The FM's annual rankings of brokerage firms and analysts take place this year against the background of a three-year bull market, continuing globalisation of financial markets and much improved profitability in the industry.
A few years ago, brokers' profit margins were shrinking and predictions about a consolidation in the industry and a shake-out among analysts were common.
Those forecasts have faded. With the JSE outperforming many other markets, international players are taking more interest in the SA market.
Three or four years ago the industry was retrenching analysts, says Deutsche Bank CE Murray Winckler. Now, the period of rebuilding teams is bearing fruit. Also notable is that black analysts who entered the industry as trainees are becoming more conspicuous in the rankings.
Domestic brokers such as Barnard Jacobs Mellet (BJM), Andisa Securities and Nedcor Securities have also maintained strong research teams, which most players - other than pure execution or dealing houses - still regard as a key factor in winning or holding market share.
"There has been a real improvement in the value of market activity," says BJM co-CE Andile Mazwai. "We've had a very pleasing run."
Competition in the research rankings remains fierce, though the international firms often have the advantage in the big sectors holding globally traded stocks with large market capitalisations.
In the overall ranking of firms for research, Deutsche Securities is first on unweighted points, with all sectors treated equally. It's followed by BJM, second, and UBS Securities, third.
In the firms' equities research ranking, with JSE sectors weighted on their values in the shareholders weighted index (Swix), an index that reduces or eliminates foreign shareholdings, another global firm, UBS Securities, is first. Deutsche Securities is second and Citigroup is third.
Deutsche Securities leads the firms' overall research ranking, with all sectors weighted. In second place is UBS Securities and last year's leader in this ranking, Citigroup, is third.
BJM, the leading domestic research firm in this survey, is fourth in both the firms' weighted equities table and in the overall research ranking.
Andisa Securities is fourth in the firms' research ranking on unweighted points, but slips to sixth in the weighted equities ranking and eighth in the overall research ranking.
Nedcor Securities is fifth in the unweighted points table, thanks partly to its strength in the mining sectors and in others such as medium and small market cap stocks, but it slips when sectors are weighted.
Deutsche Securities retains its lead in the rankings for sales teams, and is also top in the weighted ranking for dealing in fixed-interest securities.
In the latter category, three local banks (or, in one case, a bank's broking arm) - Standard Bank, RMB Stockbroking and Nedcor Securities - are respectively second, third and fourth.
Merrill is again ranked first in the weighted table for equities dealing, with Deutsche Securities second. These positions are reversed in the unweighted ranking for equities dealing, with fund managers' votes treated equally.
Cadiz Financial Strategists, a specialist firm, retains the leads it has long held in the rankings for derivatives dealing and research - though another specialist, Peregrine, is closing the gap.
Differences in strategic approach are again evident among the various broking firms contesting the research rankings.
Some of the firms' rankings reflect wins in key sectors. Citigroup's performance was helped greatly by top rankings in important areas such as oil, gas & chemicals (Gerhard Engelbrecht); banks (Henry Hall); support services & packaging; and diversified industrials (both Ceri Moodie).
However, Deutsche Securities continues to derive particular strength from its breadth of coverage. It slipped in the rankings last year, after the departure of some experienced analysts.
This year, the firm is first in only four of the 40 research sectors covered in the survey: life assurance; luxury goods & tobacco; corporate governance; and fixed-interest securities. But it's in the top six in 27 sectors and in the top three in 15 sectors, with seconds in important areas such as banks and telecoms.
Big players are recognising that a highly selective approach to research has limitations. UBS Securities appears to be doing well in more sectors than before. The firm's James Bennett, ranked second in other mining extractors, has entered the steel sector in first position.
Citigroup head of equities Nick Harwood says institutional investors are showing more interest in medium-cap stocks, which often are not researched as well as the big companies. His firm is broadening its coverage to include medium caps, while also covering big stocks from Johannesburg, London and elsewhere.
Alan Heap, a Citigroup analyst based in Sydney, is ranked first in commodities, a particularly topical sector this year. Heap attracted attention internationally with a report on the commodities "super cycle".
Bullish market conditions may have contributed to greater stability among research teams in the past year, with the analysts' musical chairs game less conspicuous than in many previous years.
Some of the winning analysts show impressive consistency in their performance, regardless of market cycles.
Nedcor's David Pleming has won the other mining extractors, which lists Anglo American and BHP Billiton, for more than six years. Citigroup's Henry Hall has had a similarly long run as top analyst in the banks sector.
Though brokers' profitability has risen with the upturn in dealing activity and values in the bull market, competition is intense and downward pressures on commission rates have not disappeared.
RMB Asset Management chief investment officer Charles Booth says rates are falling throughout the financial services sector, including asset managers'. Stockbroking firms that serve institutional asset managers can hardly be excluded.
Andisa Securities CE Patrick Mathidi says globalisation of financial markets has led to greater competition from global players, and has changed fund managers' expectations. "The winners in this market will be the organisations with international resources," he says.
A few years ago, there was speculation that some of the global players already in the SA market could shrink or close their local activities. Now the opposite is happening.
Credit Suisse, which previously had a small stake in First South Securities, is forming a 50-50 joint venture with Andisa Securities, now part of Standard Bank. Andisa already has a full-service broking operation and will be able to draw on Credit Suisse's global research.
Morgan Stanley, a US giant that had not yet established a broking operation in the SA market, has formed a 50-50 joint venture with RMB Stockbroking.
The new company, to be called RMB Morgan Stanley, will have access to Morgan Stanley's global research on international stocks and markets, and will draw on its global liquidity and distribution capacity. RMB's Ryan Proudfoot says the JV plans to build a local research team, though it wants to differentiate its research from the traditional model.
Moves to unbundle the services paid for in brokers' commissions could lead to further change in the industry. This would follow steps already taken in the UK, where the Financial Services Authority has stopped short of requiring full separation of remuneration for services such as dealing and research but is demanding greater disclosure of what brokers' commissions are intended to remunerate, and how much is paid for each component.
The likely effects for the local market are unclear. Some players say that when new rules on commissions are applied in the UK, the SA market will have to fall in line. Investec Asset Management (IAM) has told brokers it plans to start discussing the process with them this year.
Others say local institutions - unlike many in other markets - already tend to give their brokers detailed information on how they rate their services and how much they are paying for research. That may mean little change would be needed.
But there are concerns that some fund managers and, perhaps, their clients (usually, retirement fund trustees) will become more demanding about value and may place tighter limits on what they will spend on research.
For some brokers, that may lead to narrower coverage, or to a more tailored approach.
"We'll do what makes sense commercially," says Winckler. "We could provide different services, according to what clients want to pay for."
Asset managers are likely to approach unbundling of commissions with caution. IAM's John McNab says brokers contribute to transparency and liquidity in the market, and the industry could be damaged if unbundling were rushed or taken too far.
But it could also create new opportunities for independent research houses. The appearance of two of these, Noah Financial and Avior, in this year's rankings underlines the change that is occurring in the investment research landscape.
