SuperCycle era ends for analyst ‘buy’ judgements

HBR Nov12.pngThe above chart may well become a collectors’ piece in time. It appears in a fascinating article in the latest Harvard Business Review, which focuses on why stock market analysts in the USA (U), Europe (E), Asia (A) and Latin America (L) issue ‘buy’ recommendations on a company.

It represents the end of the economic SuperCycle era, with analysts valuing just 2 main factors:

• Projected industry growth – the ‘story’
• The quality of top management – the ‘characters’

These are the only factors which rate ‘high’ or ‘very high’ for almost all analysts.

And, of course, this approach made perfect sense during the SuperCycle. ‘If you build it, they will come‘, was the theme of the period. So there was no need to analyse strategy or ability to execute. Equally, the economy was always growing, so balance sheet strength was irrelevant. Much better instead to load up on debt, to boost equity returns.

As the chart shows, most analysts still ignore these key factors. Yet they have begun to tell a diiferent ‘story’. It is focused on the idea of a quick return to the SuperCycle, based on a belief:

• In Asia, that China’s demand will come roaring back
• In the US, that shale gas will restore manufacturing growth
• In Latin America, that Brazil’s growth can substitute for lost China exports
• In Europe, that Eurozone problems are just a short-term issue

In reality, however, the ageing of the BabyBoomers means the ‘story’ is already history. The Boomers’ demand drove the SuperCycle when they were young. Now, however, we are going back to a world where a company’s strategy, its ability to implement and the strength of its balance sheet will separate the sheep from the goats.

A rising tide lifts all boats. But as Warren Buffett warned, ‘it is only when the tide goes out, that you see who has been swimming naked’. Analysts are a resilient bunch of people. A growing number are realising that the rules for success are changing. But in the meantime, the chart stands as a memory of an already disappearing era.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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