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Saturday, 14 June 2008

Analysts, Thanks For Telling Us To Buy In A Bear Market

Poor stock research costing Singaporean investors billions of dollars. Its time to start grading the performance of brokerages.

Jan 3, 2001

When the Singapore stock market fell one day, an analyst attributed it to the overnight Wall Street decline. Fair enough. But then a few days later when shares rose, another researcher explained it was also due to US weakness.

How was that possible? Because, the man beamed, foreign funds would now return to Singapore. When I heard it I thought that the world of stock analysing had gone bonkers.
Actually, like they say, I ain't seen nothing yet.

Of all the rude awakenings that the bear market brought last year, the one that stands out is the poor standard of stock analysis in Singapore.

Do you remember the October market rally of 1999 when analysts were predicting, almost to a man, that the New Year would be an even stronger year and a ST Index of 3,000-3,200?

It was then hovering around 2,600. As that year ended, the ST Index never reached 3,000 or even 2,000, but only 1,927. Instead of rising, it had fallen by 22.3 per cent.

For Singapore to become a market regional centre and promote public investment there has to be a quantum leap in the industry's advisory capability. At the moment with a small exception, it is poor.

The upgrading is more important with the approach of E-trading. In the future, brokers and remisiers will themselves take on the role of advisors in order to survive. Imagine the harm they will inflict on their customers if standards remain what they are today.

And most of the causes of the recent weak performance were not imponderable ones that caught the world by surprise. They included US interest rate hikes, the collapse of NASDAQ, Indonesia's chaos and Asia's financial instability, where signs had been evident for a long time.

It is, of course, true that investors often under-mention the contribution of researchers when the market is going up but blame them when the rains came. You know what they say: "If I make money, I'm smart. If I lose, the broker is stupid."

But the last phrase is not always wrong in Singapore. Researchers are paid big bucks to give good advice.

They have to be smarter than the taxi driver in stock picking. Besides, if Singapore is to be a regional hub, standards have to be world class.

When 17 of our finest brokerages consistently pronounce a stock a "strong buy" or "overweight" (and one "neutral") and it goes down by 60 per cent in less than a year, something is terribly wrong.

The stock market is full of such stocks. Analysts cannot, of course, be blamed for a bad market, only for failing to warn their customers about it. Otherwise why do we need them?

What is this telling us? Firstly, our analysts are generally below par. Many of them are young, textbook-bound and have poor reading of the market.

Some are doing things wrong like issuing a "buy" advice, then forgetting to follow it in later when fundamentals turn and the price has plummeted.

In other words they tell you to buy at $6.00 and sell at $3.00.

Sure there are researchers and there are researchers. Some are good or very good while the rest cost their clients dearly.

They also missed out on the severity of the Asian financial bug, the ST Index's sharp market from 2000 to 1,000 (a 9 year low) in just 12 months.

Instead they started telling clients to pick up bargains during the early part of the decline when street-wise investors were selling.

You can tell the bad from the good. The bad has twice as many "buy" recommendations in a long bear market as the smart ones, a mini-disaster for people who heed them.

With their noses stuck on what they had learn at business school, they dish out theoretical advice; after a 30 per cent fall, buy.

Another failure - not many brokerages gave early recognition to the new economy as NASDAQ surged or a warning of an imminent sell-down of "old economy" stocks - until too late.

More recently, they were again slow to react to the dot.com collapse.

Few were clever or fast enough to warn people about the impact of Indonesia's rising woes on the Singapore market.

To be fair, the business of giving advice has been made tougher by the IT revolution which is changing life itself. The dot-com business is unpredictable.

Even seasoned global players like George Soros and Warren Buffet threw up their hands and professed bewilderment at the markets. All the rules seem changed forever - until the NASDAQ tanked.

Covering the dot.com companies, in particular, is next to impossible as the savvier Americans are discovering. There were numerous examples recently of companies looking well suddenly going bust.

"An analyst's performance also depends on outside factors beyond his control. One is company transparency," explained a brokerage director.

Unlike in the West, managers here just don't understand that it is their job to grant more access or information to researchers.

On the flip side, inexperienced researchers hunt in packs; what one says today so will say half a dozen tomorrow. Others are just number crunchers, basing their assessments by just looking at accounts and avoiding the harder work of talking to workers, customers and checking warehouses.

But investors suspect there is a more sinister reason why some analysts dish out so many "buy" or "overweight" calls in the early phase of a falling market.

"If I want to believe the worst, I'd say the research department is merely following company policy. More "buy" calls mean more business and in a poor market, they are needed.

Another darker suspicion is that the unscrupulous push out "buy" orders to allow favoured customers to unload - or vice versa.

How can we lift competency and fairness for stock researchers? Have a grading system for their companies to be conducted by a credible institution, like the Singapore Securities Investors Association of Singapore (SIAS) or a government-selected committee.

It should devise a method of grading their research work at least once a year and making the results public.

At the end of the day, analytical work is not just about gathering data and digesting knowledge; good instincts are as important.

Recently, the Asian Wall Street Journal conducted a six-month long, stock-picking experiment, pitching taxi drivers against professional money managers in several cities.

Who came out better? Yes, you guessed it - the drivers. I think the next time I take a cab, I'll work on rearranging my poorly performing portfolio.

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