During Europe’s three-year bear market, most major investment banks let go of about a third of their equity research staffs. It’s not clear these days whether those who held onto their jobs actually got the better deal.
Equity research everywhere has become more demanding -- longer hours, smaller pay packages, more regulatory scrutiny, less administrative support -- but in Europe it’s gotten downright contentious. In January, French luxury goods maker LVMH Moët Hennessy Louis Vuitton won a E30 million ($37.6 million) lawsuit against Morgan Stanley after charging that one of the firm’s analysts, Claire Kent, had unjustly derided LVMH to further her employer’s investment banking ambitions. The same day, French caterer Sodexho Alliance said it might take action against Smith Barney Citigroup for an allegedly erroneous research note written by Adrian Cattley about its finances. The dispute was settled amicably without going before a judge.
Coming on top of the research changes spurred by Wall Street’s $1.4 billion settlement with New York Attorney General Eliot Spitzer, this legal skirmishing underscores the difficulties facing analysts of European equities today. Miss an accounting problem at a company and get sued by investors and regulators; express doubts about a company’s strategy or finances and risk a lawsuit from angry corporate executives.
“Reform of investment banks’ research efforts was desperately needed,” says European Editor Tom Buerkle, who wrote the introduction to this year’s All-Europe Research Team, which begins on page 47. “The question now is whether analysts can conduct hard-hitting research while living within regulatory constraints and steering clear of shareholder or corporate lawsuits. It’s not easy to be objective in the current environment.”
And yet in Institutional Investor’s 19th compilation of Europe’s best analysts, investors again single out researchers whose skills allow them to take bold positions. For example, this year’s first-teamer in Paper & Packaging, Thomas Brodin of Smith Barney Citigroup, challenged the paper industry’s old saw that a cyclical recovery sends the sector soaring: The euro’s appreciation against the dollar would undermine the benefits of an economic rebound, he argued, and eager paper companies had jumped the gun by ramping up production in anticipation of a big spike in demand. Brodin was right. Demand didn’t jump, and neither did paper shares; they rose just 4 percent in 2003. Brodin’s other achievement: No one sued him.
