For most companies and investors, the events of the past few years have felt like those from a decade. Both were struck with price deflation, global supply chain disruptions, and recession during the height of the pandemic. What followed was an uneven recovery driven by unprecedented central bank intervention, with economies now facing surging inflation and the threat of recession once again. Add in geopolitical pressures and long-term investors are now mired in an economic environment working against the business models that had adapted to the decades-long progression of globalization.

With short-term pressures mounting, companies and investors are finding it more challenging than ever to focus on the long term.

The role of resilience – broadly, the ability to resist and recover from disruptions – has come into focus as economies seek to emerge from the turmoil on stronger footing. But are companies’ business models truly becoming more resilient as a result of this volatile period, or is that wishful thinking?

Corporate investment horizons fall to their lowest levels in our study

This was a question that we posed in our annual update of FCLTCompass, a dashboard that tracks the investment horizons of global savers, asset classes, and companies on an annual basis, set to publish 5 December 2022. Over the years, this and other FCLTGlobal research has demonstrated that companies and investors who have a long-term focus on their business and investment decisions stand to reap substantial returns.

Coming out of the pandemic, companies became shorter-term in a number of areas after initially spending capital on R&D and fixed assets. In 2020, corporate investment horizons lengthened (below), reversing the previous trend. Yet during the recovery period in 2021, investment horizons shrank to their lowest point of the past twelve years. At the same time, the average holding period of public equities has been increasing (to its highest point measured). Tensions are building as investors are getting longer-term while public companies are becoming shorter.

2021 did represent a significant bounce-back year for companies, buoyed by higher household consumption levels and the reopening of economies. As a result, many companies shored up their balance sheets with higher cash reserves, better positioning themselves to weather short-term volatility and support credit ratings.

Yet a deeper analysis raises the question of whether this behavior will contribute to longer-term resilient businesses. High levels of cash reserves are a drag on performance and indicate lagging reinvestment in areas known to drive long-term value creation. Faced with short-term pressures and the increased tension between resilience and balance sheet efficiency, companies held onto their cash via retained earnings, and did not keep up with 2020 levels of spending in R&D and capital expenditures.

Overall allocations to R&D decreased by one percent, while allocation to capital expenditures fell more than seven percent to 22% of overall corporate spending, a historic low (below). Companies were spending windfall profits on buybacks – most prominently driven by companies based in the United States. Companies were buying back their shares at expensive share prices as markets peaked in 2021. Globally, buybacks have nearly surpassed dividends as the preferred method of returning cash to shareholders.

These findings imply that companies have not been positioning themselves to weather longer-term challenges – like climate change or geopolitics – even while investors have lengthened their horizons and become increasingly concerned with such challenges.

Looking Ahead

The issue of resilience is a top concern for today’s CEOs. Though, with the current state of global markets, a turning point still feels far off. These trends will be further explored in our upcoming webinar on 5 December 2022 with the launch of the latest FCLTCompass data. Participants can register here to listen to experts from FCLTGlobal’s membership discuss the economics of recovery, and observe how companies, investors, and the national economies in which they operate plan for a return to normalcy and its impacts on investment horizons.

Looking ahead, FCLTCompass will continue to monitor global trends in long-term investment as companies and investors navigate unpredictable markets. To learn more, view our interactive dashboard.