Arqaam Capital follows long list of brokers disinvesting from SA
Arqaam Capital, an emerging market-focused brokerage house based in Dubai, is shutting its SA office, following in the footsteps other global equity research companies as a stagnant economy weigh on trading volumes.
In a brief message to clients on Tuesday, Arqaam, which also has offices in Beirut and Cairo, said it would be closing its local equity equity research coverage and immediately withdraw recommendations, target prices and estimates. It did not respond to Business Day’s request for comment.
Brokerage houses have been struggling to grow profit margins in SA as a weak economy – which unexpectedly contracted in the third quarter – stunt trading volumes, mergers & acquisitions, corporate bond issuance and initial public offerings. The JSE has roughly 300 fewer companies listed than it did two decades ago.
The industry has also been hit by the cost of regulation such as Markets in Financial Instruments Directive II (MiFID II) in Europe and client shift towards greater passive investing. MiFID II is a regulatory intervention that among other things, requires fund managers to be charged separately for the research and trading services offered by banks and brokers.
Arqaam's closure follows a number of high-profile institutional stockbrokers that have decided to close or downscale their equity research and trading businesses in SA which has included the likes of Macquarie, Citi, Deutsche Bank and Credit Suisse.
“The current turmoil is due to significantly weaker volumes, lower commissions and the rise in direct market trading means the underlying stock broking model is fundamentally broken,” says Anthony Clarke, an independent small cap analyst that recently left the employ of an institutional stockbroker to strike out on his own.
Both locally and internationally lower trading volumes have compressed margins for brokers. Some of this reduction was by design – in the aftermath of the global financial crisis, investment banks were prohibited from using depositors’ money to fund certain types of investment banking activities.
The rule was named after former US Federal Reserve chair, Paul Volcker, who promulgated it.
Peter Koutromanos, a director of JSE-listed Avior Capital Markets, said the declining number of participants was not healthy for the system.
“Fewer participants means less transparency, lower liquidity and poorer price discovery, and it doesn’t bode well for the country’s savings pool,” he said. “Compliance costs have become very high and changes to regulations are frequent.”
SA’s weak economy and poor returns — the FTSE/JSE all share has risen only 10% over the past five years — meant the industry was probably overtraded and needed to adjust to the new diminished economic realities, said Clarke.
“The days of well-paid analysts only researching a handful of stocks in narrow industries are over. The advent of MiFID, where research and dealing have to be split into their respective component costs, means the current model has to evolve,” says Clarke.
With asset managers also feeling the pressure from lower returns and competition from passive products, writing a cheque for research that was previously considered to be "free" has also drastically affected the revenues for brokers.