Enduring power of equity reports

It is known that Greek professional and retail investors, along with the majority of commentators in the local media, have been critical of many equity reports, especially those containing sell recommendations, produced by well-known international investment houses on Greek listed companies, to the point of even questioning the authors’ motives. Despite this, it is obvious that some of these reports continue to influence the local investment community’s decisions. To this extent, one has to wonder why this is happening. Is it because local investors lack a clear-cut investment strategy, or is it because they have no confidence in the company reports written by local brokerages? In the latest incident, the shares of Public Power Corporation (PPC) jumped as much as 5 percent before easing to close 3- percent higher at 12.70 euros on Thursday. Brokers and analysts attributed the sharp upward move to a positive report by analysts at investment bank Goldman Sachs. The report assigned a target price of 17 euros for PPC shares. Goldman Sachs, along with Salomon Smith Barney (SSB), acted as coordinators for the firm’s international offering in early December 2001. A few days earlier, a Lehman Brothers report on the failed National Bank-Alpha Bank merger on January 22 had a positive effect on National Bank of Greece (NBG) shares, according to local brokers. The report upgraded National Bank to «buy» from market perform, but lowered the price target for NBG shares to 28.3 euros from 30.6 euros. NBG shares closed at 24.84 euros on Monday, January 21, but rose over the next few days to 25.24 euros the next day, 26.52 on January 23 and 26.94 on January 24 as local institutional portfolios, which were underweight in NBG shares, rushed to build positions. There is no doubt that most analysts’ reports made the wrong calls on stocks in the last two years. This is not, however, a unique Greek phenomenon but an international one. It is known that even in the US stock markets, widely considered the most efficient in the world, buy recommendations exceeded sell recommendations by far in 2000. As a matter of fact, «buy» or «strong buy» calls accounted for 71 percent of the total 28,000 recommendations in the US market in 2000, as opposed to just 1 percent for sell recommendations in the same period – when the Nasdaq index fell by some 60 percent. There are no corresponding figures for the Greek market in 2000 or the US markets in 2001, although large foreign investment houses, hammered by accusations for biased equity reports, have become more careful in issuing recommendations. It is also known that company reports issued by local brokerage houses have been heavily biased toward «buy» recommendations while «sell» calls are a rare species. This bias can be explained, in some cases, by the fact that some brokerages, or the group they belong to, have been doing business with the major shareholders of the firm under coverage or because they act as market makers in the company’s shares. In other cases, the reports merely reflect the authors’ expectations about the company’s future growth prospects and valuation. Local institutional investors and some retail investors alike are fully aware of these links between brokerages and listed firms which may help explain why professional investors usually pay little attention to equity coverage by local brokerages. The credibility of these reports is further undermined by the fact that a number of them do not contain original research but rather reflect the views of the top management of the company under coverage, and local institutional investors are in a position to know the latter. Local institutional investors tend to pay more attention to equity reports written by foreign houses for three reasons. First, they know these reports can generate demand for the Greek company’s shares, especially for large-caps with a heavy weighting in stock market indices, which may hurt their own performance vis-a-vis their competitors in Greece if they are underweight on the stock. Second, they assume, even though they may question the motives, that the large foreign investment houses have more experienced analysts with better access to information. Third, a number of local institutional portfolios simply seek higher returns without pursuing a well-defined investment strategy. This means they are prone to buying and selling stocks based on market momentum and perceptions, sometimes created by analysts’ reports, rather than company fundamentals. All in all, the influence that some foreign equity reports exert on share prices of prominent local companies can be explained by two factors: First, the lack of credibility characterizing many local equity research reports and second, the tendency of local professional investors to pay more attention to foreign research for reasons related to own portfolio performance, lack of clear-cut investment strategy and recognition of foreign analysts’ superior expertise. Are all these justified? Perhaps not. However, for this to change, Greek brokerages will have seriously to address the credibility matter and local institutionals will have to act more as investors and less as traders. Confronted with rebellion, the majority of politicians succumb.

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