“It was the most horrible time in finance even the banks didn’t trust each other and wouldn’t lend to each other.” That was how Karl Mahler Roche, head of IR for Roche, described their acquisition of Genentech during the Lehman crisis. This week’s blog will discuss how your IR team can better prepare for, and handle, a bear market. It is not something we expect to happen, but by definition bear markets are rarely anticipated, with inflation rising, bond yields climbing, many supply chains broken, and Mexico’s outlook marred by possible counter-reform in the electricity sector, it’s worth considering.
About Bear Markets
A bear market is a prolonged period of price decline, usually a fall of 20% or more from a recent high. There are two types of bear markets, secular and cyclical. Secular can last 10-20 years and has below average returns on a sustained basis, which can be broken up by rallies, but never last. Cyclical bear markets are shorter, and can last anywhere from a few weeks to a few months.
The biggest and most consequential sign of a bear market, and what sets it apart from a market correction, is that investors see no bottom in sight. A correction can be a good opportunity for value investors to find an entry point, but not bear markets. Traders instead try to make money by shorting the market, with put options, inverse ETFs, etc. Importantly for IR professionals, is that in a bear market investors are more risk averse than risk seeking.
Bear markets can be caused by slow economies, wars, a burst market bubble, pandemics, etc. The last two factors caused the last two bear markets. In March of 2020, as a result of the COVID-19 pandemic, the DJIA was down 38% from it’s high on February 12th. However, by August 2020 it had already hit new highs. From 2007-2009, the Great Recession saw a 17 month downturn where the S&P 500 lost half of its value.
Prepare by practicing good IR
The key to bear market IR is to be “transparent, responsive, and available to investors and analysts”, according to IR Magazine. Relationship building, good IR practices, and solid reputation can’t just happen overnight, it is something that is practiced over years. Then, when times are bad, investors and analysts will trust that you’re giving it to them straight, because you always have.
IR During a Bear Market
During a bear market investors will want to hear from the C-suite even more than before. They want to know what the senior team’s world view of the crisis is and how the macro changes will affect the company. Also, they will want to know what is going into the C-suite’s decision making process. If investors believe in the fundamentals of the company and trust the communication coming from the leadership team, there is much less reason for them to leave. The financial crisis should be short-term compared to the long-term investment relationship with your company. It’s also important to remind investors that consumers still have/will soon have demand for your product/service.
Naturally during a bear market to the extent possible highlight your defensive qualities, and focus less on blue sky long-term growth opportunities. Talk about a strong balance sheet; inelastic demand for your products; cash flow generation; how room for sector consolidation in your favor: that you’ve been through this before, and came out fine. If one thing Mexican companies can manage, (sadly), it’s a crisis. Usually a bear market will coincide with structural changes in the economy (eg, move to digitalization during the COVID pandemic) and explain how to benefit from such changes.
IR Magazine interviewed Colleen Johnston, former CFO of TD Bank, about IR during bear markets. She said, “just getting out and talking that through with investors was highly valued. You can offer investors a look at how your company views the world. You can show them the scenarios you’re planning for and let them see how you’re managing for best and worst-case scenarios.”
Also, if your organization is thinking about making cuts to the IR team to save budget, it’s good to remind executives of the organizational knowledge, consistency, and relationships built up with investors that can save them when times get rough.
Special Advice For Small Caps
Small cap companies are more prone to face sell offs during bear markets. Even if they are insulated from the macro events, they are at a disadvantage because they are lacking the historical financial data to show how they have reacted to previous down times.
You want to avoid a large shareholder from exiting, so engage with them, understand their concerns and address them. For each investor, understand why they have invested, what their timelines are, how your firm performs compared to peers, and if a bear market changes their investment thesis. It is recommended to prepare this background knowledge ahead of time and keep it updated.
For targeting during this time you may need to rethink your entire approach, i.e., not just approaching sector specific investors with the same profile. Be willing to explain more during these times, highlight your resilience and tell stories of how your customers are still engaging with your product.
Matt Chesler, partner at FNK IR, in an IR Magazine interview on the topic said, “the overall goal is to think about new and different metrics that help investors appreciate the durability of the business and reduce perceived risk, but avoid over-promising during a challenging climate, which can impact not just valuations, but also credibility, and can have a lasting negative effect.”
How Miranda IR can help
Miranda IR are experts in corporate communications and crisis management. We can help you create an IR plan for an economic downturn, along with any other IR needs.
Contacts at Miranda Partners