Interbrand released its 2010 Best Global Brands report this week (brand report highlights). This is the 12th year that the report has been published, and we’ve often wondered if there are deeper insights that can be garnered from this report. We’ve analyzed the past 12 years of data with a specific eye to the following questions:
- Do changes in brand value predict changes in stock value, or merely reflect information that is already priced in?
- Do the brands with the strongest momentum hold up in recessions?
- Can the report provide insight into the broader market?
Let’s take a look at what we found …
1. Do changes in brand value predict changes in stock value, or merely reflect information that is already priced in?
We analyzed changes in brand value along with changes in past and future stock market performance. Specifically, we focused on the top 1/3 and bottom 1/3 performing brands each year based on year-over-year % change. Our hypothesis was that there would be high correlation in the best performing brands also having the best stock performance over the past 12 months. This is true. In every year EXCEPT 2010, the best performing brands also outperformed on the stock market in the prior year. We will return to the 2010 exception below. As for the correlation with brand performance in future years … one would expect that if there is “special insight” from the Interbrand team, brand perfromance could be predictive. We found that there is some correlation of future gains (although a bit weaker). However, we noticed that there is inverse correlation of future performance at times when the business cycle changes. This leads us to question #2.
2. Do the brands with the strongest momentum hold up in recessions?
The answer is complex. Yes, the largest brands tend to retain their brand value over time. For example, Coke, Microsoft, IBM, and Disney have been near the top of the list since inception. However, it appears that those brands that had the strongest momentum leading up to a peak (2000 and 2007) are the very ones which performed the poorest immediately into the recession. As an example, Amazon.com grew its brand value from $1.4 billion in 1999 to $4.5 billion in 2000, only to fall back to $3.1 billion in 2001. Likewise, AIG rocketed up as a new addition in 2007, only to lose brand value in 2008 and fall off the list completely in 2009. In fact, most financials were above average gainers in 2007, before significant drops in 2008.
Ultimately, 12 years worth of data shows this: Strong performing brands continue to gain momentum as long as business conditions remain relatively constant. However, when there are major shifts in business, brand performance works in reverse. This makes sense. Since an excelling brand is built to gain momentum in the current environment, it can be difficult to adapt to sharp changes. This gives opportunity to other large, yet lagging brands, to make some gains on a relative basis.
3. Can the report provide insight into the broader market?
This is where the analysis gets really interesting. In the chart above, we see the negative green bars in 2000 and 2002 which signal changes in the business cycle (the tops and bottoms of the market). In 2007, we again see the signaling of a business peak with the negative green bar. If 2009 was indeed the end of the recession and market bottom, a negative green bar would be a confirmation based on the theory above. However, the green bars for 2008 and 2009 were actually the most positive. Meaning that brands that adopted to the new normal quickly performed the best.
What’s even more interesting is that in this 2nd chart, the orange bar in 2010 reflects that the poorest performing brands actually did the best in the stock market even while their brand values were lagging. This is the first time that brand and stock market performance were inversely correlated in the same 12 month span. For anyone who reads Minyanville or watches Mad Money over the past year, you’ll know that commentators have spoken about how the most speculative stocks have risen the most since the market bottom. For example, Ford brand value went up 1% in 2010 while its stock price went up 49%. Likewise, even though Harley Davidson brand value went down 24%, its stock managed to rise during the same period. And some of the stronger, safer brands actually fell on the stock market (JP Morgan: +29% brand value, -16% stock price) and (Shell: +24% brand value, -2% stock price).
What does this imply? For the past 12 months, investors have preferred riskier, more speculative plays regardless of underlying strength or weakness in brand. This is actually a scary thought because with the market just above 10k, it doesn’t seem that the market is particularly speculative. In fact, it seems that everyone is hiding in treasuries and bonds. A pure interpretation of these charts leads to 1 of 2 possible conclusions:
A) We have entered a new normal in which the business cycle has shifted, but not reversed completely from the bottom. If this is the case, then the recovery will look more like a square root symbol than a V-shaped recovery. Slow, steady growth is on the way.
B) If the 2010 chart rhymes with 2000, 2002, and 2007, then the green bar for 2010 might be dramatically positive. What that means is that the highest quality brands will perform dramatically better over the next 12 months than weaker brands. You’ll note that some of the brands that performed the best on the stock market in 2010 include luxury plays such as Burberry and Cartier despite very little brand momentum. A scenario that favors the flight to quality typically coincides with a pullback in stocks.
At Sparxoo, we focus on cultural trends. Periodically, we observe major moments that lend insight into the macro economy. Our last such moment was in May 2009 when we observed that America wanted to restore confidence and wanted happier times as signaled by Kris Allen’s victory in American Idol (social mood analysis). Our analysis of this Interbrand report shows that we are clearly not in the midst of a classic recovery. The numbers and charts point to a square root or W recovery over the preferred V recovery. Despite the apparent stock market recovery, we believe that risk remains high.
We reiterate our prior guidance on risk: “The velocity of risk-taking is slowing. With the slower game, it’s not necessary to take every risk, it’s necessary to take the right risks. Doing nothing remains an attractive option as additional opportunities will present themselves in the future.”
Lightening image by rore_d from Stock.Xchng