeconomic uncertainty have led many investors to conclude that the current bull market is running on borrowed time. Even so, most investors do not anticipate a major market correction or deep recession. They want companies to continue investing for competitive advantage and future growth while also developing a recession plan to ensure resilience.

The results of the global survey of more than 250 portfolio managers and buy- and sell-side analysts, conducted in November and December 2019, are discussed in a new BCG article, Investors Want Companies to Be Resilient and Bold.

“The survey data, along with the opinions of investors BCG has recently interviewed, indicate that investors want management to have a dual focus—building resilience to prepare for the anticipated short-term headwinds and investing to create long-term value,” said Jeff Kotzen, a BCG senior partner.

Investor sentiment regarding short-term performance was, on average, largely unchanged from a year earlier: 

• Nearly one-third of respondents are bearish or extremely bearish about equity markets’ likely performance over the next three years, while just over one-third are bullish or extremely bullish.
• Respondents’ expectation for average annual TSR over the next three years was 5.6%. This effectively matches the level reported in BCG’s previous three surveys—the lowest levels recorded since the firm began tracking TSR expectations in 2010.
• 73% of respondents believe that markets are overvalued. Among self-described bears in the 2019 survey, 78% cited market overvaluation as the reason for their pessimism.  
• 71% of respondents anticipate a recession within the next two years. Nearly three-quarters of respondents (74%) expect a recession—if it does occur—to be mild (with a contraction of less than 2% in real GDP), and nearly half (46%) expect a recession to last more than one year.  

Against this backdrop, investors want companies to invest in opportunities that have the potential to deliver strong and sustainable TSR, despite potential near-term headwinds. Nearly two-thirds of respondents said that one of their top preferences for a healthy company’s deployment of capital and free cash flow is organic investment.  Respondents said that 50% of companies need to invest more aggressively in digital capabilities and technology. They also believe that approximately 40% of companies should be more aggressive in pursuing investments in R&D, marketing and sales capabilities, and other avenues for innovation, such as corporate venture capital. In contrast to their views in prior surveys, investors appear to see tight cost control and capital management as table stakes, with only one-third of respondents citing room for improvement on capital allocation processes.

“Investors see durable organic growth as the most important driver of top-quartile TSR over the next three years,” said Alexander Roos, a BCG senior partner. “One way that companies could meet investors’ expectations is to approach value creation with the disruptive mindset that many tech companies and startups use. Such companies focus on creating value through innovative and disruptive digital and go-to-market capabilities.”

Investors pointed to a number of specific improvement opportunities that companies must address. For example, respondents said that 62% of companies can better align their sustainability and business strategies. Companies also need to close the communications gap between management and investors: only 55% of respondents indicated that they actively engage with the management of the companies they invest in or follow, and only 57% said that they are comfortable with directly expressing their frustrations to management.

“A company needs a deep understanding of its investors’ expectations and preferences so that it can align its strategy with the right ‘natural investor type’— for example, those focusing on yield, quality value, growth at a reasonable price (GARP), or aggressive growth,” said Hady Farag, a BCG partner. “A broad-based approach includes not only traditional investor relations, but also newer topics that are rapidly gaining in importance, such as sustainability and diversity.”

A copy of the article can be downloaded Investors Want Companies to Be Resilient and Bold.

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