IR Weekly – Monday 11th May

Welcome to FTI Consulting’s IR Weekly newsletter

In the IR Weekly today, we assess the struggle facing Wall Street analysts as companies hold back full-year profit guidance amid the spread of coronavirus. Hardman & Co.’s recent research on public markets raises interesting questions – indicating their rapid decline over the past few years. We also look at the global impact Mifid II is having on fund managers’ use of research and then consider City AM’s discussion on the slowdown in activist activity in 2020. Our penultimate article, Deloitte’s quarterly survey of UK CFOs, shows that businesses are expecting revenues to fall by 22% this year, leaving business confidence at a record low. And finally, we discuss Elon Musk’s commitment to unconventional forms of investor relations – after a single tweet about Tesla’s share price wiped out $11bn in value.

The week’s news

Wall Street ‘flying blind’ after companies scrap guidance

Financial Times reported that the number of US blue-chips offering full-year profit guidance alongside their first-quarter earnings has been cut in half, leaving Wall Street analysts struggling to assess the full impact of measures to contain the spread of coronavirus. With the earnings season already past its halfway mark, Credit Suisse expects just 23 per cent of S&P companies to offer guidance for the year, less than half the usual proportion. The bank’s chief US equity strategist Jonathan Golub remarked that analysts are “really flying blind”. While there is little doubt that this shift reflects the uncertainty for corporate executives over widespread lockdowns, strategists believe the lack of guidance for investors comes at a critical moment. Rather than obsess about what the valuation should be in the short-term, it is forcing investors to think long-term. Liz Young, director of market strategy for BNY Mellon Investment Management, said the lack of forecasts was probably a positive thing for what is, at the moment, a nervous market.

Are the public markets closing to smaller companies?

In their May issue of The Monthly, Hardman & Co. considered the fact that equity markets in the US and Europe have been shrinking for some years now. By assessing the evidence in London and the explanations, they ask whether it matters and (assuming it does) what can be done. Hardman & Co. found that, excluding the 350 largest companies and all financials, the number of trading companies on the Main Market has fallen by 72% since 1999. They also discovered that the average market cap at IPO has gone up substantially; for example, the average AIM IPO market cap has grown from £21m in 1995 to £127m in 2019, even when adjusted for inflation. Companies leave it later in their life to float. This is bad for them, the economy and society. All in all, Hardman & Co. conclude that shrinking public markets matter: the success of public companies in raising fresh equity in recent weeks to plug holes caused by the coronavirus lockdown is powerful testament to the utility of public markets.

Mifid II influence spreads beyond EU borders

Financial Times reported that Mifid II is having a significant impact on fund managers’ use of investment research around the world. Over two-thirds of investment groups have rolled out changes to their approach to paying for research globally, despite the rules covering just the EU, according to estimates. While the Mifid II regime was largely accepted with gusto in 2018 and European fund managers responded by announcing that they would pay for research themselves, few said they would roll it on a global scale. Yet a study by Liquidnet found that 70 per cent of investment managers polled had implemented a global policy of unbundling research costs, up from just over half last year.

Activist investors take a timeout, for now 

City AM discussed the slowdown in activist activity in 2020, with fewer targets being attacked and fewer board seats being secured than in the first quarter of 2019. The previous financial crisis in 2008 led to upswings in opportunistic actions towards distressed companies by hedge funds and activists, and drastic actions like dividend cuts might normally prompt activist interest. This time, however, activists have realised that boards do not need further distractions right now and cannot be blamed for conserving cash. Scared also of public perceptions of being tone deaf, activists have now held off – but analysts predict that they will target companies made vulnerable by the current crisis in the next couple of years – with a particular emphasis on those who have made big equity raises.

CFOs anticipate a sea change 

Deloitte’s quarterly survey of UK CFO’s has found that business confidence has reached a record low due to the impact of coronavirus, with business expecting revenues to fall by 22% this year compared to original plans. Anticipating a slow recovery, most of those surveyed do not expect demand for their goods and services to return to pre-COVID levels until after mid-2021. There is also a broad consensus that the current crisis will have lasting effects on the business sector, with business resilience gaining rapid importance and a more interventionist approach from governments likely.

And finally… Elon Musk “manages” consensus

Tesla’s maverick leader has continued his unconventional approach to investor relations by using his personal Twitter to claim shares in his automaker were “too high imo.” The market obliged, wiping out $11bn in value – but Reuters Breakingviews thinks that Elon was right about the valuation, describing Tesla stock as being traded “out of step with reality”. Unfortunately, Musk’s previous business-related tweets (where he said he had secured funding to take the company private) mean that he may now have breached his agreement with the SEC that governs what he shouldn’t tweet about.