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Amid volatility, stick to long-term thinking

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OUR BEST IDEAS, QUICK AND CURATED | OCTOBER 14, 2022

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Edited by Barbara Tierney
Senior Editor, New York

This week, we’re focusing on long-term value in an era of turbulence. Plus, the state of fintech in Africa, and a look at how a more efficient food system can build global resilience.

Image of a winding road through a beautiful forest

October is the cruelest month for stock markets, or so many believe (think 1929 and 1987). With worries swirling about the global economic picture, it’s a good time to remind even the most sophisticated business readers what a solid bet the capital markets are over the long term. Stock markets can be volatile, and some years they decline. This is no surprise. But the ups far outnumber the downs —and recent returns are in line with two centuries of performance.

A longer horizon. In “Looking back: What does the long term really mean?,” partner Tim Koller writes: “When McKinsey on Finance was first released in 2001, the market capitalization of the companies that made up the S&P 500 Index was about $10 trillion. As of mid-June 2022, the S&P 500 Index market capitalization was about $35 trillion.” Koller goes on to note that “from 1996 to mid-June 2022, S&P 500 Index returns declined annually only five times (six if we assume that full-year 2022 will also result in an annual decline).”

The long-term mentality. With a stretched time horizon, companies generate more shareholder value, create more jobs, and contribute more to economic growth than do peer companies that focus on the short term. Data also show that companies can achieve better long-term performance when they address the interests of employees, customers, and other stakeholders . Even so, a 2020 survey of 500 global executives conducted by FCLTGlobal and McKinsey shows that many continue to feel pressure from shareholders and directors to meet near-term earnings targets at the expense of long-term strategies. Managers and boards can take five steps to reorient their organizations toward long-term value creation rather than just short-term performance.

Creating value. Although it is far from perfect, shareholder-oriented capitalism is still the best path to broad economic prosperity, as long as companies focus on the long term. The guiding principle of business value creation is a refreshingly simple construct: companies that grow and earn a return on capital that exceeds their cost of capital create value. When managers, boards of directors , and investors forget this guiding principle, the consequences are disastrous, as we saw with the financial crisis of 2007–08 and the Great Recession that followed. Creating shareholder value is not the same as maximizing short-term profits—and companies that confuse the two often put both shareholder value and stakeholder interests at risk. What’s needed at a time of volatility is a clear definition of value creation that can guide markets and managers alike.

Off the charts

Expectations for company performance, by industry

In the latest McKinsey Global Survey on economic conditions, respondents’ expectations for their companies’ performance are more somber than they have been since early in the COVID-19 pandemic. This pessimism comes as companies feel the impact of cost increases. While expectations for profits have become less positive in most industries since December 2021, respondents working in the energy and materials sector have a rosier view of their profits over the next six months than they did last quarter.

Chart of respondents who expect demand for their companies' profits to increase in the next six months, by sector

Check out our chart of the day here.

PODCAST

Image of a Latina smiling while seated at a desk in a business meeting

Empowering economic growth in the US Latino community

In this Future of America podcast, Domenika Lynch, head of the Aspen Institute’s Latinos and Society Program, joins McKinsey partner Bernardo Sichel and senior partner Kweilin Ellingrud to explore the economic experiences of Latinos in the United States and the prospects for their full participation in the US economy. As workers, entrepreneurs, and consumers, Latinos are “too large of a community to fail,” Lynch says, but they continue to experience a wage gap and barriers to full economic participation that must be addressed.

More on McKinsey.com

Fintech in Africa: The end of the beginning | In the face of political and economic challenges and a global pandemic, Africa’s fintech industry is booming. Here’s what comes next.

Still feeling good: The US wellness market continues to boom | New survey results show continued growth of consumer interest in health and wellness, with persistent gaps in certain areas presenting exciting opportunities for companies to serve unmet consumer needs.

Leading operating model modernization: What do transformation leaders say? | Executives from across Europe and Asia–Pacific discuss their organizations’ emerging agile-working practices and factors they view as crucial for success.

INTERVIEW

Nicolas Denis

Nicolas Denis is a partner in McKinsey’s Brussels office. He advises government institutions on sustainable economic development and serves leading companies in agribusiness, fisheries, forestry, and biotech.

A combination of factors is disrupting the global food supply . We have more people to feed in a system that is global, but where there is more geopolitical constraint. And at the same time, there is an increased risk of simultaneous breadbasket failure because of climate change.

There are six breadbaskets in the world. Combined, Ukraine and Russia are a big one. The region produces 28 percent of the world’s exported wheat and 15 percent of its corn. The current war in Ukraine has two implications in this area: besides being a region where a lot of commodities are produced, it’s also where some of the world’s fertilizer is produced. That has contributed to the price of fertilizers going up, which affects farmers’ ability to pay for those fertilizers, which can potentially have an impact on crop yield.

This is happening at a time when grain stocks are relatively low in many countries. That’s because since 2020, we saw a spike in the price of agricultural commodities, and countries tend to deplete their stocks more aggressively when the price of commodities is high. The combination of relatively low stocks with a disruption in one of the breadbaskets has a further impact on price.

The bottom line is that there are currently more shocks to the food system than usual.

To deal with these problems in the shorter term, we must ask: How do we rebuild strategic stocks for different commodities? How can we protect populations most vulnerable to food insecurity and make food affordable for them? In the medium to long term, private- and public-sector stakeholders can think about how to build more resilience into the food supply chain. One way may be through diversification of the sources of supply—being less dependent on just a few countries.

Another could be by trying to eliminate losses and waste, including by using effective seeds and irrigation efficiently. Roughly 30 percent of all food globally is wasted across the value chain . And then there’s getting both the right level of protein consumption in diets and thinking about the protein mix. There is a factor of ten or more between the least and most efficient ways of producing protein. Focusing on the most efficient proteins can relieve some pressure on the food system. It’s like energy: the more efficiency you create , the more resilience you have in your energy system.

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