COMMENT: EMEA research - rumours of its death (slightly) exaggerated

By bne IntelliNews June 26, 2014

Peter Szopo of Erste Asset Management -


Sell-side equity research was among the many victims of the financial crisis - although surely not the most important one. Some estimates point to a 20% drop in spending for equity research globally in recent years. The main driver behind this development is the decline in trading volumes in the cash equity business, which have more than halved since 2007. At the same time, rising regulatory costs and increasing hurdles to spread research costs beyond the brokerage segment of investment banking added to the malaise.

There is ample anecdotal evidence suggesting that equity research in Emerging Europe has not escaped these trends. A number of banks retreated fully or partly from the region, including UniCredit, Chevreux, KBC and ING, while many others reduced their presence on the ground. Still, compared to developed markets, Emerging Europe benefited from a somewhat better development in terms of trading volumes. While volumes dropped sharply, as elsewhere, in the course of the crisis, they rebounded quickly in 2009 and are now, despite another drop in 2011, above pre-crisis levels. Thus, the pressure on commission income was probably less pronounced than in the developed world, although the overall cake has become much smaller, of course.

Despite lower trading volumes and cutbacks in research staff, sell-side coverage of Emerging European stock markets seems resilient. In the larger, more liquid markets the research coverage of stocks continued growing after the crisis. In Turkey, for example, the average number of ratings per stock almost doubled from around 13 ratings per stock on average in 2007 to 25; in Russia and Poland this figure rose by 80%. (Better data collection by Bloomberg may have helped, but certainly cannot explain the entire increase).

Smaller markets in Central Europe have seen diverging trends. Coverage of Czech stocks (not counting Austrian stocks like Erste and VIG with a secondary listing in Prague) and of Hungarian stocks has dropped significantly since 2011. Both markets are small, lacking any notable domestic investor base and, most importantly, have been without any sufficiently sized IPOs in recent years to attract investor interest.

The Austrian market developed differently, as research coverage increased by 80% to, on average, 16 per company. While the market itself is not part of the emerging market (EM) universe, research coverage benefited from the fact that listed financials and some other stocks are highly geared to Emerging Europe and, therefore, are covered by both developed market- (DM) and EM-focused brokers. Outside a narrow group of liquid blue chips, however, coverage of most stocks is relatively low by international standards, and some of the smaller companies started to increase their coverage by adding paid research.

Greece is a different case. Coverage of Greek stocks more than halved in the course of the sovereign crisis in 2010-11, as trading volumes and investor interest plummeted. In the past two years, coverage rebounded, helped by macro-economic stabilisation but also – and certainly more important – by the return of the Greek market into the EM universe. Its inclusion in the MSCI Emerging Market Index will likely increase investor and sell-side interest further. While it was easy to run a developed Europe equity fund without having any exposure to Greece, for EMEA funds this is a riskier proposition, given that Greek’s index-weight is bigger than the weights of the Czech Republic and Hungary combined.

Emerging and underdeveloped

Compared to stock markets in core Europe, the intensity of research coverage in Emerging Europe looks still underdeveloped. While in core Europe, typically stocks have between 25 and 40 ratings; in Emerging Europe the corresponding figures are 10 to 25 in the bigger markets, and around five in the smaller markets. Research coverage is clearly driven by trading volumes, and both in developed and in emerging Europe most markets fit into this pattern. Particularly, the coverage of the Russian market – regardless whether the RTS or the MSCI universe are used – is broadly in line with international peers. By contrast, the liquid segment of the Turkish market (as represented by the XU030) seems "over-covered" relative to trading volumes, reflecting the competitive environment in the Turkish brokerage industry.

Unsurprisingly, small markets like Hungary and Romania appear "under-covered", even relative to trading volumes. However, one has to take into account that the costs per stock coverage are fixed in absolute terms (somewhere between $30,000-50,000 depending on the research business model). Thus, in less liquid markets, it is much harder to recoup research costs purely from secondary business. While in the large markets in core Europe as well as in Russia and Turkey the percentage of total commission income required to cover research costs is a low single-digit figure, in smaller markets research costs are likely climbing to 20% or more of commission income.

Bottom line: research coverage of Emerging European equity markets will continue to expand in line with rising stock market turnover. However, for a number of reasons – including cost issues, falling commission levels, growing in-house research on the buy-side, and regulatory reform attempting to limit the use of investors’ money for third-party research – coverage levels currently seen in core Europe, where single stocks are sometimes covered by more than 40 sell-side analysts, will probably not be reached in Emerging Europe.


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