Citigroup analysts hosted a call with former Federal Reserve chair Janet Yellen in mid-March to discuss the fiscal response to Covid-19. The virtual call system was so flooded with client calls it ran out of space.
The same week, some 7,000 people dialled into a Citi call about real estate investment trusts. Berenberg said its 80 analysts in London produced 6,000 pages of research in the week after the UK’s coronavirus lockdown. Meanwhile, Morgan Stanley chief executive James Gorman said that his research teams generated 1.5 million interactions via reports, webcasts and conference calls related to the pandemic.
In a world of rising passive investment and shrinking budgets, research teams have struggled to justify their existence as some banks have cut to the bare bones in recent years. Market panic on an unprecedented scale caused by the Covid-19 crisis has finally presented a chance for them to shine.
“These are the moments you live for,” said Mike Mayo, a bank analyst at Wells Fargo who produced 20 reports on the coronavirus in the space of a week. “People are looking for greater clarity on a nerve-wracking and unprecedented situation. We haven’t seen this kind of demand for insight since the 2008 financial crisis.”
It’s a much-needed boost for bank research teams, especially those in Europe which have been decimated by years of job cuts, sweeping regulation and shrinking trading floors. Since the second iteration of the Markets in Financial Instruments Directive in January 2018, which required firms to charge directly for research instead of bundling it in with other trading costs, banks have been forced to overhaul their teams. There are now just 900 equity research jobs in the top 12 investment banks in Europe as banks have wielded the axe, according to data provider Coalition — a reduction of 25% since 2018.
Banks have invested in senior, well-ranked analysts at the expense of mid-ranking staff.
“Clients are feeling more blind than normal in an extraordinarily difficult market, and the sell-side is filling the void with virtual events, conference calls and an increase in written research,” said Rob Garlick, head of research for Europe, the Middle East and Africa at Citi.
He added that client interactions at Citi are up by 9% on the same period last year, while one on one meetings with analysts are up by 47%.
Laura Jensson, head of equity research at Berenberg, said its approach was “shock and awe” to adjust their company valuations and write as much detailed research as possible to tap into what they perceived as increased demand.
Berenberg brought in some senior hires: former JPMorgan insurance analyst, Michael Hunter, and heads of pharmaceutical research, Luisa Hector and Kerry Holford from Exane, joined in recent weeks.
“Right now, fund managers are all sat at home working remotely and are even more engaged with sell-side analysts than normal. They want it to be quality research, and there’s huge demand,” said David Mortlock, head of investment banking at Berenberg.
Another head of European research at a UK bank, which is also still recruiting, said the coronavirus is yet another catalyst for change within banks’ European research teams. “Yes, demand is high, and this is an opportunity, but it’s also a chance for us to show what we can do and gain market share.”
This Darwinian approach is how most big research houses are approaching the current crisis. The increased demand for research is coupled with a potential reduction in the overall revenue pool, and now is the time to step up.
“The caveat to all this is that coronavirus has created some headwinds for asset managers, and thus suppliers, which will add pressure to revenues,” said Garlick. “Clients are under pressure and short-term deal flow has ground to a halt – it remains a tough environment.”
In the UK alone, funds posted outflows of £3.1bn in March, according to data from Calastone, and more pain is expected in the sector as the full impact of Covid-19 is felt.
“There may be a temporary blip in demand, but this is not a sudden reversal of fortunes for sell-side research,” said Benjamin Quinlan, CEO of strategy consulting firm Quinlan Associates.
“Fund managers will undoubtedly scale back their research expenditure,” said the head of research at a large investment bank. “Everyone’s looking at the mid-year client review, when they’ll make some difficult decisions on who they will pay and who they won’t. Now is the time to make an impression.”
“It remains incredibly competitive, and this is the chance to get in front of clients like never before,” added another head of research.
Covid-19 has stirred up competitive spirits in the research sector in ways not seen since the outset of Mifid II when brokers slashed the costs of written research and trading commissions in a bid to gain market share from smaller rivals. More than two years on, the fallout has yet to be fully felt and many predict that the crisis will consolidate the sector even more.
The current crisis could see some of the stronger players emerge victorious, said Quinlan.
“There will continue to be a big demand for thematic, big-picture research over individual stock coverage”, he said. “The sell-side more than ever needs to offer value, this means big ideas that can really help buy-side clients rather than just meditating on a single quarter”.
To contact the author of this story with feedback or news, email Paul Clarke