Macroeconomics: Framing the bigger picture

What happens to a Swiss company when its national currency appreciates by 25 percent in a week? Will other industries in an energy-dependent economy suffer from crashing oil prices? Is there life for global business after the end of the ‘Chinese miracle’? Those are a few of the questions investors have been asking themselves as global markets were rocked this past year by a period of unprecedentedly violent macroeconomic turbulence.

According to IR Magazine’s latest US-focused investor perception study, a resounding 86 percent of buy-side respondents and 82 percent of sell-siders would prefer companies to give their views on how macro issues will affect their business, rather than rely on their own judgment (see Macro communication, below). Investor relations departments worldwide are therefore under intense pressure to deliver more detailed and accurate data on macro trends and their impact on performance. Here are a few tips on communicating clearly and efficiently about different economic factors during stormy times.

Foreign exchange rates

Exchange rate mayhem has kept IROs particularly busy these past 18 months. The end of the Swiss franc’s peg to the euro in January 2015 and the soaring US dollar, which has appreciated by 20 percent over the past two years, are key concerns for investors that have reportedly been eager to discuss the effects of currency fluctuations on business performance.

Timothy Post, head of IR at the Krasnodar, Russia-based food retailing major Magnit, explains that the ruble had maintained a strong level for the past 10 years thanks to high oil prices. When the exchange rate tumbled in the aftermath of the 2014 political crisis over Ukraine and the Russian government imposed counter-sanctions on western products, food inflation peaked at 25 percent in February 2015.

‘While inflation is now down to 5.2 percent year-on-year, the delta between wage increase and food inflation is still negative, which is a big challenge for us,’ Post says. ‘That’s a dominant macro issue and it filters into every aspect of the business right now. Our task is to adjust the assortment to sell our customers items they can afford.’

Over in Basel, for Switzerland-based pharma company Novartis it’s – surprisingly – the US dollar and not the fickle Swiss franc that has attracted most inquiries from investors and analysts. ‘Of course, the euro was a natural hedge for us,’ says Novartis’ head of investor relations Samir Shah. ‘And with the unpegging last January we’ve lost that.’

‘Because we’re listed on both the SIX Swiss Exchange and the NYSE, however, we report in US dollars, so for us a major issue has been the continuing appreciation of the US dollar, which has negatively impacted earnings and cash flow.’

Consequently, Novartis’ IR department has been giving much more detailed guidance with regards to currency effects on both the firm’s top line and bottom line. ‘We’re finding it’s much more difficult for analysts to make projections because they’re so overworked,’ Shah says, explaining how Novartis’ new policy helps sell-siders with their models. ‘As opposed to giving them just yearly guidance, we now give them future quarter guidance in terms of our expectations for currency impact by providing an extra slide in our quarterlies.’

American Express, which has about a third of its business overseas, took a similar approach when it saw its performance affected by the strong dollar. ‘That’s something we’ve seen in the past at times, but I think the magnitude of the change over the last year has been something pretty much unprecedented,’ notes John Hall, IR director at Amex. ‘Foreign exchange is the one area where we’ve had incremental change in our presentation material. We try to do a better job providing details about which currencies drive the biggest impact and how those currencies have shifted over the last year.’

Amex’s IR team started adding a page about exchange rates in the report for the first quarter of 2015, showing revenues on a foreign exchange- adjusted basis as well as on a reported basis. ‘At the bottom of that slide, we also give a little bit more detail about the volume of that currency,’ Hall says.

KEY TAKEAWAY: Increase guidance on currency fluctuation and impact from yearly to quarterly, including data on currency volume and foreign exchange- adjusted figures

GDP trends

With growth decelerating significantly in emerging markets over the past four years, Shah has been getting lots of queries about Novartis’ business in these areas. ‘Emerging markets were always volatile but our growth in these markets, which represent about a quarter of our revenues, has slowed significantly over the past year,’ he explains, highlighting that the situation has improved very recently after a bad start to 2016, when the firm was receiving ‘negative reports coming in from China and the rest of the emerging growth markets.’

Hall, on the other hand, is not often asked about the effects of the economic slowdown in China. Amex, which has ‘a decent amount of volume’ in the country through an agreement with China UnionPay, hasn’t seen a big impact from a financial perspective. ‘Because it’s such a low-margin business, we earn little revenue on those billings,’ he says. He is, however, concerned about the Chinese situation’s indirect impact. ‘If it’s a harbinger of lower growth in the world economy and that leads to a global recession, that would definitely be more of an issue as GDP tends to be a pretty good determinant of payments volume and our business overall.’

In Brazil, has the country’s state of ‘stagflation’ steered local investor conversations toward GDP trends? ‘We’re a consumer company, so it’s factors such as disposable income, consumer confidence and interest rates that can impact our business,’ says Fabio Cefaly, IR manager at Natura. If most IR meetings at the cosmetics giant are dedicated to discussions about the company’s domestic and international markets and the business itself rather than the economic situation, ‘macro issues are definitely gaining some ground, relatively speaking,’ he adds. ‘Investors and analysts have access to experts in macro and political issues, so questions don’t go into very much detail, and it’s mostly about the political and economic environment, especially – as mentioned – the factors related to consumers.’

‘The macroeconomic situation and growth trends are the first topics everybody wants to talk about,’ observes Post. ‘Russian food retailers are an interesting sector for global investors because of their top-line high-growth rates. In aggregate, the top five Russian food retailers are gaining more than 20 percent growth per year.’

Post did a complete overhaul of Magnit’s investor presentation two years ago, transforming it into a more digestible infographic. He’s recently been working on redoing the firm’s data book, with an improved section on economic figures. ‘Our new fact sheet will have a lot more of the macroeconomic data,’ he says, explaining how he reviewed historic inflation ‘month-to-month for food, non-food and services, as well as the consumer price index. People want to discuss this and my hope is that I will give it to them in a very comprehensive format.’

Post goes on to explain that he has never given out a formal presentation in front of investors. ‘When we meet with buy-side people, they usually want to do Q&A,’ he says. ‘I’ll hand out a presentation document but I’ll try to limit that to 20-25 pages, because what they really want is a data book they can open up to dig into the numbers and copy and paste them into their models, as opposed to a static PDF slide.’

KEY TAKEAWAY: Create a comprehensive fact book including relevant highlighted macroeconomic data to help with model building

Interest rates

Deirdre Neary, senior manager of investor relations at Toronto-based TD Bank, explains how the company addresses sensitivity to changes in interest rates in its financial literature.

‘Net interest income represents more than 50 percent of total bank revenue,’ she says. ‘In our report to shareholders, we provide the after-tax impact of changes in interest rates on the economic value of shareholders’ equity. In addition, we provide the after-tax impact of a 1 percent increase in interest rates on net interest income in our supplemental financial information package.’

Somewhat surprisingly, given that Amex is a financial services company, the December 2015 interest rate hike hasn’t been a main talking point in meetings, Hall comments. ‘We have a big charge business so we’re borrowing money to fund the loans of our members,’ he explains. ‘A rise in interest rates will have a slightly negative effect on our P&L but, as we are a spend-centric model that is very different from other businesses, it doesn’t affect us as much as it might our issuing peers.’

At Novartis, Shah’s audience is reportedly more interested in the secondary impact of actual and potential rate increases. ‘Investors and analysts want to discuss the US rate hike but only in the context that it actually influences whether the US dollar continues to strengthen and therefore continues to depress our earnings and cash flow,’ he says.

Asked about the impact of the negative rate environment in Switzerland, Shah says it hasn’t yet prompted traditional fixed income investors to switch to Novartis shares. ‘They may be more inclined to hold on to Novartis shares for the dividend, but are they switching to Novartis because of that?’ he asks. ‘I haven’t noticed it yet.’

‘People think things are much more negative in Russia than they actually are, both in the stock market and the general economy,’ Post points out. ‘Life goes on. We’re in a recession but there are a number of countries globally that are in recession and can’t stimulate their economy with low rates.’

KEY TAKEAWAY: Incorporate case study scenarios with impact of different levels of interest rate increases or decreases on top and bottom-line figures

Oil prices

‘What’s happening in Russia right now is really a function of the price of oil,’ says Post, who confesses to regularly joking about barrel price predictions in investor meetings. ‘The buy side understands that the ruble devaluation is tied to the price of oil and that there’s a near one-to-one correlation. So I don’t get questions per se about oil, but it’s certainly just below the surface in everyone’s mind.’

The decline in oil prices, which led to lower fuel prices, has had direct repercussions for Amex’s revenues. ‘Given that gasoline makes up 2 percent to 3 percent of our volumes and prices are down 20 percent to 30 percent, that’s a 90-100 basis-point drag on our billings growth,’ Hall explains. ‘And we haven’t yet seen consumers use those savings in other discretionary categories. So it’s something that’s on investors’ minds, but for us it’s more about looking back at when the large drops occurred and when we might be lapping up some of that impact.’

With commodities a big part of the Canadian economy and the volatility in energy markets over the last year and a half, there is heightened interest among investors around TD’s oil and gas exposure and the potential impact of low oil prices on credit losses. As such, the firm’s IR team has enhanced its disclosure on this topic in its quarterly results presentation and report to shareholders. The bank’s chief risk officer was also enlisted to participate in investor meetings and conferences, speaking about the bank’s credit quality and potential credit losses from low oil prices, Neary says.

‘Our investors and analysts are keen to understand our exposure to the energy sector,’ she explains. ‘In recent quarters we’ve enhanced our disclosure in both our quarterly earnings presentation and our report to shareholders on our lending to corporate and commercial clients in the sector, as well as our consumer lending and small business banking exposure in provinces that are affected by the decline in oil prices – namely Alberta, Saskatchewan and Newfoundland and Labrador.’

Oil prices are only a mild concern for investors in Natura, whose free float is 90 percent-owned outside Brazil, Cefaly says. ‘We haven’t seen any structural changes in our shareholder base because of macro turbulence, although we inevitably feel the impact of big capital inflows and outflows as we’re in the top 50 national companies in terms of liquidity,’ he explains. ‘There’s a difficult scenario in Brazil at the moment, but our good execution, strategy and communications to the investment community can definitely help soften the big lows in the market.’

KEY TAKEAWAY: Add a special section to disclosures on exposure to commodities and potential related losses, bringing in operational expertise for earnings calls and investor meetings

This article appeared in the Summer 2016 issue of IR Magazine