In Japan, the cushy era of analysts relying on access to company executives for advance information on earnings is over, so one of the biggest securities firms has started crunching vast amounts of public data to gain an edge.
Mitsubishi UFJ Morgan Stanley Securities Co is using information troves to provide longer-term analysis of companies and their industries, said Kunihiko Shiohara, general manager of equity research. It will issue its first industry report using this technique as soon as this month after analysing more than a million patents in Japan, Europe and the US to estimate which firms will have the most advanced technology over the next 10 years, he said.
“Our focus is shifting to how to provide investors with mid-term and long-term viewpoints that are difficult to foresee,” Shiohara said in an interview in Tokyo. Tightening of rules in Japan constraining earnings-focused analysis is one reason for the move, along with plans by European regulators to separate billing for research and execution, he said.
Brokerages in Japan are now shunning a long-standing practice of conducting interviews with company managers before quarterly earnings are released and then using the information to compile preview reports that they can share with clients. Meanwhile, the European Union is seeking to force securities firms to make their equity research pay its own way by preparing rules that will unbundle stock analysis fees and trading commissions.
Banks worldwide are increasingly trying to harness voluminous, rapidly expanding flows of information known as big data to improve their services and decision-making. Financial firms spent $6.4bn on such data-related programs last year, and the amount is expected to increase by about 26% each year through 2019, according to an Accenture report in May.
“In-depth, long-term analysis will become more significant for investors, especially as quarterly earnings previews are disappearing,” said Mitsushige Akino, a Tokyo-based executive officer at Ichiyoshi Asset Management Co. “For long-term investors, companies’ quarterly earnings results are just noise.”
Mitsubishi UFJ Morgan Stanley will plot big data on charts to isolate patterns and trends – a method known as cluster analysis – to find out which companies are grasping emerging technologies and what products may become “game changers” over time, Shiohara said. For the first report, the bank is working with a Japanese startup that conducts cluster analysis, he said. He declined to name the industry, citing Japanese securities rules, and he didn’t identify the alliance partner.
The FSA undertook its crackdown on banks’ equity research previews to ensure that all investors have fair access to information on stocks. Last December, the agency ordered Deutsche Bank to improve compliance after it leaked a company’s earnings information to clients. It penalised Credit Suisse Group in April for a similar breach, prompting the Swiss firm to stop publishing research that previews Japanese companies’ financial results.
After the two European companies were sanctioned, local firms including Nomura Holdings and Daiwa Securities Group said they stopped interviewing company executives for earnings previews, while Mizuho Financial Group halted curtain-raisers altogether. In July, the Japan Securities Dealers Association drafted guidelines urging analysts not to conduct such meetings.
The upheaval has frustrated some investors. Myojo Asset Management Co is urging brokerages to continue producing short- term, earnings-focused analysis.
“What we value from analyst reports is the forecast for the present period,” said Makoto Kikuchi, chief executive officer of Myojo Asset in Tokyo. “I understand that fewer earnings reports are being produced in the Japan market, but I don’t want brokerages to remove forecasts from their main business.”
In Europe, the so-called MiFID II rules being introduced in 2018 mean equity research will have to be as worthy as execution services, Shiohara said.
“Institutional investors regard our trading platform more highly than our research,” he said. “We’re acutely aware that we need to become a brokerage that investors will choose not only for our execution but for our research as well.”
Mitsubishi UFJ Morgan Stanley plans to expand Japan stock coverage to 500 companies from 487 by March 31, Shiohara said, narrowing the gap with the top firm, Nomura, which covers 589 firms. The joint venture between MUFG and New York-based Morgan Stanley added 18 junior analysts over the past 18 months, he said.