At one point it looked like Eliot Spitzer had turned equity research into a sunset industry. However, in recent months there seems to be a lot of hiring. Is Asian research on the uptick again?
Paul Bernard: Definitely, and the labour markets would suggest that. Research is still very driven by whatÆs happening in the secondary and primary markets. There will be demand for analysts if there are more deals and bigger daily equity volumes. At the most basic levels that is what is driving the recent round of hires. At the time of the Spitzer settlement, both those businesses were at cyclical lows, and it was easy to extrapolate the trend into a very negative outlook for equity research. What we are now seeing is a mean reversion, overshooting the other way.
Joseph Lee: I also think that Asia is a little different from the US and Europe, in that we are still in a growth phase. Asian markets are less efficient - information flows are less efficient, companies are not as organised on the IR side. So analysts who really know the companies and can model them, are more valued in Asia. In other words, there is still a premium in Asia on having someone on the ground who can help you understand what is going on.
Bernard: The growth of the market is a key point. In the US you have M&A that offsets the growth in listed companies from IPOs in most years, but out here we are seeing many new sectors being created by new listings. Chinese banks are a good example. This sector didnÆt exist a year ago, and now itÆs bigger than the Singapore banking sector, and there are two more to come.
Lee: ThereÆs a lot of growth in Asia and a lot of emerging sectors as well. These sectors require new analysts.
Bernard: The securitisation of real estate in REITs is one of those emerging sectors. ItÆs been long established in Australia, recently started in Japan and is really just beginning in Asia. ThatÆs a hot space for hiring analysts in the region. Every bank is scrambling to bring property analysts on board.
And analysts who can cover the natural resources sectors?
Bernard: Yes and no. I am a former oil and gas analyst, so I know the players. It seems like some analysts have moved to the buyside, which has left holes for some banks to fill. Resources is a cyclical sector, but I am not sure there is going to be that much growth in terms of analysts covering the area.
Would you say another area that needs staffing up is coverage of Chinese and Indian mid-caps?
Bernard: Our Kotak JV in India has dissolved and we are on verge of opening an Indian operation. We have already identified, internally, who our research head will be and that person will relocate to Mumbai. And the mid-cap space is an area we will be giving a lot of focus to. In China our Gao Hua research platform has really focused on mid-caps.
The perception has always been that Goldman is not a particularly research-focused house. Would you argue that is incorrect?
Bernard: About three and half years ago, when markets were reeling from SARS, we took a pretty hard look at our equities positioning in Asia. We were covering 230 stocks and took the view that this was not a big enough footprint to be in the sweet spot of profitability, and servicing clients. So we devised a plan to grow our footprint.
We will end this year covering around 475 stocks. So in a three year period we will have doubled. We have been pretty quiet about this. ItÆs been a slow but consistent build û and the number I just quoted excludes Australia, Japan and India. By our count, we reckon that puts us in top three in the region.
And if you add in India?
Bernard: Ultimately that will take us up to around 575 stocks. Most of the major players are covering between 80 to 110 stocks in India, and are growing that coverage. We are realistic that in phase one of our growth in India, we will cover 60 to 70 companies.
How many analysts will you hire in India?
Bernard: Phase one is to hire 13 analysts.
How many research analysts are there in Gao Hua?
Lee: ItÆs currently 15 and will grow to 20. We will also be relocating some of our regional analysts to Beijing.
Bernard: Today we cover 101 companies in China. We believe that this is the biggest China coverage footprint among any foreign firm. That is split between people sitting in Hong Kong and Beijing and is run as a fully-integrated team.
But we believe we will be covering 150 China stocks by the end of the year.
Lee: The other big change between now, and three years ago when we started this build, is that we now have full country teams everywhere. We have a full team on the ground in Korea and Taiwan, and China too. We will have a full team in India. We have 17 people sitting in Singapore. So we now feel we are much more balanced between country and sector.
So it is more like the European broking model, which always emphasised in-country over hubs?
Lee: Five years ago you would have called that the European model. But in this industry, business models change. I am not sure what you call it anymore. ItÆs what our clients demand, and thatÆs why we built our in-country teams.
Bernard: The places where we havenÆt gone in-country to the same degree as what I like to term the ælegacy-colonialÆ houses are the ASEAN markets. That was based on our client feedback telling us they didnÆt need another full-service broker in Thailand, as well as an assessment of the wallet size of those markets. So we still cover those markets out of Singapore.
How long will the India build take?
Bernard: The first six to nine months are about getting people in place. So we hope to have the full team hired by the end of the year.
Are we back to the situation where headhunting the best analysts require two and three year bonus guarantees?
Bernard: We donÆt do multiple year guarantees and I haven't heard of any in Asia lately, but I think the market will shortly get there. I did hear that they are now seeing two year guarantees again in the US. Given how depressed the labour market for analysts was there, there were people who thought those types of guarantees would never return.
Has there been a change within the analyst community itself that Goldman has become a more research-focused house?
Bernard: Of the analysts who know us, the answer is yes. And if you look at the publicly-disclosed information on all the banks, we have the largest equities business in the world. And thatÆs real client-driven business. In Asia we suspect we are near the top too. So that is being recognised.
Are there examples you can quote that demonstrates the independence of your research?
Lee: We have a fairly high market share of primary transactions, and so people naturally think of us as a strong investment banking house. One thing we have tried to demonstrate is our focus on coverage, and a lot of that is small caps. Some people find it surprising when they notice that we cover $200 million market cap stocks, because they are just plain good stock ideas. We have dedicated small cap analysts in every country û and that is often not recognised. We are always associated with big cap stocks and landmark IPOs. But we are constantly looking for new stock ideas.
Also, we have a very determined focus on stock-picking. We have something called our Current Investment List, which is our list of highest conviction stock ideas. We publish it every week û good or bad û and weÆve had tremendous success with it, and are very proud of it.
We are very focused on our stock recommendations.
Bernard: Our Current Investment List is what we would actually buy today. Each of the three years weÆve had this, it has done very well. We made a conscious effort to be public with it, even before we knew it would be successful. ItÆs the only way you can really show investors that you are living by what you say.
When we first did, some were skeptical. But over time, it has been very potent for us.
Your strategy team has been quite on the mark with some big themes, such as Korea.
Bernard: The game we didnÆt want our strategists to play, was ôYou should be slightly overweight in country X, and fund it with an underweight in country Yàö Instead weÆve charged the team with getting the big thematics right, but also drive it down to actual stock picks. It starts to mean something when you say which stocks you should buy and sell, rather than just say you are bullish on the China consumer.
And finally, how do you see the economics of broking and research evolving?
Bernard: If you look at our business, it has been very faith-based. The sellside has done a lot of servicing for the buyside via research, salespeopleÆs time, and without any true accounting of whether that was valued and whether you were really getting paid for it. Now both are being forced to think about what clients actually want, what they are prepared to pay for it, and how they want it delivered. I donÆt think that is a bad thing.
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