Advisory intelligence: A look at Canadian macro issues as Mifid II makes its presence known
Recent years have seen Canadian companies facing a number of macro issues – from the ongoing back and forth on the U.S.-China trade deal, to the discussions around Nafta and how those are impacted by tariff talks – and these have resulted in a 'valuation discount' versus peers in the U.S., explains Prab Sagoo, a Montreal-based associate director at Nasdaq IR Intelligence.
'Over the last few years there has been a subtle shift of assets away from Canada due to a number of headwinds the region is facing,' he says. 'Prior to the U.S. election, there were a lot of assets coming into the Toronto Stock Exchange [but] once the U.S. election had passed, a lot of that diverted back to the U.S.'
Although Canada largely benefits when the U.S. sees positive returns, Sagoo says the far larger market also 'tends to operate like a black hole in some respects' – sucking in assets Canadian firms are competing for. The result, he says, is that 'the valuation difference between the primary Canadian market and the core U.S. benchmark has widened – to the point that the valuation differential has been among the widest in several years.'
At the same time, the trickle-down effects of Mifid II – the European regulation that came into force in January 2018 – are now starting to be felt in the U.S. and, to a lesser extent, in Canada.
This means that even as things have started to pick up in terms of U.S. interest in Canadian equities over the past six months or so, which Sagoo says means 'Canadian IROs are starting to find a little bit more of a foothold in the U.S. market', the challenges of a shrinking sell side and the effects of a regulation that impacts corporate access and research coverage are also starting to be felt.
'Over the next two years or so we will see this becoming a bigger issue, especially for IR teams operating in the smaller to mid-cap Canadian market – which in U.S. equivalency terms tends to be small cap,' he says.
And while few are seeing real impact from Mifid II just yet, Sagoo notes that Canadian IROs are aware of what's ahead: they understand that these regulations require change in how the buy side interacts from a corporate access standpoint.
'As sell-side coverage changes and buy-side participation changes, the IR function is going to have to change as well,' he points out. He adds that one part of the solution for IROs is technology, with everything from corporate access and equity research platforms to artificial intelligence-powered targeting tools being driven by changing regulation.
As a result of these changes, the role of the IR professional is becoming more challenging, Sagoo says, noting that the increasing number of generalists in the market adds to the fact that companies are now competing more than ever for those investment dollars.
'If you're an energy company, for example, you're now no longer just competing with other energy companies for that capital,' he explains. 'You're also competing with tech companies, with industrials. If you're not adopting new technologies to address this, you're leaving yourself at a competitive disadvantage.'