Dubai, Mumbai, Singapore, Shanghai: Emerging market companies should expand their reach, says ALG
A new partnership announced this week sees Austin Lawrence Gidon (ALG), one of South Africa’s leading equity research companies, join forces with UK-headquartered Edison Group with a professed mission to ‘transform South African corporates’ access to international capital markets’, before doing the same in neighboring markets.
Marius Strydom, CEO at ALG, talks to IR Magazine about the challenges South African IROs are facing, where they should be looking for capital in a post-coronavirus world and how South Africa is ‘famously quick’ to adopt European and UK rules.
How would you describe the corporate access/research scene in South Africa?
The research and corporate access scene in South Africa is in flux. Historically, it has been one of the most over-brokered markets in the world, with almost every global bank setting up operations or partnering with local outfits over the past 25 years. In recent years, though, stockbrokers have faced increased top-line pressure, driven by a weak economy, country downgrades by ratings agencies, weak portfolio flows and the unbundling of equity research.
Many companies have scaled down their operations or shut up shop altogether. Others have increased their focus on large-cap stocks and companies with secondary revenue potential, often at the expense of smaller companies or companies with low offshore shareholding. Analyst coverage has reduced and corporate access looks to be heading the same way, which does not bode well for companies wanting to attract new investors.
Pre-coronavirus, where were South African companies typically traveling and marketing themselves? How would you like to see this targeting evolve?
You typically found South African companies traveling to where the usual suspects in emerging markets fund management reside. London and New York/Boston always formed the core of any roadshow. Many companies would add Zurich, Paris and Edinburgh to their European schedule, while US trips sometimes extended to Chicago or the West Coast for those who were happy not to travel light.
We see meaningful potential for companies to more effectively tap into new pools of capital and we believe the pandemic is leveling the playing field. Increased exposure to Middle Eastern, Indian and Asian investors is on the cards, adding Dubai, Mumbai, Singapore, Shanghai and many more cities to the list.
What has been the impact of the pandemic on research and corporate access?
It has put corporates on the backfoot, requiring them to respond to outside forces rather than developing their own narratives, facing increased scrutiny from investors and pressure on their ratings. Research has become very immediate and reactive in its focus. On the positive side, the lockdown and travel restrictions have enlightened companies to the benefits of doing business remotely and electronically. They have become more efficient at virtual meetings and appreciate not just the time and money that saves, but also the increased reach those meetings provide.
Corporate access is starting to change, with companies realizing they can now reach any investor from the comfort of their own office or home office. Stockbrokers’ large travel and conference budgets are suddenly not the competitive advantages they used to be.
Putting aside Covid-19, what are some of the key challenges South IR professionals have been facing in recent years and how should they be tackling them? How do you expect those to change going forward?
Selling strong South African company stories has become more difficult in recent years due to reduced coverage and broker support, even for large-cap companies. We estimate that up to 25 percent of the top 40 stocks on the Johannesburg Stock Exchange have four or fewer contributions to their consensus forecasts. As a result, IR professionals have found it increasingly difficult to defend and gain share-of-voice in the very competitive emerging market space.
Companies are being forced to take more responsibility in disseminating their own message and this has resulted in increased investment in IR budgets.
What could South African companies – and those in other emerging markets in the region – be doing to better get their names out there?
The key here is to recognize that the golden days of stockbroking research may not return and that companies cannot continue to depend on brokers disseminating their message for free. If companies are not large enough and/or do not offer sufficient potential for corporate finance and investment banking revenue, they may find that brokers do not provide them with the visibility, especially into non-South African investors, that they have become accustomed to.
One solution lies in companies growing the budgets to promote their own message, but they should also consider employing external third parties to write about them, without fear or favor, as they do when it comes to corporate debt. Transparency breeds confidence and companies that promote such transparency over time are more likely to see the combination of operational delivery and significantly increased visibility result in growing investor interest and tradability.
Finally, while Mifid II is a European directive, what has been its impact (if any) in South Africa?
South Africa is famously quick to adopt European and UK regulations, whether it be anti-money-laundering, protection of privacy, bank capital, insurer solvency or accounting conventions. Mifid II is expected to be no different and most large South African fund managers are already demanding unbundled research from brokers, with smaller managers expected to follow over time.
As a result, broker research revenues have come under severe pressure and many household names, including Credit Suisse, Deutsche Bank and Macquarie, have shut up shop while others have reduced analyst count or off-shored research. New York and London sales desks have been culled by almost all banks; this creates a significant risk for South African corporates that their message will not reach the true marginal buyers of South African stocks, which will limit their potential to achieve better ratings.
But the country is full of dynamic companies with great prospects, and pools of capital have not gone away. Companies just need to find new ways to tap into those pools.