News und Studien cometis AG, Frankfurt am Main

The “downfall of equity research” … opens up new opportunities for listed SMEs

Research reports are becoming rarer. The current legal requirements of the EU Directive MiFID II are further strengthening the trend. In particular, small and medium-sized stock corporations are disappearing from the cover lists of research departments. Their securities are traded less frequently and the banks can therefore earn less commission. At the same time, however, these securities remain attractive for investors. SMEs are innovative and grow faster than large companies. There is a discrepancy between the unbroken attractive investment opportunities and the declining, independent research offer. Paid research is not accepted by investors. What opportunities does this offer for listed SMEs?

Since the turn of the millennium, many banks have been thin-fitting their central departments. The financial crisis has intensified this trend. The result: According to the DVFA, the number of equity analysts in Germany has fallen by around a third over the past 20 years to only about 250. Regulation by MiFID II is likely to further accelerate the contraction. The EU directive stipulates that investors must pay directly for the research they receive. Previously, research on trading orders was subsidised. Since then, research has had to be ordered – and paid for – separately. Obviously, the quality of many studies does not meet investors’ requirements. Otherwise they would be willing to pay for it. Even research paid for by the issuers themselves is unlikely to change much. On the one hand, hardly any issuer will pay for critical studies on its company. On the other hand, purchased studies are not accepted by investors. The question arises as to how providers of studies paid for by issuers can earn (serious) money at all. Consequently, due to the low willingness of investors and issuers to pay, many banks are likely to put the axe to the (cost) positions again.

As the number of analysts declines, so too does the number of companies analysed. Reports on small and medium-sized companies are becoming increasingly scarce. And some companies are no longer observed at all. If there is no neutral assessment of the quality of some shares, there is a danger that many investors will keep their hands off these companies completely. So is the light going out in the small and mid cap sector? This does not necessarily have to be the case – as the development of the media world shows.

Parallels to the transformation of the media world
The triumph of the Internet is accompanied by a loss of significance of traditional print media. Younger people in particular are hardly turning to daily newspapers any more. This is also reflected in the editorial offices. Since the turn of the millennium, the number of journalists employed by daily newspapers and magazines has fallen from around 30,000 to around 20,000. The bloodletting of about one third is a striking parallel to the declining number of financial analysts. What remains, however, is by no means a vacuum. Other media fill the gaps. Internet media are gaining in importance. Twitter and the diligently twittering US president, for example, have acquired a significance that was previously hardly thought possible. And YouTube is now also shaping the political discussion – as the CDU recently had to painfully experience. The job description of the “youtube” or “influencer” was still unknown a few years ago – but it has now established itself in the opinion market and is gaining in importance. Already today there are about 30,000 influencers on the net in Germany. And 3 percent of Youtube users account for 85 percent of all views – which makes them all the more effective. It is not only those who want to continue to make their voice heard in the political debate who must make adequate use of the new channels.

What could the future of analyst glides look like? Many are likely to move into corporate finance and investor relations or into corporate finance. The best will probably strengthen the buyside research of large asset managers. Some very good entrepreneurial analysts will also assert themselves as lone warriors or form mini teams and open up new customer groups via the Internet. Small units act faster than traditional research factories. They can tailor their communication precisely to the tonality of the communication channels they serve and their users. In a next step, the lone warriors could come together to form more powerful networks and brands. The broad-based law firms are a corresponding blueprint.

As long as there are worthwhile investment opportunities, the supply will create its demand. Investors should also be willing to pay for good information – but only if they recognize its value. This creates an opportunity for good equity analysts. Then they should not only reformulate company reports, but must also deliver real added value. Sector specialists are likely to operate across Europe or globally. Just as conventional industries, from automobiles to smartphones, sell their products internationally, researchers are also likely to win their customers globally.

Conclusions for work of Investor Relations
The (potential) interest of investors remains unchanged. But the research is becoming less. In the future, companies will therefore have to manage their stock market listing themselves. Medium-sized companies should communicate in a more differentiated way in the future. In addition to mandatory reporting, further target group-specific information will become the trump card. IR factbooks can replace company studies. In addition, broker-independent roadshows and capital market days expand the tasks of IR managers. This can arouse the interest of international investors. Video messages can also be used to attract private investors. As in the media world, direct communication – i.e. without brokers or other intermediaries – is likely to gain in importance in investor relations work in the future. This applies to both digital and classic personal communication.

Michael Diegelmann

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Michael Diegelmann
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