Equity markets reacted positively to Donald Trump’s surprise victory in the US presidential election, favoring financial stocks in anticipation of lightened regulatory burdens. Does Trump’s success signal a similarly favorable outlook for investment research?
US Investment Banks Benefit
Financial deregulation will be a priority for the new Trump administration, creating a very different regulatory environment for US investment banks than their European rivals. We have already seen widening divergence between the equity franchises of US-based investment banks and those of non-US banks struggling to improve capital ratios by rationalizing low margin cash equity businesses. We can expect this trend to continue as US banks benefit from a more benign regulatory environment. Morgan Stanley’s stock is up 19% since the election, while Goldman Sachs shares are up 20%.
The separation between investment banking and research imposed by the 2003 Global Research Analyst Settlement was already eased by the 2012 JOBS Act, which allowed analysts to participate in pitch meetings for Emerging Growth Companies. US banks may argue for additional rollback of the walls between investment banking and research as a rationale for improving IPO financing for a broader set of companies than the JOBS Act’s narrowly defined Emerging Growth companies.
Hedge funds, which have endured greater regulation under Dodd Frank, may also benefit from lightened regulatory scrutiny, helping research providers generally.
The SEC & MiFID II
The SEC has been tied up for six years implementing Dodd-Frank’s provisions. Now the commission will be tied up for the next four years unwinding Dodd-Frank. Insider trading will no longer be one of the top enforcement priorities as it has been for the last five years, as retail-oriented fraud cases become the main focus.
The odds of the SEC reforming soft dollar payments for research, already quite low, have become even more negligible. UK regulators had hoped that the SEC would clarify rules that are potentially punitive for US brokers accepting cash payments for research, but such hopes are fading. The disparities between MiFID II research unbundling provisions and US regulation, such as differing views on cross-subsidizing research costs, are likely to persist if not deepen.
Policy & Macro Research
The big winners from Trump’s election will be the policy research firms, which will be tasked with deciphering the new administration, which has so far articulated scant policy direction. The threat of greater regulation of policy research, which remains a grey area under insider trading regulation, has vanished.
Macro research firms and political risk firms may also benefit from the Trump election, especially if US policy actions become as volatile as some observers predict.
Market forces, not regulation, are the primary drivers altering the investment research landscape. As such, secular declines in research commissions from increased electronic trading, deleveraging and greater use of passively managed investment products will continue irrespective of which political party controls Washington.
Nevertheless, Trump’s election signals a decline in the peripatetic efforts to reform financial markets after the financial crisis, at least until the next crisis hits. Investment banks, particularly the large US-based brokers, will benefit, as may hedge funds. European regulatory efforts to reform research payments are in greater danger of regulatory arbitrage. Policy research firms will be the standout winners in the research field.