IR Monitor – 17 July 2024

In this week’s newsletter:

• New listing regime: the FCA is risking the UK’s reputation for good governance
• Do we have a consensus? Houlihan Lokey on the accuracy of analyst estimates
• Did stock split decisions achieve targets? Argaam looks at the Saudi market a year after companies representing 14% of the Tadawul decided to split
• The stubborn IPO lull defies supply and demand logic; a glut of inventory and a crowd of enthusiastic shoppers typically create a bustling marketplace
• Asset managers increase investment research budgets: first time since MiFID II
• And finally … the Wall Street Journal invites us all to ‘Double-Click’ on the latest cringeworthy corporate buzzword which has become pervasive in conf calls

This week’s news

UK risks reputation for governance

Early Thursday morning, the FCA published long-awaited and much-consulted revisions to its listing regime for UK capital markets, the most significant in over 30 years. Intervention, writes Alistair Osbourne in The Times, was inevitable if Britain is to address its paltry listings (they’ve dropped 40% since their peak in 2008), and the FCA was wise to strip off regulatory red tape. The existing regulations do not meaningfully correlate with valuation premiums, as UK pension schemes and asset managers have long preferred equities from more loosely regulated jurisdictions. And yet, Osborne notes that those same groups are raising alarm over the removal of dual class share categories and the requirement of shareholder approval for most major transactions. What UK capital markets lack in global competitiveness, they should make up for in a reputation for governance. Osborne echoes the concerns of the investment community that the new rules will make it too easy for low-growth companies to list here.

A year later: Did stock splits achieve their objectives?

In other market regulation news, it is now one year since the Capital Market Authority of Saudi Arabia cancelled the minimum stock par value, allowing companies listed on the Tadawul All-Share Index more room to split their stock value with board approval. 42 companies – 18 on the Main Market and 24 on the Nomu-Parallel Market, equating to 14% of Tadawul-listed companies — have thus far taken advantage of the Companies Law and its Executive Regulations. The primary motivation for the reform was to boost stock liquidity and maximise the number of investor demand. According to analysis from Argaam, this seems to have worked well for high-priced firms, who have enjoyed a big rise in liquidity levels & fresh investment. Companies already priced low (i.e. below SAR 50 a share), meanwhile, have seen liquidity recede. 

Do we have a consensus?

Houlihan Lokey has raised the question of the accuracy of estimates included in sell side consensus. In its report, published last week, data from the Russel 3000 and S&P 500 indices between 2014 and 2023 were combed through, broken down into 11 market sectors. Findings underscored that analysts have far more success accurately projecting revenue expectations than earnings. Moreover, longer forecast periods are correlated with greater percentage errors – even the best data analysis cannot withstand unpredictable global events like Covid and higher-for-longer rates. But investors should not dismiss consensus just yet. Analysts produce solid estimates for larger-revenue companies and generally beat the accuracy of historical growth models, which draw from a more limited data pool. There is also unsurprising power in numbers – the more analysts cover a company, the smaller the error margin.

Stubborn IPO lull defies supply and demand logic – BreakingViews

In a market that is abundant with demand and low in supply, corporate stock sales have been surprisingly quiet, contradicting typical marketplace rules. In a piece for Breakingviews, Jeffery Goldfarb writes that price is the problem. While 2024 was meant to mark the return of IPOs after two quiet years, market debutantes have only raised $49 billion in H1 2024, the lowest level since 2016. The absence of interest-rate cuts and a lack of Chinese issuers can be used to partly explain this slowdown, yet it is still puzzling, especially as the S&P 500 and MSCI World indices are continuously hitting all-time highs according to Goldfarb. The article also highlights that buyout shops have been holding over $3 trillion of portfolio companies for a median of 5.4 years, pushing the industry well beyond its comfort zone. Disagreement over valuations is most likely to explain the status quo, as companies are able to raise more money privately rather than on public markets. However, it’s not all bad news for the IPO market. There is a queue forming of firms looking to go public, including Klarna and OneStream. While it may take a minute for momentum to get going again, the piece concludes that the law of supply and demand always wins out.

Asset managers increase investment research budgets for first time since MiFID II

According to a survey by Substantive Research, asset managers have increased their investment research budgets for the first time since the implementation of MiFID II in 2018, which sparked budget cuts. The survey found that investment research budgets among EU and US fund groups both rose in the first half of 2024 (15% in the US, 4% in the UK). After polling 60 asset managers overseeing over $20 trillion collectively, Substantive Research found that investment research budgets increased by 2.2% across the board. After years of cuts to investment research budgets after the rollout of MiFID II, this news will be welcomed by asset managers and issuers alike. The EU rules, which aimed to increase transparency around costs by preventing asset managers from bundling research payments in with the trading commissions charged to their funds, drew criticism from various parties who argued that MiFID II negatively affected the industry, causing sharp reductions in investment research provisions. The recovery may be slow, but it could be a step closer in the right direction.

And finally…Let’s ‘Double-Click’ on the latest cringeworthy corporate buzzword

To the pleasure of some and the disdain of many, another ‘cringey’ buzzword is making its rounds in the corporate world. ‘Double-Click’ has become the new phrase of choice on Wall Street, used as shorthand to delve deeper into something – like double-clicking on a computer folder. Whilst some can’t stand the phrase, there are clear lovers of the new terminology, with The Wall Street Journal highlighting how it is one of the fastest-spreading corporate buzzwords in recent years, with executives & analysts dropping the phrase 644 times in conference calls during the first half of the year. CEOs such as Douglas McMillion of Walmart and Nvidia’s Jensen Huang have both deployed the term, joined by a range of people from beyond corporate America such as congressional representatives, influencers and authors. Defenders of the phrase say that it prompts you to stop and engage in reflection, forcing you to think deeper about what you are doing and saying. Hmmm.

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