It’s a stock pickers market, what should companies do?
After a summer of high share price correlation, we are back in a stock pickers market, which means investors are focusing on company fundamentals rather than macro-economic trends to direct their trading strategies. It’s tempting to think that this means you as CEO or CFO should allocate more time to meeting with investors. Our view is that even when macro-economics is dominating investor behaviour, you should maintaining a regular drumbeat of investor communication, because the companies that do this reap rewards in the stock-picking markets that we see today.
Our chart this week tracks how much shares in European stock markets are moving in correlation with each other. When correlation is high, as in Q1 and Q3 this year, and on and off for much of 2014, it means there’s less differentiation between different companies share price movements. Q3 2015 was particularly extreme, with the smaller stocks (the Europe 600 index) actually having higher correlation than the big ones (the Europe 50) for a few weeks.
Fundamental investors hate times of high correlation. You can’t outperform cheaper index funds when correlation is high. So the active fund management industry will be welcoming the change after a summer of macro-driven share price movements. This is their moment to shine – at least for the ones that are positioned correctly.
But the work to build an outperforming portfolio will have already happened. We can’t predict the ebb and flow of correlation, but we do know that few fund managers will invest material amounts on the back of one meeting. Fund manager trust in a company is built over time, with regular meetings at roadshows and conferences. Executives often resist suggestions of a roadshow if they have “nothing new to say” but in fact a repeat of the previous message, coupled with appropriate reported numbers in the meantime, is very reassuring to investors.
The “steady drumbeat” theme applies equally to private companies who might be months or years away from a fundraise or IPO. Investors hate being rushed in to a decision and spreading the word at conferences and VC events is much more powerful if you say you don’t need money yet.
Andrew Griffin spent almost two decades as a technology equity analyst before working in investor relations, corporate development and market intelligence for a UK listed software company. In 2015 he set up Oakhall to provide smart financial analysis and articulation for European public and private companies.