It’s all change in Europe over the next few months as sector plays come to the fore. For investor relations officers, whose companies may find themselves being looked at under a new sector light, the challenge is to get their messages across to the right analysts and fund managers. Non-European companies may also find they have new European contacts as teams change in light of the euro. Examining companies under a pan-European microscope is not a new phenomenon, of course. Nor is internally slotting these corporates into their own sub-sectors.
What is different is that continental European fund managers are giving it a higher priority. And that’s because they are following their brokers, who are increasingly breaking down geographical boundaries and creating teams along sector lines. ‘Previously, stocks were more correlated with their local market than sector but, in the run-up to the euro, the major sell-side firms have changed to viewing companies across Europe,’ says one London-based analyst ‘However, UK fund managers tend to remain rather London-centric. For the most part, the UK buy-side and consultants are behind the Continent.’ At the moment, the pace is still being set by the large American and continental European-owned securities houses. And their sectoral research strategies have persuaded many buy-side institutions to follow suit. After all, the Americans have been doing it this way for years, led by the sectoral breakdown in their own market. And the continental European houses have had their eyes fixed slightly more firmly on the euro than many of their UK counterparts. One analyst suggests that UK institutions have been in a ‘state of denial’ as far as the euro is concerned. That’s meant they have been slower to adopt a sectoral view. The old split between the UK and continental Europe still prevails. Some City-based institutions are having to play catch-up. And fast.
New talk in town
The sector play is also being given an extra push by increased talk of a pan-European stock exchange becoming a reality. This time round it’s not Easdaq making the running but the potential for alliances among existing national exchanges such as the one between London and Frankfurt. This two-pronged shift toward a unified exchange and wider sector analysis is the main driving force behind the index creators getting in on the act. For example, FTSE International a specialist index company jointly owned by the Financial Times and the London Stock Exchange has recently moved toward developing its own single classification system. The real task at hand for the sell-side, though, will be in educating their new and existing analysts, especially since the euro is expected to lead to an increase in cross-border investment. As Albert Richards, managing director and head of European equity research at Salomon Smith Barney puts it: ‘The head of a large French pension fund, for example, will know all the local companies, regardless of their size, in his portfolio very well. But once he starts widening his brief, a huge cross-border education process will need to take place. The demands from continental analysts on an IR officer’s time for information about the company will be substantial.’ ‘I think Europe will follow the American trend and there will be European stock indices structured along the same lines as the US sectors and sub-sectors,’ says Robert Vaudry, director of operations for European equity research at Morgan Stanley in London.
At the moment, though, it is still very much early days, with Morgan Stanley Capital International (MSCI), FTSE International and Dow Jones Stoxx still battling it out to be Europe’s premier index provider. Thomas Tilse, chairman of the FTSE International classification committee, notes ‘a growing belief among international fund managers that sector, rather than country, allocation will become more important in achieving excess returns in the post-Emu environment. The new classification system will allow investors and market participants greater flexibility in analyzing industrial sectors on a global and pan-European basis.’ To date, FTSE International’s main changes have been the creation of an information technology economic group, which is split into hardware, software and service companies. The industrials basic and general, consumer goods and services have also been divided into cyclical and non-cyclical components. More groupings and rejiggings are certain to follow but not overnight, partly because Europe does not break down its industries like the US. For example, under the American computers and communications tag, there are roughly 14 categories, including PC hardware, PC software, the internet, server and enterprise hardware, and software. This is without even mentioning wireless equipment, wireline equipment and wireline services.
Buyer’s choice
Anthony Habgood, chairman of UK-based Bunzl, the paper and plastics group, believes that the refocusing of sectors is a good thing. Analysts will increasingly be looking for the best stocks rather than a company’s country of origin. Bunzl has just joined support services, leaving behind its former home of paper & packaging to better reflect its wider business. ‘There are many companies in the sector which should mean we won’t automatically be tarred with the same old brush if there is volatility but the company is doing well,’ notes Habgood. ‘The analysts will have to make decisions based on how we’re doing. Although some of the analysts who cover us now will continue to do so, we expect the number to increase both in the UK and on the Continent.’ Overall, both sell-side and buy-side analysts believe that IR officers need to gain a better insight into how their research departments are structured. ‘The more IR people understand how we’ve developed and operate, the better they will be at getting their messages out,’ says Vaudry of Morgan Stanley. ‘The key for them is how they want to be perceived and what kind of information they want to transmit.’
Software company Logica is also changing its sectoral home. It will be rebranded into the new computer support services sector, whereas it has been lumped together with companies like Rentokil Intial, the rodent control and office cleaning company, under support services. The move has already meant that its circle of analysts has widened, especially in continental Europe and the US. The phone lines had become so busy that Logica decided to hire a full-time investor relations manager to help field the calls. Jane Hurley joined the company last July. ‘We have to get the message across that we offer a complete package of systems integration as well as consultancy and are not just a one product-based company,’ she explains. ‘Our aim is to get back to anyone who shows an interest in the company. But the most important part of my job is to give analysts, whether new or old, as much information as possible about what we’re doing. For example, one of the main challenges this summer was to make sure they realized that our products were not that exposed to the financial community and were not as affected as other companies when the financial crisis hit.’
