The inter-dealer brokers are weaker this morning after investment bank UBS downgraded the sector.
The broker said structural pressures were building on Icap and Tullett Prebon.
We downgrade both ICAP and Tullett to Sell following: (1) a significant pick-up in structural pressures on investment banks – which we believe will ultimately squeeze IDB revenues; (2) increasing cyclical headwinds, notably in interest-rate-related activity; (3) the misconception that IDBs will benefit from volatility; and (4) the delay in structural changes benefiting ICAP. Tullett is our least preferred stock in alpha preferences
UBS said the brokers are vulnerable to the same trends banks are, and will not benefit hugely from market volatility
Although correlation between IDBs and investment banking revenues are low in the short term, we expect capital and regulatory strains imposed on banks to impact IDB revenues in 2012/2013. This, combined with greater certainty on low interest rates, should lead to weaker IDB revenues. Furthermore, we believe the idea that IDBs are significant beneficiaries of volatility is overhyped. IDBs do benefit from short bursts, but the actual relationship between volumes and volatility is rather weak.
The pair are two of the big fallers this morning. Icap was the biggest FTSE 100 faller, down 1.7% to 420p, while Tullett Prebon is down 3.2% to 369p.
