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2011 All-America Research Team

The world economic crisis has accelerated the globalization of finance — at least in the eyes of many investors. Asset managers that once focused primarily or even exclusively on the U.S. have been compelled to look beyond its borders not only to keep abreast of developments overseas that could affect American markets — the Arab Spring and Europe’s sovereign-debt debacles, among others — but also to avail themselves of better opportunities that exist in other countries.

“Our clients, particularly the larger ones, are global,” explains Noelle Grainger, J.P. Morgan’s head of U.S. equity research. “They might not be investing truly globally, but they have to think about issues globally, and it’s important to make sure that we’re driving our strategic initiatives in that direction as well.”

This broader focus applies to corporations as well as countries. Stuart Linde, head of global equities research at ­Barclays Capital, offers one example. ­“Consumer staples is a big global business,” he says. “If you’re covering General Mills, if you’re covering Kraft, you need to know what’s going on at Nestlé. If you’re covering P&G, you need to know what’s going on at Unilever,” he explains, comparing U.S.-­based consumer goods companies with their European peers.

There’s another reason, notes Stephen Haggerty, head of Americas equity research at BofA Merrill Lynch Global Research. “The U.S. is becoming a more mature market,” he observes. “Our economic growth rate is not going to be off the charts for the foreseeable future, given what has to happen to restructure the U.S. economy. It’s harder to find alpha if you are just looking at the U.S.”

To deliver the kind of research that clients find most helpful, analysts covering U.S. stocks are working more closely these days with their counterparts in Hong Kong, London and around the world. The researchers who outperform all others when it comes to providing the perspective that money managers require can most often be found at J.P. Morgan, which leads the All-­America Research Team for a second consecutive year — but by a very narrow margin. J.P. Morgan captures 40 total team positions, six fewer than last year and only one more than the two firms that tie for second place: BarCap, which repeats at No. 2 despite a loss of four positions, and BofA Merrill, which rises one notch even though its total drops by three.

That margin widens dramatically, however, when team positions are weighted: J.P. Morgan is the clear favorite, thanks to having 17 analysts who win the top spots in their respective sectors — that’s more than double the No. 1 spots captured by BarCap and four times the number claimed by BofA Merrill (see Weighting the Results, page 92). Survey results reflect the opinions of more than 3,500 buy-side analysts and portfolio managers at over 1,000 firms that manage some $10.7 trillion in U.S. equities.

Ensuring that analysts provide the worldwide perspective that investors demand prompted a research department restructuring at J.P. Morgan, with Grainger rising from deputy to replace Thomas Schmidt as head of U.S. equity research last October, when the latter was tapped to oversee global equity research. The firm is emphasizing collaboration among members of its regional teams via written reports, conference calls and “the dialogue that happens day to day behind the scenes between the analysts,” Grainger says. “That’s a relatively new structure for us and an important evolution.”

BarCap is employing a similar strategy. For a worldwide approach to succeed, Linde says, a couple of things have to happen — including support for the initiative at the top. “If the senior people participate and understand it’s important, it will become pervasive in the organization,” he says. Aligning nonequity forces is also key. Haggerty concurs. BofA Merrill brings its “economists, equity strategists, currency strategists, credit strategists, mortgage-­backed strategists together for conference calls for big events,” he says. For instance, a Sunday evening call in early August on the Standard & Poor’s downgrade of the U.S.’s credit rating drew 1,600 clients — and 2,200 more listened after the call was made available for replay.

Citi, which jumps from eighth place to tie for sixth (with Morgan Stanley), picking up three positions, for a total of 26, is also leveraging its entire platform to assist investors. “The focus is on global insight, being able to tell clients in the U.S. how what is happening in Asia, Europe, Latin America is going to impact the outlook for the stocks they care about,” explains Jonathan Rosenzweig, director of Americas research. “That’s different than trying to make a global call, such as which stock in a sector do you buy in the various regions.”

Related to investor demand for a global perspective is the soaring interest in macroeconomic research. Ever since the financial crisis began, “we’ve seen macro dominating stock selection,” observes Yin Luo of Deutsche Bank Securities, who debuts in first place in ­Quantitative Research. Before the meltdown an overwhelming majority of money managers — upwards of 90 percent, he says — were more interested in stock picking than anything else. But since 2008 “we have seen the trend changing, and now half our clients say the most interesting, the most relevant topic is macroeconomic analysis,” Luo says.

Aware that fund managers are on the lookout for new ideas, Luo is constantly on the hunt for new information sources and over the past year has tested a wide range of databases, including options data, bond data and high frequency trading data. “One thing we’ve been working on and getting a lot of interest from our clients about is borrowing ideas from other asset classes,” he explains. “We can no longer be just equity investors.”

That’s because the stock market is still searching for direction. Nonetheless, portfolio managers still value top-notch insights about companies and sectors, such as those provided by J.P. Morgan’s C. Stephen Tusa Jr., who captures top honors for the first time in Electrical Equipment & Multi-­Industry. Even though shares of many of his companies are well above their 2009 lows, he says, the market is waiting for the next stage of earnings growth and looking for signs that business confidence has returned. “I’m a believer that, while this isn’t a normal cycle, we’re not going back into recession,” Tusa says. This time is different, he adds, because growth is slower than in previous downturns. Among companies in his sector, average organic growth for a five-year period is usually in the 5 to 7 percent range; Tusa forecasts growth for the next three years in the low single digits.

Tusa’s view is echoed by his colleague Steven Alexopoulos, No. 1 for the first time in Banks/Midcap. On average, midcap bank stocks are down 24 percent this year, Alexopoulos says, but clients are still waiting for the bottom. “Investors are looking at bank stocks and saying: ‘Now wait a minute. If you don’t have room left on the deposit side to further reduce rates, your margins are going to get really squeezed — squeezed to the point where you’re no longer earning the cost of capital,’” he notes. The situation probably won’t improve anytime soon. “We may not see rates up for another two to three years,” he adds. “You need the economy to show some strength and consumers and businesses to see increased confidence for rates to go up. All that’s going to happen simultaneously — and it’s probably a 2014 event.”

Alexopoulos is downright giddy compared with BofA Merrill’s Tal Liani. “I’m negative — way more negative than others,” declares Liani, who finishes in the winner’s circle for the first time in Data Networking & ­Wireline Equipment. (He’s also ranked second in Telecom Equipment/Wireless.) “The growth rate has slowed down materially in the past three quarters, and investors are still not reflecting it. People know it conceptually, but they haven’t translated it yet to lower expectations and lower earnings-­per-share forecasts.”

Investors need an “EPS reset,” agrees Credit Suisse’s John Pitzer, in his first appearance at No. 1 in Semiconductors. Companies in his sector are seeing EPS estimates fall further than those in other tech sectors and in the broader economy, with estimates down 8 percent in the second quarter alone, Pitzer says. “People are trying to figure out, ‘Is it enough? Is there one more earnings cut to come, or are there going to be several?’” He believes semiconductor companies in general are back on the path to achieving the 9 to 11 percent growth they enjoyed before the tech bubble burst in 2000 — but it will take a while to get there. “We’ve just gone through an eight- to ten-year period in semis where it was too easy to add capacity,” he says. “We’re now going to go through a three- to five-year period where supply growth is going to structurally slow, and that should give pricing power back to semis.” In the near term the big issue is “the macro headwinds and how those headwinds are going to impact the sector in the next couple of quarters,” he says. “Semis are the most cyclical sector in tech, and tech is one of the most cyclical sectors in the market.”

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