Category

Corporates

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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