The Extel survey, which ranks brokers and analysts in the UK, reveals a troubling trend in the small and mid-cap (SMID) sector, where the number of retail analysts has dropped from 29 in 2007 to just 17 today.
This decline is largely attributed to the implementation of MIFID II in January 2018, which mandated that brokers charge separately for research, thereby increasing costs for investors and reducing demand for small-cap research. David Enticknap, CEO of Extel, noted that while MIFID II did not deliver a fatal blow to equity research, it certainly caused significant harm.
The consolidation in the sector is evident, with notable firms like Numis Securities and Panmure Gordon undergoing mergers or closures. The survey's coverage has also shrunk, with the number of sectors analyzed dropping from 18 to just nine. However, recent regulatory changes by the Financial Conduct Authority, which allow for some bundling of research payments, may signal a potential recovery.
Enticknap emphasized the need for the buy side to value research to restore liquidity in the market. Additionally, attracting new talent to the analyst profession is crucial for revitalizing the London market, as many young graduates are currently drawn to technology sectors instead.
The overall implications of these trends suggest a challenging environment for small and mid-cap equity research, which could affect investment strategies and market dynamics moving forward