Even at depressed share price levels, many companies are raising capital. Should investors follow their money and support these issues? That proved right for most fundraising in the aftermath of the financial crisis, but this time could it be different?
While the financial crisis was largely a credit problem, some businesses are now faced with uncertainty over demand and the timescale in which that might correct. For consumer services and hospitality – pub chains for example - prospects this year and next are very uncertain. But where consumer businesses also have an online strategy, or can use additional capital to acquire or take market share from weaker rivals, new money might genuinely improve prospects. And the purely business-serving b2b services may be best placed of all. April and May have seen very few of these types of businesses call on shareholders. Only some of the consumer offerings make sense just now.
Hardest to forecast are sectors such as international travel, but investors should not ignore the challenges in other areas. The prospect of changes in consumer behaviour, unemployment, wealth taxes and government intervention in key sectors, brings guesswork into the calculation. All the rigour of investment modelling cannot ignore that much of the global market background will be uncertain for some time.
Investors seem more focused on growth, preferring companies more focused on niches and with better control over their own destiny. In contrast, many large FTSE 100 businesses have been forced into dividend cuts, with income having been a key reason for holding the shares previously. Despite money printing, the background is disinflationary – typically more of a challenge for global economically-sensitive businesses. And global supply chains must change – moving from a lean but risky model towards structures that are more resilient.
There are opportunities for investors to follow their money in some of the businesses currently fundraising. But a selective approach is important. Many tech and B2B businesses have seen strong demand during the current crisis and IT budgets are expected to grow to strengthen cloud and digital services.