Europe may be struggling with a debt crisis but it’s US investors who are asking the IROs most of the questions
By January, the shenanigans affecting Greece, Italy, Spain and the rest of the eurozone – indeed, markets all around the world – may have resolved themselves.
All may be calm in the world of equities, forex and geopolitics and we may be taking the first steps toward a healthy world economy and a global bull market. Oh yes – and pigs might fly.
In the meantime, it seemed like a good idea to talk to some leading IROs in the eurozone to find out what impact the turmoil is having on them.
In particular, how has the debt crisis altered the nature of their conversations with the investors and analysts who follow their stocks?
Lack of focus on fundamentals
Gunhild Grieve, IRO for German energy firm RWE in London, says the real difficulty is that it’s so hard for investors to look at a company’s fundamentals.
‘That’s because share prices don’t reflect fundamentals,’ she explains. ‘In our case, it’s even more difficult for investors because we have no idea how the sovereign debt crisis is going to affect the economy, and energy sales depend on the economic outlook.’
Sébastien Martel of Sanofi in Paris also thinks his company is a bit different but in his case because of its diverse shareholder base.
‘L’Oréal owns 9 percent of Sanofi and Total has 4 percent, but apart from those big holdings all the shares are in free float,’ he explains.
‘Most are held by institutions, with just 6 percent in retail hands. Of the institutional ownership, 38 percent is held in the US, 23 percent in France, 16 percent in the UK and 4 percent in Germany.’
This global spread is important as Martel believes the extent to which investors are worried about the euro debt crisis depends largely on where they sit.
‘Some US investors look at the situation with a fair amount of caution,’ he reports. Grieve also finds US investors asking more questions and being more concerned about the eurozone falling apart than their counterparts in Europe.
Reducing exposure to Europe
These may be generalizations but Martel cites the example of a US investor who recently came to visit Sanofi. He was pleased with the information he was given at the meeting, happy with Sanofi’s performance and very satisfied with the improved dividends.
But his firm still sold down its Sanofi ADR holdings in its US domestic funds because of its desire to reduce exposure to Europe and the euro. ‘But Sanofi remains their biggest position in non-US funds,’ Martel reports.
Certainly decisions are being made on a macro level far more than in the past, evidenced by the fact that both Sanofi and Bayer, the German pharmaceutical company, have underperformed UK and Swiss pharmaceutical companies like Roche and GlaxoSmithKline.
Market mechanics make things worse
But Chris Hollis at France’s LVMH, the world’s largest luxury goods company and purveyor of Champagne and handbags to the world’s wealthy, takes this further.
For him the situation is exacerbated by the way the market now works. He’s thinking of two changes in particular.
‘The first is the fragmentation of markets, which means a large portion of a stock now trades outside the reference market,’ Hollis explains.
‘In the case of some CAC 40 companies, as much as 60 percent of trade now takes place in dark pools, or on the OTC, CBT, BATS, and so on.’
The second change is the rapid technological advance in financial markets making access to sophisticated products easier and more attractive. ‘Because these new instruments are also cheaper, they are popular and more liquid, allowing faster reaction times,’ adds Hollis.
In evidence, he offers the following: ‘By September 2011 just 16 percent of the turnover in European markets related to cash equities; the rest was in indices, futures, exchange-traded funds and similar.’
This salutary fact, together with today’s widespread uncertainty and extreme market volatility, exaggerate the influence of macro factors in investment decision making.
‘Using indexes or futures in order to react more quickly to change means all companies in a given geographical or industry sector are being treated similarly,’ notes Hollis.
‘There’s much less differentiation between companies in the same segment or geographical zone.’
Finding a hook
Hollis does say that in the case of LVMH there is still an interest in company specifics. ‘But that’s because we are a proxy for the sector and have an exposure to global markets,’ he adds.
For Martel, being in a defensive sector like healthcare makes a positive difference. ‘We’ve outperformed the CAC 40 by 25 percent,’ he says.
‘We’re also helped by the fact that we’re a global firm, not a pure eurozone company.’ Indeed, a quarter of Sanofi’s sales are currently in the US, with a third each in Europe and emerging markets. The remaining 7 percent or 8 percent of sales are in Japan.
That may help but there are still plenty of questions relating to the euro crisis. Some investors are worried about European countries cutting budgets to the detriment of spending; some have expressed concerns to Martel that a country like Greece might reach a point of not being able to pay its hospital bills.
‘But these conversations usually last only from when they arrive at reception until they get to the actual meeting,’ Martel says. ‘Anyway, as Winston Churchill said: we just have to keep buggering on.’
