IC Market Espresso 28 Oct 2019

 
Short-Termism Effect on Global Capital Markets

As more and more investors focus on short term gains, we decided to see how that trend affected the World’s largest capital market and what consequence it could hold in the long run.

Historic Overview

Even though stock markets existed for few hundred years, household ownership of stocks surged during the past four decades, as memories of the 1929 crash faded, and a newfound expectation of retirement sparked investment demand. However, for US households owning stocks remained a minority activity for most of the 20th century. It took the advent of the IRA and 401(k) in the late 1970s to change that. 401(k)s, which weren’t in widespread use until the early 1990s, boosted household ownership of stocks to levels that covered a majority of Americans, even after the 2008 financial crisis.

Percent of U.S. Households Owning Publicly Traded Equities or Mutual Funds (%)

However, rising number of investors brought new trends. Just as more people began relying on stocks, the way markets operate and the way we think about stock markets fundamentally changed. At the beginning investing was a longish endeavour where profits accrued slowly over time. Today, the attention is on the here and now, with the average holding period for stocks trading on the NYSE falling from more than seven years to less than one.

Average Holding Period for Stocks by Decade

The current holding period of less than a year is indeed shocking since stocks should be held for a longer period of time in order to achieve a particular goal or earn a high return on one’s investment. This reflects investment transactions driven by both individuals and institutional investors. Until the 1970s, the investment landscape was largely dominated by wealthy individuals and families; this has since changed markedly, with professional investors now accounting for the largest share of investment activity, though it should be noted that these professionals manage significant mutual fund asset pools that are driven by retail investors.

Well, for starters, the abundance of asset management companies to choose from has put severe pressure on managers to generate returns, thus pushing towards a more active investment approach. Furthermore, trading has never been cheaper. Since the formation of the New York Stock Exchange in 1792, it set a firm rule: Trading commissions charged by brokers were to be fixed, and equal among anyone with a seat on the trading floor. It stayed that way for the next 183 years. During that time it cost the same amount per share to trade 100 shares as it did to trade 1,000 or 100,000 — and brokers regularly shaved 2% or more for themselves off the typical trade. That changed in 1975, when commissions were deregulated, and a new free market was set loose. Brokerage commissions plunged overnight, and new discount brokerages came to life.

The Cost of Trading Before and After Commission Regulation (USD)

Cheaper trading resulted in higher liquidity, and with it the ability to exploit short-term market inefficiencies and anomalies also went up. It was too costly in the 1960s to, say, buy Coke stock before earnings with the intention of squeezing a few basis points out of the market’s reaction. The result of deregulating commissions and the ensuring plunge in trading costs was predictable: Trading volume went up. As a percentage of market capitalization, total annual market trading doubled between 1975 and 1983, and then quintupled by 2008.

Effects on the Companies

However, the effects of focusing on the short term came at a cost.  Company CEOs are now under increased pressure to deliver favourable short-term result in the company’s quarterly reports rather than focusing on long term growth. Thus, fewer companies are going (and remaining) public, and those that do are waiting longer, in part because there are now better alternatives than the short-term madness of being a public company. According to research from Wellington Management, companies are waiting longer to IPO, stretching on average from 4.6 years after founding to go public from 1990–2001 to 6.5 years from 2002–2015.

Publicly Listed Companies in the US

Those alternatives have downsides, as individual investors now have access to fewer of the economy’s most dynamic and promising companies just at the moment they’re required to invest their own money for retirement. This is clearly seen on the chart above, as one can notice the number of publicly traded U.S. companies peaked in 1996 at 8,090. Today that number has been sliced in half as the number of publicly traded companies amounted to over 4,300. Note that the U.S. population has risen nearly 50% since 1975, and real GDP has tripled. But the number of public companies has declined 15% since 1980.

On the flip side private equity assets have swelled almost sevenfold in the last 15 years, from USD 600bn in 2000 to more than USD 4 trillion today. As a percentage of public-equity market cap, that’s a rise from about 4% to more than 16%. So private equity, all else equal, has captured about twelve percentage points of equity market share over the last 15 years. Trillions of dollars of companies that may have be public 15 years ago are now private. That’s a big deal for individual investors who rely on pubic market returns to drive their retirement accounts.

Three Members of Petrol’s Management Board Step Down

No official reason as to why the board members stepped down was given, thus we continue to monitor the situation closely.

Petrol published a document on the Ljubljana Stock Exchange announcing that the Supervisory Board agreed with three members of the Management Board to end their term in the office early through mutual agreement.

The term of Tomaž Berločnik (CEO), Rok Vodnik (board member) and Igor Stebrnak (CFO) ended effective Friday (25 October 2019). Ika Krevzel Panić will continue as Management Board member and Worker Director. Such news negatively affected the share price, which recorded a 1.4% decrease on Friday.

The announcement came as a surpirse, as Petrol published a statement on Thursday in reply to the news reported in the media, in which the Management Board of Petrol denied to have been aware of any item on the agenda of last week’s meeting of the Supervisory Board under which the members of the Supervisory Board would discuss the replacement of the Management Board.

Note that Nada Drobne Popović, the current president of the Company’s Supervisory Board, will take over as Management Board president until such time as a new Management Board is appointed. She will not perform her duties as Supervisory Board member during this time. 

According to media, the reasons behind the termination of the agreement are differences in opinion regarding the investment strategy. Allegedly, the Board insisted on pursuing investments on regional markets, which would be financed via leverage (new bond issue), which the Supervisory Board deemed unacceptable.

The change of the Management Board could potentially lead to the shift in the Group’s strategy, however no indication of that can be confirmed until mid 2020, when the company will update their strategy from June 2018.

Telekom Slovenije Went Ex-Date

As Telekom Slovenije went ex-date yesterday, we are bringing you a brief overview of the company’s historical dividends, dividend yields and share price performance on ex-date.

As a reminder, the shareholders approved the proposal to use the distributable profit, which amounts to EUR 38.99m for 2018, to pay out dividends in the amount of EUR 29.27m, translating to EUR 4.50 per share and a payout ratio of 75%. The approved dividend was in line with the initially proposed divided payment.

In the graph below you can see the historical overview of the company’s dividends and dividend yields.

Telekom Slovenije Dividend per Share (EUR) & Dividend Yield (%) (2010 – 2019)

Also, in the graph below, one can observe the historical movement of the share price on ex-date. As visible, the share price dropped by 7.1% on Friday.

Share Price Reaction on Ex-date vs Dividend Yield (%) (2015 – 2019)

Since the beginning of 2015 the share price of Telekom Slovenije has observed a decrease of 60.3%, while the total return amounts to -36.8%.

Share Price Performance vs Total Return (2015 – 25.10.2019)

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