IR Monitor – 01 November 2023

In this week’s newsletter:

• Comparisons between the UK and US stock markets are odious, suggests UBS. A large chunk of the structural valuation discount evaporates simply through the exclusion of a handful of US tech giants, who have no real peers in the UK or indeed anywhere else
• Investors deliver harshest punishment for profit warnings in 16 years, warns Reuters, as investors grow increasingly unforgiving in the face of soaring global interest rates, geopolitical tensions and a murky economic outlook
• AI can transform the potential of investor events, claims IR Magazine. IR teams can make the most of data-driven storytelling and personalised experiences with AI 
• There’s a reason why UK stocks need UK owners, argues Bloomberg. Local shareholders used to support London cash calls, bringing global investors with them. Their retreat means hedge funds have filled the gap — to companies’ detriment
• Dividends dry up in London but can shareholders expect a bounce-back? asks CityAm
• And finally … a setback for shareholder democracy? No interest in pass-through voting

This week’s news

Comparisons between the London and New York stock markets are odious – UBS

James Arnold, UBS’ Global Co-Head of Strategic Insights and Advisor, is challenging the narrative of the London stock market’s decline which has become more prevalent since the 2016 Brexit referendum. Arnold’s team contends that a basic comparison of P/E ratios across all companies means comparing British apples with US pears. Focusing instead on comparable stocks, including UK blue-chip companies and their closest US counterparts, UBS found that many British stocks were on par with or even exceeded their US peers from a valuation standpoint. Another interesting distinction from the UBS analysis is one between investing in indices and in the economy of the country, as Arnold makes the point that indices are often “quirky artefacts of history and stock exchange marketing campaigns”. Lastly, an inflection point may be near according to the research, based on an expected re-allocation of UK pension capital going forward.

Harshest punishment for profit warnings in 16 years

As economies begin to stagnate, investors are becoming increasingly concerned about the financial condition of companies. Research conducted by Morgan Stanley has shown that the market has been particularly unforgiving for companies that have recently missed their projected forecasts. On average, European companies that fell short of their EPS in Q3 2023 have seen their share prices fall by an average of 6% in the five days after reporting their financial results. But some investors see this as an opportunity to buy stocks in “overly punished” companies which still display strong and reliable core businesses. Highly valued stocks are indeed those that have taken the hardest hit recently… but also those that tend to have the most robust business models. An opportunity?

AI can transform the potential of investor events, claims IR Magazine

Chris Israelski writes about how harnessing AI in event planning could transform investor relations events and help build a stronger investment case. By distilling publicly available information from diverse sources, these applications can offer baseline readings on financials, valuation, market sentiment, and predictive indicators. AI is able to make use of alternative data sources, such as transcripts, news, and social media, to gauge market sentiment as well as provide predictive data on future returns using factor-based and technical indicators, better informing decision making. The applications of AI in investor events are very dependent on the nature of the events and the company itself but can range from personalised souvenirs to VR-augmented experiences and real-time translation.

UK stocks need UK owners

In his recent column, Chris Hughes argues against the belief that the increasing presence of international investors in the UK stock market is a success story for London. Instead, he argues it’s really a tale of declining domestic ownership and a resulting leadership vacuum among shareholders. Theoretically, the nationality of a shareholder shouldn’t matter but once you get the past the surface, the withdrawal of the home crowd puts UK companies at the mercy of opportunistic hedge funds when they need to raise cash. This has had knock-on effects and coincided with UK companies becoming less ambitious, overdistributing cash to shareholders and at times engaging in clumsy capital raising activity.

Dividends dry up in London but can shareholders expect a bounce-back? 

Computershare’s recent UK dividend monitor has shown that the decline in one-off special dividends and pay-out cuts from mining firms have reduced the total dividend pay-out in the UK by 8% in Q3. Commodity prices, which are subject to significant fluctuations in price, heavily influence the dividend pay-outs of mining firms. However, on a brighter note, there is reason for UK investors to be positive in the coming months. Higher growth rates outside the mining sector mean regular dividends are expected to rise again. This will of course depend on how the UK and global economies manage tighter credit conditions and rising costs, but the underlying growth rate in regular dividends now looks like it will reach 5.4 per cent for the year.   

And finally … a setback for shareholder democracy? Aviva clients are ‘not interested’ in pass-through voting.

As the number of ESG proposals rise, companies are having to deal with several competing stances among their investors on ESG matters. To help mitigate this problem, other companies such as Legal & General Investment Management, Blackrock, Vanguard and State Street Global have implemented pass-through voting mechanisms for their clients and ultimate owners. However, Aviva have not followed this trend. According to Nathan Leclercq, head of corporate governance engagement at Aviva Investors, such measures only serve to dilute the impact of company votes. Having a pass-through system may well incorporate different perspectives, but so far Leclercq claims Aviva’s clients have shown no interest in establishing such a system.  

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