December 14, 2022
We have identified four trends that are likely to impact Investor Relations in the year ahead and provide some guidance for Investor Relations programmes:
It has been well-publicised that the South African equity market has suffered a dearth of new investment and mediocre performance over the last five years. In addition, the re-rating of some sectors has meant that there are deep discounts to be found. Recent research by the Edison Research Group in London shows that globally, 84% of Initial Public Offerings (IPOs) executed in 2020/21 are now trading below their issue price. At the same time, however, asset classes the world over have reset, driven by less stimulus, inflation rates rising to multi-decade highs, and higher interest rates. As a result, the competition for capital is likely to intensify. To this end, a clearly articulated investment case, with a balanced narrative of the risks and opportunities is crucial to maintaining and enhancing credibility.
The role of ESG has been as volatile as financial markets. Over Covid, it was catapulted to the fore as a primary differentiator while more recently, the emerging trend of “green hushing” has plagued the acronym. “Green hushing” refers to the trend where companies intentionally do not release details of their ESG targets (especially climate-related) to avoid scrutiny and allegations of greenwashing. This follows lawsuits overseas, filed against companies with overly ambitious ad campaigns, as well as regulatory crackdowns of ESG-funds due to lax oversight.
In addition, the integrity of frameworks used to measure sustainability is being called into question, creating uncertainty about governance and potential conflicts of interest.
Either way, we believe ESG will remain topical. Investor Relations Officers will need to demonstrate that ESG is embedded into a company’s core strategy, can underpin and support commercial strategies and create a competitive advantage.
Volatility is expected to continue into 2023. Volatility on the JSE this year was elevated with the index in excess of 20 relative to the pre-Covid number of low to mid-teens. In addition, Russia’s invasion of Ukraine has thrown energy, food, exchange rates and other markets further out of balance. This has resulted in inflation and interest rates being at 40-year highs in developed countries.
Added to this, Elon Musk’s takeover of Twitter will return the platform to a typical town square, where everyone has a voice and can express an opinion. While it is unlikely that this will impact the equity market too much, it may create a significant amount of ‘noise’ which will add to volatility overall.
At home, unemployment remains high. Load shedding has become a regular occurrence. We have broader infrastructure challenges and political uncertainty remains. This all contributes to excessive speculation and share price volatility. Amid volatility, consistency in communication remains key to ensuring that value-destructive uncertainty among investors is minimised.
The rise of retail investors has been all the rage over these last two years. Boosted by fiscal stimulus and supported by social platforms such as Reddit and Discord, retail investors have often been seen to be behind frothy valuations. Although this is largely a developed market phenomenon, the retail investor has grown in prominence in South Africa too. In the local context, one view is that lower disposable income would mean less being spent on equities and more on basic necessities.
Even if retail investors do participate in the markets, they are unlikely to move the needle in terms of share price uplift. Regardless, IROs would do well to keep their narrative simple, messages concise and communication consistent, considering listing requirements require all shareholders, big or small, to be treated equally.
In conclusion, 2023 is likely be another volatile year, with risk-off dominating investment views. The local landscape has its own nuances. To this end, how companies communicate will separate the boys from the men. After all, the market rewards consistent communication, visibility and transparency in the long run.
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