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Nov 15, 2019

Mifid II makes its way East

The European regulation is weighing heavily on small caps in Asia

Much of the coverage of Mifid II has inevitably focused on its European impact and, more recently, on North America. But what of its effect on Asia and – in particular – Asian investor relations?

‘There is no lack of understanding about Mifid II per se,’ Angela Campbell‑Noë, senior partner at Tulchan Communications Asia, tells IR Magazine. ‘It’s more about relevance – and for some stakeholders in the Asian investment community, Mifid II has limited relevance. There is no lack of education on the topic, but there is some process dissonance in the way Asian brokers deal with partners according to their domicile, which may be why certain observers believe there is a lack of understanding.’

This is all changing, however, as capital markets become ever-more global, making it less easy for ‘local’ markets to remain domestic, or even regional. ‘As the current capital market is an international market, the impact of Mifid II over the past year has far exceeded the EU’s territory, and has had a profound impact on the entire international financial market, providing more equality and transparency,’ explains Venus Zhao, IR Magazine Award-winning head of investor relations, corporate finance and public relations at Hong Kong-based Far East Consortium International. ‘The trading environment has spawned new regulatory technologies, but it has also reduced the liquidity of financial markets to a certain extent.’

Reinforcing this evolving picture, Campbell‑Noë adds: ‘In Asia, we see many international brokers adhering strictly to the governing principles of Mifid II. Whether Asian brokers are directly or indirectly subject to Mifid II, they are required to comply with prevailing Mifid II regulations when assisting partners in Europe.’

Nevertheless, the characteristics of the markets in Asia and the stakeholders involved are different to an extent, with many Asian brokers having larger domestic or regional-focused footprints. ‘Asian funds and brokersmay not see an urgency to adapt – rather, they look to find a balance when conforming to new regulations such as Mifid II, without upsetting clients who are used to the status quo,’ observes Campbell‑Noë.

Mifid II and international investors

Ultimately and inevitably, however, Mifid II is shaping how Asian IROs engage with Europe-based buy-side and sell-side firms and asset managers that are linked to, or have underlying, European investors. ‘Accessibility to targeted institutional investors in Europe from Asia is now more challenging given the compliance restrictions on outreach by European brokers,’ notes Campbell‑Noë. ‘This impedes the ability of Asian IROs to reach out to the European investor base should they not have developed in-house expertise or connections to international brokers.’

And as the scope of capital markets continues to transcend borders, driven by demand for investment options and competition for the investment dollar, Campbell‑Noë expects more Asian brokers will be forced to comply with Mifid II. ‘It is increasingly hard to ring-fence non-European stakeholders,’ she notes.

It remains to be seen whether Asian brokers will apply the new regulations uniformly in their dealings with both Asian and European clients.

‘But at a time of rising interest in Asian assets from within the investment community in Europe, even Asian brokers that invest entirely in Asian assets may start seeing more underlying European investors,’ Campbell‑Noë points out.

‘The internationalization of Asian capital markets, evidenced by MSCI’s decision to quadruple the weighting of China’s A-Shares in the MSCI emerging market index, will continue to encourage international institutional fund flows.’

But for Jonathan Kuah, a director at the Investor Relations Professionals Association Singapore (IRPAS), there have been evident negative developments on the research front. ‘Since the implementation of Mifid II, there has been a series of consolidations of the brokerages and their analysts,’ he observes. ‘Within a short period, we have seen the closure of Nomura Research and Deutsche Research, and the downsizing of Macquarie Securities.’

Campbell‑Noë adds that ‘access to high-quality research has been impacted as international brokers opt to cut back on research budgets in Asia alongside European clients that have stricter research spending.’

The small-cap challenge

Small caps have been hardest hit by Mifid II in Europe and North America, and that pattern appears to be mirrored in Asia. ‘The unique challenge for Asian IROs now, especially for smaller markets, will be to continue providing key market intelligence in a landscape where coverage is diminishing,’ says Campbell‑Noë.

Kuah agrees. ‘Smaller listed corporates have lost analyst coverage or are now frozen out of corporate access as larger brokerages typically require a certain threshold service to the corporates – for example, minimum market capitalization and minimum daily trading volume and value,’ he says.

Without the coverage of analysts and market-makers, smaller corporates seem to be marginalized by Mifid II, warns Kuah. ‘Fortunately, Singapore Exchange has been working with brokerages to provide corporate access both domestically and internationally,’ he adds.

Rather than seeing this as a negative, Zhao believes it creates an opportunity for IR teams to step up. ‘In the context of the transformation of the entire capital market, small and medium-sized listed companies can take the opportunity to optimize and improve their IR [teams] and establish more direct and deeper contacts with investment institutions,’ she points out.

Addressing the challenge of Mifid II

As a small-cap IRO, Mifid II is very much on Zhao’s mind, and she believes IROs should take a four-pronged approach to mitigating the legislation’s effect.

First, Zhao says they should be more proactive in communicating directly with investors as the sell side reduces coverage of small and medium-sized companies. ‘Specific measures include actively contacting potential investment institutions, reporting to important institutions on a regular basis or following significant company announcements, and establishing and publicizing an investor relationship hotline to welcome direct consultation from investment institutions,’ she recommends.

Second, IROs need to target investors by collecting and sorting out the types and preferences of investors and establishing a database to enable communication and record feedback.

Third, IR professionals should comprehensively summarize the ‘selling points’ and communication strategies of their companies. ‘The IRO should have a broader perspective related to the industry cycle, the company’s position in the industry, policy impact and outstanding features compared with peer companies in order to accurately formulate the information and attract more investors,’ says Zhao.

Fourth, the IRO should strictly monitor the stock price. ‘Small and medium-sized listed companies may face difficulties with stock prices,’ Zhao observes. ‘If there is abnormal rising or falling in the stock price, the company should issue a clarification announcement in time to maintain the stock-trading order. If the stock price is lower than the actual value, the company should actively maintain the stock price through operations – such as share repurchases – to convey the company’s confidence to the market.’

It would appear that as a result of Mifid II, effective investor relations in Asia – especially for small caps – is more important than ever.’

This article was published in the winter 2019 issue of IR Magazine