IR Monitor – 26th July 2021

This week’s news

The lowest number of profit warnings in over 21 years – and the highest

In just over a year, EY have recorded both the lowest and highest quarters of profit warnings in over 21 years. In the second quarter of 2021, EY recorded just 32 profit warnings, compared with a record high of 301 in Q1 2020 and the second highest ever total of 165 in Q2 2020. EY recorded similar dips in 2002/3 and 2009 after 9/11 and the global financial crash, respectively. Markets tend to over-correct and last year’s drastic expectations reset, combined with a better-than-expected recovery and government support, have helped all but a handful of companies to beat depressed forecasts. But history also shows that companies and markets can underestimate the challenges of recovery.

Mind blowing earnings are already so last season

Big companies are set to report stellar second-quarter results. In Europe, earnings for companies in the STOXX 600 Index are expected to increase by 115% in the second quarter from a year earlier. But Breaking Views has reported that the best will soon be in the rear-view mirror and many worries, notably about Covid-19 variants, lie ahead. Last Monday’s slump in global stock markets spared nobody: the S&P 500 fell 1.6% while the STOXX 600 was at one point down nearly 2.5%.  Comparisons with a very weak patch in 2020 flatter this earnings season and coming quarters will be less flattering.

The private equity backlash against ESG

As listed companies come under increasing investor pressure to act on everything from executive pay to carbon emissions, a reaction against those constraints seems to be fuelling a spate of buyouts by private equity firms. The Financial Times has asked whether private equity is also reactionary in the conservative backlash sense of the word — facilitating a rebellion against some of the constraints of public company existence, particularly the growing demands to comply with standards on environmental, social and governance issues. The evidence is mounting. The latitude on governance shown to companies that are privately owned extends to the private equity firms themselves. Social issues, the S of ESG, are also antithetical to much traditional private equity. But it is in the environmental field that a good chunk of the private equity industry is playing its most obviously reactionary role. When oil majors are looking to sell off stranded production assets, private equity are among the readiest bidders. The ESG drive among listed companies may well continue to spur reactionary instincts in the private company domain — at least until ESG criteria can generate superior investment returns.

Seven in 10 institutions expect to buy digital assets

Companies looking to compete for the investor’s wallet have a new rival. IR Magazine has reported on the Fidelity Digital Assets Study, which has highlighted that over 70% of institutional investors plan to buy or invest in digital assets. Investors lead the trend in Asia, where adoption rates of digital assets are highest. The study found that volatility is currently the biggest barrier to investment, with a lack of fundamentals, and concerns over market manipulation, following closely behind. Tom Jessop, president of Fidelity Digital Assets commented: “The increased interest and adoption we’re seeing is a reflection of the growing sophistication and institutionalization of the digital assets ecosystem.” Interestingly, the findings of the survey clash with a study published by JP Morgan last month, which found that just 10 percent of institutional investment firms trade in cryptocurrencies.

Listed UK companies should be freer to tap retail investors

Despite the proclaimed decline of public markets during the pandemic, in an opinion piece for the Financial Times, Dru Danford, Head of Corporate Advisory at Shore Capital, has observed that there has been a significant amount of equity raised by UK listed companies. Specifically, more than £40 billion was raised in 2020 alone by London listed companies to support investment and boost growth. However, Dru questions previous EU directives that the UK is no longer bound to, including one which often caps further capital raising beyond 20% through the requirement of a prospectus and regulatory approval. The UK Prospectus Regime Review is a partial solution but will still give the FCA the discretion to set its own rules on when a prospectus is required. He concludes by urging regulatory bodies to make the changes necessary for London to not only maintain but to enhance its premier financial status, offering his opinion that the current 20 per cent rule should be removed.

And finally … Teenage scribblers no more

As the middlemen between companies and investors, analysts are subject to certain scrutiny and criticism. Nigel Lawson famously dismissed them as “teenage scribblers”. The Times, however, has pointed to one analyst in danger of giving his profession a good name. Giles Thorne, head of European internet research at Jeffries, went the extra mile for his recent research note (My Week Sat Outside A Getir Store); decamping to an industrial estate in North Kensington, he staked out a dark store site to analyse how many orders it takes. He noted blind spots in his dataset due to the antisocial hours of operation and other factors; however, he also calculated that Getir deals with roughly 370 orders a day, with possible efficiencies to be gained from instilling urgency in the riders. Thorne concluded the online grocery store phenomenon is here to stay; “The dark store model will be a defining feature of competitive outcomes in online food delivery over the medium to long term.”

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