The China disconnect: analysts lose plot on financial stocks

Seventy per cent of analysts covering Chinese financial stocks rate them a buy, the highest among the world’s top 10 markets for such shares. Yet its financials are the worst performing this year in the group, Thomson Reuters StarMine data shows.

That disconnect has been on display in recent weeks, with Chinese financial stocks getting hammered on fears about a credit crunch and the country’s slowing economy. While the majority of analysts remain positive, mutual funds have dumped shares and short sellers have moved in.

“The sell-side, as is typical, has their blinders on,” said Thomas Monaco, a managing director at independent research firm Forensic Asia. He compared China’s financial industry to the Titanic. “It has hit the iceberg,” said Monaco.

Critics such as fund managers have long said research analysts were too soft on companies.

Analysts worldwide face pressure from investment banking colleagues to go easy on a stock in case that company wants to use the bank for an initial public offering, a merger or a debt deal. Analysts are also reluctant to cut access to a company they cover, something a sell rating can do.

Experts said the recommendation gap for China was wide for other reasons.