IR Weekly – Monday 20th July
Welcome to FTI Consulting’s IR Weekly newsletter.
This week, we open with coverage of the market structure quirks that has driven Tesla’s valuation into the stratosphere. The UK’s Covid-19 induced ECM fundraising boom is also in focus, as is a piece on the way the role of IR is changing as companies navigate Covid-19. Two prominent finance academics discuss their view that ESG is ‘overhyped and oversold’ in the Financial Times, drawing on their academic research published earlier this year. We discuss proposed regulatory changes in the US to mandated shareholder disclosures, which present a challenge to the fund management industry, and finally we highlight Reuters Breakingviews coverage of BlackRock’s own ESG credentials, asking whether it is in any position to criticise others.
This week’s news
Indexing, shorting and the Tesla bubble
In a Bloomberg Opinion piece, John Authers reported that Tesla is in the midst of a speculative frenzy, citing the fact that its stock is priced at 166 times next year’s earnings and 20 times book value. The article gives a number of reasons for the frenzy, two of which – indexing and shorting – it describes as modern phenomena. For one, Tesla’s pricing is guided by indexing. The company has not as yet passed the performance criteria required for admission to S&P 500, the world’s most tracked index, so those that ‘front-run’ prior to its likely future admission to the S&P will profit handsomely. Moreover, Tesla’s pricing is boosted by the fact that so many are speculating against it. Total money shorted stands at over $2 billion, with some even buying the stock to then lend it to short-sellers at huge interest rates.
Fundraising boom for London, as IPOs fall
City AM reported that while IPOs have plummeted during the covid-19 pandemic, London markets have had their busiest half year for fundraising in a decade. This has shown in the figures, with data from E&Y showing that over £20 billion of funds were raised in the first two quarters of 2020 in London, and that 40% of Q2 European funds being raised in London alone. The article went on to suggest that IPOs look set to return in the second half of 2020, with March’s market volatility having subsided somewhat and valuations and stock prices having recovered.
ESG – overhyped and oversold?
In an opinion piece for the Financial Times, Damodaran and Brad Cornell suggested that the surge in popularity of ESG initiatives among corporates is based on “non-existent evidence” of promised pay-offs for companies that implement them. The article begins by citing the commonly held view among corporates that “being good” is consistent with maximising long-term shareholder wealth, and that good companies will be more valuable in the long-run. For this to work, a company has to either change the cash flows it generates or the risk of those cash flows. But this is difficult for corporates operating in large, price sensitive markets. Secondly, the article responds to the view of ESG advocates that fund managers reward good companies with higher values with the obvious retort that investors who buy at those higher values will earn lower returns thereafter. That said, the article concludes on a more positive note for investors, suggesting that there is a pay-off for investing in undiscovered good companies during the lag period before the market recognises this and prices the “goodness” accordingly.
The changing reputation of IR and managing resources (& your career) post-COVID
In a webinar by the IR Society, Laura Hayter, CEO of the IR Society, and Oskar Yasar, Managing Partner of Broome Yasar as well as a high profile panel of FTSE 100 and 250 senior IROs discussed how the pandemic, and ensuing events, have changed the perception of IR and how teams have been overcoming these new obstacles and challenges. If one thing has become abundantly clear, it is that IR leaders need to switch from crisis management to thinking about strategic outlook, because managing the crisis that has been triggered by this pandemic, and the attendant lack of preparation, is not something that should be repeated. IROs need to become more creative when it comes to finding hybrid ways to manage both physical and virtual versions of events. Participants in the webinar also said that it is expected that IR budgets are to decrease in the next half year. However, panellists also agreed that this pandemic has highlighted the importance of IR as being a trusted counsel to the c-suite and board.
13 reasons why
Financial Times reported on the SEC proposal shared on the 10th of July, which seeks to alter the regulations surrounding stockholding disclosures. Currently, 13F filings are required for funds with equity assets of more than $100m to disclose positions within 45 days of end of quarter, but SEC commissioner Jay Clayton wants to increase this threshold to $3.5bn. For companies this means that it would be even harder to learn more about shareholders, as this regulation would provide further anonymity to funds. According to the FT, this new regulation will mean that plenty of fund managers and prominent activists will no longer meet the disclosure threshold, though managers such as Vanguard and BlackRock will not be affected. The SEC claims this move will be beneficial for smaller funds, as they will not need to pay for the annual compliance costs of $30,000.
And Finally… who is sitting on the naughty step?
Reuters Breakingviews applied a critical lens to BlackRock which has itself been reprimanding and highlighting many companies on their ESG values and operations. However, while BlackRock is putting other companies on the naughty step, it may risk looking more like a laggard than a leader itself. The group received criticism in May for failing to support a resolution calling for the energy firm Woodside to set binding targets for reducing the carbon emitted by its customers as well as carbon emitted by its own production processes. BlackRock’s assets are mostly under passive management, so its voting record is the only way for the company to publicly signal its ESG values.
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