What is the current market outlook for Europe and the UK?
The short-term dynamic for the UK has improved quite dramatically in the last month or two due to a mix of falling CPI and looming political clarity after the July general election declaration. Longer term, the new Government will face a number of aggressive assumptions regarding UK growth and tax revenue, with implication for absolute debt service levels. The demise of the UK market is exaggerated; however, the challenges are real. Structural reforms could be helpful to make the UK a more accommodative listing destination.
The UK and Europe are unique ecosystems. An evolving product of ‘de-globalisation’. Brexit clearly did not help, nor help the perception of UK equities. We have seen a stabilisation of money flows in recent months, global funds are returning to the UK, while we continue to see outflows (mostly to US) of domestic asset managers.
European retail is still a growing part of the liquidity pool and there are a number of providers such Turquoise Maxx that are seeking to simplify and cheapen market access. That is something that the mid and smaller brokers can access relative to the bulge bracket who don’t really see that as an important USP for the business right now. In terms of liquidity, and with the fragmentation in Europe is hugely important to access any growing sources of liquidity. The UK market is still a much more capital-intensive market for most accounts.
How does execution strategy differ in the UK and Europe?
There is an ethos for slightly different dealing strategies in the UK. The UK retail network is an established source of liquidity. A lot of the flow that we see is very much in that mid cap space as large cap execution is highly commoditised. It is about creating a much bigger situation when you trade those names. It is about ensuring that you’re growing the liquidity footprint that you have.
We all know it is very cheap and easy to trade electronically but you’re not necessarily fulfilling your liquidity obligations. Some of the big push back from my meetings with clients recently has been the general lack of sell-side service. We must remember this is a customer facing business. In terms of technology, we are getting to a point now where the ability to differentiate is becoming much more challenging – the role of AI and machine learning ‘smart algorithmic strategies’ are yet to be tested in an extreme market dislocation.
We are currently developing our own differentiated electronic product. We are one of a few mid-market firms that have a significant US presence and that translates to connectivity between US retail, UK retail, European retail. We saw the meme stocks return to the focus a couple weeks ago. Retail trading remains highly topical. Criticality and scale are the issue that everybody faces.
It’s very easy with a large prime brokerage business to support your electronic business on pricing and front-to-back cost. Whereas in the mid-market we have to really differentiate the offering. We’re mindful of the ongoing cost of electronic business. If you look at the progression of electronic in the US over the last decade market share moved from 70 to around 85%. The direction of travel is very clear within the European ecosystem. The business is getting more electronic with more non-human interaction, so you have to have a seat at that table. It’s pushing high touch and marginalised brokers into a smaller section of the market.
There is a clear focus on the businesses that you think are going to add value in the next five to 10 years. Everybody’s moving away from a global focus to being at least good, or exceptional in certain pods. That’s really the way that the business will evolve over the next five to 10 years – in order to maintain relevance to our partners.
We still don’t have the 85% plus penetration of electronic that the US does so there is still more attention to high-touch trading particularly in the mid-cap space and we see that as an area that really differentiates the smaller brokers vs the bulge brackets who are very electronic. Within the next five to 10 years, Europe will be at that level. The path of travel is very clear.
What are your thoughts on the recent changes to unbundling rules?
Post-Mifid II we have sought to build a differentiated research and corporate broking product in the UK. It depends on who you talk to but certainly for the larger accounts I see little compulsion to move away from unbundling. It is incredibly beneficial to them that they can elect the services that they choose to receive and pay accordingly. I do not see the larger asset managers moving away from that model at all. There is a clear issue with regards to small and mid-cap coverage and how that the market addresses that. The ability to pay via trading will help. From a complexity point of view, the last thing the sell-side needs is a complex regime of re-bundling.
There is a challenge in creating unique price points for each customer. It is going to be incredibly difficult from a resourcing perspective. The theory of it is compelling but actually the execution could be quite difficult. We would need to see more clarity on that. While the bigger accounts just don’t see any benefit to do that there will be no change and ultimately, they’re thought leaders and drivers of the industry.
What trends are you observing in equities globally?
The macro side is getting a little concerning. Confidence numbers in the US have been falling not dramatically but enough to question whether the US consumer is really starting to rain in the Covid spending. The savings rates through Covid and subsequently we’re incredibly high and the market has underestimated the physical amount of money that was in the system which has given us a nice tailwind for the last couple of years.
It is going to be very difficult for the Fed and the Bank of England to move inflation to target which is 2%. The markets so far have been really bad at predicting the path of interest rates.
In terms of the summer, volatility is incredibly low there’s quite a lot of complacency around. We have some changes in government potentially beginning in July. Business levels have improved steadily throughout the year, we have seen a very strong end of March/April.
How is your trading desk reacting to these?
We are constantly looking for opportunities. In terms of where we see opportunities for the rest of the year, we think financials still represent a sector that is still very cheap structurally particularly in the UK. Election volatility could bring an interesting dynamic, although we see little direct policy implication.
Macro-economic headwinds are building but the housing market is showing no real signs of stress. A Labour government could deliver a significant uptick to homebuilding. The de-equitisation in the UK with consolidation and mergers could continue. We need that IPO supply and pipeline to replenish.