Hitting a moving target: A think tank recap
There can be no doubt we live in uncertain times: global geopolitical events swing and sway, sometimes touching on worrying and extreme scenarios. Given this, it was timely for the IR Magazine Think Tank – Europe 2018 to explore such issues in the global economy within the context of targeting.
It was pointed out at the event that the end wasn’t quite nigh: on a macro level, despite negative headlines, the IMF highlighted the world economy as doing fine, growing by almost 4 percent in 2018, with only a minor slowdown expected in 2019. And the three major central banks – the US Federal Reserve, the European Central Bank and the Bank of Japan – were all praised for keeping a lid on things and increasing their balance sheets.
‘We are talking about growth thanks to the central banks’ activities,’ noted one think tank participant, summing up the bigger picture. ‘Of course, when we are optimistic about markets, there are risks,’ countered another, while a third noted: ‘We have to look at each country and each market’s own risks – and also take into account the positive aspects. Wherever there are risks, there are generally investor opportunities.’
Inevitably, US-China trade sanctions were cited as top of the list of risks facing world business. ‘Global markets are very concerned [for the future],’ as one worried buy-sider put it. ‘US and China trade sanctions are increasing day by day.’
Next on the list were worries brought up by the then ongoing peace talks between the US and North Korea. ‘Depending on how this plays out, it could create shock waves for emerging markets,’ said one attendee. A precarious situation in Italy was also high on the list of concerns for Europe and the wider global economy.
There was a focus on the opportunities offered by emerging markets, too, with the IMF highlighting that China had achieved a soft landing: its economy continued to perform strongly, with growth of 6.6 percent for 2018, no sign of recession and no in ation pressure on the horizon.
Looking at emerging markets more generally, three problematic countries were named: Argentina, Turkey and Ukraine. Even in those regions, however, the outlook was deemed not to be all that bad.
‘Is it the end of the world for these countries?’ asked one speaker. ‘No. Even though the reserves are not high enough in these countries, there is another gun they can pull out in the form of interest rates – and these three all offer good rates, along with the majority of emerging markets. Emerging markets can be like a roller coaster: fun but also frightening.’
On the subject of fund flows, it was noted that in June this year £2.9 bn ($3.8 bn) of British investments were moved out of the London Stock Exchange, while £7.2 bn and £4.2 bn moved in from the US and Europe, respectively, suggesting a lack of impact from geopolitical issues – specifically Brexit – though it’s fair to note that these numbers represent just one month’s data.
‘Clearly, you are unlikely to change your investor relations strategy based on one month’s numbers,’ said one corporate panelist. ‘Should this become a trend, however, you do have to think about where you get the best valuation from. And targeting is a valuation-led exercise.’
The panel noted that geographic location does not fully drive targeting. ‘Having said that, we do align our roadshow program to the targeting list as much as possible and use management’s time as effectively as possible,’ one panelist said. ‘That means we take our management to the regions where our major shareholders are. In practice, that means London, the US, Frankfurt, Paris and Asia.’ Another agreed: ‘Our shareholder base and its breakdown – which remains stable – reflects our roadshows.’
It was noted that emerging markets always represent new pools of capital by uncovering new investors. ‘The first thing you need to do is know what the barriers are: is it the market or you as an organization?’ asked one IRO attendee. ‘IROs can do many things, but they cannot turn a poorly performing business into a performing business.
‘What they can do, however, is make the market understand what the drivers of the performance are: is it about sectors being in or out of favor? Is the market looking at cyclical companies while yours is a defensive business? So you need to work out the barriers and use them as one of the factors in your targeting.’
Another IR professional pointed out: ‘You have to be realistic as well. Some pools of investors, based on geographic region, are extremely limited.’
Targeting the right investors means focusing on the barriers some see when it comes to investing in your company. The top three obstacles to getting involved were cited as corporate governance issues, poor transparency and inconsistent communications. ‘There is a clear opportunity to improve if you can honestly assess that you are lacking in one of these areas,’ noted an IRO. ‘And if you don’t know [where you might be lacking], the best thing to do is ask investors.’
Understanding the similarities and differences between investors in different regions is another key to good targeting. ‘For example, US investors are far more likely to consult someone else in the firm, whereas in Europe and Asia that happens less frequently,’ explained one attendee. ‘So US investors have many more internal meetings, which means there are going to be lots more people looking at the materials you have presented.’
In order to stand out, therefore, it was suggested that this simple advice be followed: ‘Get out into the market and get known. It is a simple strategy; doing it effectively is the difficult part.’
‘Selectivity is important,’ said another attendee. ‘Targeting is kissing frogs: you may have to kiss many frogs before finding your handsome prince, but you don’t want to kiss too many frogs, so you have to choose the right frogs at the beginning and narrow the choice from the start.’
In addition, noted a corporate IR professional, it is about giving investors what they want. ‘You need to understand what they need,’ he explained. ‘What type of engagement do they want? Most investors will take a site visit over a group meeting at a conference. And who do they want to meet? It matters. Also, have a real honest think about what you have to offer.’