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European Equity Research Has Changed — ‘And That’s a Good Thing’

The sell-side was disrupted first by MiFID II, then by Covid-19. Ability to adapt defines the firms at the top of II’s All-Europe Research Team and U.K. Small & Mid-cap Research Team.

More than a year and half since the Covid-19 pandemic plunged Europe into lockdown and ushered the equity research industry into a virtual environment, there are some changes on the near horizon. 

The region’s vaccine effort — sluggish at first — has now reached 70 percent of adults in Europe, according to European Union officials, and the end of the summer signals a return to the office for many employees, despite the looming Delta variant. 

This shift is poised to recalibrate the industry and its relationships once again — and finding the right balance for both research teams and their institutional investor clients will be key. 

“It’s obviously true we’ve been sitting at one extreme for most of the last 18 months,” said Theepan Jothilingam, head of research at Exane BNP Paribas. “But the new normal in terms of how we interact with our clients won’t be exactly the same as it was prior to March 2020. And that’s probably a good thing.” 

For those last 18 months, nearly all interactions between analysts and clients happened remotely, and the current crisis has forced research teams to dramatically accelerate the way they embraced communication technologies. But the core mission has not faltered, according to Jothilingam.

“Everyone in the industry is working with lots of intensity,” he said. “But pre- and post-Covid, what we are trying to do — the purpose of our research — hasn’t actually changed. Nor has the content. What has changed, arguably, is how we deliver that content, and how we deliver that service to clients.”

Still, Jothilingam reported an intense appetite from analysts, clients, and corporates for face-to-face meetings “whenever or wherever it’s safe to do so.”

“If you look at the situation with clients, they face all of their normal challenges,” said Nick Webb, COO at Exane BNP Paribas. “They’ve got to protect their clients’ money and deliver performance, but they’ve got lots of extra obligations that have grown exponentially in recent years, in terms of monitoring sustainability of these investments. And they now have to layer on top of that, all these operational challenges that come from Covid and I think that’s a difficult challenge for them.”

Addressing that challenge remains at the forefront of Jothilingam’s mind. “We’re going to have to work with our people and our clients to find the right balance, to find a way that works without sacrificing quality of service.”

It also illuminates why Exane BNP Paribas is once again the No. 1 provider in Institutional Investor’s 2020 All-Europe Research Team.

Topping the survey “suggests that we’ve done a good job at adapting to provide the kinds of service that [clients] need,” said Webb. “What we’re trying to do is help them get access to information to help in their investment decisions, and get them access to liquidity for them to be able to make those investments efficiently and safely, of course.”

UBS, which shared the crown last year, placed third in this year’s ranking, the second since II’s All-Europe Research Team merged with the Extel survey. Meanwhile BofA Securities rocketed from fifth place to second place, missing tying for first by only the narrowest of margins: Only one team position separated BofA Securities (32) from Exane BNP Paribas (33).

JPMorgan Chase & Co. and Morgan Stanley placed fourth and fifth, respectively.

Eric Lopez, managing director of BofA Merrill Lynch Global Research, credited his firm’s success to adaptability both during the pandemic and looking forward. “The number one thing is, let’s not try to impose our model on our clients. Let’s listen to what they want,” he said. “The question is what will this look like in six months? I will be in front of the buy-side whether it is via WebEx, phone, or in person, and there is a good chance it will be different in another six to 12 months.” 

According to Lopez, BofA Securities continued to recruit and retain talent throughout the pandemic. “It starts with outstanding research analysts,” he said. The firm reported historically low turnover among senior level analysts, though for junior level retention it has, like for much of the industry, “been a tough 18 months.” 

With plans to return a majority of his team to the office in the second week of September, Lopez believes “coming back, we can recreate that team spirit and belonging to something bigger: the team, the department and the firm.”

Even in a work-from-home environment, Lopez said the duration of client calls had gone up 40 percent due to Covid-19. “The average call is very long,” he said.

The changes wrought by the pandemic came as the industry was still reverberating from second Markets in Financial Instruments Directive, or MiFID II. The 2018 European rule required brokers to unbundle research from execution and trading and has been blamed for a decline in sell-side research coverage in the region. 

“MiFID has been maturing while Covid was appearing, and the world we are in today is a mix of both shocks to the industry,” Lopez said.

At Exane BNP Paribas, Jothilingam believes firms will differentiate themselves in this environment through strong talent. “Ultimately it’s the strength of the bench and how they deliver their content,” he said. “I think it’s important to give it context particularly when you’ve seen a European research industry that continues to disinvest and juniorize.”

In addition to the All-Europe Research Team, which covered all of developed Europe, II also ranked the top purveyors of insights on small- and mid-cap stocks trading in the United Kingdom.

Peel Hunt was once again voted the No. 1 provider in 2021 U.K. Small & Mid-cap Research Team. This is the second year the survey has been published under the II brand following the acquisition of Extel in 2018. 

The specialist U.K. investment bank placed first, followed by Investec in second and Numis Securities in third, in a year where developed European markets bounced back thanks to a huge amount of liquidity from central banks.

“[The markets] have performed astonishingly well,” said Jothilingam. “They’ve recovered very strongly since March and the initial crash. That said, from our perspective, if you dig a little bit deeper, there is a little bit of underlying uncertainty.”

Inflation is now a concern, along with the central bank response in 2022 and beyond, according to Jothilingam. From a geopolitical perspective, all eyes will be on Europe during the German and French elections this year and next year.  

 “There will be external shocks,” he concluded. “And they’re not really far away. [The sell-side] can’t get complacent, and can’t get comfortable with whatever trends are in the market today. The way we can react, that’s going to be always a key to our industry to providing quality content.”

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