Yesterday HSBC, Europe’s largest Bank, warned of a “more challenging” trading environment and predicted “softer” revenue growth.
Revenues in Asia have held up well for the Bank, the region where it generates most of its profits, but performance within Europe, the UK and the US was “not acceptable”.
As a result, the company reported that pre-tax profits for the three months to September were down 18 per cent to US$4.8bn, significantly below a consensus analyst estimate of US$5.3bn.
The shares in Hong Kong reacted accordingly and were down 2.4 per cent on Monday, but the share price reaction has been mitigated by three actions – the Bank giving a clear picture of the trading environment (with factors including continued protesting in Hong Kong, Brexit uncertainty and a US-China trade war); the impact that this has had on pre-tax profits; and, most importantly, by regularly providing investors with a compilation of analyst consensus forecasts.
This course is how major companies should act and we see these best practices adopted by FTSE 100 companies regularly. Yet this is a far cry from the way that smaller AIM companies act when it comes to guiding investors on their performance, particularly when they have failed to hit the mark.
More often than not, it is not the AIM companies themselves at blame. Small Cap and AIM listed companies are regularly discouraged by their advisers from giving specific guidance, and more specifically on publishing forecasts; the second is that private investors are deliberately denied access to the key information needed to measure success or failure in company performance – with only FCA qualified or institutional clients of investment banks able to access consensus forecasts.
Firstly, AIM companies need to be more open in the information that they provide investors. Far too often a trading update simply focusses on revenue performance and provides little clarity of the impact on pre-tax profits. It’s also worth remembering that there’s nothing in the AIM rules stopping a company for providing or commenting on profit forecasts.
The only time when it becomes an issue is in the case of a bid for the company or if a major acquisition is looming, in which case any profit forecasts need to be supported by a report from an independent accountant or auditor confirming the assumptions used for the forecast are consistent with the company’s accounting policies.
Companies also need to know that many Institutional Brokers have a vested interest in only allowing their analysts to provide company forecasts to their institutional clients – in a post-MiFID II world the availability of expectations has reduced massively and brokers are keen to ensure their research has value, given that they must now ensure that fund managers pay to receive it.
Typically research notes contain a target price and a recommendation and the FCA protects retail investors from exposure to such financial promotions by denying access. As a result forecasts are only published for a private club and the FCA “protection” serves to disadvantage smaller shareholders. But there’s nothing stopping private investors from seeing what the current consensus forecasts are as long as it’s not part of a financial promotion.
I would argue that the London Stock Exchange needs to recognise the disadvantage that having market forecasts available for a select audience and ensure that everyone has access to the consensus expectations – perhaps insisting that these be included on each company website as part of AIM Rule 26.
Whatever happens the onus is on smaller listed companies to provide clear guidance on numbers, and to follow the lead of the larger established corporates by making available their own consensus forecasts.