According to Integrity Research’s latest annual forecast, research sales will drop 8.7% in 2018 from the prior year’s total — considerably less than the extremely bearish forecasts many industry analysts are expecting due to the research unbundling requirements of MiFID II.
Integrity’s 2018 Research Industry Outlook
As we mentioned above, we expect that research industry sales will fall 8.7% or $1.4 bln to $14.7 bln in 2018 from prior year levels due, in large part, to weakness in Europe brought on by MiFID II. We project that research payments in Europe will fall 17% as a large percentage of equity managers subject to MiFID II plan to pay for research from their own pockets. This fact will prompt asset managers to actively try to shrink their European research spending.
We project that research spending in North America will fall, albeit a less dramatic 7.7% as fewer asset managers in this region are subject to MiFID II and will be able to continue using client commissions to pay for their sell-side and independent research. Asian research sales are expected to rise $110 mln or 3.3% due to continued growth in the Asian markets.
Sell-Side Research Forecast
The team at Integrity Research projects that buy-side payments to investment banks for their research will fall $1.2 bln or 8.4% to $12.5 bln in 2018 when compared to 2017 driven by a 16.2% drop in Europe and a 7.8% decline in the U.S. MiFID II will clearly be the primary reason for the weakness we expect in Europe. However, not all sell-side firms are expected to be impacted equally.
A recent survey we conducted indicates that asset managers subject to MiFID II expect their research allocation to bulge bracket banks will drop most sharply, while they keep their allocations unchanged for mid-tier and regional banks, and actually increase their allocations to boutique banks. This shift is due to the duplicative research coverage provided by many bulge bracket firms, whereas many boutique firms provide specialized coverage in a limited number of sectors.
Independent Research Forecast
Our 2018 forecast for independent research firms reveals a 9.5% or $233 mln drop to $2.2 bln in revenues from the previous year. The bulk of this drop will be due to weakness in economic research. We project that spending on economic research will fall 18.2% as EU regulators have deemed that macro-economic research openly available to any asset manager wishing to use it could be seen as a minor non-monetary benefit and therefore not classed as an inducement. Consequently, we expect a number of sell-side firms will choose to give their macro-economic research product away for free creating an unlevel playing field for independent research firms.
We also expect that spending on fundamental research will drop 13.6% as EU asset managers view sell-side research and fundamentally oriented independent research to be competitive products. This factor that will put pressure on independent research as European asset managers put together their research budgets under MiFID II.
The one category of independent research we expect will hold up relatively well in 2018 is primary research. We project spending on primary research will fall a meager 0.5% in 2018 as asset managers value highly differentiated inputs to their research process including expert networks, channel checks, and formal survey research. Generally, asset managers cannot acquire these inputs from sell-side firms.
Consequently, we expect that 2018 global buy-side payments for various types of primary research will hit 34% of total spending on independent research, eclipsing the 30% share that is will be spent for IRP provided fundamental research for the first time.
While Integrity Research projects that the implementation of MiFID II will prompt buy-side spending on research to fall 8.7% in 2018, we do not expect it to plummet 30% to 50% as many analysts anticipate. Of course, we do forecast that European spending on sell-side and independent research will drop sharply – particularly as many EU asset managers have decided to pay for research out of their own pockets. However, we don’t expect that asset managers in North America or Asia will slash their research spending so precipitously, particularly as they will continue to be able to pay for research through the use of commissions.