Photographer: Bay Ismoyo/AFP via Getty Images

The Global War Against Skeptical Research

  • Indonesia cuts ties with U.S. bank after bearish analyst note
  • More governments are seeking to stifle negative market views

The world is getting more hazardous for skeptical analysts, the banks that employ them and investors who rely on their published research.

Even by the rough-and-tumble standards of emerging markets, Indonesia’s punishment of JPMorgan Chase & Co. this week for a bearish analysis of the nation’s stock market stands out. The country’s finance ministry cut business ties with America’s biggest bank, telling reporters Tuesday that the firm’s November research note wasn’t “accurate or credible.”

Official attempts to deter such research are nothing new in developing economies, but rarely do governments retaliate against a Wall Street powerhouse for publishing opinions that contradict official views. The move builds on a trend: In July, Turkey’s banking regulator issued an industry-wide warning to avoid negative reports. In 2014, Brazil President Dilma Rousseff chastised an analyst for suggesting her election would hurt the economy.

“It’s definitely been getting more aggressive recently,” said Paul McNamara, a London-based emerging markets fund manager at GAM Ltd., which oversees client assets of about $65 billion.

As money managers around the world pull capital from developing economies on concerns over rising U.S. interest rates and a stronger dollar, policy makers are becoming especially sensitive to critical analyst opinions, according to Medley Global Advisors. The risk for Indonesian authorities is that their actions backfire by undermining investor confidence in the country’s market research.

“Published research is already a diluted view, but these kinds of actions will make it even more bland,” McNamara said. “Retail investors will have no idea what analysts are really thinking because the written reports won’t say anything real.”

JPMorgan downgraded Indonesia’s equity market by two notches to underweight from overweight in a Nov. 13 report, calling it a “tactical response” to Donald Trump’s election win. The bank also cut its rating on Brazil, while noting that both countries may provide a "better buying opportunity” later.

Indonesia’s finance ministry said Tuesday it will stop using JPMorgan as a primary dealer and as an underwriter of its sovereign bonds. While Finance Minister Sri Mulyani Indrawati said the government is open to improvement and respects the assessments of research providers, she said banks should take responsibility for economic reports that “could influence fundamentals and psychology.”

“The finance ministry and the government are very open to criticism, but JPMorgan’s research result was pretty weird and unfair,” Sofjan Wanandi, head of the experts team at the vice president’s office, said in an interview on Wednesday.

JPMorgan’s business in Indonesia continues to operate as normal, the bank said in an e-mailed statement Tuesday. “The impact on our clients is minimal and we continue to work with the Ministry of Finance to resolve the matter,” the bank said. On Wednesday, the finance ministry clarified that it won’t stop JPMorgan from conducting private-sector business in the country.

Turkey’s Warning

Government retaliation for negative research can have a chilling effect on market analysis. 

Some investment banks in Turkey scaled back commentary on sensitive political subjects after the banking regulator warned brokerages last July against publishing “reports that would turn expectations and the atmosphere negative.”

That same month, the head of research at one of Turkey’s largest brokerages was stripped of his professional license and charged criminally over a report analyzing the impact of a failed July 15 coup targeting President Recep Tayyip Erdogan. The criminal charge was later dropped, but an investigation started by the capital markets regulator is still ongoing. An official for the Ankara-based market regulator SPK, who asked not to be named citing the institution’s policy, declined to comment on the investigation.

Analysts Afraid

In 2014, Rousseff publicly shamed an analyst at Banco Santander Brasil SA for forecasting a deterioration in the country’s currency and stock markets if she were re-elected. The firm later said it fired the analyst, disowning the remarks as that person’s opinion, not necessarily reflecting the company’s view. The episode spooked other analysts, according to Klaus Spielkamp, head of fixed-income sales at Bulltick LLC.

“If anybody had anything bad to say about Brazil at the time, they wouldn’t say it,” he said. “Everybody was afraid.”

Rousseff’s campaign press office declined to comment at the time, as did the nation’s banking association, Febraban. Rousseff was replaced as president last year after being impeached for breaking budget laws.

Other governments’ moves also have stoked concerns among research analysts. China’s crackdown on hedge funds and broker-dealers for alleged trading abuses during its 2015 stock market rout was seen by some as targeting negative financial views. And in Italy prosecutors accused Fitch in 2012 of mismanaging its analysis of the euro-zone debt crisis. The firm disputed the claim, and the case against it was later dismissed.

Capital Outflows

While governments usually go after negative research during political or economic turbulence at home, the biggest concern for emerging markets today is capital outflows tied to the prospect of faster interest rate increases under a Trump presidency. International investors pulled $23 billion from developing-nation funds from the start of October through mid-December, according to the Institute of International Finance.

“Governments are sensitive to criticism, especially in countries where there are large capital inflows that can quickly turn into outflows and prompt a currency sell-off,” said Nigel Rendell, London-based senior analyst at Medley Global Advisors.

Yet even the most developed market isn’t immune to concerns that free speech is being stifled. S&P Global Ratings initially claimed that the U.S. government’s 2013 lawsuit against the firm for allegedly inflating ratings on subprime-mortgage bonds was in retaliation for S&P’s downgrade of America’s sovereign credit rating. The firm dropped that accusation when settling the government’s case in 2015, acknowledging in a statement of facts that it hadn’t found evidence to support the claim. The company didn’t admit wrongdoing in agreeing to pay $1.375 billion to federal and state authorities.

Changing Landscape

For Andre Spicer, a professor at the Cass Business School at City University in London, the increased willingness of governments to challenge big banks like JPMorgan reflects the industry’s diminished reputation in the wake of the global financial crisis.

“In the past, large investment banks were masters of the universe,” Spicer said. “Now, nation-states are flexing their muscles.”

Still, Indonesia relies on international securities firms to market its sovereign bonds to overseas investors, who accounted for about 40 percent of local government debt holdings as of September, according to the Asian Development Bank. If policy makers were to alienate more banks with similar spats, they might undermine the government’s ability to finance its spending plans.

“JPMorgan has been in the country for a very long time,” said Christopher Wheeler, an analyst at Atlantic Equities in London. “It will blow over them, but probably do more harm to Indonesia.”

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