The pot of gold in China research

Investors' thirst for Chinese assets has placed a high premium on China research, a trend that is viewed positively by independent research providers and execution brokers in favour of unbundling.
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Getting a footprint in China has become a core imperative of bulge bracket brokers, with Credit Suisse the latest to announce a series of new appointments aimed at strengthening its China investment banking team. At the same time, investors' thirst for Chinese assets has also placed a high premium on China research, a trend that is viewed positively by independent research providers and execution brokers in favour of unbundling.

Credit Suisse announced on 19 July a series of new appointments, including Carl Bautista, Mervyn Chow and George Pavey as co-heads of its global markets solutions group (GMSG) for Asia Pacific and Zeth Hung as vice chairman of the investment banking department and GMSG for Greater China. The appointments are aimed at strengthening the management of the bank's capital markets and structured products business in a key growth region, and demonstrate continued investment in covering key clients in China, the bank said in a media release.

Like many other China bulls, Credit Suisse has reasons for ridding out the bumps in the journey, such as the prospect of rate hikes to stem inflationary pressures. Across the market, brokers are beefing up their China trading and research capabilities and driving up the price of China research and salaries of China equity analysts to unprecedented levels.

“The value of quality research has definitely gone up because it pays for itself –independent or otherwise. The biggest issue is – where's the best place to find that quality?” said Edward Stockreisser, co-founder of the Asian Association of Independent Research Providers (AsiaIRP). Scarcity, he suggests, is driving up salaries.

“The premium that people are paying for is based on capacity; the number of people who know China with experience. There’s a huge surge in demand for generating alpha through research based on China’s role in the global context. The talent is certainly out there but how many people have looked at China in a global context? That's what's most needed and costing a premium. Ultimately, China analysts need time to prove themselves; there are many economic/market cycles that they have to go through and it's very much still a new sector in China.”

AsiaIRP was launched in November last year to promote research independence in Asia and enable research providers and execution-only brokers to compete on more even footing with full-service investment banks. The first organisation of its kind in the region, AsiaIRP was founded along the lines of the European Association of Independent Research Providers (EuroIRP) and Investorside in the US. EuroIRP was set up in 2005 while Investorside was established in 2002. Like its US and European counterparts, AsiaIRP is a non-profit organisation that aims to raise awareness of independent research and change the perception of research as free of charge, in part by promoting the use of commission-sharing agreements (CSAs) that allow investors to separate payment for research and trade execution.

Stockreisser added, “We are trying to allow the independent economists and analysts who have been in the industry for as long as 20-25 years to get paid fairly for quality research, rather than for execution and IPO access, and allow investors to have the best of ideas.

“Since the crisis, mainland Chinese buy-side firms now no longer have the same level of faith in sell-side research. That trust will come back, but ultimately Asian investors want a competitive edge and people who know China within a global context. We all want to increase the quality of research across the board. If that means independent research firms who are being paid commissions are able to hire better quality staff, or keep their research outfits going, that’s good for independent research,” he said. “Once any investor has spotted experience, they are prepared to pay for it any way that they can to get access to those ideas. What AsiaIRP does is push unbundling so that the investor gets best execution and best research.”

From an execution broker's perspective, the lack of transparent and knowledgeable stock coverage when providing best execution services can result in a misguided market place with a lack of conviction and direction. “Clear, concise and accurate research is a necessity to provide clear, concise and accurate direction to us, from our buy-side clients,” said Alistair Fullerton, head of institutional sales at IND-X Securities (Asia) Limited, one of the founding members of AsiaIRP. “Independent research providers have a non-conflicting and non-biased stance that allows a completely impartial view on companies, impartial to investment banking, corporate finance or advisory pressures,” he added.

The fact that clients are spending more on research does not risk undermining the firm's commission pool because it maintains a fixed basis-point charge agreed with buy-side clients. “Regardless of what they pay the research provider, we retain the same basis point amount and allocate commissions accordingly. We promote honest and independent research because at the end of the day poor quality stocks with no going concern is no good for anyone,” Fullerton added.

Author: Jill Wong