Blindsided stock-pickers struggle to stay relevant

LONDON (Reuters) – The carnage in stock markets is getting uglier by the day. Should you buy, sell or hold on tight?

Research houses at big investment banks who provide these recommendations on stocks are dumbfounded. Their ratings on share prices of many companies have become obsolete as markets have skidded at a record pace from bull to bear.

Most of them are waiting on the sidelines for the dust to settle, while some braver souls have come out with recommendations, only to get it wrong.

On March 6, for example, investment bank BofA moved its outlook on the European airline sector to “overweight,” telling its clients the shares were likely to rally despite coronavirus risks.

The sector had an “8% implied upside potential even in our [coronavirus] downside scenario,” a note from the bank said.

Since then, European airlines’ share prices have plummeted more than 40%, making the BofA call one of the many to go sour as the coronavirus fueled a bullto-bear shift on world markets that has been breathtaking in its speed, scope and severity.

BofA’s research department was not immediately available to comment, but a spokesperson said guidance to clients had not been updated since March 6.

To be fair to BofA and other banks, the coronavirus pandemic has blindsided governments, financial experts and businesses across the world, with one illustration being shortages of medical gear like face masks and ventilators.

A glance through email inboxes reveals an abundance of obsolete-sounding target prices and strategy calls from various analysts at banks. They highlight how badly most analysts, as recently as last week, also read the gathering coronavirus storm despite warning flags from the outbreak in China.

In another painful call, Exane BNP Paribas put an “outperform” rating on Air France on February 27.

Three weeks on, shares in the French airline are now worth €4.12, down from €7.7 that day.

“We do use sell side inputs for particular things, but have our own research strategists and we do a lot of modeling within the team,” said Justin Onuekwusi, portfolio manager at Legal & General.

“Many analysts got it wrong, the impact of the shutdown, maybe they didn’t fully understand the domino effect of [business] shutdowns and border closures.”

In a sign of how the business world has swiftly been turned upside down, Air France shares are now 60% below the €9.9 median target price based on analysts’ recommendations, mostly made before the coronavirus outbreak became a global health crisis, Refinitiv data shows.

Of the 21 analysts who had a view on Air France, only one recommended selling the shares.

Two-thirds of analysts covering British cinema operator Cineworld rated the stock as a “buy” before the new virus spread across the world and the government told citizens to avoid social activities.

Cineworld shares have fallen 83% since mid-February when the virus started spreading rapidly in Europe.

It’s a similar picture in energy and other sectors roiled by coronavirus panic and the oil price plunge precipitated by a dispute between top crude exporters Saudi Arabia and Russia.

Interest rate cuts, cash injections and the prospect of government stimulus haven’t prevented $21 trillion being wiped off global equities’ value.

But with hundreds of companies issuing dire warnings or canceling previously stated outlooks, it’s tough for analysts to adjust target prices.

“There’s very little data available to analysts,” Barclays equity strategist Emmanuel Cau told Reuters.

“While a lot of companies just cancel their forecast, they’re actually not providing analysts with up-to-date data on how the crisis is impacting their earnings.”

Danish jeweler Pandora, travel firms Expedia and Tui and chipmaker Broadcom are among those to recently withdraw 2020 financial outlooks.

As a result of analysts’ lack of updated guidance, median target estimates remain light years above where shares are trading now.

Meanwhile, equity traders who closely monitor sell-side research are having to do their own groundwork before taking a call on selling, buying or holding.

“You do your own work, take your own risks and end up selling anyway,” said Keith Temperton, a sales trader at Tavira Securities, a brokerage.

“This is uncharted territory. The nature of this crisis is unlike 2008 which was systemically rescued by the central banks.”