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INSIDE THE BUY-SIDE® THIRD QUARTER | ISSUE DATE: JULY 8, 2015
An up-and-down quarter of trading stumbled to a close as Greece’s ongoing debt crisis seemingly came to a head at the end of June, resulting in a mixed-to-negative performance for U.S. stock indices. For the second quarter, the NASDAQ gained 1.8% and the Russell 2000 added 0.1% while the S&P 500 and DJIA declined 0.2% and 0.9%, respectively. For the S&P 500, the loss marked the end of a nine-quarter upward trend while the DJIA turned in its second straight quarterly loss.
Inside The Buy-Side ®
In our ongoing effort to track changes in institutional investor sentiment and expectations, as well as provide insights heading into earnings season, we surveyed1 78 investors globally across multiple industry segments and investment styles. Participating institutions manage just over $4.4 trillion in total assets. Global markets plunged on June 28, as the Greek government ordered its banking system shut down for six days and directed its central bank to enact measures preventing money from leaving the country. Many major stock indices posted their biggest losses of the year. The following day, Greece announced it would not make a scheduled debt payment to the IMF and was seeking an emergency bailout from other Eurozone nations, which never materialized. In the meantime, the Shanghai Composite Index lost 30% in 14 trading sessions after reaching a peak on June 12.
EditorEditor-inin-Chief: Rebecca Corbin rebecca.corbin@corbinperception.com (860) 321-7369 Director of Research: Bronwyn Swanson bronwyn.swanson@corbinperception.com (860) 321-7309 Market Performance 2Q15 YTD DJIA (0.9%) (0.5%) NASDAQ 1.8% 5.8% S&P 500 (0.2%) 0.9% Russell 2000 0.1% 4.1%
Investment Style Hedge Fund | 24% Value | 22% GARP | 19% Growth | 17% Yield | 5% Other | 13%
Geography
N. America | 53% Europe | 25%
Meanwhile in the U.S., economic reports continued to provide mixed signals with evidence of both a resilient consumer and slowing industrial production. In May, consumer spending rose 0.9%, its biggest monthly gain since August 2009, while the economy created 280K jobs, the highest figure since last December. At the same time, U.S. industrial production decreased modestly for the second consecutive quarter.
Asia/Pacific | 18% Latin America | 4%
Sector Generalist | 78% Multi | 10% Industrials | 3%
While our current survey shows evidence of an upturn in sentiment, participants continue to take a cautious approach in the face of many of the same concerns expressed in the previous two reports, including continued currency
Energy | 3% Financials | 3% Cons. Disc. | 1% Materials | 1% Technology | 1%
1
Timeframe: June 9 – 26, 2015 1
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headwinds, moderate global growth prospects and low energy prices.
Key Trends
Inside The Buy-Side ®
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•
•
As 2Q15 earnings season kicks off, our channel checks on sentiment indicate renewed optimism following a twoquarter trend of building bearishness; while certain regions and sectors are favored, it remains a stock picker’s market
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88% report 1Q15 earnings in line or better than expectations, significantly better than original predictions
–
70% expect 2Q15 results to be in line or better than consensus, up from just 55% in the prior quarter
–
Management tone is largely described as cautiously optimistic, while those reporting a more negative outlook declined by more than half
After two consecutive quarters of waning confidence in organic growth, free cash flow and EPS momentum, investors, in aggregate, are now anticipating improvement in all three metrics this quarter, setting the stage for a potential sell-off should corporates fall short relative to expectations; still, rifts in regional opinion exist European investors are notably the most optimistic to outwardly bullish closely followed by their U.S. counterparts; meanwhile, Asia-based investors are decidedly downbeat
•
60% of participants consider U.S. equity market valuations sustainable; we note a significant upsurge in those pointing to corporate profits as the main driver of the U.S. bull market
•
Investor conviction in the U.S. economy over the next 12 months remains strong though other areas, specifically the Eurozone, Japan and India, continue to gain in sentiment; the perception on Latin America’s economy remains poor
•
Nearly 60% continue to expect the Fed’s initial rate increase in the second half of 2015; the number targeting 2016 has risen only modestly
Corbin Perception: Proven Methodology, Proven Results Corbin Perception assists public companies with systematically understanding and positively influencing critical institutional investor sentiment. We provide senior level executives and IR professionals with company-specific quantitative and qualitative feedback from investors and analysts and then draw upon our firm’s considerable expertise to guide management teams in shaping those perceptions and maximizing valuation. Our clients range from mega-caps to micro-caps worldwide across diverse industries. Our quarterly investor research report, Inside The Buyside®, which tracks changes in global institutional investor sentiment, is covered by news affiliates worldwide and featured regularly on CNBC’s Squawk on the Street. CorbinPerception.com info@corbinperception.com (860) 321-7309 Follow us @CorbinResearch
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Reinvestment remains investors’ leading choice for use of excess free cash, underscoring their desire for organic growth
•
More than half expect crude oil prices to rise from current levels2 by year-end
Are Equity Market Valuations Sustainable At Current Levels?
33% 50%
•
•
Investment professionals are bullish on financials, healthcare and technology and bearish on utilities, materials and REITs; while still downbeat on energy overall, sentiment continues to warm and it appears we have reached an inflection point Just over 60% expect 2Q15 U.S. GDP to be sub-2.5%
Inside The Buy-Side ®
Views On On Equity Market Market Valuations Indicate Indicate A Level Of Comfort Setting In U.S. equities took a choppy route through 2Q15 before the markets staged a Greek-induced, stomach-churning last two days of trading to end the quarter. Before June 28, stocks had been moving in a narrow range since the end of February. And, while our poll closed ahead of the unfolding Greek referendum, surveyed investors reported the potential for a Greece default and related Euro exit risk as a top concern. Besides Greece, investors remain focused on the likelihood of a rate increase from the U.S. Fed, a potential recession in China and the improved lift from the U.S. consumer. The percentage of investors who view current equity valuations as sustainable increased marginally, to 60% from 58% last quarter. European investors are the most confident, increasing to 78% from 43% last quarter. Not surprisingly, fund flows continue to move out of North America and Asia and into Europe. Still, the majority of investors based in Asia and Latin America largely indicate their respective regional equity markets are unsustainable at current levels.
67%
78%
50% 22%
60%
40%
Yes N.A.
No Europe
Asia/Pac.
LatAm
What Is The Primary Driver Of U.S. Equity Markets' Performance? 43%
Corp. Profit/Earnings
68% 60%
The Fed
65% 52%
Economic Growth
55% 33%
Lack of Alt. Investments
Share Buybacks
Inflows: Fixed Income
2Q15
40% 40% 28% 19% 23% 3Q15
In a change from recent quarters, participants now cite corporate earnings as the leading U.S. equities market driver and not Fed policy, though the actions of the Fed along with economic growth remain key. Importantly, a lack of compelling alternative investments, as evidenced by money inflows from fixed income, continue to direct equity markets. 2
~$60 per barrel during survey timeframe 3
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“Globally, market valuations are sustainable. However, it is more expensive in terms of P/E ratio but with the 0% interest rates in U.S., Europe and Japan, there is no alternative.” Core
What Was Your Opinion Of 1Q15 Earnings Results?
Value, Generalist | Latin America
“We see market valuations at a high level to their historical trading, above two standard deviations. Market liquidity and the lack of other attractive investment vehicles support the premium in current valuations. With higher rates in the future, we should see a correction.” Core Value, Generalist | Latin
28%
Better Than
35% 27%
In Line
53%
America
45%
Worse Than 12%
“They are a little high depending on interest rates. If you look over a three-year view, they are sustainable.” GARP, Industrials Industrials | North America
“Current market valuations are not sustainable for indices but they are for small caps.” Core Value, Generalist | Europe
After A Significant Reset In Expectations Last Quarter, Investors Are Hopeful
Expectations
View Post-earnings
What Are Your Expectations For 2Q15 Earnings Results? Better Than
33%
Inside The Buy-Side ®
In Line
Among surveyed investors, 88% describe 1Q15 earnings as in line or better than expectations, a notable figure given that, heading into the quarter, 45% were predicting results to come in worse than consensus. Conversely, investor expectations for 2Q15 earnings are significantly more hopeful. Currently, 70% anticipate results in line or better than consensus versus just 55% last quarter. Investors largely cite “conservative guides” and improved U.S. consumer confidence. Such optimism represents a return to levels seen in the third and fourth quarters of 2014, when 70% and 76% of investors, respectively, projected in line to better than consensus results. Regionally, European investors, who were slightly more upbeat last survey, are now even more bullish, with none of those surveyed expecting worse than consensus results for 2Q15 earnings. Meanwhile, Asia/Pacific contributors, who had turned optimistic last quarter, have flipped yet again, exhibiting the most pessimistic outlook of all the regions, including Latin America. Specifically, 75% expect earnings to be worse than consensus, up from 38% last quarter, while none of those surveyed expect better than consensus results.
37%
Worse Than
30%
2Q Earnings Expectations By Region
33%
67%
25% 37%
63%
75%
33%
48%
19%
Better Than
In Line
Worse Than
N.A.
Europe
Asia/Pac.
LatAm
Have FY15 Guidance Estimates Come Down Enough?
49% 51%
Yes
No 4
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Notably, surveyed participants are split on whether FY15 guidance has come down far enough relative to headwinds including global growth concerns, currency and energy prices. While 51% maintain guidance is sufficiently reduced, with 23% of this group expecting upward revisions, 49% contend estimates have not come down enough with nearly all predicting additional guidance revisions to the downside.
“U.S. consumers are out of hibernation due to another horrible winter nationwide. Jobs are solid, housing is improving, inflation remains low and confidence is up.” Core Value, Generalist Generalist | North America
Improving
Staying the Same
Worsening
Organic Growth 53% 1Q15
23% 24% 33% 27%
2Q15
40% 40% 35%
3Q15 25%
“Concerns about rising interest rates deter investments and consumption, which has dampened my expectations.” Core Growth, Multi | Asia/Pacific
Inside The Buy-Side ®
“I am hoping that the effect of the weak euro and oil prices will start to be seen in the numbers as hedging starts to roll off.” Deep Value, Generalist | Europe Europe
Free Cash Flow 48% 1Q15
34% 18%
2Q15
35% 35% 30%
3Q15
37% 33% 30%
Performance Performance Metrics Channel Check: Predictions For Improvement Reverse TwoTwo-quarter Trend Our quarterly channel check on performance metrics (i.e., Organic Growth, FCF and EPS) reveals that sentiment, which had been moving steadily to the downside the last three quarters, took a strong, positive upturn. In aggregate, the percentage of respondents expecting all three metrics to improve rose significantly, with Cash Flow growth seeing the largest spike in expectations. Moreover, the number of respondents expecting worsening numbers was down modestly as well across the board.
EPS Growth 44% 42%
1Q15 14%
2Q15
27% 21% 52%
Drilling down into the various regions, investors: •
North America: Are more positive on organic growth and EPS acceleration than on FCF generation
•
Europe: Expect significant EPS growth while views on organic growth are split between remaining stable and improving; meanwhile, FCF is largely seen as improving
•
Asia Pacific: Are decidedly mixed on EPS improving or worsening, see middling to deteriorating organic growth and a slight improvement in FCF
•
Latin America: Expect deterioration across the board
42% 3Q15
33% 25%
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Despite Ongoing Uncertainty, Uncertainty, Management Cautiously Optimistic Optimistic
Investors Investors
And
After holding generally steady through the previous two quarters, investor sentiment reveals some shifts, especially at each end of the spectrum. Notably, bullish sentiment doubled, to 18% from 9% last quarter while outright bearish sentiment jumped to 9% from just 4%. Again, we see a regional split: 44% of European investors describe themselves as bullish while none hold a bearish outlook. On the other end of the spectrum, no Latin America or Asia/Pacific investors currently describe themselves as bullish.
“We see improving economic data, improving weather and increased consumer confidence.” GARP, Generalist | North
Bulls vs. Bears Trend Analysis 25% 20% 15% 10% 5% 0%
Bulls
Bears
How Would You Describe Your Current Sentiment? 9% 9%
Bullish
18%
America
“While margins appear sustainable, ongoing economic expansion is a question.” Core Value, Generalist | North
Inside The Buy-Side ®
America
“Although spending should pick up in the summer months, growth remains a concern. There is a heightened chance of an external shock.” GARP, Multi | Europe Following a period of three quarters during which management tone was perceived as increasingly more negative, participants report outlooks have stabilized and even turned slightly more positive. Specifically, the number of respondents reporting a more negative management tone declined to 11% from 24% while those describing it as bullish rose to 15% from 11% last quarter. Investors across all regions report hearing a “mixed bag” of expectations from senior managers as concerns about currencies and global growth are juxtaposed against optimism driven by lower energy prices and favorable unemployment data, which should bode well for the U.S. economy as consumers begin to spend.
39% 45% 34%
Cautiously Optimistic 15% 9% 14%
Neutral
33% 33%
Neutral to Bearish
25% 4% 4% 9%
Bearish
1Q15
2Q15
3Q15
How Would You Describe Executive Tone? 14% 11% 15%
Bullish
56% 59% 59%
Cautiously Optimistic Neutral
11%
“Some people are very bullish about lower gas prices, improved unemployment and the macro environment for the consumer but there are definitely pockets of weakness.”
Bearish
Hedge Fund, Multi | North America
Less Negative
“Guidance has been more of a re-affirmation of ongoing expectations: not too hot and not too cold. They are primarily focused on managing downside surprises (e.g., revenue
More Negative
7% 3% 2% 2% 3% 2%
1Q15
21% 24% 11% 2Q15
3Q15 6
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surprise; earnings surprise). Pricing power at producer and retail levels remains constrained.” Core Value, Generalist |
Looking Out 12 Months, On Which Region Are You Most Bullish?
North America
“We see an optimistic management based on a better economy but we still see certain aspects that remain weak.” Core Value, Generalist | Latin America
48%
U.S.
34% 22%
Eurozone
Around The World: Optimism Abounds In Europe While China Has Has Further To Fall
25% 4%
Japan
22% 15%
India
Inside The Buy-Side ®
North America: America: For three consecutive quarters, investors remain the most bullish on the U.S. though less so in past quarters as other regions/countries begin to garner positive attention, most notably the Eurozone. Meanwhile, fear of a U.S. recession in the next 12 to 24 months is minimal with 60% predicting a downturn 2 to 3 years out. Europe: Europe: Following last quarter, when bullish sentiment toward the Eurozone surged from just 6% to 22%, the positive outlook among investors continues to gain momentum. The ECB’s ambitious QE program and the belief that Greece and other sovereign debt issues can be contained without negatively affecting stocks long-term buoyed sentiment. Japan: Japan: Bullish outlook toward Japan took a leap forward, as investors seem reassured that the Japanese economy is pulling out of its recession and that the Bank of Japan and political leaders will continue to take actions that will drive further growth.
11% 7%
SE Asia
China
Canada
LatAm
8% 2% 0% 2% 0% 0% 0% 2Q15
When Do You Think The U.S. Will Have Its Next Recession? 45% 37%
Latin America: America: In line with the previous two quarters, Latin America continues to garner the most bearish sentiment and for largely the same reasons: poor economic policymaking, commodity price pressures and political instability. Top Geographic Concerns
Prior Quarter
Current Quarter
Latin America economy China slowdown Russian aggressiveness ISIS
China slowdown Global capex spending Greek default Latin America economy
3Q15
18%
0% < 1 Year
1 - 2 Years 2 - 3 Years 3 - 5 Years
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Investment Sector Trends Despite overall mixed sentiment, surveyed investors maintain a bullish stance on healthcare and technology stocks this quarter, given the outlook for higher margins and improving growth largely driven by innovation. Meanwhile, financials remain a top pick as M&A activity in 2015 continues at a substantial pace and is on track to eclipse 2014, a record year.
Inside The Buy-Side ®
While views remain downbeat on energy in aggregate, our survey marks two consecutive quarters of improving sentiment with 35% indicating a bearish stance versus 52% last quarter. Indeed, investor sentiment has seemingly reached an inflection point. To that end, 53% of surveyed investors project oil prices to rise albeit only “somewhat” by year-end, despite continued reports that markets are currently oversupplied. Investors expect rig counts and production out of the U.S. shale-oil industry to decline going forward. Meanwhile, 33% see prices holding steady during the remainder of 2015. Continuing, investors have become significantly less bullish towards industrials this quarter, with only 28% remaining bullish versus 52% last quarter largely attributed to extrapolation of second- and third-derivative effects from weakness in the energy markets and lower exports impacting a variety of industrial end markets. Still, our recent industrial sector sentiment report3 points to signs of life in higher growth verticals, such as building products, construction (resi and non-resi) commercial aero and auto. Not surprisingly, investors maintain a bearish stance towards interest-sensitive utilities and REITs.
Bulls “I am bullish on consumer staples, financials, materials and technology. My Brazilian equity view is different than a global perspective.” Core Value, Generalist | Latin America
On What Sectors Are You Most Bullish/Bearish? Healthcare
63%
Financials
63%
Technology
55%
Energy
33%
Biotechnology
30%
24%
Cons. Discr.
28%
27%
Industrials
28%
27%
Cons. Stpls.
23%
Materials
25%
Telecom REIT Utilities
8% 19% 11% 35%
24% 30%
20% 22% 13% 32% 5%
51%
Bullish
Bearish
Energy Sector Sentiment Trend 80% 60% 40% 20% 0%
Bulls
Bears
“I am bullish on energy as oil prices are going higher, as well as healthcare due to an aging population.” GARP, Energy | North America
“We see continued innovation, pricing power, sustainable margins and government expansion in healthcare. In technology, there is continued innovation, sustainable 3
Issue Date: June 16, 2015; report available on website 8
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margins, pricing power and a benefactor from capex. In financials and consumer discretionary, there are expanding margins and improving revenues.” Core Value, Generalist | North America
When Do You Anticipate The Fed Will Announce Its First Rate Hike? 46%
3Q15
27%
Bears “I am bearish on telecom and utilities due to higher interest rates and lack of growth in EPS.” Core Value, Generalist | North America
“We are bearish on technology but we are looking at profitability and opportunistically buying when we do see weakness in stocks.” Growth, Growth, Technology | Europe
20%
4Q15
31% 14%
1H16
31% 7%
2H16
4% 6%
Beyond 2016
7%
“There is lack of pricing power and constrained capacity in energy. There are declining prices for raw and semi-finished products, compressing margins and constrained capacity in materials. We also see rising interest rates and compressing margins in REIT and utilities.” Core Value, Generalist | North
2Q15
3Q15
Inside The Buy-Side ®
America
Who Doesn’t Love Organic? For the fifth quarter in a row, participants rank reinvestment highest as their preferred method for deploying excess free cash underscoring the demand for organic growth, a metric on which they place a premium. Further, dividend growth regained favor given its “real yield” appeal, while share repurchases remain in the bottom quartile of preferred uses. M&A has fallen in aggregate largely due to the perception that multiples are becoming frothy in the face of overly optimistic growth assumptions and an unsustainable low interest rate environment. Finally, debt reduction is largely a preference of European investors going through the early stages of their economic recovery.
What Is Your Preferred Use Of Excess Free Cash? 91% 89% 91% 87%
Reinvestment
84% 73%
Dividend Growth
50% 72% 86% 64% 78% 71%
M&A
58% 49% 41% 60%
Debt Reduction
70% 53% 59% 57%
Share Repurchase
4Q14
1Q15
2Q15
3Q15
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IR Topic – Direct Investor Access to the Board In this day of activism whereby shareholders are increasingly holding boards of directors and management teams accountable for unlocking shareholder value, public companies must be their own activist. Indeed, with over $111 billion in managed assets, activism has become a recognized investment class and is expected to grow.
Is Your Firm Interested In Having Direct Access To Board Members?
37%
45%
Yes No
18%
It Depends
Inside The Buy-Side ®
Given ongoing investor interest in and questions from corporate clients about board access, we surveyed financial professionals on their positioning regarding the matter. Notably, 82% maintain they are in favor of having direct access to board members, with 45% indicating it is especially important when there is a serious disconnect between management and investors. This underscores the importance of maintaining a pulse on investor sentiment through systematic and periodic investor perception work. It is especially important to get a candid and independent read on views toward management regarding strategic vision and execution track record, and to identify potential campaign themes.
“CEOs from BlackRock, Vanguard, ISS, and Glass Lewis along with SEC Chair White have all made it clear that shareholder engagement will play a major role in how they will respond to management and the board’s request for support. Looking at all the different avenues where we see activism developing, it’s just foolish for a board not to have a plan to engage with shareholders,” asserts TK Kerstetter, CEO of Boardroom Resources and host of Inside America’s Boardrooms. We agree that it is in a company’s best interest to be proactive and develop a methodical process whereby access is either broadly offered, such as at an investor day, or on an as-needed basis in the case of a special/crisis situation. Board access representatives should be considered based on their knowledge of the company and industry as well as financial community engagement experience. It is important that the representative be briefed on Reg FD and current company messaging in order to avoid mixed messaging and or accidental disclosure. Best practices and guidelines when considering board access include:
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Inside The Buy-Side ®
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•
Be sure to develop a formal shareholder engagement communication plan and then appoint an owner or “champion” on the board in conjunction with existing staff support to execute the program
•
Conduct a company assessment to identify areas of vulnerability to corporate governance issues before engaging; for example, if you lack a viable board evaluation or board/CEO succession process, take the time and initiative to get those programs in place as soon as possible
•
Learn to walk before you run – take initial steps to get board members more comfortable with direct shareholder engagement, including:
•
–
Create informative videos on board members and what skills and experience they add and house on the governance section of the company website; invite key constituents to meet them digitally
–
Understand investor sentiment on the company
–
Start with one-way communication solutions and after some practice, evolve into a two-way engagement platform
Recognize which portfolio managers/security analysts are involved in voting decisions –
Identify whom has voting authority and how they vote (e.g., internal, ISS, Glass Lewis or combination)
–
Learn which firms have activist tendencies
•
Develop your messaging to address concerns and/or misperceptions and leverage your communication platforms (e.g., regulatory filings, press release, earning conference calls, investor presentations, etc.) to proactively state your case; either defend the issue or address it with an action plan
•
Establish guidelines for direct board access (e.g., must be a top-five shareholder, influential investor) and if warranted: –
Identify the most appropriate board representative to address the issue at hand
–
Brief board representative on investor history and questions to expect; conversations are typically 11
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high-level regarding strategy, capital allocation and governance-related matters –
•
Set an agenda for the meeting and topics expected to be covered; agree in advance on issues related to the confidentiality of information discussed at meeting
Limit and control investor access; key venues include: –
Investor Days
–
Non-deal roadshows
–
Conference call
–
Letter or email
“Having access to a board of directors that is not on the Clevel of the company would be helpful. I wonder if those boards of directors are prepped; where they can meet with investors and not cross the line.” Growth, Generalist | North
Inside The Buy-Side ®
America
“Historically, we have never approached that route and the reason being is that our firm is bottoms-up fundamental. We want to understand your company, manufacturing chain and the management team. Accessing the board can be a good option in select names if you believe the board needs to know your opinion or you can get a better understanding of the company’s strategy and the board’s opinion.” Value, Generalist | North America
“In addition to quarterly calls, companies could have an annual one with independent board members perhaps three to five months after the annual meeting” Core Value, Generalist | North America
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