Markets aren’t known for their patriotic fervour. Populated by cynics and motivated by money, there is little reason to expect local markets to support their national governments – particularly in the eurozone, where the response by the wealthy in crisis-hit countries has been to ship their cash to Germany or the UK.
But hang on! Perhaps brokers are more patriotic than popularly thought: it turns out that analysts tend to recommend shares in companies from their countries.
A nice piece of work by Charles de Boissezon at Société Générale‘s global equity engineering and advisory unit looked at broker recommendations on German and Spanish blue-chips, the two markets tending to be reasonably domestically-exposed.
Not surprisingly there are more buy recommendations on German than Spanish shares, and more sells on Spanish.
But the breakdown is revealing: analysts at German brokers are much more positive about German companies than analysts working for Spanish brokers, and vice-versa:
My post on the inherent bias towards bullishness among Wall Street’s analyst community prompted an interesting response from Ian Harnett at Absolute Strategy Research.
He agrees in principle that sell-side analysts and strategists tend to be pro-cyclical, raising predictions as the market rises (his London research house is on the sell-side too, it’s worth noting).
But he argues that when analysts refuse to raise their forecasts in line with rising markets, that is a good sign for investors – and that this is exactly what’s happening now. When it happened in 2005-6, the market soared even as analysts became more cautious.
Source: Absolute Strategy Research
It has long been known that Wall Street analysts working for investment banks (the sell side) are biased towards shares going up, from which they and their employers benefit.
This chart from Kevin Gardiner, head of European investment strategy at Barclays Wealth (part of the bank on the buy side, not the sell side) shows analysts tend to start each year optimistic, then become less optimistic as the year goes on. Each line shows how S&P 500 profit forecasts for a single year developed as time went by. Only in 1988, 2005 and 2006 did they end up more positive than they started, yet hope continually overcame reality.
Source: Barclays Wealth
There’s an intriguing explanation for the bias of sell-side strategists from Dhaval Joshi at BCA Research. The way for a strategist to prosper is to be right as frequently as possible – and he should know: he is a sell-side strategist himself. Assuming that the strategist can’t forecast the market with any accuracy, that means it is best to ignore the odd period of big losses and instead focus on the higher likelihood of rises.
It is quite reasonable to assume forecasts will not be accurate, partly because of their history (chart below) but mostly because if a strategist could accurately forecast the market, they would not need to work for a living.