The past few weeks have seen extreme volatility in the world’s capital markets, driven by the uncertainties surrounding Covid-19, the strain of coronavirus that is rapidly causing global anxiety.
The past 10 days have seen the Dow Jones Industrial Average post record declines and a record rise. It is hard to exaggerate the scale of market volatility, with trillions of dollars in valuation removed then added to company market capitalizations. Investors responded by removing as much risk from their portfolios as quickly as possible: the yield on 10-year US Treasury Bills fell below 1 percent, while Europe and Japan face negative rates on government borrowing for longer than anyone predicted as billions were moved from equities into safer sovereign debt instruments.
Central banks played their part in bolstering sentiment, with the Fed cutting 50 basis points from its rates, and the governor of the Bank of Japan being particularly bullish, calling to mind former European Central Bank president Mario Draghi’s ‘we will do whatever it takes’ statement in the pit of the financial crisis. The upshot has been that, with Covid-19 accelerating, investor risk sentiment has been replaced by fear – and a major shift to a ‘risk-off’ stance.
In this maelstrom, IR teams can feel isolated and redundant. What is the point of investor relations when market cap is being driven one way by global pandemic fears and another by the prospect of the return of central bank quantitative easing? While understandable, this professional paranoia is misplaced. At times of uncertainty, strategic investor relations is more valuable than ever.
The role of IR in explaining and detailing how a company is responding to a crisis is critical. If a company cannot make the best educated estimate of the impact of a crisis, who can? We were shown an example of best practice in this area last week, when Diageo, a global alcoholic drinks company with a market cap of $85 bn, issued an unplanned trading update specifically around Covid-19.
‘It is difficult to predict the duration and extent of any further spread of the Covid-19 outbreak both in and outside of Asia. Based on current information, we have made assumptions to estimate the fiscal 2020 impact on performance,’ the company reported, before going on to list the business lines it sees as most exposed to Covid-19, and the extent to which disruption in these markets will impact sales and profit.
Covid-19-related business slowdowns in China, Asia-Pacific and the travel retail trade together would carry an impact on sales and operating profit in a range of £225 mn to £325 mn ($288 mn-$416 mn) and £140 mn to £200 mn, respectively, Diageo announced. These numbers are large, but need to be put in the context of total sales in 2019 of £12.7 bn.
More important than the bare numbers, however, is the action of the company in keeping the market appraised of the impact of a global health crisis. Diageo operates in 180 countries and has more than 200 brands in its portfolio. And with one of the first victims of Covid-19 being large public gatherings where alcohol is consumed, Diageo has faced up to its duty to the market to proactively deliver a measured and costed analysis of the potential impact.
The short update concludes: ‘We remain confident in the growth opportunities in our Greater China and Asia-Pacific business. We will continue to invest behind our brands, ensuring we are strongly positioned for the expected recovery in consumer demand.’
By disclosing the damage that will be done by Covid-19, Diageo has earned the right to help investors look into the future and ask them to trust the management team. The company has also earned the right to state its opinion that recovery in consumer demand is ‘expected’. Investors appear to be reassured – Diageo’s stock price has tracked the wider FTSE 100 Index since the firm delivered its update.
Diageo’s IR and management team, through swift and decisive communications, have got on to the front foot, addressed and accounted for an issue, and reassured investors of their long-term strategy.
Two days after Diageo’s announcement, another business facing a major impact from Covid-19 delivered its scheduled full-year results. IAG, the airline group that owns British Airways, Iberia and others, gave an upbeat report on 2019 performance in spite of higher fuel costs and other disruptions.
In its trading outlook, however, IAG is far more circumspect than Diageo. After detailing the route cancellations it has made as a result of Covid-19, IAG said that its seat capacity would fall by 1 percent to 2 percent.
It went on to state: ‘IAG is resilient with a strong balance sheet and substantial cash liquidity to withstand the current weakness. We have a management team experienced in similar situations and have demonstrated that we can respond quickly to changing market conditions. We are strongly positioned for the expected recovery in demand. Given the ongoing uncertainty on the potential impact and duration of Covid-19, it is not possible to give accurate profit guidance for FY 2020 at this stage.’
In discussions at the results announcement, CEO Willie Walsh urged investors to focus on weaker airlines: ‘We are well able to adjust to this situation because our business is in great shape. It’s the failing airlines that will be most affected by this,’ he said, adding that he expected ‘more consolidation as a result.’
This is a profoundly different approach from Diageo’s. Where Diageo has given a number for investors to factor into their forecasts, IAG has not. Where Diageo has focused on investment in its brands, IAG points the finger to competitors.
The future direction of Covid-19 is unknown. The only thing that all can agree is that it will get worse before it gets better. All listed companies have an obligation to their investors to be as open and transparent as possible about the business impact of Covid-19. In this example, Diageo has done so and will likely recover faster as a result. It remains to be seen whether IAG will recover as quickly, or as much.
The IR teams at these companies have taken markedly different approaches to communicating with the market at a time of stress. Time will tell which has chosen the right approach.
Oliver Schutzmann is CEO of Iridium Advisors
