IR Monitor – 21st June 2021

This week’s news

UK lawmakers want to gut MiFID II in wake of Brexit

A high-profile group of MPs has urged the prime minister to undertake a radical shakeup of MiFID II  in the wake of Brexit, as they look for opportunities for the UK to remodel its rulebook following its departure from the EU, Financial News has reported. According to the government’s Taskforce for Innovation, Growth and Regulatory Reform, key elements of the directive around costs and charges disclosure, as well as rules on position limits, should be scrapped. Among the 100-plus recommendations in its report are a number that would look to roll back on significant aspects of MiFID II, which requires fund managers and financial advisers to break down charges for clients (including fund costs, advice costs, platform costs and transaction costs up front and on an ongoing basis).

Putting pensions over dividends

Companies with large defined benefit pension deficits have been warned by The Pensions Regulator that dividends might have to be put on hold, if they are under financial pressure, amid efforts to recover from the pandemic. Shares Magazine has reported that fewer than 200 pension schemes have asked to reduce or postpone their deficit contributions since April last year. However, as the Government winds down its support to businesses, pension trustees will be under greater scrutiny. The regulator has noted that for companies hit hard by Covid, but which are recovering, there could be some short-term affordability constraints; for firms still feeling the impact of Covid, trustees may need to be flexible but the pension scheme should not be the only creditor feeling the pain. In the words of David Fairs (executive director for regulatory policy, analysis and advice at The Pensions Regulator) ‘Trustees should remain vigilant as we emerge from the worst of the pandemic, there is still a lot of uncertainty and there could well be an increase in insolvencies.’

Pandemic hangover: $11 trillion in corporate debt

Heavy borrowing at low interest rates by U.S. companies was growing before the pandemic; when Covid-19 lockdowns triggered a recession, companies borrowed even more and soon paid even less. By the end of March, the total debt of non-financial companies stood at $11.2 trillion, according to the Federal Reserve, which equates to about half the size of the U.S. economy. That torrent of inexpensive money has benefited all types of businesses, from those attempting to weather the pandemic-induced storm to thriving businesses looking to stock up on cash raised from bond sales. The question now,  the Wall Street Journal asked last week, is whether companies have merely delayed a reckoning after withstanding last year’s recession far better than many had feared. Many CFOs and investors have acknowledged that businesses could still be punished in a normal downturn, during which borrowing costs are raised for a longer period and household finances take a harder hit.

US equity market overvalued say CFOs 

Bringing together the thoughts of 138 CFOs based in the US, Canada and Mexico, Deloitte’s recently published Q2 CFO Signals Report espoused an overall positive outlook regarding the North American economy. Providing an overview of what senior figures see as the biggest risks and opportunities at present, the report offers key insights into the prevalent thinking at board level. IR Magazine has offered a lowdown on the findings, leading with the headline news that 86% of those polled believe US stocks are currently overvalued. The S&P 500 has seen sustained rises in recent months, finishing last week with a new record high of 4,247, and it is now becoming common wisdom amongst CFOs that such highs do not represent true value. Regarding risks, those polled showed concern regarding economic stability and rising prices with long-term inflation prominent on the radars of many. Finally, commenting on debt and equity financing, the research shows that amongst respondents the less risky nature of debt financing remains a preferred proposition versus equity financing.

The bear: an endangered species? 

As activity on the reddit forum WallStreetBets refuses to dissipate, with “meme” stocks continuing to grow in number, some on Wall Street are raising the question as to whether the days of the bear are numbered. Known as the pessimists of the market, bears have existed since time began, taking the risk of heavy losses to engage in the risky art of short selling. Today’s bears now live in dread that one of their shorts will be talked up on WallStreetBets and pounced upon by day-traders using the Robinhood app. Breaking Views have offered a brief history of the bear, coming to the defence of this sometimes misunderstood creature of the market while also setting out the true impact those using WallStreetBets have had in recent months. Concluding that the bear is likely to survive despite the spontaneous nature of its current adversary, the article leaves an ominous warning to those wishing extinction from legendary investor Bernard Baruch who suggested that without bears, “there would be no one to criticise and restrain the false optimism that always leads to disaster”.

And finally … a trend towards the long-term

The age of short-termism appears to be sliding away in the rear-view mirror as investor demands regarding ESG force Chief Executives to focus more on the long term. That was the view of a piece in Money Stuff from Bloomberg which looked to explain how, despite the net income of the S&P 500 falling by 19% last year, the price of the index continued to go up. Once claiming to be handcuffed by the need to post strong earnings every quarter, companies are now being encouraged rather strongly to think longer-term and abandoning the myopic attitude of yesterday. In response, firms of all kinds are making sizeable investments, investing in new facilities, initiatives and products to reduce emissions, increase diversity and embolden sustainability. This action is largely being rewarded, backed up as it is by rising stock prices. But it does come with a risk. Heavy investment into long term projects with yields that are hard to quantify is likely responsible for a lot of headaches in the offices of CFOs. Yet inaction is likely to cause more pain, a lesson learned by firms such as Chevron who saw their credit outlooks downgraded as they were judged too exposed to risks around the transition to a low carbon future. The CEO bemoaning the perceived short-term outlook of investors in the past must now put her money where her mouth is.

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