>Going through the motions

>Looking for gold amongst the shit is the now largely forgotten origin of this idiom, but perhaps accurately represents the goal of an equity research analyst. Finding nuggets however was never easy (indeed for 17th century diners it was the less alimentary challenging gold leaf that was being recovered) and it seems is no less so in today’s markets.  Notwithstanding the Tsunami of “actionable” and “high conviction” ideas that are spewed out each day to feed this multi-trillion dollar industry, the hard truth is that equity analysts as a group (or whatever a collection of analysts are called) have a terrible record in anticipating change.  In 2008, the FT All share index had fallen by 20% up to July, yet the consensus expectations for earnings growth (from 2007 to 2010e) continued to predict growth at +15-20% right up until October of that year before dumping.  Once in a while us “bottom-up” analysts need to raise our gaze from company motions to see what’s going on the the bigger world.  If industry is slashing jobs (as it had been doing with vigour in the US since Feb 08), employment data might provide a more revealing metric to gauge real levels of corporate confidence and prospective investment decisions rather than the trailing indicator of earnings guidance around which consensus expectations tend to orbit. Similarly on the way up, when trillions of dollars of additional liquidity are being pumped and helicoptered into the system, perhaps we shouldn’t be too surprised to see some of this overspill into other asset classes such as commodities, antiques and even equities   

Now don’t get me wrong. Markets can often screw up (hence the volatility) and analysts can provide an important insight into what markets are pricing in, which has to form the building blocks of any decision on risk/return, sensitivity analysis and therefore asset allocation. While markets chase short term and changing momentum, this is precisely the time that investors need to have firmer grounding of what the current valuations mean. In subsequent blogs I shall try and explore the prospective risk premiums being priced into the broader equity markets and the extent to which markets are again aiming off for possible reductions in market earning expectations and rises in real government bond yields. I shall also look at the systematic relationship in growth ratings that the markets price into media stocks with their changing cyclical and structural revenue growth profiles.