As the regulators in Europe look to clamp down on the division of payment between research and trading, it seems the sell side is becoming self regulating. Since the collapse of Lehman and the ensuing GFC, the aggregate forecasts for analysts across all rated stocks in Japan (compared to company guidance within a +/-5% range) is over 50% vs around 30% in 2008. For forecasts in a +/-10% range to company guidance that figure is around 70%. What this means is that for buy-side firms looking to pay sell-side analysts for leading edge value added research is diminishing because the majority believe that hugging the company is the most prudent action. So perhaps in the reverse therein lies the opportunity for the few brokers that do think outside the box to do deep dive analysis.
Perhaps there is a correlation to the hollowing out of experienced hands on the sell-side in a quest to cut expensive overhead. One firm has recently put on a replacement strategist in his 20s which seems at odds with a firm seriously attempting to get to grips with uncharted territory. One would think that having a wealth of real time experience would carry significant advantages over someone who has read Harvard MBA case studies
Finance sector analysts saw a surge to over 70% now vs around 25% at the time of Lehman’s collapse. Industrial and Materials sector analysts show a similar lack of willingness to move away from the safety of company guidance.
In any event the inputs from the sell-side seem highly consistent with revenue output. It should hardly surprise those in the industry however if the regulator truly understood the industry better we wouldn’t be in the mess we’re in.
I note that the analysts in Korea had 3 buys, 8 holds with the lone foreigner from HSBC the only sell recommendation on bankrupt Hanjin Shipping. While Korean analysts are notoriously bullish and a “hold” rating essentially a sell, they stuck together to protect the national interest.