Shrinking sell-side research: should we be concerned?
Cast your mind back to September 2008 and the implosion of the once mighty Lehman Brothers empire. Remember when Nomura swooped down on the smouldering remains to pick up the European and Asian operations for a relative song? This decisive and swift move was then widely feted as Nomura would be catapulted in an instant into the top bracket of global investment banks.
Now wind forward to April 2016: Nomura announces it is to close down its European equities research division, the bulk of which is centered in London. How can events have disappointed to such a large extent? We have of course experienced the worst global downturn since the Great Depression of the 1930s that has ravaged the wider financial sector, but it’s generally accepted that the worst has been put behind us, so why now the decision to pull out?
Nomura has cited “extreme volatility and a significant decline in liquidity, triggered by heightened uncertainty in the global economy”. These are factors that are not unique to Nomura alone and so natural questions to ask must include: “where does this leave other equity research providers?” and “is Nomura’s withdrawal just the tip of the iceberg?”.
Whilst Nomura’s retreat from equity research has naturally grabbed the headlines on account of its sheer size and reputation, it is worthwhile drilling further down and having a look at the smaller research houses, whose pockets are not as deep. What is immediately revealing, but not perhaps that widely reported has been the rather extraordinary shake-up of the smaller broker landscape in recent years with a number either closing down, being taken over or merged, or downsizing their research capabilities in the face of these headwinds (cue: Arbuthnot Securities, Canaccord Genuity, Collins Stewart, Charles Stanley, Daniel Stewart, Evolution, Oriel Securities, Seymour Pierce etc.)
Should we be concerned at all by these developments, particularly as it has long been thought there has been an excess of broker research capacity? The argument goes that such a reduction in capacity and “me too” research should lead to a flight to quality; however, there can be no disputing that the smaller brokers cover a disproportionately larger number of mid- to small-cap stocks than the larger houses such as Nomura. Should these smaller brokers scale down further, it may ultimately be the mid- to small cap companies who suffer the most in terms of liquidity.
Oh, and on top of all this, I almost forgot to mention the elephant in the room that is MiFID II, the EU directive aimed at unbundling broker commissions that is due to come into effect in January 2018…perhaps Nomura has displayed a canny prescience after all?
For a recent CDR roundtable discussion examining the likely implications of MiFID II for corporate issuers, fund managers and the sell-side, please click here.
financial pr, Fund Managers, investor relations, IR, MiFID II, Nomura, Research, Sell-Side