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Friday, 18th September 2020
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All singing model a thing of the past: O'Kelly back

NCB Stockbrokers Chief Executive Conor O’Kelly makes a cold and realistic assessment of the Irish stockbroking industry. It’s going to be a long way back, he says, ‘but I’ve no doubt we will eventually get there and the first steps may indeed have already been taken’.
The party’s over - the punchbowl has been taken away and the only question now is how bad will the hangover be?
The deleveraging by institutions and individuals has been swifter than anything seen before in markets and the losses have been of record proportions and gut wrenching.

The Irish market has suffered more than most where the lack of sectoral breadth and diversity has been cruelly exposed. The concentrated exposure to financials and construction, in particular, has been compounded by the poor technical position of the market. Leveraged positions of private individuals through CFDs has led to forced selling and, ultimately, capitulation. More fundamentally, the over weighting of domestic institutions in Irish stocks has come back to haunt them and has meant that when the market needed backing from its domestic investors most, they were, in fact, doing the opposite and selling down their holdings making a bad situation worse.
Conor O'Kelly

The brokerage business is under enormous pressure internationally and domestically. A world where brands such as Lehman Brothers, ABN and Kleinwort disappear within a couple of months is difficult to comprehend.

Many private clients have suffered huge wealth destruction and, not surprisingly, have become very risk averse. Individual balance sheets must be repaired and this will take a number of years. Institutions have seen assets under management collapse in value and have witnessed record redemptions. Equities are even being questioned as a viable long-term asset class.
Key questions still remain unanswered and any change in the landscape around Irish financials will have a dramatic effect on the market and the domestic brokers.

Investment managers will continue to reassess how they approach counterparty risk, Direct Market Access (DMA), execution and unbundling. It’s likely that counterparty lists will shrink with execution confined to the bigger, supposedly safer, names with research being paid for separately.

Agency brokers could thrive but asset managers may ultimately put more investment and resources into direct market access which is the ultimate reduction of counterparty risk. None of this is good news for brokers and with confidence in the street’s research product at an all time low those unbundled cheques could be small.

But brokers, as they have always done, will adjust their own business models to reflect the new realities. For Irish stockbrokers the all singing all dancing integrated broking model is a thing of the past. Research on micro cap and small caps will disappear and many companies in the market will feel even more unloved than they do currently. With the Irish market 70 per cent off its highs and all but abandoned by foreign investors, for the time being, the commission business in Irish equities has contracted significantly.

Against this background, firms will need an international product to keep their institutional relationships alive while waiting for some of the Irish stories to come back into favour.

For NCB our membership of the European Securities Network has proved critical and this firm now generates over 25 per cent of its revenue from international stocks. The access to European local research coverage and a fully integrated execution this platform has been increasingly well received by clients as hopefully is evident from this client survey.

The competitive landscape has changed dramatically internationally and may yet change locally. It’s entirely possible that by this time next year there will have been significant changes in the stockbroking sector that historically would not have been contemplated.

Regulation has continued to increase in the sector and that has potential to escalate. For some the high cost of compliance and an increased capital requirement may become too much to bear - for others, if the low volumes of recent months continue indefinitely, consolidation may be the only option.

But while there is no shortage of things to get bearish about experienced market professionals intuitively know that a contrary view is likely to be rewarded although this time the pay back period is likely to be long. It takes stomach (and cash) to seek out value among the rubble and despair but when legends such as Warren Buffet, Bill Gross and Anthony Bolton start putting their money down it is worth paying attention.

Historically it’s been wise to follow the Wall Street adage ‘never fight the Fed’ and now that authorities around the world are displaying unprecedented determination and co-ordination to fix the financial system following that adage could be more apt than ever.

Ireland’s low debt / GDP, healthy dependency ratio, young population combined with the safety valve of migrants taking a one way ticket home means the 80s have not returned nor are they likely to. Ireland’s savings rate is high and there is a difference between consumers who ‘can’t buy’ vs ‘won’t buy’. It’s going to be a long way back for the Irish market but I’ve no doubt we will eventually get there and the first steps may indeed have already been taken.

I’m pretty sure President Elect Obama was not referring to the Irish brokerage community when he said ‘our journey will be long and the road will be steep’ but he was right on the money. We will need to be right on the money about lots of things if we are to get through this period intact.
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