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Things were supposed to get better: Part 2

 

investment, stocks, markets, investing, financeThis is the second article in Peter James’ Ryan’s four week series, ‘Things were supposed to get better’. The first can be found here.

The theory of a free market is that market forces are the best creators of optimised economic productivity. Supply and demand should create a natural yield curve that leads to sustainable and predictable investment returns.

In reality, investment market manipulation for movement has reached a crescendo. Movement, regardless of direction, means that investors can take a ‘position’ – a wager if you like – on an outcome and make money.

Most economists seem to agree that we are in for an extended period of modest real growth.

The old formula of profit multiplied by a number (multiple) that reflects the risk profile of the company in order to determine a market capitalisation figure and a share price, does not drive the market value today. For example, if Woolworths Group has not experienced a profit decline in many years and it sits in the low risk category of supermarket/grocery, then you would expect its multiple to be fixed at a high number and any profit increase to be reflected in a share price gain.

But as Woolworths shareholders and management will tell you, with many increases in profit and indeed dividends, the share price more often that not goes down. Technology stocks on the other hand, seemingly do the opposite.

Retailers that attempt to build a sustainable model, taking decisions that may have a medium term impact, are penalised in favor of shares that have a ‘story’ that fits now.

This situation is even worse in terms of some supply areas for retail. The spot prices in commodities markets for example have nothing to do with smoothing the price movements affected by supply and demand – the purpose they were originally established to fulfill.

So what does this mean for retail in the 21st  century?

Retailers are increasingly polarising into two camps. The ‘build to flick’ category, and those that set out to build a legacy, often for their families.

In the former camp, the investment market that has evolved needs to be approached from a perspective of a sellable story. The profit reality becomes secondary to the growth story that can be sold in an exciting way.

For the latter, contemporary investment markets are problematic and need to be approached with caution, resolve and great advisors. You need to be very clear on why you are going to the market, what you want to achieve with this course of funding, what you are prepared to compromise to play with ‘shareholders’ and what your potential exit strategy is.

There are an increasing number of alternative forms of growth funding. Finding the one that best fits your model, vision, and objectives will require clarity of thought and the right advice to carefully consider all the alternatives not just the obvious ones.

Once the rooster is in the hen house it is very difficult to think and react clearly above all the cackling and pecking.

Peter James Ryan is head of Red Communication. He can be contacted on (02) 9481 7215 or at www.redcommunication.com.

© Copyright 2014. Red Communication Australia.


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