Research 'sell' notes decline as conflicts persist

Only 9% of the recommendations from investment banks and brokerage firms globally are a "sell", from 20% ten years ago:. "research teams still appear conflicted between their conviction and their bank's client list". It makes their research not very useful.

A mere 9% of recommendations are a 'sell' right now

While so-called 'Chinese walls' were set up after regulators and legal cases shed light on the role analysts and bankers played in inflating the 1990s technology bubble, research teams still appear conflicted between their conviction and their bank's client list.

A mere 9 per cent of analyst recommendations by investment banks and brokerage firms globally are a 'sell' right now, based on 120,029 recommendations issued on nearly 17,000 companies, according to a Reuters study of StarMine data.

Ten years ago, sell orders jumped to nearly 20 per cent after a series of rules were put into place to wipe out banker-analyst conflicts. It's now back in the single digits and in some cases headed to levels last seen in the 1990s.

'Research is associated, rightly or wrongly, with an organisation and if somebody puts out a sell recommendation people don't like that,' said David Baran, co-founder of Tokyo-based hedge fund, Symphony Financial Partners.

An analyst with a negative view on a stock will often prefer to keep that belief tight, fearing pressure from top bankers seeking business from the company or being shut out by its senior executives.

'In general, it's difficult for a lot of the analysts who could be negative or negatively biased on a company and expect to see them welcome at the next investor meeting or get access to the management,' said Mr Baran.

The survey of data from StarMine, a Thomson Reuters product, showed just 6 per cent of the recommendations in the United States were 'sell' as compared with 10 per cent in Asia and 14 per cent in Europe.

Some analysts, when convinced of a stock's imminent drop, have been confident enough over the years to issue 'strong sells'. Around the world those calls now account for just 2.5 per cent of the recommendations.

That 6 per cent figure in the United States is nearing the 3 per cent mark that stayed in place before and during the tech bubble, according to a study published in the Journal of Accounting and Economics, before post-crash rules were put in place to encourage more honest research.

A major pressure on analysts to award a 'buy' rating has always been from their bank's 'sell side' - the equity sales staff who can pitch the recommendation to a fund client and earn a commission on a resulting order to buy a block of shares through the bank.

That remains the case, even though the analysts' role in directing revenues to the trading desk appears to be shrinking.

Greenwich Associates produced a recent study saying that most of the growth in the Asian commission pool between the third quarter of 2010 and the same period in 2011 occurred in Q4 2010, while trading conditions were challenging for much of 2011.

In Asia, where countries and regulations vary widely causing the region to be difficult to understand even for the biggest fund houses, sell side research does help filter ideas and assess where some of the investment flows might be. -- Reuters

(HONG KONG) More than a decade after US regulators moved to clean up the stock research industry at investment banks, analysts across the globe are as hesitant as ever to issue negative research on companies they believe are destined to struggle.