Approach to guidance

Whilst most are keen to provide guidance within their existing framework, there is significant concern about misalignment in the future, given the potential impact from several exogenous factors. This concern has been exacerbated by recent trends, where stocks have been punished for mismanagement of expectations as investors adopt a greater risk-off approach and, more generally, an increased focus on selective stock-picking.

It has been noticeable that the companies providing guidance over multiple years, often in the form of a mid-term strategic plan and outlook, are much better positioned to manage the current conundrum. The longer-term framework enables them to more credibly build potential choppiness into the operational and financial trajectory of the business, and signpost delays in execution, as investors are reassured by the longer-term reference point.

It is also interesting to note that companies that have conducted Capital Markets Days in the recent past are able discuss the factors weighing on the operating environment with more traction, as the relevance of the themes is generally well understood. On the flip side, issuers that have not done so are concerned that, in an already noisy environment, providing the additional context might effectively complicate the issue rather than simplify it.

Develop a framework

Transparency remains critical and being open with the investment community around risks and mitigants, with appropriate context, will yield a positive result in the longer run. In practical terms: provide an overview of the business areas that are likely to be impacted; outline the potential operational or financial impact and; describe the mitigating strategies in place. In addition, be proactive in addressing the potential timelines where possible (e.g., H1 profitability lower than H2) to better manage investor expectations and reduce stock volatility.

In some instances when performance is directly correlated to macro inputs, such as commodity prices, or certain assumptions on market growth, provide a sensitivity analysis where possible.

In most cases there is not necessarily a direct correlation and, in those instances, identifying both the upside and downside qualitative risks, potentially with some KPIs, will help you to contextualise the trajectory of the expected performance more easily.

As such, whilst providing guidance, the 2023 outlook could be articulated around a framework including some of the elements provided below.

Example guidance framework