MiFID II exacerbated the decline in analyst coverage of European stocks, based on our analysis of data supplied by Refinitiv I/B/E/S. Most of the 26% decrease in European coverage occurred once MiFID II was finalized. Analyst coverage has also been shrinking in the US, but at a slower pace. US small-cap coverage is falling slightly faster than large-cap coverage.
Our analysis is based on the number of estimates supplied by research providers to Refinitiv I/B/E/S, which collects company earnings forecasts and stock recommendations from 900 research providers across 100+ markets. Estimates supplied to I/B/E/S represent a proxy for the number of equity analysts active over time. Our analysis is based on weekly data supplied from 2008 to the present. Because some companies have fiscal years ending before calendar year-end, the number of current estimates tends to decline over the course of the year, so we have used the maximum value for each period analyzed. We used estimates for component companies in the MSCI Europe index as a benchmark for European stock coverage, the S&P 500 for US large-cap coverage and the Russell 2000 for US small-cap coverage.
Based on our analysis, coverage of European stocks has fallen 26% since 2011. Although coverage appeared to level off from 2013 to 2016, coverage resumed its fall as brokerage consolidations prompted by MiFID II generated a 15% decline from the first quarter of 2016 to the first quarter of 2020.
Unlike the S&P 500 and Russell 2000, the number of companies included in the MSCI Europe index has declined over time. However, most of that decline occurred in the wake of the 2008 crisis, with analyst estimates rebounding close to previous levels by 2011. Since 2009, the number of component companies have declined 7%.
Although less impacted by MiFID II, US coverage has also declined. Analyst estimates for companies in the S&P 500 peaked in the first quarter of 2014, and since then have fallen 12% to the first quarter of 2020.
The small-cap oriented Russell 2000 has also seen a decline in the number of estimates, falling 14% from the peak in the first quarter of 2015 to the first quarter of 2020.
Looking at the maximum number of estimates for each year since 2008, European coverage has been in decline since 2011. Coverage leveled off for three years from 2014 to 2016, only to resume with MiFID II’s advent. Over the nine-year period since 2011, European coverage has fallen at a compound annual rate of 14%. From 2011 to 2106, coverage fell 7% on a compound annual rate, then accelerating to an 8% decline after 2016.
US large-cap coverage, as represented by the S&P 500, has been easing since 2014 but at a 6% compound annual rate. Coverage for the stocks in the Russell 2000 has fallen 7% on a compound basis since 2015.
Although research payments have been declining for over a decade — a decline accelerated by MiFID II – the resulting impact on research coverage has been muted. European research payments are estimated to have fallen 30% as a result of MiFID II, yet the related decline in analyst estimates has been half that rate.
US commission payments attributable to research have shrunk over 50% since their 2009 peak according to estimates by Greenwich Associates, yet coverage of the S&P 500 continued to rise until 2014. Since 2014 US commission payments for research have fallen 42% while coverage has eased only 12%.
The disconnect reflects the fact that investment bank research coverage is funded not just by institutional investor trading, but also by investment banking and wealth management. As trading has become a more fickle support for research, the importance of banking has grown. ISI’s merger with Evercore and Redburn’s union with Rothschild exemplify the growing importance of investment banking as the sugar daddy for research.
Refinitiv I/B/E/S supplies Key Performance Indicators (KPIs) for 22,000 active companies in 90 countries sourced from over 18,000 analysts. Estimates are expressed via 260+ measures, including generic measures such as EPS and industry specific KPIs such as oil production per day. History goes back to 1976.