With input from the BlackRock Investment Institute, BIS has published a viewpoint discussing how the companies in which our clients are invested are navigating the structural changes in the economy that may impact their business models, and capitalizing on the opportunities spurred by it.
The business environment companies are operating in has changed. Companies are navigating a new regime of muted economic growth in many advanced economies, greater inflation pressures and higher interest rates. A range of production constraints are limiting how much those economies can produce and grow in the future before prices start rising too quickly. Even as pandemic-related inflation pressures abate and interest rates fall from their peaks, central banks may have to keep rates higher than they were before the pandemic, compromising growth if they want to avoid resurgent inflation.1
In our engagements with companies, many have told us that they are reassessing their financial position to ensure they are resilient to structurally slower economic growth and a higher cost of capital. They are considering how to adapt to a reshaping financial landscape, as banks face tighter regulation and greater competition for customer deposits and the supply of credit from banks tightens. CEOs and CFOs are thinking about how to unlock operational efficiency, optimize their balance sheets, and enhance capital allocation.
At the same time, a set of mega forces – large, long-term structural shifts – are changing how economies are structured, how consumers and governments spend, and how companies operate.2 In addition to a reshaping financial landscape, we see four forces driving significant shifts in profitability across sectors and companies:3
- Digital disruption and artificial intelligence (AI) – Generative AI-based solutions could streamline operations, improve customer experience, and enable new capabilities. Tech firms are already pivoting their businesses around generative AI. We see opportunities across other sectors and a potentially transformative impact on profitability and productivity. Managing data privacy and cybersecurity risks will likely become increasingly important.
- Geopolitical fragmentation and economic competition – Geopolitical fragmentation and mounting competition between countries are rewiring globalization. We see companies reconfiguring their supply chains to adapt to growing regulation and mitigate risk in their operations, often increasing costs. At the same time, we also see them capitalizing on industrial policy to spur innovation and diversify their business models.
- Transition to a low-carbon economy – Public policy, technology, and consumer and investor preferences are shaping the low-carbon transition, creating both risks and new opportunities for companies. Growing demand for climate resilience solutions has propelled product innovation opportunities.
- Demographic divergence – Workforces are growing more slowly as populations age in major economies, making labor more scarce and costly. Companies are exploring how to attract and retain talent, automate production or offshore operations to emerging market economies with younger populations.
Against the backdrop of these shifts, we expect to see a wider range of company performance – with companies that can harness these forces and capitalize on them outperforming, while those that struggle to adapt could underperform. That wider range of outcomes – and the uncertainty that comes with it – is reflected in an unusually wide range of analyst estimates of future company earnings.
The choices companies make as they adapt to this new regime could be an important driver of their long-term financial performance. In our engagements with companies, and through reviewing their disclosures, BlackRock Investment Stewardship seeks to understand how they are positioned to create value and deliver financial returns in this regime for their long-term investors, like our clients. We have been interested in understanding how companies are:
- strengthening their financial resilience in an environment of higher interest rates;
- adapting their business models to capture relevant opportunities in this new regime and manage their risks; and
- positioning for change in a fast-evolving and more uncertain operating environment.
BIS will continue to engage with companies on behalf of our clients to learn about how corporate leadership is managing risks and opportunities to help protect and enhance their company’s ability to deliver financial returns over time.
Long-term strategy and financial resilience is one of BIS’ five engagement priorities, and this new viewpoint highlights a set of mega forces – large, long-term structural shifts – which we believe are shaping a new economic regime that is driving significant shifts in profitability across sectors and companies. BIS is interested in learning more about how companies are adapting to strengthen their financial resilience as they face this new dynamic.
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