eBusiness Weekly
Taking Stock Kudzanai Sharara
The impact of financial analysts on capital market efficiency has been much debated in academia and in practice. A large body of academic research finds that analysts act as important information intermediaries, generating financial forecasts, stock recommendations and other fundamental research which help investors make informed decisions.
Other research, however, has identified situations and contexts in which the value of analyst coverage may be relatively more limited or lacking depth.
This debate was ignited this week, when Econet Wireless Zimbabwe financial director Roy Chimanikire reportedly said he prefers reading more of international analysts’ reports on Econet than local ones, which he said lack depth.
Generally, good equity research demonstrates the analyst’s emphasis on teasing out information that is most relevant to institutional clients. This often requires artful posing of incisive questions, which allow management teams to reach an optimal balance of financial disclosure. But for Chimanikire, the quality of questions asked also leaves a lot to be desired.
Debate has been raging since Tuesday, with some siding with him while others thought he was being harsh.
“We have had one-one one interviews with analysts. It is at such events that we have found out that our local analysts lack information compared to foreign analysts,” said Chimanikire adding that he has to rely on information published by foreign analysts because they invest a lot in acquiring information and the questions are pertinent.
This is true considering there has been little investment in the tools that analysts would want to use in their work. There are software and systems that are used by analysts across the globe, but are considered as expensive and not necessary locally. Local analysts are also regarded by their firms as jack of all trades, and asked to cover all the 63 listed counters. Such analysts will have a massive volume of financials to comb through, especially during earnings season, so providing in depth reports might be a big ask, one can only scratch the surface.
And then there are also fresh from college analysts, still raw in the game. If they are brave enough to ask questions, they might lack the so-called depth, and all this need to be put into context when judging performance or is it questions. Local companies should also consider holding their briefings post release of the results to give analysts ample time to comb through the numbers something which foreign analysts have the privilege of before commenting and asking questions.
It’s the market stupid!
Another point that need to be put into context is the state of the country’s capital markets. The stock market is currently trading at its highest levels since dollarisation. Companies are currently posting unprecedented results recording double digit growth rates. But all this will confuse even a seasoned analyst. What’s the true value of these stocks, or the revenues and cash that is being generated? Is $1 million in FCA Nostro equal to $1 million in an FCA RTGS? Accountants are currently in quandary and not sure of what value to report the 2018 financial accounts. If accountants do not have a clear picture, what more analysts? What valuation method do they use? With such a distorted market its even hard to ask the right questions.
Limited disclosure, limiting depth
It’s a good thing that the Securities and Exchange Commission is working on increasing its effectiveness in terms of regulation and registration of securities as well as disclosure of information. According to local analyst and CFA charter holder, Ranga Makwata, disclosures by local companies is not good enough as only very little information is shared with analysts.
The Zimbabwe Stock Exchange has not made things easier either, as it has not insisted or has not published all company financials on its website.
For instance, latest results from Econet, Seed Co, and Powerspeed were not uploaded on the ZSE website following their release. Some of these results, Powerspeed for example, are yet to put up results on their websites.
The informativeness of analyst reports, and the depth of analyst coverage, can be adversely affected by certain limited disclosures and information availability.
The quality and quantity of the information that is provided constructs the foundation for the questions that can be asked, analysts reckon. In order to set a solid basis for research reports it is crucial to also have sufficient information to work with.
Local analysts are of the view that they are not being favoured with some of the required information, which unfortunately will determine the depth of questions and reports.
“At analysts’ briefings management hardly give important fundamental information helpful for investors and analysts to formulate a view,” Makwata said.
He said some companies are notorious for evading questions and are dismissive especially on issues they are uncomfortable to discuss, and yet these would be pertinent.
“Surprisingly they are comfortable disclosing detailed information to foreign analysts forgetting that local analysts are influential in the way local investors trade their shares and the value perception on the business,’ said Makwata.
This is true, I have had the opportunity to accompany foreign investors to management meetings with listed entities and you can see the treatment is different.
Fear of victimisation also comes into play in some cases. Some analysts fear to ask uncomfortable questions one might end up being disallowed to attend meetings (AGMs, briefings).
“Having said that there’s always a room for improvement even within the analysts’ community just as we also expect managers to observe what international business managers do when presenting financials and interact with investors/analysts,” said Makawata.
He added that programmes like the CFA Research Challenge launched this year by the Investment Professionals Association of Zimbabwe are meant to train future analysts on best practice.
“Also the proposed amendments to the Securities and Exchange Commission Act especially compelling issuers of security to provide information into the SEC repository regularly will help enhance information availability.
“This should make analysts work easier. Currently we have to rely on begging for basic information from managers and they choose who to give and what to give depending on how they perceive an analyst’s perception of them,” said Makwata.
