The average AIM stock with a market cap in excess of £600m enjoys research coverage from an average of 6.1 analysts, up 20% since the introduction of MiFID II in January 2018. Analyst resource appears to have shifted post the reforms, as coverage of FTSE 250 stocks of the same size is at 6.3 analysts, a fall of 2.4%. Research coverage for large-cap FTSE 100 stocks has fallen 8%.
AIM companies attracting additional analysts over the past 15 months include tonic and soft drinks maker Fever-Tree and specialist telecoms business Gamma Communications. Coverage of these two companies has doubled, adding four and three analysts respectively, according to FactSet data.
Total research output across the market has struggled to grow since MiFID II, despite a net increase in companies on the combined AIM and Main Markets since December 2017. Industry surveys clearly point to reductions in analyst headcount. Taken together, these datapoints suggest brokers require each analyst to cover more companies than the pre-MiFID II period.
Keith Hiscock, CEO of Hardman & Co, comments:
“While the increase in coverage of larger AIM stocks is encouraging for long-time fans of the UK’s growth market, the shift raises further questions about the sustainability of broker research models. Main Market stocks represent a deeper market for institutions than AIM, so it is unlikely AIM research is as profitable for brokers as the Main Market research it seems to be replacing.
“While data shows AIM stocks are more popular with retail investors, most broker research does not reach retail investors, so the value to these audiences is questionable.”
Companies need to consider volume and quality
Hiscock adds:
“We see more senior analysts departing broker firms, replaced by junior staff, if at all. This means less experienced analysts, stretched more thinly across their coverage universe, as well as deteriorating research quality. ‘Copy-and-paste’ analysis of corporate announcements adds scant value to investors or companies.”
Meanwhile, liquidity has continued to fall since MiFID II came into force, dropping between 15-30% across all segments of the market, with the worst impact coming across mid- and large-cap companies on AIM, where it has shrunk 26% and 30% respectively.
Hiscock notes:
“Falling liquidity means it is harder for share prices to find the correct level, when market-moving news breaks, or macroeconomic sentiment changes. Volatility and illiquidity go hand in hand, with more volatile share prices discouraging long-term investors.”
Further research:
Hardman & Co has produced a series of research pieces on the impact of MiFID II, the relationship between research coverage and liquidity, and the importance of retail investors for liquidity. Publications include:
► The importance of the retail investor (Keith Hiscock, January 2018)
In addition (copies available on request):
MiFID II – Impact on research & stock market liquidity (Keith Hiscock – 2017)
Why broker research coverage of non-clients is collapsing (Jason Streets – 2016)
