When it comes to high quality sell-side research in the developing markets of Eastern Europe, the Middle East, and South Africa, the buy-side is spoiled for choice — at least according to Institutional Investor’s annual ranking of firms.
BofA Securities, HBSC, and J.P. Morgan Chase captured a three-way tie for first place in II’s 2023 Emerging EMEA Research Team ranking. More than 930 investment professionals across 486 institutions with significant emerging EMEA securities holdings elevated BofA from 2022’s third place finish to join last year’s winners HSBC and J.P. Morgan.
Each winning firm captured 17 total team positions, and HSBC once again had the most first team positions with eight. Morgan Stanley and Citi both improved one spot to place fourth and fifth, respectively.
Raj Sinha, head of EEMEA Equity Research for HSBC, reported another challenging year for emerging market equities due to U.S. inflation and unresolved Chinese growth issues, but also said that there are signs for optimism.
“We see a lot to be enthusiastic about in the EMEA region — between turnaround stories, new technologies, and exciting opportunities that are underpinned by some of the region’s demographics and ambitions for future city development,” he added.
While markets and sectors sensitive to Chinese growth have generally underperformed, the South African equity market, as a whole, and the Saudi Arabian materials sector stand out. “Markets where inflation is falling sharply, like CE3, have performed well,” he added. “Equally markets with a good structural growth story have also outperformed; this includes Greek equities and domestic Saudi Arabia. Anemic oil prices and a weaker USD have weighed on GCC markets more broadly. Turkish equities were impeded by USD weakness through H1; however, since then, the appointment of a new economics team and the return to a more orthodox macro policy have led to a sharp equity turnaround.”
Since the start of the Russia-Ukraine war, which is approaching the 18-month mark, the overall landscape of Emerging EMEA has changed and the opportunity set for investors has shifted, according to providers in the region.
Sophie Warrick, head of EMEA equity research and co-head of Global ESG Research at J.P. Morgan, noted that there has been “a continued shift towards the Middle East and North Africa (MENA) and the Kingdom of Saudi Arabia at the center of Emerging EMEA, both on the secondary side in categories like index weights and trading volumes as well as in primary markets.” The Gulf Cooperation Council is now about 60 percent of Emerging EMEA by index weight, she added. Saudi Arabia is now the sixth biggest market in the Emerging Market index, not far behind Brazil.
Additionally, geopolitical factors continue to be front of mind for many of J.P. Morgan’s clients but Warrick credited the firm’s on-the-ground presence for its success. “From a sell-side research perspective our role is always to help our clients assess risk reward and identify the best ideas within their investable universe,” Warrick said. “We have a local presence in all key markets of Emerging EMEA, hence were able to fully address client demand that has shifted towards MENA and South Africa.”
Eric Lopez, head of EMEA equity research at BofA Securities, reported that the ongoing Russia-Ukraine conflict has changed the economic outlook for European economies, which has an impact for earnings forecasts. “Some sectors have been more impacted than others, but overall, the growth outlook is lower than it was 18 months ago. This has had a negative impact on our growth expectations for European companies,” he said. “Within EEMEA, we have stopped covering Russian equities and have transferred our team to Dubai, where we have increased our stock coverage. We see an ongoing focus on the MENA region, initially because of high energy prices and latterly due to ongoing reforms and new investment.”
But on the whole Lopez reported little change or turnover to BofA’s team: “The aim is consistency and continual improvement,” he said. The firm also placed first in the All-Europe Research Team survey.
According to HSBC’s Sinha, the shift toward MENA is also intersecting with the increasing attention toward ESG metrics and risks, as the region gears up to again host the 2023 United Nations Climate Change Conference (COP28). “With COP28 being hosted in the UAE this year—and COP27 in Egypt last year — there has been greater demand to learn more about how companies compare to their peers and potential opportunities or issues on the horizon,” he said.
The UAE has become more of a regional hub for HSBC, as it continues to grow and develop its team based in Dubai, expanding coverage from the region to include U.S. and LatAm companies as well as an increased focus on ESG research. “As we largely expand our U.S. equity research platform, we plan to use this buildout to further link up our global coverage and promote even greater collaboration across teams,” he added.
J.P. Morgan’s Warrick observed that physical marketing has continued to increase in 2023 with more client trips to emerging EMEA regions as well as analyst marketing. “The space between physical meetings has also been filled with more client engagement than last year, and significantly more than pre COVID,” she added.
From a content perspective, investors are still working hard on getting up to speed following the shift in focus in Emerging Europe to MENA, she added, as well as to understand the macro stories; getting to know the companies bottom-up; and traveling to the region in some cases for the first time. “Our primer on the region which we updated this year has been one of our most read pieces in Emerging Europe,” Warrick said.
Investors are focused on the impact of the China slowdown on the CEEMEA markets and economies plus how these changes may impact emerging markets as an asset class as well as key commodities. “These kind of questions for clients are where our completeness and scale as a research franchise allow us to add real value to our clients—we work across sectors and asset classes, while paying equal attention to detailed bottom-up work for implementation,” she said.
HSBC’s Sinha has also noted the uptick in face-to-face meetings and agreed that the research industry is better for it: “Over the past year, there has been a clear demand for more in-person meetings and trips. Clients have been asking to meet with analysts and companies in-person, restoring some of the same value for local color from pre-COVID,” he said. “We think that virtual meetings, access, and events have a very important place in our business, but we think it’s crucial for our relationships to also be meeting in person.”
