This year’s rankings show independent research houses may be a better model
By CHEW XIANG 6 April 2009
(SINGAPORE) The good thing about a crisis of this depth and scale is that no matter who you are and what happened to you, there is someone you can blame for it.
Commentators have put forward US regulators and Wall Street CEOs as pet targets, but they are a little far away and so immune from the more directly satisfying forms of retribution.
Still, there are plenty of others to go around. Structured product victims have their relationship managers, if they can still find them; and almost anyone can blame analysts, those whose frothy buy calls were so profitable - until, suddenly, they weren’t.
‘Stock investment is basically about forecasting the future,’ says Regina Lim, a property analyst with UBS. ‘Analysts will always face criticism when their predictions turn out to be wrong.’
But it takes a certain kind of genius to get things so spectacularly wrong. As this newspaper noted last month, at the beginning of 2008 every single investment house projected the Straits Times Index to end the year above 3,100, with one broker even setting a 4,800 target. As it turned out, the index finished at 1,761.
There are as many explanations as there are bad calls. ‘I think the biggest difficulty is we’ve been in a period of unprecedented volatility,’ says Thilan Wickramasinghe, who covers banks for CLSA. ‘I think no one could have predicted the speed that this crisis unfolded and the magnitude of this crisis. As analysts we base our opinions on what is available publicly.’
Cheryl Lee, another UBS analyst, offers something akin to a cri de coeur. ‘A thousand different data points could be pointing the analyst in conflicting directions. And our job is to sieve through the mountain of data and decide what is important to the company we are looking at, make a call on the stock and explain clearly our basis for this call.
‘It is a process that seems simple in theory, but is in reality much more complex.’
The truth is that when investors rely on others for their research, they do so at their considerable peril. As David Lum of Daiwa Institute of Research says, analysts ‘are wrong most of the time’.
Still, some research houses get it right, and even fewer get it right more often than the rest. This year’s StarMine’s - which was bought by data provider Thomson Reuters last year - annual broker rankings tells you just which ones did so last year and why.
For CLSA, which tops the recommendations category for STI stocks, it is its independence from its investment banking operations.
As Mr. Wickramasinghe says: ‘Our main product is research. Our clients reward us with commissions based on the quality of our research and that’s all it is, as opposed to some of the larger investment banking houses where research is a loss leader for larger investment banking deals.’
‘I think it actually enables us to differentiate ourselves a lot in cycles like this. This is a much stronger business model than the traditional investment banking business model,’ he says.
The difference in models shows, says Caroline Maes, who covers shipping and marine stocks for the house. She points out they are often the first to turn negative on a stock. ‘Independent research houses are definitely a better model going forward,’ she notes.
Daiwa, which is placed after CLSA in the same category, is also ‘fairly independent’, notes Mr. Lum.
‘We still have to work closely with the securities group but we’re not under that kind of pressure,’ he says. ‘It’s always a concern, but here, it’s actually the way it’s set out. The management is totally separate from the sales and investment banking operations.’
In terms of earnings estimates for STI stocks, Goldman Sachs wins the laurel, followed by UBS and Bank of America-Merrill Lynch.
In the small and mid-cap coverage universe, UBS topped both the recommendations and earnings estimates categories, followed by Macquarie Research, BOA-Merrill and Citigroup.
For them, and the rest of those who got their calls spot on, was it luck - or good judgement? If you’re on the warpath for someone to blame for the crisis, avoid these guys. At least they got it right.
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Some get it spot on even in a volatile year
This year’s rankings show independent research houses may be a better model
By CHEW XIANG
6 April 2009
(SINGAPORE) The good thing about a crisis of this depth and scale is that no matter who you are and what happened to you, there is someone you can blame for it.
Commentators have put forward US regulators and Wall Street CEOs as pet targets, but they are a little far away and so immune from the more directly satisfying forms of retribution.
Still, there are plenty of others to go around. Structured product victims have their relationship managers, if they can still find them; and almost anyone can blame analysts, those whose frothy buy calls were so profitable - until, suddenly, they weren’t.
‘Stock investment is basically about forecasting the future,’ says Regina Lim, a property analyst with UBS. ‘Analysts will always face criticism when their predictions turn out to be wrong.’
But it takes a certain kind of genius to get things so spectacularly wrong. As this newspaper noted last month, at the beginning of 2008 every single investment house projected the Straits Times Index to end the year above 3,100, with one broker even setting a 4,800 target. As it turned out, the index finished at 1,761.
There are as many explanations as there are bad calls. ‘I think the biggest difficulty is we’ve been in a period of unprecedented volatility,’ says Thilan Wickramasinghe, who covers banks for CLSA. ‘I think no one could have predicted the speed that this crisis unfolded and the magnitude of this crisis. As analysts we base our opinions on what is available publicly.’
Cheryl Lee, another UBS analyst, offers something akin to a cri de coeur. ‘A thousand different data points could be pointing the analyst in conflicting directions. And our job is to sieve through the mountain of data and decide what is important to the company we are looking at, make a call on the stock and explain clearly our basis for this call.
‘It is a process that seems simple in theory, but is in reality much more complex.’
The truth is that when investors rely on others for their research, they do so at their considerable peril. As David Lum of Daiwa Institute of Research says, analysts ‘are wrong most of the time’.
Still, some research houses get it right, and even fewer get it right more often than the rest. This year’s StarMine’s - which was bought by data provider Thomson Reuters last year - annual broker rankings tells you just which ones did so last year and why.
For CLSA, which tops the recommendations category for STI stocks, it is its independence from its investment banking operations.
As Mr. Wickramasinghe says: ‘Our main product is research. Our clients reward us with commissions based on the quality of our research and that’s all it is, as opposed to some of the larger investment banking houses where research is a loss leader for larger investment banking deals.’
‘I think it actually enables us to differentiate ourselves a lot in cycles like this. This is a much stronger business model than the traditional investment banking business model,’ he says.
The difference in models shows, says Caroline Maes, who covers shipping and marine stocks for the house. She points out they are often the first to turn negative on a stock. ‘Independent research houses are definitely a better model going forward,’ she notes.
Daiwa, which is placed after CLSA in the same category, is also ‘fairly independent’, notes Mr. Lum.
‘We still have to work closely with the securities group but we’re not under that kind of pressure,’ he says. ‘It’s always a concern, but here, it’s actually the way it’s set out. The management is totally separate from the sales and investment banking operations.’
In terms of earnings estimates for STI stocks, Goldman Sachs wins the laurel, followed by UBS and Bank of America-Merrill Lynch.
In the small and mid-cap coverage universe, UBS topped both the recommendations and earnings estimates categories, followed by Macquarie Research, BOA-Merrill and Citigroup.
For them, and the rest of those who got their calls spot on, was it luck - or good judgement? If you’re on the warpath for someone to blame for the crisis, avoid these guys. At least they got it right.
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