Now that interest rates are tilting up for the first time in nearly 30 years, the financial markets are taking the new reality in stride. But what does the changing interest rate environment mean for your particular company and how are investor expectations likely to shift in a rising rate environment? How should this shift be prioritized when matched alongside the emergence of index and ESG-focused capital?
Even if your company is not in a traditionally interest rate-sensitive sector such as financials or utilities, does this new reality change the investors you should be engaging with? Regardless of sector and in some cases, even geography, the market evolution over the last 18 months has been substantial – has your targeting program adapted accordingly?
“Effective targeting must incorporate a heavy degree of behavioral finance into the analysis,” says Dan Romito, global head of investor analytics at Nasdaq Corporate Solutions. “It’s slicing and dicing investor behavioral tendencies and assigning a specific spectrum of risk for their individual investment opinions.”
In a rising interest rate environment, that can mean a variety of scenarios. Romito and his team tease out certain investment themes that analysts and portfolio managers display a preference for when analyzing a particular stock. Nasdaq’s behavioral approach identifies dominant themes and aims to pinpoint the particular threshold each individual deems acceptable or unacceptable. “We are one of the only advisory providers that holistically targets people, not only with fundamentals, but with corporate governance and ESG as well,” says Romito.
Rising rates generally will be viewed as putting pressure on revenue and margins at large-cap companies with heavy international exposure. Which investors entered the stock based on its margin story and how do those investors think rate hikes will impact profitability? Similarly, which investors are attracted by the balance sheet, yield or top-line growth and what are the implications on each of rising rates?
For small and mid-cap companies, it’s a slightly different story. Investors are more likely to scrutinize a company’s cost of capital and remain relatively more vocal when discussing capital deployment strategies. In addition, small and mid-cap investors are most sensitive to an individual stock’s trading liquidity, particularly in terms of entry-point risk. In other words, how easily could an investor exit the stock if the respective story does not come to fruition?
Companies can initiate conversations with major shareholders to understand what their concerns will be. “Convincing investors they should be aligned with management’s forecasted discount rate, for example, takes a lot of time, effort and patience,” Romito adds. For the time-constrained Investor Relations Officer, partnering with the targeting team at Nasdaq Corporate Solutions can help enable them to “map out a more actionable strategy and increase their return on invested time,” Romito concludes.
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Nasdaq Advisory Services can partner with you to advise on and help facilitate your IR program. The Advisory Services group offers an objective analysis of the investment community tailored specifically to a company’s IR program. With collective insight into the markets, we are well positioned to interpret special situations such as changing interest rates and their impact on your capital structure.
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