Socially distancing from the short seller and the activist feast

By Henry Adefope & Anthony Hughes, Associate Partners

Investment veteran Keith Skeoch is the latest high-profile investor to remark that the current market is best suited to stock pickers: winners and losers of the Covid-19 crisis are becoming clearer – and that means some shares would soar while others would tank.

In the markets, perception quickly becomes reality.  Managements who see their share price underperform – even if that’s the result of sentiment driven by a global pandemic – will quickly come under pressure.  Sitting tight and battening down the hatches may have worked in the choppy seas of 2019 – but won’t cut the mustard in the post-Covid typhoon.  Business strategies which had broad shareholder support in February will need to be justified for the new environment – even if they are still fit for purpose.

It’s often said when things are going well discontent is muted; when they go badly everyone has an opinion and becomes an expert on how to fix the situation.  There will be few businesses that report numbers that have not been harmed by the economic impact of the global lockdowns.

All of which creates perfect conditions for short sellers and activist investors – especially if there’s a sense (or a sense can be created) that a company is losing control of its narrative.

With the news today of further relaxation in the UK’s lockdown rules there’ll be a sense of relief.  Yet for many businesses the hard graft still lies ahead as workers return from furlough – or not, if they have to be laid off; with balance sheets in need of repair, and; uncertainty about how keen consumers will be to resume spending at pre-pandemic levels.

We’ve never had an economic hit like this.  So there’s only so much we can draw from past experience.  However it’s likely that when investors are picking the winners and losers, those companies that get ahead with clear, deliverable objectives and those who have a strategy set in the context of the new environment are most likely to head off trouble.  With investors, at least for now, a laser focus will be on operational and financial resilience during and post-pandemic; Board and management effectiveness – especially for setting and hitting targets, and; openness and transparency.

This is a drama that will play out over many months and in several acts.  Management teams with share incentive plans set when markets plummeted in March and April – potentially at artificially low strike prices – risk political as well as investor ire.  Diversity has once again risen up the list of issues that are front of mind.

As the summer of government support for jobs and business transitions to the winter of unemployment and harsh reality, we are entering unchartered corporate territory.  Will Environmental and Governance still be key to investors?  It seems highly likely that governments will make sure that the Social of ESG becomes more prominent in Board members’ thinking.

So whilst activist activity during the throes of the lockdown has been muted, today there are certainly reasons for opportunistic investors to start sharpening their knives in preparation for the coming feast.  Which all means that Boards will have to keep control of the corporate narrative as the best way to keep the short-sellers and the activists at bay.