Page 80 - Accelerating out of the Great Recession

THE NEW REALITIES

percent of executives in our survey think that profit levels in
their industry will be lower in the coming years; only 10 percent
are confident that profit levels will rise.
There are two main reasons for this shift.
The big reason, of course, is the altogether tougher climate in
which to run a business—one marked not only by lower eco-
nomic growth and excess capacity but also by higher costs
resulting from interventionist government activity: protection-
ism, greater regulation, and higher taxation.
The other reason—and a side effect of the tougher business
climate—is that the corporate modus operandi will have to
change. Well-run companies will be characterized by solid bal-
ance sheets, good cash positions, and strict risk management—
all of which will likely contribute to lower profit levels as
postrecession prudence replaces prerecession leverage.

Institutional Investors: A Changing Perspective?

The buoyant valuations that some companies enjoyed in mid-
2009—up from the lows during the depth of the Great
Recession—suggest that investors, far from thinking that the
world is entering a new phase of low growth and profits, expect
markets to return to precrisis levels. But we do not believe that
such a bounce-back is possible. It is more likely that the high
earnings and stock market “recovery” came about as a result of
fast and decisive cost-cutting measures and that it will be diffi-
cult for the market to return to its old highs—unless cheap
money allows the buildup of another bubble, whose bursting
could be even more risky for the future development of the
world economy.
Investors almost certainly will adapt and change their expec-
tations in the years ahead as they come to understand the chal-

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