Q&A: Mikael Rautanen, CEO Inderes
Written By: Milja Mieskolainen
This post addresses the impact that the corona virus has had on the investment world. The Q&A has been conducted with Mikael Rautanen, CEO and analyst at Inderes (which is a Finnish analysis service). In particular, we will be discussing the general market situation, future prospects and the technology sector.
Mikael Rautanen
· CEO & analyst at Inderes
· Following: Revenio Group, Nokia, Qt, Siili Solutions & Enedo
How has the corona situation affected Inderes? Does the situation make it difficult to carry out analyzes, as conventional indicators do not necessarily tell us anything about the future?
Just as the previous quarter was wrapped, the coronavirus epidemic took over the market situation. Recent times have been busy for analysts as the reports have been updated on a tight schedule. The situation is further complicated by the low visibility of the companies' business operations, but at the same time investors are demanding more information. Thus, even an uncertain prediction is better than a “hands up” reaction. During the current quarter, more visibility will be gained as to where the situation is evolving. For a fundamental analyst, central bank stimulus measures further increase the challenge, as share prices seem to be detaching from fundamentals in some places. The economy is going down, but at the same time, stock prices are on the rise. On the other hand, the uncertain makes the work more fun, as it would be boring if “analyzes could be done with a ruler”.
In general, stock markets have risen tens of percentage points from the bottom, but the situation with regard to the pandemic has not improved. How do you see the market right now?
I cannot get a read on the general market at the moment and I do not think I can predict it. We are living in interesting times because the combination of the recovery policy and an unpredictable disease makes any kind of predicting difficult. In a sense, economic theory is being rewritten, since such a situation has never been seen before.
Forecasting the future of individual companies vs. the economy as a whole: what to consider?
In the case of individual companies, the macroeconomic situation must also be considered since the general situation affects the company's situation. Macro numbers are blood red, but stock prices are rising, so the situation is insane. Analysts need to think about how to interpret the situation: in many cases, the valuation of companies has risen to a level for which there is no basis. When a stock price detaches from the fundamentals with a negative recommendation, it can be wrong for a long time until it corrects itself. The analyst should have a feel for the market situation and strive to discover factors that can trigger a fall or rise in the price.
Guesses and predictions are worthless on their own. Value lies in the rationale and analysis behind them. As a process, doing analyzes is a matter of continuous development: the longer and more it is done, the less there is self-confusing unnecessary confidence in one's own predictive abilities. The brutal fact is that uncertain predictions are constantly being made, and some of them will inevitably go wrong. If 60% of the predictions come true, it is really good work.
Can anything be learned from the events of history about what the future will look like? Are we going to see similar rapid price inflation as before?
Many crises have similar elements, but they are not identical. The corona situation has been compared to the Great Depression of the 1930s and the 2008 financial crisis, as they are easy benchmarks for experts and concrete benchmarks for the public. The danger in these comparisons is that there are few confluences that can help predict this situation. The good thing about this crisis is that it did not come from the failures of the economic system, but as a result of the virus. The concern is that the virus acts as a “trigger” that “breaks” the economy and superimposes structural problems lying beneath the surface. Central banks are “all in” at the moment, which has so far been enough for the market.
The new generation has grown up amid technology and expect information and communication from companies rapidly. Do you believe that this will affect both corporate communication during and after the corona crisis?
Investor communications has traditionally been a very conservative field, with little adoption of technology and digital channels in pursuit of efficiency. The corona situation is accelerating digitalization, so one could assume that it will also give investor communications the “boost” that it needs. In practice, conservatism is evident in general meetings, where votes are taken on paper, and the event does not offer much anyway.
Those companies that serve their owners’ information needs well will find it easier to gain the trust of their stakeholders. Consider companies A and B with identical businesses: company A only provides the information required by law, but company B handles investor communications well through a variety of different channels. Investors are willing to pay a small premium for company B because they have a concrete basis that investors can rely on and greater transparency in business development. The equation is simple, and companies are beginning to understand it. Trust can be gained which in turn means access to capital markets. If investor communications are handled poorly, and the stock market only bears the cost of the information required by law, screwing up can be costly.
Nokia, for example, made groundless promises and did not take care of the information needs of its owners, and now the company is paying a heavy price for it. The independence of the whole company is being threatened, as it may need a financing package, but it will not get one on favorable terms.
Until now, investment communication has developed slowly. Once a new company is listed on the stock exchange, CEOs have been amazed at the reality. "Let's run between cabinets and drink the stomach sore from coffee." Investment communication has thus been largely based on cabinet meetings and PowerPoint presentations with the same portfolio managers around the world. With digitalization, information can be easily scaled and thus achieve efficiency benefits. This is a big change that is slowly moving forward.
There are many reasons for stagnant attitudes: conservative practices, heavy regulation, and business models of many traditional banks are based on good networks, one-to-one relationships, and the transactions that result from them.
Inderes streams CEO interviews and investor events openly to everyone. The exchange of information on the ski trips of the “inner circle” are things of the past.
What kind of companies in the technology sector are survivors / winners amidst the corona situation?
Solely good stories do not get you through the crisis, the focus is on business. As an analyst, two things are important. First, will the company survive the crisis safely, how severe will the blow to profitability be, will the balance sheet withstand, and will the company have the necessary cash buffers? Secondly, the post-crisis era is important. Have the company's operations been permanently damaged, have there been structural changes in the market, and is the company itself becoming more/less attractive? As an example, airlines: will they survive the crisis and what kind of structural changes will happen in the industry?
Many technology companies will survive the crisis, and the prevailing megatrends make them even more attractive. Many companies will receive a blow to short-term earnings, but the longer-term earnings and cash flow outlook will only improve. It is good to remember that the value of a company consists of how much cash it generates for its owners over its life cycle. Thus, it can be justified that the level of appreciation rises as a result of the crisis. The effects can also be seen in companies other than Zoom. In a way, you must balance between the current crisis period and the future: are the products and strategies still valid in the post-crisis period?
Digitalization as a big megatrend: it has been prevalent for a long time, but will the impact continue in the future?
At some point, we will move on to the fact that digitalization as a word will go down in history. It becomes a normal everyday thing without the charm of novelty. Now the clock has been moved a year or two forward.
The trend will be accelerated by the fact that the “buzz” of the last decade will be left behind. Companies made their own application, experimented with it, and realized that, in fact, digitalization cannot be a separate app and project. The situation must be considered holistically with the whole business in mind. A comprehensive digital transformation is necessary for many organizations. This got off to a pretty good start, and corona has given it more momentum. Now, even the most conservative companies need to react and realize that digital channels are the primary trading channels in the current environment. The pandemic has provided a massive “boost” to this development, leading to the current situation where digitalization is not just a trend of the technology sector. More and more companies operating in traditional industries are starting to look at their industry through digitalization which is not a one-time project but a continuum that never ends.
Climate change as a disruptive force for technology companies: a threat or an opportunity? Will it act as a catalyst for more responsible business strategies?
Technology is one tool among others to solve the problems of the climate crisis: it does not solve it alone, but it is important. As an investment trend: attitudes are moving towards the direction where “shareholder value” alone is not enough. Companies must solve significant societal problems, otherwise they have no long-term justification for existence. The capital market mindset is slowly turning towards a healthier position. More and more investors are considering the impact of the company and beginning to realize that it is also a route to value-creation for owners.
A so-called “brain fart” has been enshrined in the Finnish Companies Act which states that a company’s sole purpose is to generate value for the shareholder. This is a mindset that should be left in the last millennium. The capital market is awakening to think about the overall benefits that the company provides the society. This is what creates value for shareholders.
The greed-driven industry is changing with younger generations and global change is provoking thinking in a broader context. Simply, the investor should consider the expected return and the risk that comes with it. Through responsible operations, a company can improve the owners’ expected returns and reduce risk over the long run. We are slowly getting rid of the black and white choice between profitability and charity. If a company does not act responsibly, it will not have a skilled workforce, it will be boycotted by customers, there will be no trust from stakeholders, and the company will not receive financing on favorable terms. Pressure is coming from so many directions that corporate responsibility must be considered alongside digitalization. Corporate social responsibility should be at the core of the business or a pile of competitive disadvantages will follow.
More information on the topic (in Finnish):
Inderes blog: https://www.inderes.fi/fi/blogit