The UK’s Wholesale Market Review and the EU’s consultation on Mifid II’s Regulatory Technical Standards are both under way following Brexit. What do IROs need to know about the upcoming changes?
Generally, market liquidity has declined over the last 10 years, and there is a danger that the demerger of the UK/EU liquidity pool will make things worse, in a kind of Balkanization process. Generally, we anticipate that IR staff will start to report more formally to boards on the underlying liquidity changes in their stocks at each meeting.
How will the differing approaches of the UK and the EU to regulation within capital markets impact on the IR landscape?
At present, the UK has sought to mirror the EU rules in the hope of getting ‘equivalence’. As this becomes less likely, the divergence between the UK and the EU will become a little more marked. Overall, this will gradually lead to a divergence in the investors’ agenda in the two areas.
Will any of the upcoming changes benefit the UK? Where do you think the most potential lies for boosting interest in the UK?
Stock markets have risen rapidly over recent years, and this has tended to favor high-beta stocks, often those that are forecast to grow rapidly and those geared upwards due to major debt. As bond yields bottom out, we anticipate that stocks with low-beta characteristics will become more favored. As the US stock market is dominated by high-beta stocks and this contrasts with the equity-income – that is, low-beta – nature of the UK stock market, we anticipate the UK stock market could greatly outperform the US stock market over the coming two decades.
What is the current state of the markets post-Brexit? Are you witnessing any trends IROs should be aware of?
The broader scope for setting capital markets policy post-Brexit may be helped, or indeed hindered, depending on the UK political agenda at the time. Generally, we anticipate that the Chinese slowdown is structural in nature, and hence we expect a much lower trajectory of global growth in the future.
Furthermore, [with the supply-chain issues highlighted by the pandemic], politicians will insist on greater local suppliers in future, rather than relying on personal protective equipment from distant suppliers, as before. We believe the current [UK] shortage of labor is structural in nature. If this is the case, we anticipate that many corporates may be facing up to reduced top-line growth, along with margin pressures.
You’ve spoken to IR Magazine before about small caps’ ability to buck wider economic trends thanks to their agility. With this in mind, are they less likely to be affected by changing regulation?
Generally, small caps are often younger businesses and, as such, demand for their services often comes from immature sectors, as opposed to cyclical fluctuations. Furthermore, if the slowdown in global growth along with margin pressure leads to more insolvencies, quoted small caps might be able to improve their prospects by acquiring viable, but previously over-levered, businesses out of insolvency.
How can IR professionals prepare themselves for the future? Is there anything they should be paying particular attention to?
Get ready for the forthcoming changes to the investor agenda and how well businesses can resist margin pressure. In our view, this is related to how easy the management team makes it for frontline staff to deliver outstanding service – good service won’t be good enough. Data, such as on the regularity of staff surveys, how the management team addresses the agenda, and so on, will be useful information for presentations.