Sell-Side Analysis Most Useful When Most Wrong
January 12, 2014 Leave a comment
Sell-Side Analysis Most Useful When Most Wrong
Equity analysts work harder when economies and financial markets are slumping. They also have more influence over stocks — even though their earnings forecasts are less accurate. Economists Roger K. Loh and Rene M. Stulz, studying analyst reports from 1983 to 2011, concluded that greater uncertainty and career concerns amid recessions and market crises mean projections are tougher to make and prove less accurate. Even so, harder times push investors to rely on them more for guidance and so increase the usefulness of analysis.The paper, published by the National Bureau of Economic Research in Cambridge, Massachusetts, focused on analysis by sell-side firms, a term referring to banks and similar institutions that sell financial products.
The economists studied what happens to a stock in the days following a change in recommendation during what they labeled bad times. That included the October 1987 stock market crash and the credit crisis of 2007 to 2009.
“While their forecasts are less accurate during bad times, analysts are more active and their forecast and recommendation revisions are more influential,” said Loh of Singapore Management University and Stulz of Ohio State University. “Consequently, our evidence shows that analysts are more valuable in bad times.”
That’s the conclusion of a book released this month by the Peterson Institute for International Economics in Washington. It estimated developments such as fracking will increase economic growth by an average of 0.2 percent a year between now and 2020, or 2.1 percent in total.
That is less than some estimates, the publication said. The reason: While cheaper and more available energy will help reduce unemployment and spur manufacturing, investment and hiring in oil and gas production could come at the expense of other sectors, said authors Trevor Houser and Shashank Mohan.
Manufacturing, for example, may become more competitive, yet it accounts for less than a sixth of the country’s employment. A declining energy trade deficit could hurt factories by pushing up the dollar to the detriment of sectors such as automobiles and electronics.
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