Equity research: Enhancing local & foreign ties

Harry Su

Senior Associate Director

Head of Equities & Research

Bahana Sekuritas


Doing equity research is simply expensive.


How expensive exactly?  According to our channel check, an Indonesian fresh university graduate without work experience could earn as much as USD2k per month net (take home pay) working as a research assistant in a top foreign house.  Obviously, for an experienced and rated research analyst, salaries are exponentially higher, not to mention fat bonuses involved.


With that said, if an equity research provider would like to establish a sizeable team of analysts in order to have a wide stock coverage and substantial presence in a particular country, investment allocation could serve as a barrier to entry.  Furthermore, the challenge of generating revenues from equity trading stemming from the creation of marketable research products is further undermined by margin reductions on the back of today’s rising passive investing coupled with wide-spread algorithmic trading.


Point in case is Nomura, which recently retrenched its equity research division, including its operation in Indonesia, to focus on Instinet, the company’s electronic trading system.  Nomura is not alone with other investment banks also in cost-saving mode.  Based on a study implemented by Frost Consulting, global sell-side research budgets plunged from USD8.2billion in 2007 to just USD4.8billion in 2013.  Additionally, less research investment normally occurs in tandem with reduction in sector coverage and focus in only big-cap stocks.


In such a market development, global investment banks are forced to find cheaper and more innovative ways to cut costs and yet maintain good research products for their client consumption.  This could be implemented in a couple of different ways:


1.       Tasks like editing and data collecting are being outsourced to far-away places like India by major foreign houses;

2.       Research reports are being “co-branded”, tie-ups among foreign houses with local brokers.


Co-branded research products are undoubtedly on an increasing trend these days.  In Indonesia, Indopremier has recently produced research reports co-branded with Jefferies HK Limited, a global US investment bank and institutional securities firm.


For Bahana Sekuritas, we have also just formed an alliance with a global house with a presence in 20 countries, Daiwa Securities Group Inc., to produce co-branded research.


Separately, market talks are rife that our sister company, Mandiri Sekuritas, could also produce co-branded research with Barclays in the future.


It is clear that co-branding is currently in vogue.  From the perspective of global investment banking houses, alliance formations with leading local brokerage houses can translate to immediate up-and-running operations minus the big investment costs.  In the case of Bahana Sekuritas, Daiwa can overnight have research and corporate access to 85 Indonesian listed companies, accounting for some 75% of total market capitalization of the index.


On the flip side, Bahana Sekuritas, without having to set up overseas branches, can tap on from Daiwa’s extensive global distribution network in 20 countries, excluding Indonesia.  This will undoubtedly provide greater weight towards Bahana Sekuritas’ research calls, and create an overall mutually beneficial arrangement for both parties.


In conclusion, increased budget pressures and growing stock-market competition are not only changing the old model of equity research to become more efficient, but also bringing domestic and foreign houses closer together.