Capital markets expectations

Short-term profit volatility and analysts forecasts, then, have much less impact on a company s share price than is often assumed. Capital markets have a longer-term perspective. Furthermore, in an industry like chemicals, even if we assume a continuous improvement in fundamental performance, the attempt to generate an equally continuous, volatility-free growth in profits will be virtually impossible because of structural factors like feedstock volatility, currency exposure, and seasonal effects. Chemical companies should learn to live with earnings surprises and concentrate instead on communicating a concrete long-term strategy - and of course deliver appropriately on capital market expectations, which will be correctly set on this basis. 

Perfect capital markets should see through the cycle and the reaction of valuations to purely cyclical fluctuations in the industry return on capital should be insignificant. To examine this, we again compared the actual valuation level to a fundamental predicted valuation level for commodity chemical companies. To pinpoint the effects of cyclicality, however, we used a slightly different approach. As we wanted to evaluate capital market expectations, we compared the actual valuation level with a fundamental valuation level based on perfect foresight , i.e., assuming that the capital market knew the actual development of the key value drivers for the next 8 years and evaluated this information in line with its implied fundamental value creation.4 Furthermore, we used a capital structure-adjusted market-to-book ratio instead of an earnings-based metric for the valuation level. 

Implicit capital market expectations it is meaningful to translate observable - and normally fundamentally correct - capital market valuations into expectations about fundamental performance. 

A comparison with capital market expectations is a valuable touchstone for in-house corporate planning. Currently, capital market expectations will fairly frequently be much lower than internal plans, indicating a possibly over-optimistic estimation (the well-known hockey stick ).61... 

An example of how the actual valuation level, the company s value creation targets, and capital market expectations can be integrated into a framework to assess and derive value creation aspirations is given in Figure 2.5. 

If chemical companies accept the capital markets expectations as their primary performance target, then attempts to achieve production excellence - and thereby influence the biggest cost element in the business system - can only benefit them. To ensure well-rounded performance improvement, the capital market perspective should also be combined with other outward-looking measures derived... 

Capital Markets and Expectations on Fundamental Value Creation... 

Of course, the very optimistic expectations were not a phenomenon restricted to capital markets, nor were they necessarily irrational at that time - there may have been good reasons for a very optimistic outlook, just as there were good reasons to believe in sustained above-average growth in the new economy as a result of the... 

Finally, the company s own estimation of fundamental value will frequently be more or less in line with the capital market valuation. This would mean that if the corporate plans are realized in the succeeding years, a shareholder return can be expected of exactly the level of the cost of equity, i.e., roughly the industry average. Here, the valuation logic can be used to set more ambitious objectives in relation to capital market performance, and to translate these into operational targets for profit improvement. 

As a further consequence of an advanced shareholder value orientation, a more targeted approach can be taken to investor relations. We feel that investor relations in many chemical companies today is predominantly aimed at providing timely, accurate, and exhaustive information to capital markets. Again, the assumption is that capital markets are perfectly efficient and will always evaluate this information correctly again, this does not match up with the real world. Behind the capital markets are investors with a wide variety of expectations and important specific investment preferences and institutional restrictions. In addition, it can be demonstrated that only a small number of investors with significant trading volume mainly influence stock prices in the short and medium term (Coyne, K. P. and Witter, J. W.). 

These metrics were selected in order to capture different aspects of value creation TRS measures the realized value creation for shareholders. The market-to-book value is a proxy for the capital market s expectations on future value creation. And ROIC is, in an... 

Market capitalization 15, 21, 35, 185 Market expectations 16-21, 183-185 Marketing, see Sales and marketing Marketplaces... 

There are essentially three areas where the link between a company and the capital markets can be analyzed and quantified understanding historic capital market performance, quantifying and decoding current market expectations, and assessing the value impact of strategic actions. 

The capital market in the United States is distorted by the corporate income tax which increases the before tax return to corporate capital and reduces the before tax return to capital in the remainder of the economy from the level which would prevail in the absence of the taoc. V/hile the private rates of return on capital are used to estimate the expected present value of private cost saving, the social opportunity cost of capital is used to evaluate the expected present value of the social cost savings. 

The minimisation of capital has exercised the minds of every generation of engineers, so what is new today. In spite of several years of low and relatively predictable inflation and interest rates the financial markets expectation is often for double figure growth at minimum capital investment. The hapless Chemical Company finance director seeking several hundreds of millions of pounds over 20 years is unlikely to excite the market. 

Team Learning. Our investment team has a continuous dialogue with investors and analysts and meets them on a regular basis at quarterly reporting investor meetings and capital market days. In order to develop our investor relations capabilities further, we conduct annual surveys amongst analysts and investors about their expectations ... 

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