A big regulatory change in Europe has hardly scored a mention in the local press but investors here should be aware of this development as it may be a drag on our local market this year.
The new European Union rules forbids investment banks from using fees associated with market transactions (e.g. brokerage and capital management) to subsidise stock research, which is often given out for free.
This means European investors will have to get used to paying for research if they want it under the Markets in Financial Instruments Directive – more affectionately referred to as MiFID II.
The separation of research from trading is to ensure greater transparency in financial markets and to better prevent conflicts of interests.
The key beneficiary are retail investors as they will have a more level playing field, in theory at least.
The downside is the potential for European investors to withdraw from overseas markets like ours, which is run by ASX Ltd (ASX: ASX).
Investors in Japan have voiced concerns that MiFID II will stunt the bull run in that country, according to a report in Bloomberg.
European investors may become reluctant to buy Australian or Japanese shares as local brokerages will be more restricted in pitching stocks to these investors under the new rule, which came into effect yesterday.
It is our largest cap stocks with international operations that could take the brunt of this as they typically have more appeal with European investors.
This group of stocks include hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC), which runs the largest private hospital in France, international logistics company Brambles Limited (ASX: BXB), hearing implant maker Cochlear Limited (ASX: COH) and fast food company Domino's Pizza Enterprises Ltd. (ASX: DMP), which has a growing European presence.
It will be interesting to see how London and Australian dual listed companies like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are impacted as well.
However, we are unlikely to feel any immediate impact from the rule change and experts are unclear about the extent of the impact on international equity markets.
The bigger ramification from MiFID II is whether the rest of the world, including the US and Australia, adopts similar rules. That can't be good news for investment banks like Macquarie Group Ltd (ASX: MQG).
It's a case of being alert but not alarmed. Investors should keep a close eye on this potential emerging issue in 2018.
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