Breakingviews - Hadas: Power shifts from analysts to lobbyists
LONDON (Reuters Breakingviews) - Spare a little sympathy for sell-side equity analysts. That is not always an easy request. Until recently, investment banks’ buy-and-sell (but mostly buy) experts had a pretty good life – high pay, lots of travel, often wrong and rarely punished for it. Their lives are now a lot harder.
The rise of passive fund management has cut into revenue from trading stocks - the main source of that generous compensation. Regulation has amplified the hit. The latest version of Europe’s Markets in Financial Instruments Directive has made it harder for fund managers to use clients’ funds to pay for long and rarely insightful reports about listed companies. There is no reprieve for including dozens of complex spreadsheets which generally predict, in excruciating detail, that the future will be very much like the past.
Private meetings with investors are also less valuable, now that compliance departments discourage analysts from sharing their most valuable content: wink and nudge to tell the client what you really think. With corporate action increasingly moving to private markets, old-fashioned stock analysts have fewer companies to study. They also have less opportunity to turn one of their key skills - the rapid calculation of valuation metrics - into a more lucrative job in investment banking.
If all that were not bad enough, the world works differently too. It has been since the 2008 financial crisis caught pretty much everyone off guard. Like other participants in financial markets, company experts were basically studying road signs in the face of an onrushing avalanche.
Bank analysts looked especially irrelevant. Their detailed corporate and industry knowledge was largely useless when the only thing that mattered was politics. No financial model could anticipate when governments would rescue banks or how the bailout would be structured.
That blow was not a blip. These days, movements in share prices depend less than ever on the things that analysts know about – new products, changes in market share, and shifts in profit margins. Individual stocks are more likely to be caught up in big moves caused by forces that company analysts cannot be expected to master.
Take monetary policy. Rising corporate and consumer leverage has made central banks almost as important for companies’ earnings as their ability to control prices. But equity analysts generally have little special insight into the future direction of interest rates, let alone financial regulation.
Leverage also leaves companies more vulnerable to minor shifts that analysts struggle to anticipate. The main reason that brewing giant Anheuser Busch InBev is trying to reduce the debt on its balance sheet is a pretty small shortfall in the expected demand for beer.
Then there is Donald Trump. The U.S. president has single-handedly added significantly the unpredictably of share prices. Equity analysts throw up their hands because no one can know what he will try to disrupt next, or whether the latest aggressive tweet will actually lead to a change in policy.
China is becoming another big, not-in-my-job-description variable, even without Trump’s trade war and accusations of currency manipulation. The world’s second-largest economy not only has extensive international trade links and high ambitions for global economic influence. It also has large debts, a shrinking working-age population and an authoritarian government that may be stifling the economy. Analysts can guess and hope, but they cannot really predict.
On the other side of the globe, there is Brexit. For anyone following companies with exposure to the British economy, the UK’s scheduled departure from the European Union is a large unknowable unknown. With less than three months to go before the latest deadline, there are a wide range of plausible outcomes – from a possibly ruinous “no-deal” exit to a confidence-boosting revocation of the whole plan to leave. Like everyone else, equity analysts are totally in the dark.
The era of big market-moving forces is unlikely to end soon. Consider the potential effects of climate change, the spread of economically radical authoritarian governments, or another financial crisis.
The profession will not disappear, though. Imaginative equity analysts are already finding ways to help active investors deal with - and profit from - the new types of uncertainty. Still, some of them might want to deploy their skills elsewhere.
One profession is particularly suited for the men and women who have a grasp on the details about how specific companies work and who understand what sort of special privileges would pay off most handsomely. Equity analysts are well placed to become corporate lobbyists.
Of course, some retraining would be necessary, especially in the art of finding worthy-sounding explanations for self-serving policies. Then again, any analyst who has written a glowing “buy” recommendation for a dubious corporate banking client has experience of turning truth, or something like it, to their employer’s advantage.
Lobbyists need fewer spreadsheets, and their sales calls tend to require less travel. However, the pay is still good. And they are less vulnerable to big outside forces. As powerbrokers, former equity analysts could help create market surprises that they now struggle to predict.
(The author was an investment bank equity analyst from 1989 to 2004.)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.