What the China slowdown means for IR

Mar 14, 2016
<p>Responding to the impact of a faltering economy</p>

This article was produced in association with ELITE Connect. It was originally published on the ELITE Connect platform.

As both the world’s second-largest economy and second-largest importer of goods and commercial services, any significant change in China’s markets will always have a ripple effect on the global economy. With no imminent signs of improvement in China’s slowing economic growth, however, IROs need to be focusing now on what they can do to counter its effects, both in the short term and further ahead.

Whereas the direct financial impact of lower share prices in China is moderate due to relatively little foreign investment in its markets, China consumes half of some of the world’s raw materials, so its economic slowdown has had the most acute impact on commodity-related sectors worldwide. Most notably, China’s troubles have added further downward pressure to the price of crude oil and other previously high-value materials, such as copper and aluminum.

With this in mind, it’s no surprise that most affected sectors are industrial: steel, metals, mining, oil and both container and bulk shipping. Import sales within the automotive and luxury goods import markets are also struggling in response to the economic slowdown and dwindling consumer spending.

All of these factors are resulting in investor community nerves. ‘Whenever we see new Chinese data released it has implications from an IR and shareholder perspective,’ comments Nadeem Velani, vice president of IR at Canadian Pacific Railways. ‘There is concern; when you look at how investors are responding to exposure to industrial companies, having less exposure to China is definitely a good thing right now. We generally trade better or worse depending on the perceived manufacturing data in China.’

So how can IROs practically respond to these anxieties? Not only is it crucial to remain up to speed with relevant data to effectively respond to investor queries, but IROs also need to be the eyes and ears of senior management, helping to shape and drive strategies to deal with the future.

One short-term win is being able to steer attention to positive operational matters, according to David Carey, senior vice president of capital markets of Canada’s ARC Resources. ‘It’s important that IROs try to position their business to withstand the headwinds of the macroeconomic environment and get investors focusing on the company and its operations, rather than the challenges,’ he explains.

‘To do this, you need to effectively communicate what you’re doing, where you’re headed and your strengths as an organization. It’s important to identify the right-sized capital expenditure budget and dividend payment so cash outflows are sustainable – and then proactively communicate this information to investors and shareholders.’

Remaining flexible is also vital. ‘Nothing is ever static and there will always be shifts over time within the global economy,’ states Velani. ’We can’t control wider macroeconomic factors but, as IR professionals, we need to be able to adapt to their challenges and try to stay ahead of the game.’

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