SocGen: Analysts Are Kinda, Sorta Out of Ideas
Markets of late resemble nothing of late if not a Richter scale riding a roller coaster.
With plenty of stocks making new highs and new lows, there should in theory be an abundance of opportunities for analysts to present investment ideas to clients in desperate need of their guidance.
Instead, the sell side seems to be suffering from a severe case of analysts' block, according to a new note from Societe Generale SA.
"Surely this would mean that such wild moves and diverging performances provide unusual opportunities, and the sell side is bound to come up with great opportunistic trades," SocGen strategists led by Charles de Boissezon write of recent market volatility. "Not so: our 'sell-side idea meter' (patent pending) is at record lows."
The meter measures the difference on a sectoral level between analysts' top buys and top sells in European equities, ranking them from "one" (a strong sell) to "five" (strong buy). The highest possible spread is four (or five minus one) but, per the chart below, the figure has usually hovered around half a percentage point, though it did, during the financial crisis, reach more than one.
Currently, however, the meter sits at a reading of 0.4 or the lowest spread in ratings since 2011 and 0.1 points below the long-term average.
"All sectors show very similar buy recommendations at present (3.75/5 for the overall market)," note the SocGen strategists. "As the market consists of a large variety of sectors, indiscriminate buying means no conviction in our view (the consensus is always a buyer of the market anyway: the long-term average rating is 3.72). Of course, on a stock by stock basis, things may feel differently, but we must all acknowledge that collectively there is no stand-out call coming from the bottom-up."
Instead, analysts appear to be the most bullish on European equities than they've been in about four years. That optimism is coming about as valuations—the thing used by analysts as the foundation for stock recommendations—have been falling. It's only the second significant disconnect to happen between analyst ratings and price-earnings (P/E) ratios in recent history, per the SocGen chart below.
Of course, P/E ratios are all but useless without clarity on the denominator and here uncertainty is at an historic high for certain sectors.
"This makes the margin of error of buying sectors for P/E cheapness based on misguided earnings potentially very costly," concludes SocGen. "Naturally, as we said earlier, investors would tend to consider earnings trends and try to figure out the profit cycle as best they can.
"Today this would prove tricky: there are key questions such as how China will behave, whether oil prices will recover, etc. that are not easy to answer yet without some doubts or risks to incorporate. Our experience tells us that usually when the sell side focuses on longer-term earnings, the buy side focuses on short-term cash."