Nuclear power plant

Is Nuclear Power Too Radioactive to Be ESG-Friendly?

By | General

For investors who want their money to make more impact in addition to rich returns, ESG is an ever-popular avenue – especially the “E” part. As environmental concerns, climate change, and overreliance on fossil fuels grow more pressing, ESG investors consider renewable energy just a sound deal, but a moral imperative.

To most people, environmentally-friendly investing in the energy sector usually involves wind farms, solar panels, and similar renewable energy sources. Rarely does anyone include nuclear energy in that list.


It’s interesting that the sector is so radioactive for ESG investors, considering that nuclear is one of the cleanest forms of large-scale energy at the moment.

In fact, defenders say that absent the current global backlash and decline, nuclear energy would easily satisfy that aforementioned “E” part due to lower amounts of toxic waste (relative to carbon and solar) and its capacity/cost ratio.

But the current climate is not surprising – the nuclear industry has a public image problem to overcome. High-profile disasters like Fukushima and Chernobyl have made things significantly worse for proponents of the atom as a power source. The word association between “nuclear” and “weapons” doesn’t help either.

According to Michael Shellenberger, environmental policy writer and founder of clean power advocacy Environmental Progress, nuclear energy has declined 7 percent from its peak since the 1990s, while solar and wind have not grown enough to make up the difference.

A report by Environmental Progress, meanwhile, shows that global public and private investment in solar and wind between 2008 and 2016 was US$2.1 trillion, whereas investment in nuclear between 1962 and 2016 was US$1.8 trillion.

While supporters of renewable energy question the motives and findings of pro-nuclear analysts and authors like Shellenberger, real-world examples of nuclear usage demonstrate its impact on clean, affordable energy – and even that doesn’t seem to help nuclear make its case.


Gaius King, an independent Insight Provider who publishes on Smartkarma, has written about the decline of nuclear power and its consequences. “France currently generates approximately 72 percent of its electricity needs via atomic means, coupled with wind power, which results in 80 percent from renewable sources, the highest level in the Developed World,” he notes.

This is how France offers the cheapest domestic electricity prices in Western Europe, plus exports “its surplus to a number of its neighbours, earning <€3 billion per annum.”

And yet, the country has undertaken to “close 14 of its nuclear reactors by 2035 (in addition to its last four coal-fired power stations) reducing its atomic reliance target to approximately 50 percent of domestic needs.”

“Any energy comparisons deal with substantial levels of bias,” King warns. “Some [low-carbon] options such as nuclear and hydro are not acceptable to many – for reasons I cannot fathom at times. In regards to ESG attractiveness, its a political battle. Facts are largely irrelevant, solar is green, nuclear is not… why?”

One of France’s major energy buyers, Germany, started moving away from nuclear power post-Fukushima and now covers 40 percent of its energy needs with lignite – perhaps the dirtiest type of coal.

Read Gaius King’s full Insight on Smartkarma: Uranium – About to Enter Its Own Nuclear Winter

And in South Korea, the nuclear part of the country’s total power generation decreased from 30 percent in 2016 to 23.4 percent in 2018, even as the percentage of coal usage in the country’s total power generation rose from 38.7 percent to 41.9 percent in 2018. Renewable energy sources rose as well, but only accounted for 4.9 percent of total power generation in 2018.

Read Douglas Kim’s full Insight on Smartkarma: A Pair Trade Between Doosan Heavy Industries & Doosan Corp: (미세먼지, Nuclear Power, & 0.42 Million)

It’s clear that no matter where one stands on the argument, the decline of nuclear energy due to public distrust and political issues is not conducive to cleaner forms of energy – if anything, the opposite seems to be happening.


This presents ethically-minded investors with a conundrum: do they try to put their money behind nuclear energy, or does the industry’s global decline and ill reputation augur poor returns? Even worse for ESG investors, does an investment in nuclear power conflict with their impact mandate, despite it being a much cleaner source of energy than any fossil-based fuel?

Perhaps one key challenge is that investors might not know enough about the challenges and opportunities of the sector. A study by BNP Paribas showed that access to data is the greatest challenge ESG investors face when called upon to make decisions.

The debate around the pros and cons of nuclear energy has been raging for years now, with both sides making detailed arguments to support their point of view. Investors could be forgiven for having difficulty parsing all the information out there.

Read more on Smartkarma: Why ESG Investing Is No Longer the Buy-side’s Top-Performing Cliché

What’s hard to deny is that relying solely on renewable energy is not enough to get us to reduce greenhouse emissions by 2030, our current milestone to help alleviate climate change effects.

“There is an enormous volume of data out there suggesting that solar power is the cheapest thing but doesn’t take into account the lack of battery technology, cost, or the enormous amounts of land required, replacement times, and toxic waste afterward (an estimated 65 metric tonnes by 2050),” King stresses.

“Current infrastructure resources [for electric power] are wholly inadequate, and are already facing shortfalls. If we are ever going to break out of the hydro-carbon economy, it can only be via two methods: (a) nuclear power or (b) unconventional geothermal (but the technology isn’t there yet).”

Whichever way the pendulum swings, more scalable solutions and investment will be vital.

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Why ESG Investing Is No Longer the Buy-side’s Top-Performing Cliché

Why ESG Investing Is No Longer the Buy-side’s Top-Performing Cliché

By | General

It doesn’t take a genius to figure just how dire things are in this world we call home. These flashpoints offer a sense:


Climate Change – The Killer Thaw

“Climate change is likely to cut Antarctica’s 600,000-strong emperor penguin population by at least a fifth by 2100, a study suggests.”

BBC, 30 June 2014

Less than five years later…

“Thousands of emperor penguin chicks drowned when the sea-ice on which they were being raised was destroyed in severe weather.”

BBC, 25 April 2019


Child Labour – Still Rife in the 21st Century

“Car and tech companies are scrambling for supplies of cobalt, a mineral they need to power electric vehicles and smartphones… A CNN investigation has found that child labour is still being used to mine the valuable mineral at some operations in the Democratic Republic of Congo.”

CNN, 3 May 2018


Corruption – There’s an Economic Cost

“The annual costs of international corruption amount to a staggering US$3.6 trillion in the form of bribes and stolen money, United Nations Secretary-General António Guterres said…”

World Economic Forum, 13 December 2018

In truth, the aforementioned examples represent only the tip of the ESG (Environmental, Social, and Governance) issues requiring urgent resolution.

But the unfortunate reality is such: Governments, with their finite resources, face hard choices in prioritising how they allocate budgets. And, as a result, end up leaving problematic gaps unaddressed.

Evidently, there exists a yawning gap between the resources needed to effect change and what’s (actually) available.

All is not lost.

Private Capital to the Rescue

While a shortage of funds and, to some extent, the lack of political will, has been pinpointed as common obstacles, they also create an enormous investment opportunity for private capital to be deployed to great effect.

Nine in 10 respondents of BNP Paribas’s ESG global investor survey are predicting that “impact” allocations will form more than a quarter of their funds by 2021.

And it’s already happening.

Take Norway’s US$1 trillion sovereign wealth fund, the world’s largest, for example. In March 2019, it made a firm choice to cut oil and gas exposure from its portfolio.

“Although the proposal has not stated that it is driven by climate risk, it mentioned the lack of renewable energy prospects as a rationale for shortlisting the stocks it plans to divest. This may trigger other investor groups to follow suit, impacting sector valuations further,” Investory’s Devi Subhakesan wrote in a research Insight published on Smartkarma.

Read Devi Subhakesan’s full research Insight on Smartkarma: Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

Promising signs, no? Hold that thought.

Beneath the Greenwashing

On the surface, ESG investing appears to be catching on. But beneath that facade, structural challenges remain.

BNP Paribas’s study has revealed that the greatest impediment to ESG integration isn’t a lack of conviction of its potential to improve long-term portfolio performance, nor the risk of greenwashing, nor inadequate backing from senior leadership.

It’s access to data!

Barriers to ESG adoptionSource: BNP Paribas

“I believe data on sustainability is now viewed in a similar way to how financial data was treated around 75 years ago,” notes Andreas Feiner, founding Partner at sustainable asset manager Arabesque.

“This has resulted in a situation where some companies avoid disclosing some information that would potentially show them in a negative light.”

Heap and Keep the Pressure On

Feiner couldn’t be more right.

Earlier this year, Exxon Mobil wrote to the US Securities and Exchange Commission, attempting to solicit the regulator’s help in blocking an investor proposal that called for the firm to set emissions targets.

Exxon clearly felt the heat from investors!

From this case, we can see how the power to alter corporate practices (for the better) stems not from ESG investing itself, but through its resulting activism.

Investors often look to bigger investors for direction and validation. And who better to lead (and influence) this proactive push for change than the world’s largest institutional investor – BlackRock:

“Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked…

Companies that fulfil their purpose and responsibilities to stakeholders reap rewards over the long-term. Companies that ignore them stumble and fail. This dynamic is becoming increasingly apparent as the public holds companies to more exacting standards. And it will continue to accelerate as millennials – who today represent 35 percent of the workforce – express new expectations of the companies they work for, buy from, and invest in.”

Larry Fink’s 2019 Letter to CEOs

The time has come for custodians of private capital to reexamine their patchwork approach to investing sustainably.

Their investees, on the other hand, also face a pivotal decision: Genuinely embrace the tenets of ESG, or be prepared to be isolated by the broader investment community.

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LNG natural gas

Something’s Burning. It Smells Like a Future Powered By Natural Gas

By | General

Climate activists frequently lead debate on what nations must do to fulfil their Intended Nationally Determined Contributions (INDCs), as enshrined in the 2015 Paris accord. More often than not, they cite classic greenwashing prescriptions, demanding the swift replacement of fossil fuels with renewable sources of energy.

Sure, that could be easily implemented if they played SimCity, the utopian virtual city-building game. But reality isn’t as straightforward.

Languishing in a labyrinth of socio-economic issues, some governments face more urgent spending priorities, such as welfare and education. Others have to contend with natural obstacles, like a lack of land and/or sea space to install solar and wind farms.

Such real-world circumstances create a pressing need for a transitional energy source that not only reduces a nation’s near-term carbon footprint, but supports the economic growth required to improve its citizens’ livelihoods.

For that, the world is turning to natural gas – or LNG, its liquefied form.

Natural Gas Is Catching On, Fast

What energy potential!

“Global demand for natural gas is forecast to increase at an average of 1.6 percent over the next five years with emerging Asian markets as the main engine for demand,” says the International Energy Agency (IEA).

The IEA adds that “China alone accounts for a third of global demand growth to 2022 thanks in part to the country’s ‘Blue Skies’ policy and the strong drive to improve air quality.”

Natural gas consumption 2023 - IEA

Too Much Supply Can Be a Bad (and Good) Thing

More LNG projects have begun to sprout in recent years as oil and gas giants pounced on the potential of these upward projections.

However, no amount of demand is infinite. Once (projected) oversupply sets in, the laws of economics re-tilt the balance by way of downward price adjustment.

Data compiled and published on Smartkarma by independent analyst Massimo Bellino show that “Asian LNG spot prices are now [as of 5 April 2019] at their lowest level since May 2015 (US$4.60 per mmbtu) and close to the lowest records going back to 2010 of US$4.00 per mmbtu.” The acronym “mmbtu” refers to one million British thermal units, standard measure for a million units of heat energy produced by natural gas.

Asian LNG Prices Drop Below the TTF

Asian LNG prices drop below the TTFSource: Capital IQ, Tellurian
Compiled by: Massimo Bellino


“The race to gain market share in the projected LNG demand-supply gap has produced an aggregated capacity of proposed new projects of up to 475 mtpa (metric tonnes per annum), a number larger than the total LNG traded volume in 2018 of 319 mtpa, and way above the capacity required to meet the future growth in LNG demand,” Bellino says.

A prolonged slump in LNG prices would likely force oil and gas companies to curtail investments in new projects, thereby mitigating the oversupply risk.

This has happened before: Further analysis reveals that since the last downturn in 2015, firms have cancelled or put on hold about 400 mtpa in total proposed global capacity.

Bellino’s key point is the inherent cyclical nature of the energy markets.

The peak in LNG prices during 2018, together with expectations of future supply gap, has produced a massive wave of new proposed projects.

LNG markets could suffer from periods of oversupply (like now) as a result, followed by periods of a supply gap, giving rise to increased bouts of price volatility.

Read Massimo Bellino’s full reports on Smartkarma:

How Cheaper Gas Fuels Social Good

Economically, the current price plunge arrives at the right time for price-sensitive users in fast-emerging nations.

Cheaper natural gas creates new structural demand, which catalyses an eventual switch away from coal. That not only helps to bring developing nations a step closer to meeting their INDCs, it offers some of their cities an effective solution to address severe air pollution.

“Air pollution steals our livelihoods and our futures… In addition to human lives lost, there’s an estimated global cost of 225 billion dollars in lost labour, and trillions in medial costs,” quips Yeb Sano, Executive Director at Greenpeace South East Asia.

PM2.5 concentration - 2018 world air quality report
Source: 2018 World Air Quality Report by IQAir AirVisual

The Long Versus Short View

What’s been discussed so far would likely prompt any reader to ponder the future viability of natural gas as an energy source.

In the longer-term, demand for LNG will continue to climb as nations and industries balance the transition to renewables with the immediate realities of delivering economic and business growth.

Besides, of the three main fossil fuels (coal, oil, and gas), gas is the still the cleanest burning fuel of them all.

In the near-term, brace for more price volatility from LNG markets!

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Hong Kong’s Slap to Investment Banks Solves Nothing for Future IPOs

By | General

Hong Kong’s regulator has a tough job.

On the one hand, their primary mandate – like other regulators – demands the preservation of financial-market integrity and trustworthiness.

On the other, they tow a fine line in ensuring their actions don’t tie free-flowing markets in regulatory straitjackets.

But sometimes, market players intentionally breach the rules. When that happens, the onus falls on the regulator to crack the whip and set them back on the straight and narrow.

This is because a reluctance to act often perpetuates further questionable behaviour by other players, which could lead to a spiralling decline in overall investor confidence, spurring capital flight.

Incurring the Wrath of Hong Kong’s Securities Regulator

The clear and present danger of meeting this undesirable fate should explain why Hong Kong’s Securities and Futures Commission (SFC) handed its harshest fines ever to three internationally renowned investment banks on 14 March.

The reason: Investigations by the SFC had revealed severe due diligence failings on past IPOs undertaken by them.

Swiss bank UBS received the heftiest penalty at US$375 million, “for failing to discharge their obligations as one of the joint sponsors of three listing applications.”

Next in line for the whip was Morgan Stanley (US$224 million), followed by Merrill Lynch (US$128 million). But unlike UBS’s three applications, the SFC reprimanded these two entities for just one listing: Tianhe Chemicals (2014) – the common thread tying all three banks together.

To get a sense of stewardship failings at play with Tianhe’s case, see the excerpt below from the SFC’s official statement:

Failure to address red flags in an interview

[UBS, Morgan Stanley, and Merrill Lynch] had initially requested to interview the largest customer of Tianhe, Customer X, at its office, but eventually accepted Tianhe’s explanation that since an anti-corruption campaign in Mainland China was underway, Customer X, a large state-owned enterprise, would normally turn down any third-party request to visit its premises.

[UBS, Morgan Stanley, and Merrill Lynch] then agreed to interview Customer X at Tianhe’s office. At the end of the interview, the representative of Customer X refused to produce his identity and business cards and stormed out of the meeting room. He told UBS and other parties that he would not have agreed to be interviewed under Customer X’s internal procedure, and he only attended the interview to help the family of Tianhe’s chief executive officer.

Nonetheless, [UBS, Morgan Stanley, and Merrill Lynch] did not conduct any follow-up inquiries to ascertain that the person it interviewed was the representative of Customer X and that he had the appropriate authority and knowledge for the interview.

The apparent lack of governance was plain for all to see.

Companies that score well on corporate governance tend to perform better in IPOs. Read more: What a Popular Hollywood Film Tells Us About the Symbiotic Link Between IPO Performance and Corporate Governance

Identified: Clear Correlation Found Between Sponsor Selection and IPO Performance

Independently, this latest imposition of fines by the SFC could be easily viewed as a one-off event. As to whether it materially impacts future deal-making business, though, is another question altogether.

If only companies with intentions of listing on the Hong Kong Stock Exchange had a reliable way of benchmarking sponsors.

But, they do!

Deep analysis conducted by Aequitas Research has found a distinct link between the average share returns of Hong Kong-listed companies and the sponsors of their listings.

In the First Week After Listing

“In terms of one-week deal performance post-listing, Bank of America Merrill Lynch (BAML) ranked best overall, as a sponsor, with… an average return on 17.2 percent,” according to Aequitas. “The next-best sponsor was Credit Suisse (CS), with an average return of 11.4 percent.”

1-week deal performance of Hong Kong IPO sponsors

Three Months After Listing

BAML and CS maintained their top two positions in this time frame, averaging deal gains of 22 percent and 11.6 percent respectively.

3-month deal performance of Hong Kong IPO sponsors

The irony: It appears that, based on these findings, Merrill Lynch’s latest run-in with the SFC might be a mere statistical outlier after all.

Sign up or sign in to read the full study: IPO Analytics: Corporate Governance – Alpha Generator, Shortlist of Bookrunners to Avoid/Keep Happy

Uprooting the Root Cause

Studies like the one above undoubtedly go a long way to help inform sponsor selection.

But that’s not the point.

Slapping those massive fines on the guilty three – UBS, Morgan Stanley, and Merrill Lynch – was still a reaction to grave wrongs that had already run their course.

Even though “the sanctions send a strong and clear message to the market,” the misconduct shouldn’t have occurred in the first place, not least in one of Asia’s premier financial capitals.

Yet somehow they did. And that’s because conflicts of interest persistently exist in the due diligence process: Sponsors stand to gain financially and in reputation if their IPOs perform well.

Perhaps the SFC could learn a best practice or two from the UK’s Financial Conduct Authority to nip these failings at the bud.

For a start, why not consider adopting the new UK regime for equity IPOs that allows independent analysts to scrutinise soon-to-be-listed companies?

Smartkarma covered the first listing (Aston Martin) under the UK’s new disclosure rules. Read the Insight: Aston Martin Lagonda Pre-IPO Under the New IPO Process – Lots to like Apart from R&D Capitalisation

That introduces vital checks and balances at the pre-listing phase, which could pressure the sell-side to conduct proper due diligence, or risk losing credibility.

Something for the SFC to think about, eh?

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A Lyft car in San Francisco, as Lyft prepares for IPO

Lyft’s IPO May Be Oversubscribed but Investors Are in for a Bumpy Ride

By | General

After all the anticipation, it’s Lyft that has kickstarted the year of ride-hailing IPOs, much to the enthusiasm of investors. The market has been waiting for the ride-hailing startups to go public for years, perhaps more Uber than its US rival, but that hasn’t stopped Lyft’s listing from being oversubscribed, according to media reports.

And that’s despite Lyft (or Uber, for that matter), not being anywhere near profitability and actually reporting significant losses. Where have we heard this before?

Cast your memory back to March 2017, when Snap Inc, another tech darling, held its own oversubscribed public offering despite iffy financials. People were looking for the next Facebook, and Snap looked like it might be it. 

Three days after listing, Snap’s stock price plunged more than 12 percent and never really reached anywhere near its initial value again.

Obviously, this is comparing apples to automobiles but there are common elements here. For one, both Snap and Lyft are unprofitable tech startups entering the public markets with oversubscribed IPOs.

Also, they are both up against a much more powerful and deep-pocketed incumbent: Facebook proved to be Snap’s ultimate nemesis, while Uber commands a much bigger market share and has a much larger war chest than Lyft.

It’s hard to think market history won’t repeat itself, looking at Lyft’s numbers. It’s enough pressure even without considering the fact that Uber may be after a US$120 billion valuation on NYSE.

Lyfting the Veil

In a comprehensive note on Smartkarma, Insight Provider Douglas Kim asks a question that should be on the mind of every investor looking into Lyft:

“Is US$2-2.5 billion enough for Lyft to last in the next two to three years without concerns about additional secondary offering during this period?”

In his analysis, Kim points out 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, 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.

Lyft revenue, profits and losses, base case scenario

Chart by Douglas Kim

Like several tech hopefuls who believe in super-fast growth, Lyft seems like it will be posting losses for a while yet – Kim’s base case scenario doesn’t expect the ride-hailer to turn a profit before 2025. This increases the possibility of more fundraising in the meantime, with everything that entails for shareholders.

It doesn’t help that Lyft fails to disclose some pretty vital numbers for the analysts to properly evaluate the business. “Without the quarterly active driver numbers and the full picture of the extent of shared rides, one can’t develop an accurate picture of the business,” points out Sumeet Singh of Aequitas Research in a pre-IPO analysis on Smartkarma.

Future Promise

So how can Lyft reduce costs and improve the bottom line? Autonomous cars seem to be a big part of the narrative – after all, much of Lyft’s revenue has to go to the drivers who, well, make ride-hailing services possible. Fewer drivers to pay, more money for the company.

The problem is, truly autonomous cars that will allow Lyft and Uber to do away with drivers altogether still have a ways to go before they take to the streets in large enough numbers.

It’s not just that there isn’t a clear consensus on when full self-driving technology will go mainstream. There is uncertainty in how the technology will be regulated and what it will mean for companies operating fleets of self-driving cars. There is also distrust from the public, not to mention the POTUS himself.

Diversifying the business seems to be a better strategy for Lyft. “Management seems to be aware of the need for business diversification as Lyft has pitched itself as an inter-modal transport network,” says Insight Provider Johannes Salim in a recent piece on Smartkarma. Salim highlights moves like Lyft’s acquisition of bike-sharing provider Motivate as an example.

It remains to be seen whether Lyft will follow Uber into sectors like food delivery to boost revenue – it certainly worked for Uber – or whether it will seek to expand to more markets outside the US and Canada. Unfortunately for Lyft, many markets in Europe and Asia now have their own well-established and well-funded incumbents with their own ambitions for growth.

Ride-hailing companies private valuations - Uber, Lyft, Didi, Grab

Private valuations of ride-hailing companies based on their latest funding rounds

Tech IPO Angst

So is Lyft’s IPO bound to disappoint investors like other tech IPOs before it? Citing data by Jay Ritter from the UF Warrington Faculty at University of Florida, Rohinee Sharma of Investory notes in a brief article on Smartkarma that only 16 percent of the 38 US tech IPOs of 2018 were profitable – a figure that hearkens back to the dotcom bust of 2001.

It’s not uncommon for investors to finance tech companies’ fast growth in hopes of stellar future returns. But it’s trickier to ask public markets to do the same. “Barring very few profitable IPOs marked for this year – AirBnB for example – would the market be subsidising profits for future growth potential?” Sharma asks.

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The wolf of wall street

What a Popular Hollywood Film Tells Us About the Symbiotic Link Between IPO Performance and Corporate Governance

By | General

Let’s take a trip down memory lane to the year 2013, when Hollywood released infamous film The Wolf of Wall Street.

Those who caught the movie would easily recall the questionable and audacious manner in which Jordan Belfort “conned” and separated everyday individuals from their hard-earned money.

Not as many, however, might remember Steve Madden’s cameo at the time Stratten Oakmont (Belfort’s company) took his female shoes firm public.

His character may have played a bit-part role in the film. But in reality, it was far from minor.

The severity of Madden’s involvement in Belfort’s ponzi operations came to full light when, in June 2000, US federal authorities arrested him on several counts of securities fraud and money laundering.

Prosecutors then alleged that in 22 IPO deals underwritten by two of Belfort’s companies between 1991 and 1997, Madden bought stocks at a predetermined price and sold them back at an agreed rate to artificially inflate their market value.

In return, he received a cut of the profits for services rendered as a “flipper”.

Madden had also deployed similar tactics to manipulate his own company’s share performance after it went public (Ticker: SHOO) in December 1993.

That SHOO’s stock ended up plunging nearly 15 percent the same day news of his arrest broke – nearly seven years after the IPO – shouldn’t have come as a shock.

Knee-Jerk Reactions

Shady practices, like those mentioned above, tend to draw the ire of shareholders as soon as they surface, resulting in sell-offs that send stock prices into a tailspin.

Even so, not all “shady” IPOs take years to unravel like SHOO’s.

Often the consequences of such illicit actions – should they be made known – are priced into stocks by the market within days, weeks, or at the longest, within months of going public.

Case Study: The Proof Is in the Data

In January this year, boutique research outfit Aequitas Research published a report on Smartkarma about IPO performance trends and their contributing factors based on deals analysed since 2015.

Part of the independent study aimed to showcase the positive correlation between good corporate governance and alpha generation – and that it did.

Aequitas filtered 209 past deals through 10 different parameters, which included related-party transactions, dividend/cash pull-outs before listing, partial asset listings, and legal disputes, among others.

True to their initial assumptions, the 55 percent of deals that scored positively for corporate governance outperformed those with a negative score across three time frames – on average.

Corporate Governance score impact on IPO price performance

“Deals with a positive score returned 7.4 percent on the first day, 6 percent by the end of the first month, and 8 percent by the end of three months,” wrote Sumeet Singh, Head of Research at Aequitas.

“In contrast, returns for the deals with a negative score were 1.4 percent, -0.4 percent, and 1.9 percent, respectively.”

The landmark revelation here, however, is not so much in proving how the presence of strong corporate governance drives relatively stronger post-listing returns.

While true, the bigger, underlying point is that, absent objectivity, such revelations might not even see the light of day.

Nowhere is this invaluable quality more entrenched than in the realm of independent investment research.

Why Research Independence Matters

Several characteristics underpin the strengths of independent research, but these three are most relevant in the context of Aequitas’s study:

  1. No Conflicts of Interest – Unlike analysts that work for the sell-side, their independent counterparts are not constrained by the high-value relationships a bank must preserve.
  2. Trust – For the buy-side, placing wagers in the millions (or billions) is no game. As such, asset managers frequently demand transparency and accuracy in the research they consume and on which they act. Unbiased reports produced by independent analysts provide this reassurance. 
  3. Transparency – Similar to how the free press serves as the watchdogs of society, independent analysts function as the gatekeepers of corporate governance for the companies they cover.

Karma (Always) Has the Final Word

So, what’s the key takeaway?

At the crux, companies with weak corporate governance set themselves up for relative IPO underperformance.

And for those, like Steve Madden, that get away initially, karma eventually finds its way over, no matter the time frame.

Now how’s this for an ironic conclusion: Money stolen from embattled Malaysian state fund, 1MDB, actually helped fund the production of The Wolf of Wall Street.

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A 5G cell tower, China's Master Plan to counter the US attacks on Huawei

Dominate 5G: China’s Master Plan to Counter the US’ Attacks on Huawei

By | General

The market’s obsession with 5G has reached fever pitch. Unsurprisingly, it was the main talking point at the Mobile World Congress (MWC), the world’s most prominent conference on all things mobile tech, which happened in Barcelona this past week.

Upgrading to 5G networks is no small feat for telecommunications providers. According to a report presented at MWC by GSMA Intelligence, the research arm of mobile industry body GSMA, mobile operators worldwide are investing around US$160 million per year to expand and upgrade their networks so they will be ready for 5G.

The returns, at least, should be worth all that capex. The report predicts that 5G-powered technologies – streaming services, smart city and smart home applications and devices, autonomous vehicles, and so on – will contribute US$2.2 trillion to the global GDP in the next 15 years.

However, the mobile industry’s next big milestone also coincides with a flurry of geopolitical developments that complicate things, with China at the epicentre.

Its homegrown mobile powerhouse Huawei is one of the world’s most important suppliers of mobile communications equipment. Products and services of companies like Huawei are pivotal to the development of 5G communications networks.

But Huawei has found itself entangled in a brawl with the US government over allegations of spying on behalf of its homeland. This has led to several other countries reexamining their relationship with the Chinese firm, in a move whose impact is now reverberating across the global 5G market.

Nowhere are those rumbles felt more than China itself. In a lot of ways, the US-China spat over Huawei is an extension of the greater trade and financial dispute between the two superpowers (read more about this in The End of Fair Trade, our special report about the trade war).

5G Spending Spree

The Chinese government dictates how much its state-run telcos spend on 5G infrastructure. And in 2018, companies like China Mobile, China Telecom, and China Unicom jointly prepared for a measured and controlled 5G expansion.

The rationale was that 5G infrastructure would initially be aimed more at business-oriented services and products and there wouldn’t be as much need to cover most of the country right away.

However, as New Street Research points out in a series of Insights on Smartkarma, the United States’ ongoing tussle with industry leaders Huawei and ZTE changed those dynamics. US intransigence closed off several key markets for the Chinese companies, including Australia and Japan, who cited security concerns.

European markets like the UK and Germany are still evaluating their relationship with Huawei, although they have yet to come down on one side or the other.

“In such times, great leaps forward are more appealing and 5G will open up use-cases for the economy such as smart cities and autonomous driving, even while the revenue opportunity for the telcos remains modest,” the Insight Provider writes in an Insight with a bearish outlook on Chinese telcos. “The disconnect between what is good for the telcos and what is good for China Inc. is widening.”

Simply put, China wants to be a global leader in 5G technology, and there’s a risk that it would require its telcos to spend as much as it takes to achieve it – even if the capex is much more than is healthy or desirable by the telcos themselves.

In what New Street Research terms as its “extreme case”, 5G cell sites in China would double, while existing sites would upgrade rapidly to achieve a geographic coverage of 50 percent and population coverage of 98 percent.

But even if it went that far, the problem is that, at least in the first few years of the roll out, not many commercial applications would be available – leading to lower returns for all that investment.

China telco capex for 5G expansion and upgrade

Extreme-case capex in China (amounts in RMB bn). Data and chart by New Street Research


Huawei Shunned

Elsewhere in Asia, South Korea looks to be the first country to launch commercial 5G services as early as this month. Along with selected markets in the US, these are some of the first places to see the benefits of 5G, helped by the arrival of all-new, 5G-compatible smartphones.

South Korean telcos have broadly chosen to go with partners outside of China. In fact, South Korea is evaluating whether Huawei’s products and services are a security threat, notes Insight Provider Douglas Kim on Smartkarma.

Two major telcos in the country, SKT and KT, have decided to go with companies like home player Samsung and Western firm Ericsson. Finnish provider Nokia has announced a collaboration with KT to develop and trial 5G network solutions.

Only LG Uplus has committed to working with Huawei in its 5G infrastructure. The telco’s share price saw a 17 percent drop in early February, and Kim muses that there could be more to blame for this than just the company’s poor 4Q18 results.

The uncertainty and tension are not likely to let up in the coming year, especially in light of the broader conflict. China, especially, will probably want to push the spending pedal to the metal, despite the telcos’ business concerns. As far as the government is concerned, this tactic has worked in the past.

“From the government’s perspective, past over-investment by the telcos (both 3G and 4G) has been monetised many times over,” writes New Street Research. “[I]t has underpinned the growth of the Chinese internet economy, which has transformed China, propelling the country to the forefront of the global internet economy.”

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Big bank investor flight fuels outlook for mergers and acquisitions

M&A Crystal Ball: A Fund Run on Big Banks Raises the Spectre for Further Sector Consolidation

By | General

2018 was not kind to the world’s biggest banks.

Faced with the perfect storm of global economic headwinds, whipsawing markets, and a raft of compliance scandals, the most staid names in the sector were handed the near-impossible task of preserving and/or restoring investor confidence.

Steven Holden of Copley Fund Research clearly illustrated this deep impact in a study published on Smartkarma.

Holden swept through 255 global equity funds and the holdings of the 18 largest financial institutions (by total assets) from across three regions – the US, EMEA, and Asia.

What he discovered was nothing short of alarming: Bank share ownership plunged through 2018 for all but four stocks, with the number of funds selling far outnumbering those buying.

Large global banks - key changes in ownership 2018

“It is clear that global investors are shying away from exposure towards many of the global mega-banks. Though most of these stocks have already endured a tough ride in 2018, the severity of the exodus points to a broader drop in confidence among global investors,” wrote Holden, summing up his findings of the study.

M&A’s Uplifting Effect

What could this worrying trend of investor flight possibly lead to? It shouldn’t come as a shock that such dips in confidence might actually spur increased bouts of M&A activity among the “mega-banks”.

Mergers and acquisitions have historically proven to be a near-surefire way to reverse risk-off moods, as well as usher in much-needed stability during periods of uncertainty.

About a decade ago, with the global financial crisis in full force, Bank of America (BofA)’s acquisition of Merrill Lynch (ML) helped stave off a total unravelling of the retail brokerage.

Fast-forward to early 2019, under relatively healthier economic conditions. News of BB&T’s decision to acquire SunTrust and rebirth the combined entity as the sixth-largest US commercial bank by assets lifted shares of both companies.

These two mergers may have happened under different circumstances but they have one key benefit in common: the promise of cost savings – and lots of them.

For BofA and ML, it meant shaving as much as US$7 billion in expenses over a four-year period.

For BB&T and SunTrust, the lure of a more than 10 percent cut in running costs, thanks to shuttering redundant branches and digital systems.

Lower operating expenses widen operating margins, which, in turn, free up cash for other purposes. Whether using that cash to pay down existing debt or to invest in digital transformation, a strengthened financial state almost always builds confidence in investors.

Deutsche Bank-Commerzbank

But the BB&T and SunTrust marriage may only be the tip of the iceberg of what’s to come for the year ahead.

Also red-hot on the prospective list is Germany’s Deutsche Bank (DB) and Commerzbank (CB).

The catalyst? DB’s persistent struggles to pull itself out of a financial quagmire after four years of declining revenues, with no viable plan to reverse its misfortunes.

Add to the challenge a constant string of lawsuits, regulatory investigations, heavy fines (US$17 billion in the past decade), and soured bets, like the US$1.6 billion loss it incurred on a pre-financial crisis municipal-bond wager. It’s not surprising DB features among the six banks suffering from the highest investor flight, based on Holden’s study.

Adding insult to injury, the current weakened state of investor confidence could deteriorate still further: A credit-rating downgrade on the bank has led to higher borrowing costs, making a recovery even more difficult to achieve.

Just like BofA-ML, the common narrative put forward by market pundits is that either DB find some miraculous way to turn things around, or be subject (quite possibly) to a government-arranged marriage with domestic competitor CB.

Barclays-Standard Chartered

Elsewhere in the UK, a merger between Barclays and Standard Chartered doesn’t seem so far-fetched, either.

The idea was initially mooted in May 2018, when Barclays began studying the viability of merging with another international bank.

Since then, the impetus to go through with it has only increased with a no-deal Brexit looking more likely than not.

Creating this hypothetical British banking juggernaut will bring the duo financial security and business synergy.

Financially, their combined balance sheet would help withstand any Brexit fallout post-29 March. And, on the synergistic front, Barclays’s established UK business will more than complement Standard Chartered’s entrenched presence in far-flung emerging markets, like Africa.

A merger of this magnitude, at least in theory, carries the potential to deliver a confidence boost for investors seeking stability and room for growth.

More Reasons to Deal

In addition to the aforementioned factors, there are other reasons why more consolidation could happen in the financial services sector this year.

For example, looser US regulations and a tax overhaul are freeing up increasing hoards of cash on bank balance sheets – ammunition to do deals with in the States.

In fact, an M&A report prepared by Ernst & Young showed that the value of M&A activity in 2018 (US$196.5 billion) rose by 139 percent from the year before (US$82.3 billion).


Annual increase in financial services merger activity 2018


Then, there’s the argument of cannibalisation caused by the presence of too many small players competing in a single market.

As BofA Chief Executive Brian Moynihan aptly puts it, “There are now 6,000 odd banks [in the US], and you’ll find them continuing to consolidate.”

It’s time to ratchet up those wagers on the next banks in line to get hitched. The return of lost confidence from institutional investors is not far off.

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Smartkarma Beyond Europe MiFID II

Beyond Europe: How MiFID II Spurs Regulatory Change Across the Globe

By | General

Financial firms are still grappling with MiFID II, just over a year since the regulation came into force.

What was originally intended to be internal EU regulation has now transcended borders, its impact felt by those who produce and those who consume investment research across global financial markets.

Making sense of this labyrinth of change can be a tall order given how quickly market players have moved to implement their various responses.

In this special blog feature, Smartkarma unveils a range of perspectives drawn from our network of independent Insight Providers to help establish greater clarity of what’s transpiring on the ground – and where.

Price Wars, More Red Tape, and the Search for Differentiation

The initial impact of MiFID II has been to sharply reduce the price paid for research as large banks have led pricing down. Over time, lower prices will lead to lower quality and some houses eventually withdrawing from research.

However, that is a massive step and big banks will be very reluctant to exit. Research is still seen as essential if a broader trading relationship is to be maintained. None of that is particularly good news for independent research. However, the cost structure of independent research is so different for the banks that the pressure is hopefully manageable.

While MiFID II is Europe-focused, we have seen many funds become MiFID II-compliant to simplify their own processes, while some have chosen to follow it to reduce costs. In general, MiFID II has increased bureautic processes, with costs moving from research production to managing research. Hardly a positive outcome.

On the more positive side, we are seeing more enquiries from funds looking for differentiated research. They are typically not index huggers.

– Michael Chambers
New Street Research

US: Mixed Reactions

For buy-side firms domiciled in the US, but with either EU operations or funds catering to those clients, MiFID II is in full effect. Those firms follow the MiFID II guidelines for research consumption.

While the production of reports hasn’t changed, pricing has been dramatically impacted as those firms try to absorb a significant expense (research budgets) that was previously dealt with through soft dollars.

Our EU clients have generally decided to pay for research through hard dollars, and research budgets have been slashed dramatically. Cuts of well over 50 percent have not been uncommon.

Marketing to any prospective EU-based clients has also been impacted, as blast emails and free trials are now unwelcome and raise the anxiety of any recipient not wanting to run afoul of the MiFID II police.

On the other hand, firms based in the US without a foreign footprint have generally not felt the urgency or necessity to adopt these guidelines as of yet. Research is produced, distributed, and paid for as always.

– Joe Jasper
Vermilion Research

Read our commentary on the introduction of temporary no-action reliefs in the US:
The SEC Hands Out MiFID II Lifelines, But US Firms Are on the Clock

Latin America: Not So Dissimilar from the EU

From the buy-side perspective, very large (global and international) asset managers and hedge funds are implementing the directive globally, which impacts the relationship with global and local brokers as providers of research services.

From the sell-side angle, the directive is also being implemented globally by the bulge bracket and other international investment banks.

So increasingly, as within the EU, we see dedicated pricing for research services, and at the margin, a reduction in coverage of smaller and mid-cap corporates especially by the bulge bracket. We perceive a shift of research coverage, especially in mid-caps, of quality and quantity towards locally-focused brokers initially.

With time, as bigger gaps in coverage emerge, independent research providers should take hold in Latin America. Currently in Brazil, there is at least one web-based research platform offering research products to domestic subscriber investors, and the strategy is to take this region-wide.

With regard to IPOs, there does not yet seem to be the regulatory push (as we are seeing in the UK) for independent analysts to participate in the process of due diligence.

– Victor Galliano
Independent Insight Provider

Asia: The Overarching Impact

MiFID II has already started putting pressure on large and mid-tier domestic brokerages across Asia and led quite a few to question their “me too” approach to research coverage. Given the relatively underdeveloped independent research landscape in Asia, it will hopefully nudge more analysts to take the plunge like we did, and provide true unconflicted research. A deeper independent research pool, in turn, will be better for investors and for markets.

– Sumeet Singh
Aequitas Research

China: Walled Up Against MiFID II

MiFID II may not have much of an impact on the Chinese domestic market. The government controls the flow of Chinese funds that want to invest in overseas stocks, and overseas funds that want to invest in China. Only a very small proportion is approved by the authorities.

– Ming LU
Independent Insight Provider

Japan: Succumbing to Free-Market Competition

MiFID II does not apply in Japan and a number of local subsidiaries of foreign fund management firms have changed their direct parent company structure to avoid compliance with the directive. Nevertheless, global and local brokers have responded by offering very low fees for total research access, including Japan equity research.

Irrespective of MiFID II and as a result of client pressure, most fund management houses are moving to paying for all research access from their own P&L, and are bringing Investor Relations introduction and roadshow organisation in-house.

In the ‘brave new world’ that has resulted from the directive’s implementation, the perhaps unintended consequence is that independent research houses in Japan are struggling now to make inroads into already-long ‘approved research provider’ lists at most asset management firms.

To succeed, independent research firms will have to offer a highly differentiated product, keep costs to a bare minimum, and maximise the use of innovative and efficient distribution channels such as Smartkarma.

– Campbell Gunn
TAP Japan Research

Southeast Asia: Dwindling Coverage Seeds New Opportunity

The impact of MiFID II on investment research in Southeast Asia has probably been more marked and more immediate than for the larger markets in North Asia.

Southeast Asia is the first place that large-sized investment banks have cut back their research budgets, reducing the number of analysts on the ground and hence the stock coverage.*

The ability for European fund managers to pay smaller regional brokers has also been diminished, as they are paying for research out of their own pocket, putting pressure on these players. The bottom line is that some good-quality smaller companies have very little coverage and often coverage of large-cap stocks is left to increasingly junior analysts without the experience of longer-term cycles.

This opens the way for high-quality independent analysis of Southeast Asian companies and markets. The corporates themselves are very open to meeting with independent analysts, especially when they can see that the research being written is widely distributed to institutional investors, as with Smartkarma.

– Angus Mackintosh
CrossASEAN Research

*Note by Smartkarma: Maybank Kim Eng is one exception. The investment banking arm of Malaysia’s largest lender has opted to close its Hong Kong and China equity research operations in order to service its near-term vision of becoming a leading Southeast Asian bank by 2020. Regardless, the fact that Maybank had to choose one location over the other demonstrates the resulting trend of streamlining derived from MiFID II’s impact.

Australia: More Transparency, More Intense Competition

In the Australian equity market, the local regulator has not enforced MiFID II on the asset management and brokering industries, but its implementation in other jurisdictions has had spillover effects.

Global funds managers based in Australia have implemented the change in policy and this has led domestic fund managers to follow suit. We predicted this outcome even before the policy became law in Europe.

Asset managers now make cash payments to brokers for research and phone calls. Both parties are required to keep minutes of any analyst meeting, including an assessment of the value created. That inadvertently creates more administrative work.

Commissions paid to brokers have fallen significantly and by around 20 percent across the industry.

The large global brokers are offering their research services to asset managers at a price well below the cost of producing the service and this is squeezing the mid-tier brokers that don’t have large global platforms. For example, an asset manager can pay a global broker around US$30,000 per annum for access to their entire research platform.

Mid-tier brokers without the extensive research offering are being cut as a service provider. Although none of these brokers have exited the Australian market, they are likely to do so over time.

Smaller niche brokers that use research to support small capital market deals have been unaffected and this is likely to continue; they may even see an increase in market share as mid-tier brokers leave the industry.

The market still remains oversupplied with research and is still difficult for independent research providers (IRPs) to penetrate. However, the asset management industry is now focused on paying for what it perceives as quality research. Over time, such demand should create opportunities for IRPs.

– Shane Lee
Macro Strategy Advisors

In Summary

There is little doubt MiFID II has caused quite a stir in financial markets beyond Europe’s borders. Nonetheless, the need for sweeping change also opens a rich seam of opportunity for IRPs and research distribution platforms to step up to the plate.

Three emerging challenges remain unsolved:

  1. The quantity and quality of research coverage continues to dwindle globally.
  2. Increasing bureaucracy is contributing to rising costs for managing research.
  3. Clients value differentiated research more than ever.

All three reinforce Smartkarma’s combined value proposition.

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The SEC Hands Out MiFID II Lifelines, But US Firms Are on the Clock

The SEC Hands Out MiFID II Lifelines, But US Firms Are on the Clock

By | General

MiFID II officially entered the global financial services sector about a year ago. But while most are acutely aware of its impact on financial markets domiciled in the European Union, few understand its implications overseas.

Today, the US remains a market of focus.

Saved by Temporary Lifelines

Shortly before MiFID II came into force, US broker-dealers supporting EU investment managers were thought to be severely exposed to regulatory disruption.

The main reason: In receiving separate compensation for research services rendered, broker-dealers would be considered investment advisors under US law. That meant facing more stringent regulatory requirements, including restrictions on certain types of trading with clients they “advised”.

Broker-dealers previously skirted the requirements via an exemption in the law that allowed for research payments to be bundled with client commissions paid for executing trades. Unfortunately, the standalone research payments mandated by MiFID II all but plugged that loophole.

With no timely solution at hand, the US Securities and Exchange Commission (SEC) had to move swiftly to temper MiFID II’s impact or risk a sector-wide fallout. Such pressing circumstances led the SEC to introduce non-permanent no-action reliefs after holding consultations with the EU.

Out-and-out brokers and dealers cheered the news.

They now had a new kind of exemption, albeit a temporary one, that granted them the legal right to render research services to EU investment managers, and to receive payments separately without being penalised.

Investment advisors, too, caught a break with their own version, which permitted them to continue aggregating orders to buy or sell securities, all while receiving varying payments for research from EU clients. This was done on condition they charge clients the same average price for the security and execution costs.

A third no-action relief also helped US money managers operate within the safe harbour, as long as they paid executing broker-dealers for research with client assets through a MiFID II-approved research payment account.

Time to Ask the Hard Questions

The trio of no-action reliefs brought about a welcome respite to the US financial services sector. And to some degree, even enabled market players to act more in accordance with the spirit of MiFID II.

For the SEC, the exemptions bestowed the luxury of time to engage with other regulators, including those in Europe.

“As the staff evaluates possible recommendations, it is invaluable to hear from a diverse group of market participants,” commented SEC Chairman Jay Clayton in a press release. “In particular, it is important to have data and other information about how MiFID II’s research provisions are affecting broker-dealers, investors and small, medium, and large issuers, including whether research availability has been adversely affected.”

Still, that begs the question: How long is too long for a temporary fix?

Alluding to duration, former SEC Commissioner Kara M. Stein has warned that “while a time-limited approach may allow staff to study the impact of MiFID II, taking over 900 days is simply unreasonable.”

This inaction, she adds, may be costly to investors and advantage some market participants over others.

The industry now stands at the crossroads. Market participants can either capitalise on this new regime of provisions to gauge MiFID II’s impact and plan an appropriate response or use the temporary measures as a mere excuse to prolong inaction.

Don’t Discount Market Pressures

Those who go the distance to enact change will actually discover that it’s in their best interest, especially in winning favour from investors.

US asset managers, for example, might eventually be pressured to pay separately for research as clients demand equal treatment and cost transparency, similar to their European counterparts.

According to Smartkarma’s Head of US Business Development Warren Yeh, some have been known to go so far as to absorb the cost of research with a good deal of bravado to prove their incredible level of client accommodation.

Just last year, Vanguard Group pledged to pay for stock research it purchased from banks. A move of this measure from one of the world’s leading money managers would inadvertently place pressure on rivals to follow suit, or risk alienating themselves from clients.

Viewed in this context, free market forces can indeed be a force for change more powerful than any regulatory mandate can ever be.

David(s) vs. Goliath(s)

There is a darker side, however, to such free-market competition: Research providers – the supply side – are now caught in a tussle for market share.

Of late, more independent research upstarts have come into the fray because of increased demand generated by MiFID II.

Big banks have responded by engaging in a price war of attrition. If market participants recall, not long ago JP Morgan made headlines for offering access to basic equity research for as low as US$10,000 per year.

Insight Provider Douglas Kim, who publishes on Smartkarma, views this race to the bottom as a way to further weed out smaller independent research firms and platform operators over the next one to two years.

But price isn’t everything.

“In the end, as in every service industry, it all comes down to focusing on the customer and delivering a great value proposition,” said Kim.

“Whether it be timely, in-depth thematic research, a great long-short call, or helping the client to better understand a new technological concept, independent research providers need to provide great ideas and differentiated research on a consistent basis so that investment managers would find reasons to continue purchasing their research services,” he adds.

Tick Tock, Tick Tock

MiFID II’s strong influence in the US financial services sector is undeniable, and its long-term impact is still very much uncertain.

However, as Wall Street ponders the many ways forward to step out of the shadows of no-action reliefs, one thing remains clear: resistance to change only impedes market competitiveness.

Time is running out.


The original version of this article was published in November 2018 on TabbFORUM.

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