For brokerages here, it's always time to buy
PRAVIN PALANDE
TIMES NEWS NETWORK[ FRIDAY, OCTOBER 27, 2006 03:35:01 AM]
MUMBAI: Ever since the markets have been on a roll, brokerage houses have done brisk business. Every investor is dying to lay his hands on the equity analyst report issued by these brokerages. But pause for a moment and ask yourself a question: just how accurately do the stock recommendations from the growing tribe of equity analysts mirror the ups and downs of the markets?
Its a question that throws up some interesting answers about investor psychology, if you look closely at the data Bloomberg provides on overall analyst recommendations for the Indian market. The answers get even more interesting when you contrast it with the US market.
Today, both the Sensex and the Dow are at an all-time high. Yet if you bunch up all the analyst recommendations made since 00, when the Sensex was poised around the 3000-mark, the trend is clear: buy recommendations in the US have been falling since 00, while in India, the trend has remained constant, irrespective of the state of the markets.
So heres the moot question: are US analysts simply less optimistic about the US market? Or is the Indian analyst an eternal optimist?
In 00, when the Indian markets were trading at a price-earnings ratio (P/E) of around 23, most analysts preferred to take a long-term view on India. As a result, 72% of the recommendations were on the buy side. Yet as the markets fell, the analysts did not budge from their buy recommendations.
Even as the Sensex has crossed the 12K mark, the P/E is around 24 and valuations seem somewhat stretched. One would expect broking houses to aggressively start marketing sell side recommendations. But that has not happened.
If you look at the Nifty 50, only VSNL, MTNL and Jet Airways have net sell recommendations. Amongst the 16 recommendations available for Jet Airways, 12 are a sell. As expected, Infosys Technologies, TCS and Satyam Computers are the most recommended stocks to investors.
Broking houses in India prefer not to get drawn into the reasons behind this curious phenomenon. But privately, they admit that they prefer to give buy recommendations. Why? It seems Indian investors suffer from a psychological loss aversion. In other words, they prefer avoiding losses than acquiring gains. So when a broker puts a sell recommendation, it seldom prompts investors to take action on that report. The result: the broking house stands to lose business.
Whats more, broking houses also have to cope with the problem of upsetting investment banking clients, every time they put a sell recommendation on their stock.
In the US, thanks to the SEC crackdown on irrational and somewhat exuberant reports and forecasts post-the Enron fiasco, analyst recommendations have clearly been tempered.
In fact, in the year 00, buy recommendations were 73% of all recommendations. In 06, these were down to 50%.So the next time you pick up a copy of an analyst report, it might be a good idea to remember that there is always a time to sell.
PRAVIN PALANDE
TIMES NEWS NETWORK[ FRIDAY, OCTOBER 27, 2006 03:35:01 AM]
MUMBAI: Ever since the markets have been on a roll, brokerage houses have done brisk business. Every investor is dying to lay his hands on the equity analyst report issued by these brokerages. But pause for a moment and ask yourself a question: just how accurately do the stock recommendations from the growing tribe of equity analysts mirror the ups and downs of the markets?
Its a question that throws up some interesting answers about investor psychology, if you look closely at the data Bloomberg provides on overall analyst recommendations for the Indian market. The answers get even more interesting when you contrast it with the US market.
Today, both the Sensex and the Dow are at an all-time high. Yet if you bunch up all the analyst recommendations made since 00, when the Sensex was poised around the 3000-mark, the trend is clear: buy recommendations in the US have been falling since 00, while in India, the trend has remained constant, irrespective of the state of the markets.
So heres the moot question: are US analysts simply less optimistic about the US market? Or is the Indian analyst an eternal optimist?
In 00, when the Indian markets were trading at a price-earnings ratio (P/E) of around 23, most analysts preferred to take a long-term view on India. As a result, 72% of the recommendations were on the buy side. Yet as the markets fell, the analysts did not budge from their buy recommendations.
Even as the Sensex has crossed the 12K mark, the P/E is around 24 and valuations seem somewhat stretched. One would expect broking houses to aggressively start marketing sell side recommendations. But that has not happened.
If you look at the Nifty 50, only VSNL, MTNL and Jet Airways have net sell recommendations. Amongst the 16 recommendations available for Jet Airways, 12 are a sell. As expected, Infosys Technologies, TCS and Satyam Computers are the most recommended stocks to investors.
Broking houses in India prefer not to get drawn into the reasons behind this curious phenomenon. But privately, they admit that they prefer to give buy recommendations. Why? It seems Indian investors suffer from a psychological loss aversion. In other words, they prefer avoiding losses than acquiring gains. So when a broker puts a sell recommendation, it seldom prompts investors to take action on that report. The result: the broking house stands to lose business.
Whats more, broking houses also have to cope with the problem of upsetting investment banking clients, every time they put a sell recommendation on their stock.
In the US, thanks to the SEC crackdown on irrational and somewhat exuberant reports and forecasts post-the Enron fiasco, analyst recommendations have clearly been tempered.
In fact, in the year 00, buy recommendations were 73% of all recommendations. In 06, these were down to 50%.So the next time you pick up a copy of an analyst report, it might be a good idea to remember that there is always a time to sell.