BROKERAGE HOUSES CALL THE SHOTS - SHOULD WE FOLLOW THEM?
By Ruma Dubey
The big question which looms large on our minds today is – are FIIs alone running the markets today?
In many ways, we all probably know the answer – a vehement ‘YES’ but what comes as shocking is the way in which these various brokerage houses decide, with the reports whether the stock price needs to be pulled down on hiked up.
Over the past one-two weeks, we have seen various ‘reports’ emerging. And there have been various stocks which have been dancing to the tune of these ‘reports’. Take a look at a few examples of past couple of days itself.
SRF was in the limelight after brokerage house, Edelweiss initiated coverage on the stock, giving it a ‘buy’ call. In its report covering the reasons, the brokerage house has stated that it expects the company to do well due to capacity expansion in specialty chemicals, which would lead to strong earnings growth of 28 % CAGR over FY15-17. The stock continues to remain good and it today hit a new high at Rs.1099.60, for no ‘apparent’ reason.
GAIL remains in the red ever since Credit Suisse last week put out a report stating that it has downgraded the rating on GAIL to ‘underperform’. This, the report explains is on account of major fall in its liquefied natural gas (LNG) demand and falling gas trading business.
Today, Glenmark remains the top gainer. Temasek buying stocks in the company apart, foreign brokerage firm, Macqauire put out a report maintaining its ‘outperform’ rating on the stock, with target price of Rs.1400.
And can one forget the way in which Rolta India swung around like a pendulum? First, the stock had become a virtual darling of all fund houses given its ‘defence’ profile and Modi pushing for India’s indigenization of the sector. Maybe there was enough profit on the table as soon a report came from a less heard research house - Glaucus Research put out a very strong sell report , stating that the company is tight on cash flows and is not able to repay its offshore bond holders without refinancing. It is urging its clients and investors to sell Rolta’s bonds, which are due in 2018 and 2019. Obviously many investors have given a lot of credence to this report, which is why we continue to see a sell off on the counter – the stock is down today also by over 5%.
Last week, Bharat Forge too slipped down mainly on profit booking after it hit a new high recently at Rs.1362.90. This was once again profit taking after downgrade report put out by brokerage house, Bank of America Merrill Lynch – it pulled down the stock recommendation from buy to underperform. It also cut the target price by 10% to Rs.1130. It has stated in the report that the downgrade is because it is worried about the recent decline in orders for heavy trucks from North America, which it says, will lead to slower exports of steel forgings by Bharat Forge to US truck and machinery sector. It seems a bit too far-fetched reasoning, more like a reason to exit, book profits when the price is good.
That remains the influence of FIIs and brokerage houses – the moment they put out reports, be it buy or sell, the stock price reacts strongly.
On the other hand, LIC, which probably has more investing power than all FIIs put together, seems to have no influence. It upped its stake in Infosys to 4.81% and to 12.04% in Axis Bank and on Hindalco to 11.05%. All three stocks are in the red.
So it looks like it is brokerage houses which call the shots, putting put ‘notes’ which decides the fate of the stock that day. They are essentially the movers and shakers on the market, which is why the question comes to mind - how much relevance should an investor like me and you give to such rating downgrades/upgrades by brokerage houses? Yes, we do need to pay heed to the concerns being evinced by these brokerage houses as they do an extensive research on the companies and have a very close ear to the ground. Many a times, they get a whiff of things much ahead of others.
There are many who argue that these brokerage houses have vested interests in putting out these reports. Many allege that when they want to sell, the brokerage houses put out “buy” calls and the exact opposite when they want to buy. They trap investors when they want to get out.
But these are not small time brokerage houses that we are talking about. They are of international repute and could not have reached this far without being fair. So to pooh-pooh their reports completely would be naïve and not very smart just as believing that they do not have any vested interest would be.
Yet, one needs to also question – are they always right? As traders, maybe one might need to act as quickly as possible but as investors, one should look at the reasons for the upgrade and downgrade and if there is no monumental, long term impact, they stay invested. Remember, what they “sell” today becomes a “buy” later. Thus best to stay invested if you are a long term investor. Thus one needs to understand the relevance of the reasons and then take an intelligent decision.
This is a worldwide phenomenon where brokerage houses constantly publish upgrades and downgrades. And all over, they are eyed with a lot of suspicion. They are always blamed, like we do here, of having vested interests while putting out these reports. They surely might have vested interests in most of the reports but it is up to us as to how we treat this information.
Maybe if you have conviction in a stock, say like Infosys, when the rating downgrade pushes the stock price down, it could be the best time to actually go contrarian and buy.
Thus it is our decision entirely about how much importance we give to these reports. Brokerages houses, be it domestic or international, are ultimately about making money and all their actions will be about maximizing their returns. We too need to do the same and stop being a cow in a herd.