Holmes Report 20 Apr 2011 // 11:00PM GMT
Only 14 percent of European investor relations professionals expect a decline in corporate earnings to halt the stock market rally over the next 12 months, according to the third annual survey by financial and corporate consultancy Citigate Dewe Rogerson.
The firm says companies are feeling confident that they can maintain increased levels of corporate profitability but are more concerned with demand, with 43 percent of respondents believing that a reduction in consumer spending threatens the continuing rise in the stock market. Seventy percent of respondents believe the biggest threat comes from the sovereign debt crisis where the risk to the stock market is twofold: current account deficits or plans to reduce them could choke off demand and destroy the rally.
There are concerns about the quality of analyst coverage—a feature of our survey since it first sought the views of IROs three years ago—with 21 percent of respondents feeling that the quality of analyst coverage has declined over the previous 12 months. On balance, CDR says, the quality of coverage is not getting better, but the deterioration is slowing: 17 percent of respondents feel it has improved over the past year, compared to 14 percent of respondents in 2010.
Almost two-thirds (64 percent) of respondents are disclosing more information on objectives and strategy and 60 percent are disclosing more information on the drivers behind revenue and profit growth.
Says Michael Berkeley, executive director of CDR and head of its investor relations practice, “Many companies have had a strong story to tell in terms of costs savings over the past couple of years. Companies are now feeling more confident to be talking again about strategic objectives, growth initiatives and revenue drivers. We’re not out of the woods yet, but the fact that companies are prepared to look ahead with more confidence has got to be encouraging. What’s less encouraging is that one fifth of investor relations officers believe the quality of analyst coverage has declined in the last year, with short-termism and lack of depth often cited as an issue.”
However, only 25 percent of companies are disclosing more information on the risks to their business. Reporting on risks is still in its infancy and for too many years companies chose to avoid this area for fear of drawing attention to weaknesses in their business. The financial crisis provided an impetus for companies to address this and fund managers and analysts are paying more attention to this area.
Sean Bride, author of the survey, says: “Companies need to communicate business risks within the context of their business model and strategy with links to KPIs to demonstrate the likelihood and impact of key risks with clear strategies to help mitigate them. This can reinforce management credibility which helps to build trust with investors.”
In a year when the issue of corporate governance remained prominent and a number of initiatives born out of the financial crisis came to fruition, 41 percent of respondents feel that the biggest barrier to effective corporate governance is lack of engagement from shareholders, coupled by lack of feedback from investors cited by 33 percent of respondents. It is therefore the view of a significant proportion of companies across Europe that measures to get investors more engaged in corporate governance are desirable.