Equity research is a vocation for intellectuals; the thinking men and women of investment banks who craft notes and investment recommendations on the stocks of particular companies based around huge quantities of data and industry expertise.
It’s considered a relatively creative outlet for quantitative students looking for a job that combines financial acumen with an investigative mindset able to find the ‘real story’ behind an company’s financials.
“For my colleagues and I, the analytical work involved in solving a market mystery is often amongst the most difficult but enjoyable activities – and one that is invariably appreciated by clients,” says Matthew Thomas, head of Russian/CEEMEA oil and gas equity research at Barclays in London.
Researchers spend their time focusing on large-cap companies, generating investment ideas for clients on the ‘buy-side’ (namely big fund managers). Whilst they spend time producing reports, poring through company financials – and giving occasional views to the media – much of their job is spent doing more fundamental research that will set them apart from their competitors.
They’ll speak to company CEOs, CFOs and investors to get an idea of both sector sentiment and the specific prospects of a company, as well as creating complex financial models to predict the earning potential of particular firms.
The idea is to encourage big investors to then trade particular stocks through the sales and trading teams of the bank the analyst works for. Most cover large companies, which create the greatest investor appetite, but smaller investment banks also cover attractive mid-sized firms. There can be up to 25 analysts covering the same stock, so focusing on more niche companies can give smaller banks an edge.
Given the dynamic nature of markets, different events can unfold, often unexpectedly
If this seems a little slow-paced, the reality is rather different, suggests Zafar Khan, head of aerospace and defence equity sector research at Societe Generale Corporate & Investment Banking. Researchers fall into investment banks’ ‘markets’ teams, meaning they work closely with the sales and trading teams and have to be able to respond swiftly to market developments.
“Given the dynamic nature of markets, different events can unfold, often unexpectedly, (results release, profit warning, rights issue, acquisition or disposal) and the impact of these will need to be interpreted and conveyed to our client base so that they can react quickly and adjust their portfolios accordingly,” he says.
Equity research, like most areas of investment banking, has undergone profound change since the 2008 global financial crisis. Numbers employed across the sector halved to 9,000 over since 2007, according to analysis from Edison Investment Research.
More recently, the big change on the horizon is the so-called ‘unbundling’ of equity research under the European regulation Markets in Financial Instruments Directive II (MiFID II), which comes into effect in 2017. This means banks’ clients will have to separate out the money they spend on research from what they spend on executing trades.
Previously, research was never specifically a revenue-generator, but now that it is investment banks have realised the value of bringing in senior equity researchers. If clients are paying for it, the research has to be top-notch. At least that’s one theory – another is that investment banks will streamline their research functions even further to cut down on costs.