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Mar 01, 2019

Advisory intelligence: Dealing with short and long-term European macro issues

Alexander Free, senior analyst at Nasdaq IR Intelligence, discusses how European IROs can navigate through political and economic uncertainty and volatility, and adapting to Mifid II

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In an environment of heightened uncertainty, IROs might need to work harder to communicate a clear message that reassures investors their company can withstand political and economic volatility, according to an expert from Nasdaq.

Alexander Free, senior analyst at Nasdaq IR Intelligence in London, says ‘IR teams should be aware of the political risks’, adding that ‘macro uncertainty remains strong on the continent.’

He lists the UK, Germany, France, Italy and Spain as countries to watch, for these reasons:

  • The Brexit deadline is less than two months away, with uncertainty over whether or not there will be a deal when the UK exits the EU
  • Germany, the largest economy in the Eurozone, experienced its slowest growth in five years during 2018
  • France is undergoing significant social unrest with a nationwide movement for economic justice – the gilets jaunes (yellow vests)
  • Italy, the third-largest Eurozone economy, ended a technical recession in the fourth quarter of 2018
  • Following Spain’s failure to pass its 2019 budget through Congress on February 13, a snap general election was called. This is Spain’s fourth general election in eight years, highlighting the level of uncertainty on the political front.

In terms of the market environment and performance, Free says 2018 was ‘a very challenging year’ for equities and ‘the worst year in dollar terms since the financial crisis’, adding: ‘The STOXX 600 lost 17.4 percent. All major geographical investors and sectors were down.’

European equities recovering
So far this year, European equities have made a recovery – the STOXX 600 is up 8.1 percent, erasing the majority of last year’s losses – but the market is down 1.5 percent over the last 12 months, Free notes. ‘Every sector has risen quite substantially except for telecommunications, while technology is up 12 percent this year, recovering all of last year’s losses,’ he expands. ‘Other sector recoveries are quite cyclical, such as basic materials, industrials, oil and gas, consumer goods – they are top performers gaining between 9 percent and 9.6 percent.’

Recovery in the market, Free explains, was driven by a slight reduction in trade tensions between the U.S. and China, the U.S. Central Bank turning more dovish than the markets expected and the psychological impact of some investors overreacting and selling, which saw other stockholders take advantage to buy into the dip.

On volatility, Free states that it reached an 18-month peak in December 2018 and has risen further through 2019. The rise in volatility can help explain the pace at which flows are moving toward passive funds or exchange-traded funds (ETFs), he says, noting that in 2018 ETFs saw their slowest growth since 2011 in terms of inflows. In January U.S.-domiciled ETFs saw outflows, which are likely related to the rise in volatility in the markets.

Keep an eye on the funds
‘For IR teams it is important to keep your eye on where funds are flowing,’ Free continues. ‘Clearly position your story and find those investors that are going to be interested.’

Besides macro events, a key trend in Europe is the implementation of Mifid II and some of the longer-term impacts this regulation is having on European equity markets.

The initial impact of the year-old regulation has been on research affecting the smaller mid-caps. ‘More interesting for IR teams is the way corporates interact with the buy side,’ Free says. ‘It will be interesting to see how the sell side adapts its model in the second year of the regulation because the buy side is adapting. There has been a lot of talk among U.S. investors that they quite like the new model of added transparency.’

Summing up, Free states: ‘In terms of [IROs managing] the macroeconomic and political environment, it’s really about having a clear message and showing how your company is positioned. It is [about] finding those investors that see past some of the short-term uncertainty and take a long-term view. Find those good-quality names that will be a good fit for your company.’

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