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Oct 16, 2019

UK companies see wider fall in analyst coverage than European peers, finds research

New survey investigates global IR trends

Following the arrival of Mifid II, UK companies are more likely to have lost analyst coverage than their European counterparts, according to new research.

More than half of UK companies (52 percent) say the number of sell-side analysts covering them fell over the last year, reports Citigate Dewe Rogerson in its annual survey of IR professionals. By contrast, only 39 percent of non-UK European companies report a drop in coverage.

UK issuers are also experiencing a sharper drop in research standards, the research notes. Overall, 38 percent of UK respondents say they have noticed a fall in analyst quality over the last 12 months; the figure is 20 percent for the rest of Europe.

While much attention has focused on the impact of Mifid II on smaller companies, the research finds larger issuers are more likely to have lost covering analysts. Three quarters of UK large-cap companies say they have seen a drop in analyst coverage over the last year, compared with 44 percent of mid-caps and 57 percent of small caps.

It is smaller companies that remain most at risk, however, given they already struggle to attract investor attention, says Citigate.

‘The more pronounced decline in sell-side research in the UK means that high-quality, medium-sized and smaller companies face a very real risk of dropping off the radar of institutional investors. This can lead to a reduction in liquidity that is hard to recover from,’ says Sandra Novakov, head of IR at Citigate, in a statement. 

‘The good news is that IR professionals increasingly see this danger and are taking proactive steps to address it, such as actively articulating their investment case and increasing roadshow frequency and effectiveness. It signals a change in approach.’

The full results of Citigate’s survey have not been released, but the firm teased some other findings that appear to demonstrate further impacts of Mifid II. For example, more than half of European small and mid-caps plan to spend more time on the road during the next 12 months. 

The research surveyed 479 IR practitioners, including 242 from Europe, according to Citigate.

Mifid II, implemented in January 2018, banned investors in Europe from paying for research and corporate access out of trading commissions. Investors now exercise greater caution over what services they accept, leading to a fall in revenue for research providers.

The Financial Conduct Authority (FCA), the UK’s financial watchdog, says the changes have led to an average reduction of 20 percent-30 percent in research budgets. As a result, the regulator estimates Mifid II could lead to savings of almost £1 bn ($1.3 bn) over a five-year period. 

In its own review, the FCA said it had not found a ‘material reduction’ in the research coverage of small and mid-cap companies, but would continue to monitor the situation.