The big story in global equity markets in 2009 was the rebound in market valuations after the massive losses incurred as a result of the global financial crisis. But rebound does not necessarily mean recovery. Despite impressive gains, only about one-third of large-cap global companies have recouped their downturn losses to generate net positive total shareholder return (TSR) for the two-year period 2008–2009, according to a new study by The Boston Consulting Group.
The study analysed 2009 TSR at more than 2,000 companies across 40 countries and 37 selected industry sectors and compared 2009 returns to those in 2008 to determine which companies, countries, and sectors have regained the losses they suffered during the collapse in equity values due to the financial crisis and global recession.
The study found that the top value creators in 2009 had truly extraordinary returns. For example, of the 182 global large-cap companies in the sample (those with a year-end 2009 market valuation of at least €30 billion), the top ten companies generated TSRs of between 126 and 269 percent.
Despite these outsize returns, however, not all of the top ten clawed back their 2008 losses, for the simple reason that they were also often among the biggest losers that year—a phenomenon that BCG terms the rebound effect.
The study also found that the 2009 rebound was highly uneven across global equity markets. Emerging markets such as Russia, China, Indonesia, Brazil, and Argentina generated the highest returns. Alternatively, equity markets in the developed world, such as the United States and Germany, had a much weaker rebound. Indeed, some developed-world markets such as Japan and a number of European countries (Greece, Italy, and France) significantly underperformed the MSCI All-Country World Index in both 2008 and 2009. The rebound effect meant that relatively few local markets recovered fully from their 2008 losses. Only 5 out of 40 countries studied generated enough value in 2009 to offset their 2008 losses, all emerging markets: Argentina, Brazil, Mexico, South Africa, and Turkey.
The performance of the 37 industry sectors tells a similar story. The sectors that performed the best in 2009, such as mining, industrial metals, and oil equipment and services, were precisely those hit the hardest in 2008. And only six sectors fully recovered their 2008 losses. The big winner was the mining industry, with an average 2009 TSR of roughly 125 percent—more than enough to make up for its negative TSR of 46 percent in 2008. Other sectors that recovered their 2008 losses included providers of relatively recession-proof consumer staples such as food, beverages, and tobacco, as well as technology sectors such as computer services and alternative energy.
Explaining the Rebound Effect
What explains the rebound effect—in which the biggest winners in 2009 were often the biggest losers in 2008? Partly, it is a function of the impact of the global financial crisis on equity markets.
“The 2008 declines in equity values were driven largely by urgent concerns about companies’ creditworthiness and potential default risk at a time when credit markets were barely functioning,” says Eric Olsen, a senior partner in BCG’s Chicago office and a coauthor of the study. “The concerns triggered a massive flight of capital from equities, which hit company valuation multiples hard. But the very flight from equities that caused valuation multiples to decline so precipitously in 2008 also set the stage for their rebound in 2009. Once the worst of the crisis had passed, the money that had been pulled out of the market began to flow back in again. As long as they survived the crisis, those companies with the highest leverage benefited the most.”
But that’s no guarantee that the recent rebound in equity values will continue into the future. Single-year TSR performance is a poor indicator of long-term company performance, and it is a company’s long-term value-creation record that really counts.
“The worst of the financial crisis appears to be over,” says Daniel Stelter, a senior partner in BCG’s Berlin office and head of BCG’s worldwide Corporate Development practice. “The decline in economic activity has been brought to a halt by unprecedented government and central bank intervention. But significant financial risks remain, and the recovery is likely to prove long and difficult. Such trends could well influence capital markets for years to come, leading to a period of sustained volatility.”
Downturn Value Creators
In that context, perhaps the most intriguing finding of the BCG study was the identification of a small subset of 7 of the 182 global large-cap companies that persisted in creating value throughout the downturn. The 2009 TSRs of these downturn value creators were not enough to put them in the top ten for the year. But unlike the vast majority of companies in the Value Creators database, they delivered positive returns in 2008, despite the market selloff, and continued to do so in 2009 as well. Given the recent volatility in global equity markets during this period, that is quite an achievement.
Some of these companies—such as Ecopetrol, the Colombian state petroleum company, or Femsa, Mexico’s largest brewer—no doubt benefited from the sector and regional trends described above. But some significantly outperformed their sector—for example, Visa, the global
payments company, or GlaxoSmithKline and AstraZeneca in the pharmaceutical sector. And some, like McDonald’s, are simply excellent companies with a long history of sustainably delivering superior TSR.
“Given the likelihood that we are moving into an extended period of slow growth, it will be interesting to see what lessons companies might learn from these downturn value creators,” notes Frank Plaschke, a partner in BCG’s Munich office and a coauthor of the study.