The long arm of Europe’s revised Markets in Financial Instruments Directive (MiFID II) is knocking on Asia’s door.
The European directive, which unbundled research from execution in January, currently only affects international asset managers, but the reverberations for the sell side and their clients are being felt in the region, according to members of Institutional Investor’s 2018 All-Asia Research Team.
“We suspect it will take some time for the industry to fully digest the implications of the implementation of MiFID II, but there is little doubt that it will be transformational,” said Damien Horth, head of Asia Pacific research at UBS. Couple MiFID II with the rapid pace of technological and structural change in the global asset management industry — from the growth of passive investing to the take-up of artificial intelligence and data science — and “this is one of the most challenging periods” for a region also navigating geopolitical and trade tensions, economic reforms in China, and potential U.S. rate increases, Horth said.
Adapting business models to meet these changing client needs was a common refrain from this year’s providers. “Despite the uncertainties related to MiFID II, Morgan Stanley remains committed to its research product,” said William Greene, head of Asia research at Morgan Stanley.
For the fourth consecutive year, Morgan Stanley earned the No. 1 spot in II’s survey of Asia-focused research teams, ranking first in sectors such as autos, banks, basic materials, industrials, and telecommunications as well as a handful of country and macroeconomic categories. UBS came in a close second, with 33 total team positions to Morgan Stanley’s 34. The results were based on about 4,700 responses from investment professionals at nearly 1,400 institutions managing about $1.9 trillion in Asian equities, excluding Japan.
For UBS, the sea change Horth outlined is not without upside. “Disruption also brings a plethora of opportunities,” he said. “We have aggressively moved to change our product approach while reinforcing aspects of our heritage that drive value for clients.” This included adding China-based team members to the firm’s Evidence Lab, which gives analysts access to tools such as quantitative market research, geospatial analysis, and data science.
Citi rose one spot to capture third place in the team rankings, but in the survey’s debut of individual-based rankings — where votes for analysts at the same firm are not combined — Citi surged to first place with 43 total positions. In this ranking, Morgan Stanley placed second with 35 positions, and UBS tied for third with Bank of America Merrill Lynch.
Brent Robinson, head of Pan-Asia research at Citi, said he believes individual analysts will continue to be a key differentiator in a post-MiFID II world. “Asset managers are already relying on fewer sell-side firms for their research,” he said. “Clients are saying that they are keen to access the top analyst with whom they can have an insightful dialogue.”
Last year “surprised Asian investors,” Robinson added, as the region posted its second consecutive year of positive market returns, outperforming the large and mid-cap index MSCI World. The index-provider announced in mid-May that more than 200 China A shares will be added to its indices in June and September, opening the door to a surge of foreign investment into the world’s second largest economy.
“We are methodically building out our China coverage in line with the new revenue opportunities as the government liberalizes markets on the mainland,” Robinson said. Citi analyst Kam Keung (Oscar) Choi led a team to the top spot for Chinese research after last year’s second place finish.
Credit Suisse, which ranked fifth in both divisions of the survey, added 11 equity analysts in 2017 to strengthen its China equity research platform, according to the firm’s head of Asia Pacific research, Ernest Fong.
Along with China, Hong Kong and Korea were standouts, spurred by the technology sector, according to Vikram Sahu, Asia Pacific research head at Bank of America Merrill Lynch. Sahu predicted that “the protracted nature of China-US trade tensions may continue to bring volatility to the markets,” especially surrounding the Asia Pacific technology supply chain. “However, we expect skirmishes rather than an outright war,” he added.
At UBS, Horth noted that there is “little doubt that the environment will remain challenging,” given these obstacles. “We remain confident that investors will continue to value differentiated views that connect the dots across countries, regions, and industries,” he said.
