Today we have published our regular monthly Industrials round-up. In that piece we referenced briefly the earnings season so far and one particular point of interest.
The tone of the guidance and the discussion around the third quarter point to a slower global growth environment and one that many companies are suggesting may be around for a while. Whether it is slower growth Asia, slower growth in the US or continuing declines in Europe, the story has not changed, but the expectation of what a recovery might look like has. Companies are clearly more concerned about the shape of any recovery, and the idea that we may be a slow growth World for several years is beginning to become the base case assumption for many, at least in the rhetoric.
We recognize that Hurricane Sandy will mean some incremental demand in some sub-industries in the near term, but this will only last two quarters at the most. It is unlikely to move any needle meaningfully and companies and investors should look through this towards what might be a new normal.
This possible new base case raises all sorts of questions about appropriate strategy and whether companies need to rethink their mid-term and longer-term planning as well as the immediate term. A 2% world is very different from the 4 or 5% World we have grown used to over the last 20+ years.
Slower growth means many things and provokes many questions:
- Slower revenue growth
- Possible diminished pricing power
- More competition – “if we cannot grow into our surplus capacity we had better try and price to gain market share”
- Less need for expansion capital
- More demand for dividend growth to increase shareholder return, if you cannot get it from top line growth
- A re-evaluation of businesses you might be thinking about buying
- A re-evaluation of your own businesses and whether they remain an important part of the portfolio
- Defensive rather than offensive M&A
- A fresh look at your customers to evaluate whether their reaction to a lower growth World will change their strategies in a way that might impact you, either positively or negatively
- Appropriate levels of R&D spending
- Cost control
Every company should be focused on many or in some cases all of these issues today. Anyone who admits to a slower growth World, but is not reviewing strategy at a granular level is hoping that things will get better and is not really admitting to slower growth. They are likely to make some very poor allocation of capital decisions as a result.
I entered the workplace towards the end of a sustained period of slow growth in the early 1980s – at that time caused by a rapid rise in oil prices in the 70s and a period of very high interest rates in an attempt to stem inflation. In the chemical industry at that time, as well as in other industries, there were no “growth” projects – based on the underlying expected rate of growth we had enough capacity to last for a decade.
Now is the time for shareholders to be asking the tough questions.