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Two years of strong gains in Asia ex-Japan -- share prices rose 14 percent on average in dollar terms last year after 40 percent average gains in 2003 -- are luring capital to a fast-growing India, a rejuvenated Indonesia and a still-booming China. About $300 billion to $350 billion of institutional “hot money” has flowed into Asian markets in the past two years, two thirds of it into China, estimates Raymond Foo, regional strategist at BNP Paribas Peregrine in Hong Kong.
The markets’ vigor is good news for all firms, but none more so than UBS, which retains its No. 1 position in this year’s Institutional Investor All-Asia Research Team, taking 16 of 29 first-team slots. UBS, like CLSA Asia-Pacific Markets, which repeats in second place, and Deutsche Bank, up to third from fifth, continues to expand its research efforts in the region. “Strong markets translate into strong revenue growth for Asia research,” sums up Nicholas Pink, Hong Kong–based head of Asia research at UBS.
These market leaders are not alone in their buildups. Just in time for last year’s 13 percent gain in the Bombay Stock Exchange 30-stock index, J.P. Morgan Securities -- tied for fourth place with Credit Suisse First Boston -- fashioned a new 15-member research team in India. Sixth-place Goldman Sachs (Asia) has expanded its analyst head count from 34 to 49 in China, Hong Kong and Taiwan. Seventh-ranked Smith Barney Citigroup, which plans to increase coverage from 415 stocks in Asia ex-Japan to 460 by year-end, added to its Indian team as well as to research staff covering Malaysia and Thailand. “You have to have people and offices on the ground across the region -- running teams from here just won’t work,” says Otto Wong, who headed the firm’s Hong Kong–based Asian research effort until he retired last month. His replacement is Adrian Faure, who was with Macquarie Securities Asia.
China, with its seemingly inexhaustible economy -- up 9.5 percent in 2004 and expected to grow a further 8.4 percent this year -- continues to draw much of the attention. Citigroup is adding staff in Shanghai to serve local clients, and moving to bigger offices in the city. “We’re talking to a lot of domestic fund managers in Shanghai, which explains partly why we need people on the ground,” says Wong.
To meet demand for China insights, ninth-place Merrill Lynch is recruiting foreign-educated expatriates to return home. Wendy Liu, formerly a U.S.-based telecommunications analyst, moved to Hong Kong last year to cover cellular stocks, and Australian-trained actuary Bob Leung is transferring to Hong Kong to cover China insurance stocks. Sell-side firms also are recruiting experts from outside the securities industry. UBS’s Pink says that analysts his firm hired last year from a Chinese bank and a pharmaceuticals company had the requisite “research skills and understanding of the local culture.” J.P. Morgan, which opened a Shanghai office last spring, brought in Chinese analysts from the industries -- telecommunications and oil -- they now cover. “They complement very nicely the market expertise we have in-house,” says J.P. Morgan Asia research chief José Linares, who notes that a dearth of research talent is affecting other Asian markets. “The firms that didn’t have a big presence in markets like Indonesia and Thailand are realizing that’s a mistake and are trying to build up there, but there’s only a limited supply of talent.”
In Indonesia, where years of political and economic instability kept investors away, the Jakarta Stock Exchange composite index posted a 45 percent gain last year, on top of a 63 percent rise in 2003. Indonesian officials expect post-tsunami reconstruction efforts to more than offset the disaster’s negative economic consequences. To meet the revived demand for market knowledge, CSFB opened new research operations in Jakarta in 2004, as did Deutsche Bank, which also announced it was resuming equity trading in Jakarta after a six-year break. Citigroup, which says it covers about 40 percent of the Indonesian market from outside the country, is looking to supplement that coverage locally. More restrained is Paul Bernard, Goldman’s co-director of pan-Asian research in Hong Kong. He believes that many firms anxious to hire in Indonesia are “chasing past performance,” so he is taking his time stepping up Goldman’s Indonesian operations.
In addition to finding talented analysts, managing growth in Asian research requires firms to create appropriate team structures. Not everyone agrees on what those should be, however. UBS, for example, runs its Asia team separately from both its Japan and its Australia coverage. Merrill and J.P. Morgan include Japan and Australia in their Asia research platforms. As J.P. Morgan’s Linares explains, “You can’t look at autos without looking at Japan and China, and you can’t look at commodities without looking at Australia.”
Then there’s the question of whether equity and fixed-income research should be united or kept separate. In the past year, Deutsche Bank and J.P. Morgan have each merged their teams worldwide. Given the small size of the Asian bond market, J.P. Morgan’s Linares says the transition was “fairly seamless.” But Wong, late of Citigroup, says that if uniting teams is “done just for cost saving, it’s not going to work.” Edmund Bradley, head of equities research at CLSA, questions firms’ ability to manage joint fixed-income and equities research: “It’s very difficult to ride two horses at the same time.”
Fortunately for the sell side, investors currently are upbeat about the overall quality of research in Asia. Of the buy-side portfolio managers and analysts who participated in the II survey, more than 90 percent who answered the question about the quality of research were either somewhat or very satisfied, while 31 percent thought the quality of research had improved over the past year, compared with 11 percent who thought it had deteriorated.
Several analysts have made great strides. Of the ten new top-ranked analyst teams, six are from UBS. In three sectors -- Banks & Other Financials, Metals & Mining and Power -- UBS’s team advances; the firm claims the top spot in the new Autos & Auto Parts sector; and its analysts in the India sector, Sandeep Bhatia and team, and in Technology/IT Services & Software, led by Trideep Bhattacharya, are voted the best overall by investors after being unranked in the 2004 survey.
Similarly unranked a year ago, Macquarie Securities (Australia)'s John O’Connell and team soar to first place for Australia/New Zealand, thanks to several excellent calls, including upgrading Australian financial services company AMP to a strong buy in February 2004. By year-end the price had risen 52 percent, to A$6.85 ($5.34), approximately where it was trading in mid-April 2005. O’Connell’s team also upgraded Alinta, an Australian utility, to outperform in April 2004. Through mid-November, when the team downgraded the stock to neutral, it rose 35 percent, a big move in the utilities sector. In mid-April, Alinta shares were trading at 18 percent above their December low point. Macquarie Bank acquired the Asian equity business, including research, of ING Financial Markets in March 2004.
Investors may be happy, but analyst compensation remains under pressure, particularly below the top tier. CLSA’s Bradley reckons that compensation levels for analysts have fallen 15 to 20 percent over the past two years. “Even for the top-ranked analysts in the top sectors, who are paid as well as they ever were, the rate of increase has tapered off,” he says. “The danger is that there could be a hollowing out of the middle and lower ranks.”
Another worry is that the strong interest in Asia will suddenly chill. Bradley, who has 90 analysts covering 1,000 stocks regionwide, worries that Southeast Asia could suffer as Japan and China heat up. BNP Paribas’s Foo says the hundreds of billions of dollars that recently have flowed into Asia are far greater than the inflows that precipitated the Southeast Asian crisis a decade ago. “Too much money coming into a country is never good,” he says. “The bigger question is, Will the institutional hot money exit, and if that happens, how disruptive will it be?”
The ranking was compiled by II under the direction of Director of Research Operations Group Sathya Rajavelu, Assistant Managing Editor for Research Lewis Knox, Senior Editor Jane B. Kenney and Research Editor Evan Cooper, with Associate Editor Donovan Hervig and Researcher Opoku Danquah.
