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Professional Investors Believe Recession Is Near—and Want Companies to Take Steps to Prepare to Create Value in the Aftermath, BCG Survey Says

Investor Expectations for Total Shareholder Returns Are at Historically Low Levels

BOSTON—Nearly three-quarters (73%) of professional investors said that they expect a recession within the next 24 months, according to “Investors Brace for a Downturn and Look to the Long Term,” a new Boston Consulting Group (BCG) article that is based on a survey of portfolio managers and buy- and sell-side analysts. Notably, only 53% of investors thought that a recession was quite so imminent in 2017. (BCG’s tenth annual survey seeking understanding of investors’ views on global equity markets and priorities for shareholder value creation was conducted in October 2018 at the onset of the current market downturn. Respondents included 260 investors who represent firms that manage $12 trillion to $15 trillion in assets.)

Only a third of investors (33%) said that they are bullish about the market’s potential over the next 12 months, down from nearly a half a year ago.

Investors’ expectations for average annual total shareholder return (TSR) over the next three years remain tempered—at 5.6%, nearly the lowest level since BCG began tracking TSR expectations in 2010, according to the survey.

Investors Want Management to Focus More on Long-Term Value

“Given the intensifying concerns about the investment environment, valuations, and the economy, most investors want companies to do more to prioritize long-term value creation over short-term results. Many think management teams aren’t doing enough in this regard,” said Alexander Roos, a BCG senior partner and coauthor of the article.

The vast majority of investors (82%) are calling for companies to focus on long-term value creation. But they said that only 50% of the companies they invest in or follow have properly aligned business, financial, and investment strategies. Furthermore, they reported that nearly half (48%) of the companies they own or track need to be more aggressive about pursuing investment in R&D in order to build value. 

“In a highly dynamic and complex business environment, investors want companies to deploy their resources to drive innovation and support businesses that have the potential to achieve competitive advantage and deliver strong and sustainable value creation,” said report coauthor and BCG senior partner Jeff Kotzen. “Leaders and executives need to balance building resilience in the face of short-term headwinds with making long-term decisions that secure commercial and capital market advantage over the long term.”

How Investors Think Companies Should Deploy Cash

In the context of the more sober outlook, investors see significant room for improved capital allocation. Forty-three percent of investors said that companies need to improve in this regard, followed by 37% who said that companies should improve their strategic development and planning and 38% who said that companies need to improve risk management processes.

Organic reinvestment remains the number one capital allocation priority with nearly two-thirds of investors (64%) prioritizing it. In contrast, inorganic investments and cash payouts lost some favor: only 39% of investors said that they now advocate for mergers and acquisitions as a preferred use of corporate cash, down from 48% in the 2017 survey; only 22% said that they prefer dividend increases, down from 30% in 2017. In consideration of the potential for headwinds, investors also see strengthening the balance sheet as more important: 21% cited building cash on the balance sheet as an important priority, up from only 11% in 2017; and 32% said that they favor the retirement of debt, up from 26% in 2017, according to the report.

What Investors Themselves Are Doing

What steps are investors taking as they brace for a downturn? According to the survey, they are, by a ratio of 2 to 1, spending more time making investment decisions, taking a more value-oriented approach and exiting investment positions more quickly.

It is interesting that nearly half of investors (48%) said that they are actively considering environmental, social, and governance (ESG) factors in their investment decision-making process, because these factors drive long-term performance.

“Investors do exactly what they expect from the companies they invest in,” said Hady Farag, an associate director at BCG and coauthor of the report. “They take fewer short-term risks by being more diligent, investing for value over growth, and getting out of investments more quickly. At the same time, they look at the long-term fundamental attractiveness of the companies they invest in, increasingly also through an ESG lens.”

A copy of the article can be downloaded here.

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

About Boston Consulting Group

Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries.

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