What goes down must come up: That’s the advice many analysts and brokerages were offering investors as European equity markets tumbled in the final months of 2008 and the opening weeks of 2009, hoping to convince clients that the rout presented a buying opportunity. Relatively few investors took heed, however, preferring to pull their money out of stocks and seek safe havens elsewhere.
“Investors entered the year with real concerns that there could be a 1930s-like Depression,” explains Nicholas Pink, London-based director of European equity research at UBS. “Sentiment was negative, and there were serious concerns about the security of the banking system in the West.”
[To read analysts’ profiles, go to the index page: Best European Analysts of the Year: 2010 All-Europe Research Team.]
[Click here to view the rankings for the 2010 All-Europe Research Team.]
That sentiment began to shift in early March, after the Bank of England and the European Central Bank simultaneously slashed their benchmark interest rates to their lowest levels then on record, flooding local economies with cash in an attempt to jump-start an economic resurgence. Equity markets took notice: The MSCI Europe index, which had fallen 21.7 percent year to date through March 9, began to rise — and it kept going, ending the year up a whopping 57.6 percent above its low.
“The move was the catalyst for a phenomenal rally in equity prices, as the market moved from discounting a possible Depression to discounting a normal cyclical recovery and earnings,” says Pink.
The rebound in European equity markets seemed to come as swiftly and suddenly as their collapse, spurring a demand for research as investors sought to discover if the rally was sustainable and which sectors and industries offered the greatest potential for profit.
Money managers say no firm did a better job of keeping them informed in a year of market extremes than UBS, which for a ninth year running leads the All-Europe Research Team, Institutional Investor’s 25th annual ranking of the region’s most highly regarded equity analysts. The Swiss bank captures 28 total team positions, six more than the three firms that tie for second place: Credit Suisse, which jumps from fifth place last year; J.P. Morgan, which rises from fourth; and Nomura International, which catapults from eighth place.
Rounding out the top five is BofA Merrill Lynch Global Research, with 21 team positions; the firm was ranked second last year. Results are based on responses from more than 1,100 portfolio managers and investment officers at some 500 institutions managing an estimated $5.4 trillion in European equities.
Fifteen of the analysts who lead or co-lead top-ranked teams in this year’s survey are enjoying their first visit to the winner’s circle. Profiles of the teams ranked first, second or third in each of this year’s 44 sectors can be found on the index page of the Best European Analysts of the Year: 2010 All-Europe Research Team.
The speed of the recovery in Europe’s stock markets sent some big global banks scrambling to expand coverage and add analyst positions that were eliminated only months earlier in an effort to bolster bottom lines battered by credit-related losses. Chris Carpmael, Credit Suisse’s London-based co-head of cash equities (excluding trading) and former director of European equity research, says the firm cut its number of European equity researchers early in the year by about 3 percent, but then he hired back the same amount and ended 2009 with roughly 130 analysts tracking about 700 stocks. The firm plans to expand coverage by 5 to 10 percent this year, he adds.
Pink describes a similar situation at UBS. “The extreme business conditions in the first quarter demanded that we make tough decisions, but we’ve been steadily hiring since July and will continue to hire throughout 2010,” he says. The firm reduced its analyst head count from 99 to 95 at the start of 2009 and reined in coverage by about 4 percent, from 816 companies to 784.
Nomura found itself facing quite a different challenge, according to Paul Norris, head of European equity research. The Japanese bank acquired the Asian and European operations of Lehman Brothers Holdings in the fall of 2008 and sought to integrate operations as quickly as possible. “It was a major IT project to link the former Lehman front-office system to the Nomura back office,” he says, noting that the firm relaunched its European trading platform in mid-January 2009. Some analysts were let go, owing to overlap, while others were hired so the firm could expand its coverage of Business & Employment Services, Capital Goods, Leisure & Hotels, Oil & Gas, Pharmaceuticals and Transport.
“We were one of only a handful of firms hiring leading analysts in the first half of 2009,” says Norris, who is based in London. The firm brought in 20 senior researchers, for a total of 125 analysts covering 470 companies. “We will continue to look for star hires and add strength and depth to the research teams in 2010,” he adds.
Sanford C. Bernstein, which rises one rung to No. 9 and doubles its number of team positions, from five to ten, is another firm that found opportunities in the crisis. “We were all under pressure, but we did not cut staff or lay off any analysts,” says Robert van Brugge, London-based global head of research. In fact, Bernstein increased its number of publishing analysts from 15 to 20, adding researchers in Aerospace & Defense, Capital Goods, Health Care, Insurance and Oil & Gas, and doubled its market share in Europe, van Brugge says. The firm recently hired analysts in Building & Construction and Chemicals; they will begin publishing research later this year, he adds.
Rising demand for research and booming equity markets do not mean that life has returned to normal. “European equity commissions for the sell-side market as a whole have been down fairly dramatically in U.S. dollar terms, because there has been less trading,” van Brugge explains. “Since commissions are tied to share value, as the shares are worth less, the commission revenues are lower.”
Pink, of UBS, concurs. “The cumulative fall in clients’ assets since mid-2008 had a knock-on impact on our clients’ first-quarter commissions, and therefore our business,” he says.
As commissions have fallen, competition has risen. Some investors say that the crisis has prompted them to solicit research from a greater number of sources. Eric Melloul, a buy-side European utilities analyst with New York–based money management firm TIAA-CREF, says he sought out a wide variety of sell-side research last year to find opinions that might counter his own. “It was interesting to see how analysts with nonconsensus views interpreted news flow or short-term market moves,” he says. “My commissions for the utility sector have become more fragmented as a result of the distribution to a larger number of the brokers.”
Competition is sure to intensify as Europe’s equity markets surge, but top-tier analysts like the members of the 2010 All-Europe Research Team will always have an audience eager for the information, insight and guidance they provide — especially after a tumultuous year like the one that just ended.
“It’s been a roller-coaster year, but we are pleased that we added a lot of value to our clients,” says Pink.
To read analysts’ profiles, go to the index page: Best European Analysts of the Year: 2010 All-Europe Research Team.
Click here to access the complete rankings of the 2010 All-Europe Research Team
