The City of London's financial landscape is undergoing a quiet revolution, marked by the decline of a once-ubiquitous presence: the analysts. These individuals, once the lifeblood of financial journalism and investment research, are now in short supply, their numbers dwindling as the industry adapts to new regulations and market dynamics. This trend, while seemingly innocuous, has far-reaching implications for the City's future, particularly in the small and mid-cap equity market.
In the 1990s, financial journalists would eagerly await the annual Extel awards, a celebration of the best analysts in the business. These analysts, armed with their insights and research, were the gatekeepers of information, guiding investors and shaping market narratives. But times have changed, and the once-thriving industry is now facing a significant talent drain.
The decline in analyst numbers can be traced back to the introduction of MIFID II in 2018, an EU directive aimed at enhancing investor protection and market transparency. This regulation forced brokers to charge separately for research, a move that dealt a significant blow to the small and mid-cap segment of the UK equity market. As a result, the number of retail analysts in this sector has plummeted from 29 in 2007 to just 17 today, while support services analysts have also seen a sharp decline.
The impact of this talent drain is evident in the consolidation of brokerages. Names like Bridgewell Securities, Oriel Securities, Cenkos Securities, and Seymour Pierce, once prominent in the 2007 rankings, have now faded into history. Meanwhile, larger firms like Numis Securities, acquired by Deutsche Bank, and Panmure Gordon, merged with Liberum, further consolidating the market. This consolidation has led to a reduction in sector coverage, with fewer analysts focusing on specific industries, such as Chemicals, Metals & Mining, and Transport & Logistics.
However, there is a glimmer of hope on the horizon. The Financial Conduct Authority's Investment Research Review in 2023 has softened the rules, allowing asset managers to bundle payments for research and trade execution once more. This move has sparked a potential recovery in the industry, with Extel's CEO, David Enticknap, detecting signs of life. He believes that if research is valued and liquidity follows, the small and mid-cap market can rebound.
But the question remains: can the City of London entice young talent back to the world of investment research? In the past, a good ranking in the Extel survey could add thousands to an analyst's salary, but today's tech-savvy graduates may be less interested in the City's allure. Persuading them that being a broker's analyst is still a noble calling will be crucial for the London market's revival.
The decline of analysts is not just a numbers game; it's a symptom of a broader shift in the financial industry. As the market evolves, so must the role of analysts, adapting to new technologies and changing investor needs. The City of London must embrace this transformation, ensuring that the next generation of analysts is equipped with the skills and knowledge to navigate the ever-changing financial landscape. Only then can the City truly thrive in the years to come.
