The View | Analyst research is a huge waste for this one reason
‘According to a recent Thomson Reuters survey analysts historically have underestimated earnings 63 per cent of the time’
Knocking stock market analysts is a relatively harmless pastime disliked only by analysts themselves. However as these so called experts routinely misread the market and the performance of individual companies they are vulnerable to criticism of a kind that is especially justified right now as we are in the midst of the reporting season.
What usually happens is that broker’s analysts make unduly cautious estimates of corporate earnings thus allowing careless headline writers to proclaim something on the lines of “Ever Wonderful Corp results beat estimates”, however it could equally be stated that: “Ever Wonderful earnings forecasts – wrong again”.
According to a recent Thomson Reuters survey analysts historically have underestimated earnings 63 per cent of the time. This year some 78 per cent of S&P 500 companies who have reported their annual results have returned earnings above consensus estimates. In Europe analysts seem to be doing better as only 43.5 per cent of the earnings returns for the Stoxx 600 groups have beaten average estimates.
One big reason for these inaccurate estimates is that analysts are heavily dependent on corporate finance officers for the information deployed in their forecasts. Corporate executives like toying with them and can often deliberately mislead so as to lower expectations which are then confounded by “a better than expected performance”.
In Hong Kong the big tycoons do their own talking at well attended press briefings where they tend to downplay the prospects for their companies in the happy expectation that this modesty will yield plaudits for our friend - “better than expected performance”.
Willie Purves, HSBC’s first group chairman, was a master of dealing with earnings questions from analysts and journalists who huddled together for set piece occasions. He would carefully repeat whatever was asked, often slightly changing the question so that he could give the answer he preferred. In his dour Scottish way he would then insist that the bank’s prospects were confounded by an uncertain environment and therefore nothing was certain. Thus little hard information was delivered but it was withheld with style.