William Shakespeare's Macbeth once observed that life is "full of sound and fury, signifying nothing." That's also an apt description of 2012, a year in which there was much ado in world markets about what turned out to be not very much at all.
"The worst case of a hard landing in China and a messy breakup of the euro failed to materialize," notes Candace Browning, director of global research at Bank of America Merrill Lynch in New York. In addition, the hotly contested congressional and presidential elections in the U.S. resulted in little change to the status quo. Political gridlock continues in a divided Congress, as evidenced by the stalemate over the so-called fiscal cliff of spending cuts and tax hikes set to take effect at the beginning of January.
Global Research Rankings The Top Global Research Firms
of 2012 Most First-Place Positions Weighting the Results The Leaders: Equities Weighting the Results: Equities The Leaders: Fixed Income Weighting the Results: Fixed Income All of these issues ratcheted up anxiety, and many investors turned to sell-side researchers for guidance and assistance in understanding each new development. Throughout the year, Institutional Investor asked money managers and other buy-siders to tell us which analysts have provided the most helpful insights in a dozen countries and regions. The results of our 12 research team surveys have been published separately, but when the totals are aggregated, BofA Merrill is II's Top Global Research Firm for a second straight year. The bank wins 236 total team positions, ten more than last year, and maintains a comfortable lead over J.P. Morgan, which returns in the No. 2 spot. J.P. Morgan picks up 12 positions, bringing its total to 214.
Deutsche Bank, with 193 positions, holds steady in third place despite increasing its total by more than any other firm, with a gain of 30. Morgan Stanley, whose team-position total rises by 14, to 155, returns in fourth place.
Citi comes close to matching Deutsche's feat: It adds 28 positions, for a total of 129. That's enough to propel the firm from No. 8 to tie for fifth place with UBS, the highest-ranked firm to experience a decline in its team total. Last year the Swiss bank ranked fifth overall, with 135 spots. The tables on the surrounding pages rank firms by their overall team positions, first-place finishes, and equity and fixed-income annual totals. Deeper data can be found at institutionalinvestor.com. Many of the research directors at these firms expect the new year to look very much like the old year.
"China, the fiscal cliff and the recession remain on investors' minds, so a muddle-through scenario in 2013 seems most likely," Browning says. "Our view is that the high-liquidity, low-growth backdrop of recent years will continue and that economic risks are skewed to the upside as tail risks fade."
That sentiment is echoed by Richard Smith, Deutsche's London-based associate director of equity research and head of company research for Europe, the Middle East and Africa. "The three major sources of uncertainty for economies and markets are the U.S. fiscal cliff, the euro debt crisis and China," he says. "Having come through the China leadership transition without a major surprise and with cyclical indicators improving, the latter risk is moving to the background and we look for a slow U-shaped recovery."
Looming sequestration in the U.S. is another story, however. "There is a nonnegligible risk that a deal won't be done by year-end," he says. "Going off the cliff will result in a U.S. recession in the first half of 2013. Going off the cliff would also expose Europe to further concerns over its ability to solve its own sovereign debt crisis."
Andrew Pitt, global head of research for Citi in London, says that in addition to these worries, "China's slowdown being poorly controlled, and potentially rising geopolitical tensions" could rattle world markets in the year ahead.
"In terms of investment themes, the desperate search for yield among money managers will continue to dominate asset-allocation decisions and will likely reward companies that return income to shareholders above those that invest in growth, which builds in some risks for corporate earnings growth in the longer term," he believes.
The International Monetary Fund is projecting worldwide real gross domestic product expansion of 3.6 percent in 2013, up from 3.3 percent in 2012, but few sell-side economists are as optimistic. Citi anticipates global GDP growth of just 2.6 percent in the year ahead. Gains in emerging markets will likely be offset by a continued drag in the euro zone, Pitt explains. "Our base case still expects a Greek exit from the euro over the next 12 to 18 months, and sovereign debt restructuring—most likely via a mix of coupon reductions and maturity extension—for at least five European area sovereigns in the period 2013 to 2017," he says.
Economists at Deutsche predict output will increase 3.1 percent. "By and large, the emerging markets remain the global growth engine thanks to easy policy conditions and global liquidity," says Smith. "The developed economies remain subpar, especially in Europe. The pace of fiscal austerity may slow in 2013, which alongside potentially improving bank credit dynamics should get the euro area back into positive economic growth as the year unfolds."
BofA Merrill's operating assumption is: "The global economy grows 3.2 percent, with growth accelerating modestly from a fiscally compromised first quarter led by China and the U.S.," Browning says. "Zero-interest-rate policies remain in place across the Group of Seven, government bond returns in major markets range from –3 to 2 percent, and the dollar rallies to 1.20 versus the euro."
Researchers at Brazil's BTG Pactual, which ties for eighth place (with Sanford C. Bernstein & Co. and Credit Suisse) when firms are ranked by Most First-Place Positions, are even more upbeat.
"We think next year will surprise us by being better than analysts expect," declares Rodrigo Góes, São Paulo–based head of research, sales and trading. "The hard landing in China will not occur—actually, economic activity in China will be better than in 2012. Sure, the new growth plateau is not 10 to 12 percent, but rather 7 to 8 percent, but it will prove to be a stable plateau."
The U.S. is the market to watch, he adds. "The fiscal cliff political debate will be settled in a way that affects employment and growth only marginally. And, abstracting from political uncertainties, the underlying dynamics of the U.S. economy are quite good in relative terms," Góes says.
BTG Pactual is one of the few firms in expansion mode. In 2012 it acquired two brokerages, Chile's Celfin Capital and Colombia's Bolsa y Renta. Now, "we are in the process of opening a broker-dealer in Mexico, which should be fully operational by the first quarter," Góes adds. "In anticipation of this move, we put together a very strong Mexican research franchise, which we believe is already one of the best on the Street."
Jefferies & Co.—which climbs from No. 24 to share 20th place with ISI Group and Russia's Troika Dialog—is also beefing up operations. In November the firm agreed to merge with one of its largest shareholders, Leucadia National Corp., in an all-stock deal valued at $4.1 billion; the takeover is expected to be completed in the first quarter. "We are now part of a larger institution, with a much bigger balance sheet," notes director of equity research for the Americas Michael Eastwood, who joined the firm in September from Morgan Stanley, where he served as head of fixed-income and associate director of equity research. "This makes us a stronger competitor."
Jefferies has hired a dozen lead analysts in the past 18 months, bringing its total to 50, and "we are still hiring," Eastwood says. "We want to ensure that we continue to produce quality research, partner with key clients and make sure corporate access is focused on meeting with the right people."
Competitors cite similar goals as the world turns a page on the calendar but has yet to turn a corner on the financial crisis. If their forecasts are correct, investors will continue to clamor for all the assistance they can get. • •