The following perspective on Asian equity research is from Russell Kopp, Managing Director of Whitney Correlate, a Hong Kong-based executive recruiter.
The world of Asian equity research has evolved dramatically since I was a Thai country analyst in the early 1990’s. Over the past twenty-odd years, we saw the demise of the independent British brokers who were trailblazers into Asia’s emerging markets, and saw dramatic growth during the period from the 1987 crash to the Asian Financial Crisis in 1998. The mid-late ‘90’s also saw the demise of the British brokers and the ascendancy of the global bulge brackets.
Since then, and despite ‘bird flu’, SARS and the global financial crisis (GFC), the business has only seen marginal change. While the LEH-NOM merger led to a short-lived spike in their rankings and the consolidation of two decent platforms, the most notable post-GFC development was the launch of several new platforms. Barclays, Bernstein, Jefferies and Standard Chartered all launched equity operations in ~2010 and other than STAN’s ill-fated foray, the rest are all relatively credible platforms today.
Withdrawal of the mid-tier firms
However, there are two other changes to the landscape that have been fairly notable post-GFC. One is the long litany of largely second tier firms which have withdrawn, and the other is the slow, but inexorable, rise of the Chinese firms.
Of the firms that departed, barring RBS, most were not long-established, nor truly regional. While RBS and STAN had scale, the majority of these firms operated as relatively small platforms with few ever having more than a dozen analysts, x-Samsung. The ‘fatal flaw’ for many was also the ‘land grab’ made by a rush of players trying to build scale in Asia in a post-GFC world, which lead to unsustainable compensation packages to lure staff, followed by a tough couple years in revenue production.
Additionally, in a region where pricing was under pressure, most operated solely in the ‘cash’ business, or at best a ‘cash + ECM’ model, which very quickly became a very crowded trade. While a few small ‘niche’ platforms from that period survive today, cash equities (and hence research) is still largely dominated by the dozen or so major players who have been in place for years.
Rise of the Chinese brokers
In contrast, the PRC brokers have largely hung in there, primarily due to the ‘staying power’ of their parent organizations. These firms are almost exclusively cash, corporate access and ECM machines, with no tolerance whatsoever for ‘risk’.
A handful are offshoots of the major PRC banks, and for these, they also lack the benefit of a large onshore broking business, offset by strong corporate access and ‘relationships’ which come from their lending books and their nature as state-owned enterprises. The brokers, within the scheme of being ‘China focused’ also have a fairly narrow product offering.
CICC and Citic Securities are exceptions, which by dint of history, size and scale have made many institutional inroads, and have actually built distribution into the US and Europe. Citic expanded internationally with the acquisition of CLSA in 2011.
The remainder of the Chinese banks are largely HK-focused, have no other real international presence, and are more ‘me too’ than dynamically driven – at least in serving ‘international’ institutions. That said, China Renaissance, a high quality boutique focused on technology, and Haitong International, which purchased Japaninvest this past April and took over Espirito Santo Securities at the end of last year, have truly differentiated their strategies from their peers.
Chinese brokers which have made a foray into Hong Kong, post-GFC
ABCI BOCI BoCom CCBI
ICBCI China Renaissance China Sec Int’l CICC
Everbright Galaxy Merchant Secs Guosen
Guangfa Guotai Junan Haitong/Jap Inv KGI
Minsheng Ping An Shenyin Wanguo Yuanta
We also include two Taiwanese brokers, who are longer-standing in terms of their presence in Hong Kong, and marginally, in their business models and client focus.
The PRC brokers have matured in some ways, in that many made the initial foray into Hong Kong, by hiring in staff post-GFC on big guarantees, but then watched them leave within two years as the bureaucracy caught up with them. This has resulted in a slower and more methodical pace of growth for many of these firms in recent years. But their dominant focus on cash equities is still likely to lead to continuing pricing pressure over the longer term.
Independents remain sparse
Asia’s landscape for independent research providers remains relatively thin. Only a handful of these firms have been consistently viable over longer periods, and most of those have an inverse correlation to size. It is also no surprise to me that the handful that have survived have largely been former regional strategists/ economists, none of which have really sustainably grown a broader platform.
What is a surprise, is that aside from some of the ‘macro’ guys, there has been no real scalable platform that we have noted in recent years, except for Japaninvest, which originally sold a minority stake to Société Générale, but ultimately sold itself to Haitong Securities.
From afar, and for the novice, one may ask why a region as big as Asia, with markets which have grown inexorably over the past two decades, still has no significant pool of independent equity research providers? Part of this is scale, partly it is distance, and partly it is the simple fact that Asia remains an incredibly diverse region. There are more than a dozen markets spread across time zones from Auckland to Karachi (7 zones) and Tokyo to Sydney (4,872 miles) (LHR-Seattle is 4,791 miles).
Asia is also home to highly developed markets like Japan and Australia and rapidly emerging markets like the Philippines and Indonesia. In addition, within the region lie six of the ten most populous countries in the world (China, India, Indonesia, Pakistan, Bangladesh and Japan) – while only 5 of the world’s largest companies by market cap reside here (4 PRC SOEs and Toyota). In addition, given the plethora of local brokers, from Australia to Bangkok to China, the number of coverage analysts per company is very high – and on a liquid market cap basis makes no sense economically.
Asia Then and Now
The Asia I knew a generation ago was still made up of one dominant market (Japan), two large but inaccessible markets (China and India). and the Asian Tigers (Korea, Taiwan, Thailand, Malaysia and Singapore) which were growing at 8-10% per year.
The Asia that exists today, is not quite post-growth, but is decidedly different. Over this time, China has largely displaced Japan as the economic powerhouse in the region, many countries have posted impressive growth, and many markets have ‘emerged’ – but they remain disparate, rather than cohesive and integrated. From the perspective of equity research, Asian markets often have more differences than similarities.
Over the past 25 years, Asia’s population of CFA’s has grown from ~100 to ~18,000+, and the population of sellside research analysts has grown dramatically as well. While the traditional path out of sellside equity research continues to be into the buyside, corporates and IB – the path to becoming an IRP in Asia has not been rewarding, and given current economics, this is not likely to change in the near term.