After studying the ramifications of the upcoming MIFID II regulations and having moved through the consequent five stages of grief commonly studied by psychologists Eddie Perkin, the chief equity investment officer at Eaton Vance, says he has reached a new stage: “fascination”.
In a research note for clients Perkin says: “I am eager to observe the market-disrupting consequences of this new suite of regulations, and to pounce on the opportunities it inevitably brings our way. Between the impact of MiFID II and a once-in-a-generation overhaul of our corporate tax system, it is a safe bet that the low volatility regime is coming to an end.
MIFID II takes effect on January 3, 2018, impacting not just European fund managers but also many global ones too. While there are lots of changes, the market has focused mainly on the separation of the payment for research and securities transacting – the unbundling of commissions.
Perkin believes that brokerage research in Europe is likely to be “decimated”. Estimates for the year-on-year decline in equity research commissions range from 25 per cent to 50 per cent. One unnamed broker, from a “bulge bracket firm” said they expect a collapse of 70 per cent.
“This will force layoffs,” Perkin says. “It will force consolidation among brokers. This will lead to reduced levels and quality of equity coverage, particularly for small and mid-sized European stocks.”
He says that small-cap stocks are already underfollowed and inefficiently priced. Post-MiFID II, investing in European small caps for a well-resourced active manager will be like playing poker against someone who never bothers to look at his own cards.
“I was recently speaking with a European equity analyst with three decades of experience. He told me: ‘The European equity market in the 1990s was so inefficient. It was easy to generate 300-500 bps of alpha each year. MiFID II is going to take us back to those days.”