Equity research: CSE mixing up priorities?
Probably differing from the customary role of a stock exchange, the Colombo Stock Exchange has started to host equity research that could be interpreted as promoting individual stocks—a role which ideally should be carried out by stock brokers.
To this end, the CSE has entered into a partnership agreement with a local office of a United States- based investment research firm, Amba Research, to conduct equity research on S&P SL20 companies.
“It’s against their mandate. In fact, I also wrote to the CSE expressing my strong objection to this move. This will kill the incentive to continue research by those very few who already conduct research and secondly the research will not be independent,” JB Securities CEO and former CSE Director Murtaza Jafferjee said. Amba has so far come up with comprehen- sive research reports on two blue chips, John Keels Holdings PLC and Aitken Spence PLC which are hosted in the CSE website. However, one of the fundamental flaws according to Jafferjee is none of them recommends the investor whether to buy, sell or hold. “What’s the use of research which doesn’t have a firm recommendation?” he asked.
Meanwhile the Head of Market Development at CSE, Niroshan Wijesundere said the project was initiated to assist the retail investors to take informed decisions and to uplift the overall standards of research done in Sri Lanka.
“We took the decision based on two reasons. Unlike foreign investors, retail investors hardly take their investment decisions on research. So, they take less informed decisions and blindly invest in stocks without looking at any fundamentals. So, we thought this will help them to take informed decisions.”
“Secondly, we wanted to guide the broker community to increase the standard of their own research,” Wijesundere said. However another analyst speaking on the topic asked how the CSE could indicate a price range for a stock referring to the valuation range for John Keells shares in one of the report published. “Does this mean the stock exchange decides the price range which the stock should trade within? This will influence the investor to exit at the price which is stated. It will definitely be a mental barrier for the investor and it will avoid any new investment to flow in beyond the price which is indicated by the CSE’s research,” he commented on the condition of anonymity.
However, the research reports so far hosted by the CSE do not carry recommendations but provide a detailed analysis of the company and the risks and opportunities in the business they operate in so that investors themselves could formulate their own opinions. According to certain groups, the practice by the CSE is very much in line with international norms. As they pointed out, hosting of equity research could also be seen in stock exchanges in India, Singapore and Australia.