IAPF Spring 2018 Irish Pensions Magazine

10 | IRISH PENSIONS MAGAZINE | SPRING 2018 EXPERT OPINION Profits still matter of course, but focusing on short-term discrepancies – which typically reflect companies’ exposure to macroeconomic trends like commodity prices, exchange rates or inflation – tells an incomplete picture. Sustainability analysis sheds light on how resilient companies’ profits will prove, adding insight beyond the short-term myopia emphasised in traditional financial modelling. Rapid growth in the information available to analysts makes building that insight possible. Figure 2 shows the falling correlation between earnings surprises (the difference between the consensus of analysts’ profit forecasts and the results companies report a year later) and their share price performances. Correctly forecasting earnings of companies which the market has misjudged is a profitable strategy, but less so than it was. Figure 2: Correlation between earnings surprises and total shareholder returns has fallen Source: Thomson Reuters and Schroders. Based on analysis of 4,000 large global companies looking at the relationship between (i) annual TSR between July and following July and (ii) difference between consensus forecasts for following year and subsequently reported earnings. As of March 2018. 0.10 0.15 0.20 0.25 0.30 0.35 0.40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016