Pondering The Imponderable

At the time of writing, the UK seems a chaotic place, at least in terms of its political situation. The US is also going through its own difficulties as the Federal shutdown goes on and its equity markets remain unstable.

Given that we have yet to understand the direction of travel of the country in terms of Brexit – or lack of it – it feels almost impossible to write of things of certainty when uncertainty seems to be the current standard operating model.

I have previously written of the role of investor relations to offer a place of rationality in an increasingly irrational developed world where facts are not deemed as interesting as untruths and conspiracy. There is comfort to be found in the immutable structure of mathematics, but we also know that finance and accounting can easily drift towards art rather than science. Valuation of assets is a particularly nebulous area, as we know when it comes to the tricky issue of pricing derivatives. I am mindful also of the ongoing FRC investigation into Carillion and its auditors, and the questions of trust this issue represents.

There is so much to consider right now in our world of IR, over and above the chaos that reigns in the realm, so here is my list of things I am thinking about this month in relation to the UK market (in no particular order):

  • The impact of No Deal Brexit on the continuing implementation of MiFID II.
  • The lack of major IPOs in process or in sight (the number of public companies listed on the LSE continues to fall month on month).
  • The rise again of the importance of prime brokerage for the revenues of the investment banks with all its concomitant risk for equity issuers in terms of being set up to being shorted.
  • The slow war of attrition that is mid-tier corporate broking (surely, as Otis Redding once sang: “It’s been a long, long time coming, but I know, but I know a change is gotta come”).
  • Sustainability is now a sustainable part of corporate culture; and the need for IROs to view this as an opportunity and not just a burden or challenge.
  • Institutional shareholders becoming increasingly hard-line in their voting practice (it is going to be a very intense AGM season this year, and no company should take investor support for granted).
  • Increasing levels of takeover of UK equity issuers as sterling remains at depressed levels, reducing the number of public companies, with little topping-up of the market through the listing of new companies.
  • The increasing significance placed on the E and S as well as the G by investors.
  • The increasing importance of company reporting on HR and the training of their employees for ESG-oriented investors.
  • The future of the High Street and its impact on the quoted retail sector.
  • Traditional long-only plain-vanilla institutional investors muscling up and calling themselves “activists”.
  • The rise in the numbers of interventions by collective investor engagement to achieve change in companies that are deemed to have bad governance.
  • Concern that some senior management may take the (in my view incorrect) view that during tough times, their IR teams should talk less to the market and not more.
  • Britain will now be viewed with distrust as a place of investment, whatever happens.
  • Global growth slow-down due to US-China tariff wars exacerbating an already tough economic situation here and in Europe.
  • The slowdown or reversal in the switch to passive investment in the light of any impending major correction of the equity markets.
  • Changing skill requirements for senior management in the era of social media.
  • Shifts in cashflows from the developed to the emerging markets.
  • The ongoing convergence of governance and investor relations due to the rise of passive investment and the increased commensurate importance of companies understanding the ESG needs of investors including improved reporting on intangible assets.
  • Increasing concentration of ownership by asset managers of equities leading to investor “cliques” that potentially lead to anti-competitive collusion while increasing pricing volatility.
  • Uncertainty continuing for longer than anyone hopes…

Keep calm and  carry  on  reporting!

Whether or not our political situation, and to some or greater extent thereby our economy, will be more certain by the time I write my next column for this journal cannot be determined at this time. During turmoil, one can only continue to carry out the fundamentals of the IR process: Keep Calm and Carry on Reporting!

The job of communication to the market goes on whatever happens in the macro-environment, and one could argue that all companies should be talking to  the market more right now to ensure that investors are kept in the information loop as much as possible, both as pro-active engagement to help create demand for the shares to protect share price but also as part of a strategy to fend off activists wherever possible.

Understanding investor sentiment, both at the portfolio manager and at the governance fund manager level, is vital to the defence against those investors who seek change, who generally can only achieve leverage for that change at shareholder meetings where they have the active or tacit support of the traditional institutional investors who feel their voices have not hitherto been heard by management. It is rare that an activist presents management with a suggestion on strategy that has not been aired before by another investor.

Uncertain times

As I wrote last quarter, understanding the views of the ‘negative investors’, the shorting investors, is also important in terms of framing an understanding of market sentiment, however difficult those conversations, if they indeed can take place at all.

We live in uncertain times, but the IR role remains as important as ever. I wish you a splendid and successful results season, for those to whom this is relevant, and to all a happy and healthy 2019.