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Corporates

Exchanges Redefine Their Role as More Than Just Listing Boards

Exchanges Redefine Their Role as More Than Just Listing Boards

By | Corporates

Choosing an exchange on which to list might be one of the most important decisions a company will ever make.

The reasons underpinning this may vary from one company to another but some common denominators remain. Among them, metrics like Average Daily Trading Volume, which serve as a reliable indicator of market liquidity.

Liquid boards make it easy to buy and sell securities. As such, they tend to carry greater investor appeal. This might explain, at least in part, why some companies choose to list on foreign exchanges instead of those in their home markets.

Exchanges Unite

Faced with this current reality, many exchanges are now embarking on a raft of initiatives to enhance their unique “listing” proposition.

One trend that’s catching on is the establishment of cross-border partnerships, such as the fairly recent multifaceted accord agreed between the Shenzhen Stock Exchange (SZSE) and the Indonesia Stock Exchange (IDX).

“Both parties reached consensus on jointly building a China-Indonesia small- to medium-sized enterprises capital market service plan to leverage the SZSE V-Next Platform [an initiative to facilitate innovative capital formation] and the IDX Incubator mechanism [to support digital-based startups],” the SZSE mentioned in a statement, citing one of several areas of cooperation.

As an added benefit, the agreement could also open new doors for SZSE to actively participate in the ASEAN+3 Bond Market.

Only time will tell how such partnerships will fare. Nonetheless, they set an encouraging precedent for more exchanges to follow.

Identifying and Supporting Future Listers

Exchanges used to be viewed mainly as a final destination of sorts for startups, with public listings seen as hallmarks of success.

While that perception still holds true to some extent, listing boards around the globe are making deliberate attempts to alter this perception. Some are doing so by inserting themselves into the heart of a still-private company’s business journey.

Germany’s Deutsche Börse, for instance, supports founders of startups from the financial sector via its Venture Network, which aims to improve their financing situations. Numerous fintech firms also base their headquarters at the Deutsche Börse FinTech Hub – 450 square metres of individual offices and co-working spaces.

But that’s not all.

Refusing to rest on its laurels, the German exchange announced in March 2019 further plans to develop the Hub and bring in new startups by tying up with fintech community platform TechQuartier.

This example clearly demonstrates how exchanges are proactively repositioning themselves as early-stage partners of prospective listers.

Going Above and Beyond

To the extent that some exchanges go the distance to attract new listings, a few others go further by maintaining that commitment even after companies list.

Here’s one: The Stock of Exchange of Thailand runs an investor relations professional development division to help IROs of listed firms build communication and engagement capabilities.

Upskiling IROs happens to fall under the domain of IR associations, too. Read more about what they do: Don’t Let Your IR Association Membership Go to Waste

And, here’s another: In Singapore, smaller-cap companies on the Singapore Exchange will benefit from a S$75 million (~US$54 million) funding programme launched earlier this year by the country’s central bank. Part of the grant aims “to groom a pipeline of equity research analysts and retain experienced research talent to initiate research coverage primarily of listed mid- and small-cap enterprises.”

Beyond Exchanges

The aforementioned initiatives can potentially inject an added measure of value into both prospective and existing listers.

Moreover, they evidence the renewed commitment of listing boards to be more than just market-making platforms, but as a partner that has the best interests of their listers at heart.

Even so, companies should still take initiative to make the most out of the value provided by exchanges. For starters, why not empower their IROs to engage investors more independently?

Sign up for a FREE account on Smartkarma’s Corporate Solutions, a brand-new range of services for C-Suite and Investor Relations personnel of listed companies that’s been designed to help IR professionals establish and maintain valuable connections to the investment and analyst communities.

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Don’t Let Your IR Association Membership Go to Waste

Don’t Let Your IR Association Membership Go to Waste

By | Corporates

Clubs and societies have existed since the earlier periods of human history, clustering people based on shared traits, such as lineage, knowledge, skills, and so on.

Just as accountants have the Association of International Accountants, and investment professionals, the CFA Institute, investor relations officers (IROs) also belong to market-specific associations that span the globe.

Examples of IR associations (IRA) include: the UK’s Investor Relations Society, Germany’s DIRK, Hong Kong’s HKIRA, Singapore’s IRPAS, and MEIRA in the Middle East.

Some IROs identify with the prestige and recognition of being under one, while others view membership as mandatory to advance their careers.

If you are part of an IRA, you most likely pay an annual membership fee of sorts. So why not make the most of it?

We reveal tips on how to milk your “club” privileges for their true worth.

Navigate a Changing Regulatory Landscape, Together

“The importance of investor relations is getting more prominent when listed companies encounter the impact of changes in regulation, market structure and technology,” wrote Eva Chan, Chairman at the Hong Kong Investor Relations Association (HKIRA).

How true.

Read more about regulatory impact: MiFID II Opens Up a Whole New World of Corporate Access for IR Teams

Rather than attempt to navigate uncertainty alone, why not tap into an IRA’s collective expertise? In so doing, IROs reduce the risk of making costly mistakes.

Look out for useful hacks like HKIRA’s Investor Relations Best Practice Guide, a handbook written by actual IR professionals. Such guides offer practical tips and advice based on real-life experiences, and help inform overall communication strategy and decision-making.

Upskilling to Keep up With the Times

With drastic change to the profession looming on the horizon, some IROs see a pressing need to be more formally equipped to tackle the challenges at hand.

This view has been echoed by Harold Woo, President at the Investor Relations Professionals Association (Singapore), or IRPAS: Woo highlighted in an interview with The Business Times that as regulations and trends evolve in the IR field, IROs need to constantly update their skills.

For that, IR professionals should capitalise on the development programmes offered by their respective associations. IRPAS’s International Certificate in Investor Relations is a prime example of an upskilling initiative aimed at empowering IROs with the multi-disciplinary skills required to excel in tomorrow’s IR environment.

Event-Driven Networking

Keen to keep abreast of the latest developments? Here’s the simplest way: just… show up.

IRAs typically organise and/or list industry events on their annual calendar. We advise IROs to routinely scan through them for updates. It takes no more than a minute!

As cliché as it may sound, the added chance to mingle and expand your network with other IR professionals should be good enough reason to attend.

Final Thoughts

IRAs play pivotal roles as advocates of industry best practices and enablers of professional development. Most importantly, the work they undertake continuously supports robust communication between corporate management and investors.

It pays to capitalise on what IRAs have to offer, so spare a moment to find out what you’ve been missing!

There’s one more thing IROs can do to seed more seamless investor communication: Sign up for a FREE account on Smartkarma’s Corporate Solutions, a brand-new range of services for C-Suite and Investor Relations personnel of listed companies that’s been designed to help professionals establish and maintain valuable connections to the investment and analyst communities.

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Lyft’s Dual-Class Boo-Boo With Investors Holds an Important Lesson for IROs

Lyft’s Dual-Class Boo-Boo With Investors Holds an Important Lesson for IROs

By | Corporates

Lyft became the latest public company to be blacklisted by The Council of Institutional Investors (CII) for issuing dual-class shares.

How big a deal was it?

To a select group of investors comprising pension funds and asset managers, it mattered – so much so they had CII pen a letter to protest the move ahead of the ride-hailing firm’s IPO pitch.

The Power Struggle

Much of the grievances stemmed from the fact that “the co-founders will wield majority voting control despite together owning less than 10 percent of the company’s equity, creating a substantial misalignment between those with control and those exposed to the economic consequences of that control.”

Seen from a different perspective, these investors likely viewed dual-class shares as the antithesis of democratic decision-making, paving the way for autocratic rule.

“The notion is that equity interests should align with voting power, and that super-voting shares can lead to distortions that disadvantage other shareholders,” said CII executive director Ken Bertsche, who expressed his concerns in an interview with IR Magazine.

Bertsche’s fears are not unfounded.

Just before Lyft’s IPO, Smartkarma raised some red flags on the company’s rate of cash burn that would easily make any investor squirm. Here’s an excerpt from our pre-IPO commentary:

 

“…the company will need at least US$2 billion to make ends meet in the next two years. If it manages to raise roughly that much through its IPO [which it did], chances are it needs to raise more funds in two or three years. That would potentially mean a secondary share offering, diluting existing shareholders’ stakes.”

Read the full article: Lyft’s IPO May Be Oversubscribed but Investors Are in for a Bumpy Ride

 

But there is a flip side.

Some proponents argue that dual-class shares are a necessary evil, allowing public companies the space to implement long-term plans without having to deal with voter-induced gridlocks. Others contend that it acts as a shield against potential hostile takeovers in the future.

Whichever the case, this fiasco could have been better handled from an investor relations standpoint.

The Heart of the Matter

Was a cold, hard letter really necessary for investors to make their grievances heard? And, did it achieve the desired outcome?

Lyft went ahead and issued dual-class shares, anyway.

In our opinion, the real issue at hand wasn’t so much in making the unpopular decision as it was in failing to communicate openly about it.

For example, when reputable media, such as IR Magazine and the Financial Times, tried contacting Lyft for comment on the letter, the company failed to respond. That kind of attitude surely needs to change if they are to avoid raising suspicion among investors.

Lyft could start by being more approachable, which will go a long way to establishing trust, thus easing investors concerns somewhat.

“Being publicly traded means being responsible to all shareholders, not just the founders and other pre-IPO investors who continue to have the preferential voting class of shares,” notes Dayna Harris, partner at corporate governance consultancy Farient.

“This responsibility and other expectations about good governance are constantly evolving, and a publicly traded company needs to be responsive at some point.”

Take the First Step

The simple act of getting listed on an IR directory can ease frustrations among investors seeking to connect. Smartkarma’s Global Investor Relations Directory helps IROs be more easily accessible. Join now, and add your details for free.

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Your Company’s Blind Spots Might Matter More to Investors Than Your Financial Disclosures

Your Company’s Blind Spots Might Matter More to Investors Than Your Financial Disclosures

By | Corporates

Investors looking for sound opportunities generally require a great deal of information on a company – but what kind of information they look for in such disclosures might not be immediately obvious.

Access to financial reports used to be a key determinant of company performance. However, that is no longer the case. More and more investors are coming to realise that earnings data alone can sometimes fall short in their ability to pinpoint threats to future growth and/or profitability.

Investors are starting to think of disclosures more holistically, and are more open to additional ways of scrutinising listed firms.

The Market Demands More Workforce Disclosures

IR Magazine recently published the latest results of the Workforce Disclosure Initiative (WDI).

The study found that more than 120 investors, with combined assets exceeding US$13 trillion, had asked listed companies to disclose information on how they manage risks and harness opportunities in their workforce and supply chains.

What’s the significance of this finding?

“The initiative notes that investors are increasingly seeking this type of comparable data in order to engage with the practices of investee companies,” writes Andrew Holt, the reporter who authored the piece.

Matt Christensen, head of responsible investment at AXA Investment Managers (part of the WDI coalition), agrees: “As long-term responsible investors with several social-related funds, the data collected against the WDI is used to provide in-depth and complementary information to our social performance and impact assessment.”

But there’s still some way to go before substantive disclosures become the norm.

About half of the respondents provided no detail “on who is involved in the workforce risk-management process, how frequently it is carried out, or what areas of the business are covered.” In the long run, this issue could evolve into a major concern for investors.

Workforce risk management disclosures, Investor relations, corporate access

In Vogue: ESG Disclosures

Elsewhere, years of “greenwashing” PR campaigns have led some investors to question the compatibility of ESG factors with their pragmatic desire to seek returns.

Get in deeper with our commentary: Why ESG Investing Must Move Beyond the PR Stunts and Greenwashing

While sustainable (or impact) investing is still catching on, the rationale underpinning its approach is hard to dispute.

Take for example, the fast-fashion industry: As the price of clothing declines, consumers buy more clothes and wear them less frequently. But at what cost?

According to research published by Investory on Smartkarma, Asia has emerged as the global septic tank of textile pollution thanks to this trend.

Read the full report: Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware

“[Could] your $20 shirt have contributed to toxic chemical poisoning of villagers along Indonesia’s Citarum river? [Or the] bleaching of corals along Australia’s Great Barrier Reef? Possibly yes,” Investory opines.

 

Did you know?

Cotton farms take up less than 3% of [the] world’s arable land, but use 16% of all pesticides.
– Investory

 

Your Company’s Blind Spots Might Matter More to Investors Than Your Financial Disclosures

versus

Many consumers are already beginning to weigh the environmental and social footprint of their purchases. Accordingly, fashion houses such as H&M, Levi Strauss, and Gap, find themselves forced to embrace sustainability, or risk losing customers.

This sets up investors to get in on the act and start holding these brands accountable, like they have done previously with “vice” sectors like tobacco.

A Golden Opportunity for IROs to Engage

In addition to the aforementioned non-financial disclosures, there are others, such as boardroom diversity, that carry equal weight in the eyes of some investors.

Interested parties seeking such unconventional information have difficulty obtaining it, thanks to a lack of viable communication channels. This leads to missed opportunities for investor relations officers (IROs) to engage with those parties on a deeper level.

Smartkarma’s Global Investor Relations Directory helps IROs be more easily accessible to investors. Join now, and add your details for free.

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IROs arrange private investor interactions between earnings cycles

IROs Often Wait Until Earnings Season to Engage Investors. They Shouldn’t

By | Corporates

News headlines like “Company X Beats Analyst Estimates in Full-Year Earnings Report” and “Shares of Company Y Plunge on Biggest Loss in Decade” are not rare to see during earnings season.

They typically have the power to move markets, sending share prices of the companies in question climbing or plummeting.

In light of what’s at stake, it’s perfectly understandable that most, if not all, investor relations officers (IROs) spend an inordinate amount of time preparing for an earnings event.

Some have even been known to go as far as preparing FAQs in anticipation of hard questions, or providing clear forward guidance on future revenue and growth.

The methods of approach may differ between companies but their core objective remains one and the same: retain and/or bolster investor confidence.

Private Interactions Matter More Than You Think

Is it logical, then, to assume that deep investor interaction occurs mostly on a seasonal basis?

No, it’s not.

Survey results published in a Harvard Business School white paper reveal that the average publicly traded firm conducts more than 100 one-on-one meetings annually with investors. In fact, 70 percent of firms grant offline access to senior executives.

Private investor access to senior executives

Clearly, interactions between investors and company executives extend far beyond earnings season. And why shouldn’t they?

Pivotal industry developments and major company announcements often occur suddenly and unexpectedly. Depending on their scale of significance, investors sometimes need an avenue to raise queries and have them answered in a timely manner.  

The urgency for IR teams to communicate is amplified many times over when a company encounters a catastrophic event. Boeing, for example, saw its share price spiral into a freefall after news of a second 737 MAX crash cast doubts on the jet’s order backlog, worth billions of dollars.

Attempting to restore lost confidence, Boeing CEO Dennis Muilenberg released a letter on 18 March to express deep regret about the two air tragedies.

Muilenberg also took the opportunity to announce the imminent release of “a software update and related pilot training for the 737 MAX that will address concerns discovered in the aftermath of the Lion Air Flight 610 accident.”  

However, the move proved to be too little, too late.

Boeing’s share price had already dropped nearly 12 percent by then, when measured from the last trading day (8 March) prior to the Ethiopian Airlines incident (10 March).

Chances are, a market sell-off would have ensued anyway – it was the second such accident in five months. Even so, there’s still the possibility that the ticker’s plunge could have been better cushioned with more deliberate IR-investor interactions.

Making the Connection

So, that brings us to our next question: How do IROs typically arrange private interactions?

Organising investor and analyst days in between earnings cycles is one way. The problem, though, is they might not always coincide with important events.

IR departments also depend on the sell-side to arrange ad-hoc meetings between investors and their senior management. Such gatherings enable shareholders to ask questions about the firm. They can clarify certain aspects like a new business strategy or a recent capex investment.

But what if investors prefer exclusive access outside the confines of these events? Are they able to get in touch with the company’s IR team seamlessly?

Smartkarma’s Global Investor Relations Directory helps IROs be more accessible to investors. Join now, and add your details for free.

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Hard for investor relations to reach new investors

It’s Hard Enough for IR to Reach New Investors. Don’t Play Hard to Get

By | Corporates

What makes a leading investor relations team?

After being asked this question in an interview with Deloitte, Christopher Jakubik, VP of Investor Relations at Kraft Foods, replied with an interesting mantra, which he calls “constructive dissatisfaction”.

To deconstruct this, Jakubik alluded to “the sense that you should never assume that what has worked in the past is appropriate for the present or future.”

At first glance, the term may seem nothing more than a general guiding principle. In truth, it’s profoundly relevant to how modern-day IR departments pursue new, prospective investors.

Conventional Challenges

IR teams typically deploy an array of methods to identify the right investors before strategising how to reach out.

However, their efforts often meet with numerous obstacles. For instance, the sell-side often fails to make vital introductions to preferred investors.

Over-reliance on underwriters can sometimes prove extremely challenging for IR officers, and equally frustrating.

Why?

The sell-side relies on two main avenues for generating revenue:

  1. Trading commissions
  2. Bookrunning fees  

Taken into context, it’s only logical that the sell-side’s vested interests be represented when introductions are made so as to make such meetings worthwhile.

If an introduction has little to no chance of yielding future commissions and/or fees, it doesn’t make sense to do it at all.

Similar motivations govern sell-side coverage selection. Read our article: Congratulations, Your Company Got Analyst Coverage. But Is It Useful to the Buy-side?

Don’t Neglect the Inbound Funnel

But outreach is only part of the equation.

IR teams should also be easily accessible in case investors express an interest to make first contact.

One common way companies make themselves available is by publishing their IR contact details on the channels they own, including their website and social media pages.

As well as implementing this so-called best practice, IR officers can also leverage the network effect of sector-relevant platforms. Tapping on the high concentration of buy-side professionals that use them to monitor markets and inform decision-making can yield the desirable results.

A study conducted by Smartkarma, however, has shown that only a fraction of companies make it easy to be contacted via platforms like the Bloomberg Terminal and S&P Capital IQ.

Of the roughly 26,000 companies from more than 70 countries Smartkarma analysed, we found that nearly three-quarters of the sample size failed to list even an IR email address, while close to two-thirds had no designated IR officer for investors to contact.

The unfortunate consequence is that corporates miss out on the chance to receive potential queries and/or leads.

Investor Relations Email Availability

This ends up limiting investor interest in their companies, which could have a direct impact on investment from the buy-side.

Unconventional Solutions

Besides getting aboard Bloomberg and S&P Capital IQ, are there other avenues for IR officers to explore?

Here’s one: Targeted contact lists, such as Smartkarma’s Global Investor Relations Directory, offer a cost-free opportunity to expand a company’s IR footprint. (Add your IR details here.)

And why not? Being listed on an independent investment research network brings the upside of gaining legitimate exposure without the downside of being vulnerable to spam.

There’s a fine line between communicating proactively and spamming. Read our article: Investor Relations: How to Win Friends and Alienate Spammers

Bottom line: To all IR officers, do not settle on the status quo. Reaching new investors demands a relentless mindset of constantly searching for new avenues to get the word out and be more accessible.

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Decline in the quality of sell-side research coverage

Congratulations, Your Company Got Analyst Coverage. But Is It Useful to the Buy-side?

By | Corporates

Analyst coverage is something companies pursue constantly. Why?

C-Suite and Investor Relations (IR) of listed companies recognise that the buy-side relies fairly heavily on analyst opinions about a company to make investment decisions.

It’s easy for IR teams to find comfort in the fact that they already have analyst coverage. As a result, they become complacent as they feel that they only need to engage the analysts they have already engaged to ensure sustained coverage.

However, here is what those IR teams are missing:

  1. Sell-side analysts can stop their coverage as and when they deem fit
  2. The quality of research might diminish, providing the buy-side with no added value

Analysing Sell-side Coverage

The following points illustrate how a company typically gets coverage by the sell-side:

  1. Company IR personnel/teams engage sell-side analysts and share the company’s story, with the goal of enticing them to initiate coverage.
  2. If successful, this push results in a lengthy and detailed initiation report, analysing the company from various angles and in depth.
  3. Analysts typically absorb new details and update their models once the company releases its results during earnings season. They do so to reflect how things have changed since their last report.
  4. This process continues until a sell-side firm decides to cut coverage on a company.

In the past, the reasons for cutting coverage on a company could be based on a few of these scenarios:

  1. Lower trading commissions generated by less frequent buy-side trading of that company’s stock
  2. Failure to run a deal through the bank

Today, that pool of reasons has expanded to include the following:

  1. MiFID II causing the sell-side to re-think the economics of their research departments
  2. Sell-side reducing their headcount and, thus, their bandwidth to continue coverage of certain companies

Analysing the Quality of Sell-side Coverage

MiFID II’s impact across global financial markets has led to a decline in the quality of sell-side coverage.

Void of actionable input and opinion, many of them increasingly resemble auto-generated reports that merely regurgitate broad earnings figures.

Sell-side research is also known to be vulnerable to conflicts of interest, as the bank has other relationships to maintain. And conversely, when running deals, the sell-side might be precluded from covering certain companies going public.

What Should Corporate Investor Relations Teams Do to Change this?

Cast a wider net and engage independent analysts.

What Is the Advantage of Independent Analyst Coverage?

Independent analysts might not provide regular earnings-related updates, which are typical to the sell-side, but are more driven to provide insightful and actionable ideas to the buy-side.

Their coverage might not follow a standard approach, but it will be substantive.

Buy-side’s interest in independent analyst coverage has increased against the backdrop of the evolving set-up, pricing, and nature of sell-side coverage.

How to Gain More Coverage

  1. Promote your company
  2. Share updated investor presentations
  3. Keep analysts apprised on events that might impact your company
  4. Be accessible when they come back with questions

Smartkarma has launched a Global Investor Relations Directory. Add in your details to be accessible to analysts and increase insightful coverage on your company.

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MiFID closes and opens new doors for corporate access

MiFID II Opens Up a Whole New World of Corporate Access for IR Teams

By | Corporates

Corporate Access has traditionally functioned with the sell-side strategically placed in the middle.

The sell-side typically organises meetings with company management teams for the buy-side because they are well aware of their clients’ investment theses and can arrange for the right meetings.

MiFID II Alters the Landscape

The inception of MiFID II changed the landscape, as services like research had to be stripped out and paid for separately. Since corporate access was a bundled service, there was no straightforward way to derive a fair price for it.

Factoring in the operational costs of setting up these meetings is one possible route to formulate a basic pricing model. The easiest way could be to base it off the salary needed to employ someone to do the job, coupled with the logistics costs involved.

However, a study conducted by IR Society and QuantiFire has found that 51 percent of investors do not intend to pay for corporate access. In fact, 52 percent plan to reduce the use of the sell-side for corporate access services.

And for good reason: The sell-side might be incentivised to only present the buy-side with access to specific companies, which meet the firm’s broader client profile i.e. large-caps, as they tend to draw greater remuneration.

Uncharted Territory

Most of them have already reduced the number of conferences and the size of their teams. The resulting gap in the market leaves investment firms with little choice but to engage corporates on their own, and vice versa.

In response, some buy-side players have gone as far as creating internal corporate access teams to meet their needs, relinquishing themselves from sell-side dependence and the sky-high fees they do not want to pay.

Even so, not all firms have the budget to build such an extensive in-house capability – perhaps only sovereign wealth funds and big investment firms can do that.

Corporates, which have benefited from past sell-side’s investor introductions, would potentially have to create new budgets to service this investor demand. Alternatively, they could consider outsourcing to reduce this cost, albeit marginally. Small- and mid-cap companies might not always have the bandwidth to do that.

The Change in the Corporate Access Model Actually Empowers Corporates

Sometimes, tectonic shifts in the status quo can be an advantageous force. Imagine a workable corporate access model where the buy-side and corporates are directly in touch, completely bypassing the overpriced sell-side conduit.

Could there be a way for the buy-side to avoid setting aside a separate budget just to gain access to corporate management teams? What’s stopping the buy-side from picking a company of interest and seamlessly connecting with them? Could corporates be empowered such that they can be accessible without a middleman? Could there be a way to interact with the buy-side without paying exorbitantly?

Smartkarma’s Global Investor Relations Directory paves the way for corporate management and investor relations teams to be more accessible to the buy-side and to bridge the gap in investor access.

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Corporate Governance, Investor Relations

No Company Is an Island: How Corporate Governance and Investor Relations Catalyse Growth Ecosystems

By | Corporates

Ecosystems survive and thrive because their biological inhabitants perform their allocated roles to support circles of life.

This concept of interdependence carries an entrenched relevance in the way economies and the financial services industry function in the present day – for better or for worse.

Be it in creating political stability, developing economic policy, bolstering corporate governance, or building analyst or investor relations, the mechanisms that drive progress pass through all aspects of this interconnected world.

How Government and Corporate Governance Work for Progress

To better grasp how these mechanisms function as a single engine, let’s start by defining the pivotal role of government.

Nations are often bound by a simple economic rule: Political stability typically precedes a period of sustained growth, resulting from increased business and investor confidence.

Putting it another way, governments that get their act together have the power to foster ideal market conditions by which economic activity blossoms.

Of late, nowhere has this philosophy of progress been more profoundly pertinent than in Brazil.

Once languishing under the weight of corruption scandals at the highest echelons of government, Brazil’s economy has (almost overnight) unshackled itself from these unfavourable associations.

The main reason: President Jair Bolsonaro’s election in late 2018 as an anti-graft champion.

Bolsonaro’s extreme methods in dealing with separate issues like gun violence may raise ethical questions. Still, it’s hard to dispute his pro-market credentials and how they would eventually translate to more market-friendly economic policies.

Brazil’s financial services sector stands to benefit immensely from the impact of such policies – particularly its large-cap banks, which are already growing from a position of strength. This strength stems from years of prudent lending practices against the backdrop of improving GDP growth.

“New loan grantings in November [2018] were up 11.3 percent year-on-year, with corporate loan grantings rising at a faster pace (13.2 percent year-on-year) than individual loan grantings (9.9 percent year-on-year),” wrote Victor Galliano, who cited the Brazilian central bank’s November credit data in an Insight published on Smartkarma.

“This is driven by better business confidence and recovering GDP growth, which has accelerated slightly from 0.9 percent in 2Q18 to 1.3 percent in 3Q18,” Galliano added.

Falling non-performing loan (NPL) ratios also demonstrate a culture of strong corporate governance among Brazilian banks, further burnishing the case for sustained expansion.

Good (Lending) Governance

Decreasing NPL ratios across Brazilian banks drive the case for strengthening credit quality

non-performing-loan-ratio-brazil

Where Analyst and Investor Relations Fit In

While such underlying macroeconomic conditions present banks with the opportunity to ride momentum and accelerate business growth, pursuing pro-growth strategies aggressively can sometimes leave negative perceptions in their wake.

Take the case of Banco do Brasil (BdoB), for example.

Of the several Brazilian banks Galliano analysed, Banco do Brasil has emerged as his preferred investment pick. This is because he sees more potential to expand BdoB’s return on equity, which he thinks can be partly achieved by adopting better cost discipline.

Further scope for opex reduction via shutting branches due to more customers using digital banking services, and the potential for the sale or privatisation of non-core assets, all add to reasons for investors to cheer.

However, one of BdodB’s possible cost-crimping measures might not be universally seen as a positive: Galliano expects the bank to pare back social lending programmes with the intended purpose of raising loan yields.

Given the fact that Finance Minister Paulo Guedes is the architect of the Bolsonaro administration’s pro-market thesis, support for the move would likely flow from the top.

The tenets of ESG (Environment, Social, and Governance) investing are embraced more and more today. So, based on optics alone, there’s every reason to assume pursuing greater profits at the expense of serving community needs could end up weighing on impact investment sentiment.

But the real danger here doesn’t lie with this so-called controversial decision per se.

Instead, it’s in how the bank communicates why it made the decision in the first place, all while steering minds toward the bigger, longer-term picture.

Investor relations teams that do so successfully help ensure market observers and analysts don’t speculate or, worse, jump to false conclusions.

Read about how misconceptions occur and how corporates can best manage them:
Set the Record Straight: How Better Access Helps Curb Misconceptions About Your Company

Be that as it may, BdoB is a large-cap entity, and would naturally garner more analyst interest, making it easier for them to present their case. Conversely, small/mid-caps would likely struggle to solicit coverage, severely hindering their ability to alter misconceptions.

The prospect of investing extra time and effort only to be met with an uncertain amount (and quality) of coverage would throw a dour mood over any team handling investor relations.

Rather than taking a shot in the dark and hoping for the best, why not adopt a more deliberate approach?

For starters, join Smartkarma’s Global Investor Relations Directory to show up immediately on the radar of investors seeking to engage with and invest in companies.

Coming Full Circle

We have covered how riding the bullish underpinnings of recovering economic growth and the amplifying effect of market-friendly economic policies reinforce industry expansion in a financial sector buttressed by strong corporate governance.

We have also covered how the act of building analyst and investor relations mitigates potential bearish fallout that could result from unpopular decisions made.

These aforementioned ecosystems share a common denominator: They work in tandem to foster growth.

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Uncertainty in the markets: Brexit, Elections, Stocks

2019 Is A Year of Uncertainty. Be Prepared By Being Transparent

By | Corporates

The beauty of a new year is the ability to start afresh. With it comes new hope, opportunities, and developments. However, as with everything new, the final outcome can be uncertain.

In its first issue for 2019, The Economist listed out a few impending events with uncertain outcomes around the world. We highlight some below.

Brexit

Everyone is still guessing whether there will be a deal or not. Or whether there will be a second referendum, or simply no Brexit at all! At this juncture, picking at flower petals to ascertain whether “he loves me” or “loves me not”, would deliver a more certain outcome.

Elections

Several countries have national elections this year – India and Indonesia, for example. If votes swing in an unexpected direction, and they might, it could mean changes for businesses depending on which party comes to power. This has implications that extend well beyond these countries’ borders and the companies that are based there. They, and those that interact with them, will potentially have to adapt to new realities.  

Economic Activity & Stock Markets

There is continued uncertainty about the global economy and the stock markets, as well. Is China slowing down? Will the American stock market be impacted?

Let’s talk about an event that took place at the very start of this year.

On 2 January, Apple CEO Tim Cook announced revised estimates and lower revenue guidance for the company. He attributed these changes primarily to greater-than-expected economic deceleration in Greater China. Furthermore, iPhone sales in China were lower than expected. Apple’s stock dropped by 9 percent on the back of this news.

There are several ways to interpret this announcement. For one, management played down the sequential decline in revenue in Greater China and only mentioned the year-on-year growth in their press release communication in Q2 2018, similarly with Q3 2018.

Although they made this information available to investors and analysts through the supplemental data disclosure, did they address that they are prepared for a potential outcome where the now “expected” revenue contribution from Greater China ceases to contribute in the same manner?

The other stance is that they did well in their communication to release preliminary results ahead of time and prepare investors for what is to come in their upcoming results. Even though other positive factors have been announced, such as the 19 percent increase in non-iPhone categories, there has been little communication about how they will plan for further unexpected events such as these.

The ripple effect sent markets into a tailspin as investors were concerned that other companies in their portfolio were potentially exposed to the debatable slowing growth in China.

What should these affected companies do?

There are several aspects as listed above that might impact your company or companies related to yours, affecting you by association. Even if you can’t predict the outcome, it’s important to communicate to investors and analysts that you are thinking about potential events and have contingency plans in place.  

Corporate investor relations teams can be as transparent as they come with stakeholders, but there will be some events that you just might not be able to foresee.

Should the unexpected occur, catching a company off-guard, the least they can do is be accessible to investors and analysts. Smartkarma’s Global Investor Relations Directory allows for investors to reach you and understand how you have prepared for the year ahead.

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