27 April 2018

Blog - When is a forecast not a forecast?

By Scott Fulton | 27th April 2018

Capital Access Group (CAG) is undertaking research into the public provision of analysts’ forecasts. We have launched a survey of our investor audience, found here, and continue to review the current data provided by third party vendors (e.g. Bloomberg).

In our blog (Whither Forecasts? 19th April 2018), we highlighted that FTSE 100 constituents were covered by an average of 22 analysts and the FTSE 250 an average of 10. We have looked further into this “forecast base” and discovered that these numbers may not accurately reflect current expectations.

Within the FTSE 100 Index, there are 79 companies which have reported on earnings (either through results or trading updates) since January 2018. Fully 12.0% of all the analysts’ forecasts shown by Bloomberg for these companies were published in 2017. For the FTSE 250 Index, 147 companies have updated the market on earnings in 2018 with one in ten of the forecasts shown by Bloomberg published in 2017

If we assess the date of forecast publication against the date of the last earnings report, almost 20.0% of forecasts for these FTSE 100 companies were published before the update and, in the FTSE 250, the figure is almost 15%.

Standard Chartered is a good example of this apparent trend. It reported final results on 27th February 2018. Bloomberg shows that, as at 24th April 2018, there were forecasts from 27 analysts. Yet seven of these were published before the results announcement; as such 26.0% of the coverage could be described as “historic”.

We are not able to see the detail of these forecasts and, therefore, cannot assess to what extent the “real” consensus (i.e. that generated from forecasts following the results) is different from that shown, but there is a risk that this is the case. Perhaps more worryingly, we are not able to ascertain whether individual analysts have updated their forecasts but have not supplied them to the third-party data vendor. This raises key questions about the voracity, and, therefore, the usefulness of public forecast provision at present.

Our on-going survey into fund managers’ views of this position reveals that several of them are experiencing reduced direct access to analysts’ work. The corollary of this situation could be that they will have to rely more on public data to assess peer group forecasts and valuations.

However, it is becoming clear that public provision may be compromised by analysts suspending coverage or placing their work behind a paywall which excludes third parties (e.g. Bloomberg). In our opinion, companies can no longer rely on shareholders being able to “see” the totality of market expectations when they comment on their own performances.

We believe that a sensible solution to this apparent problem is for companies to play a bigger role in setting and managing the market’s expectations. This may involve more detail in guidance, the provision of a consensus on their own web sites and, ultimately, more direct contact with fund managers.

Our survey continues and we are very keen to hear fund managers’ views on this important topic.