19 April 2018

Blog: Whither Forecasts?

By Scott Fulton | 19th April 2018

On 4th October 2017 we published a short article highlighting the risks posed by MiFID II constraints on the public provision of consensus forecasts. At that time, ahead of the implementation of the new regulations, we speculated that putting analysts’ research behind a paywall would reduce the amount of data provided to third parties such as Bloomberg.

On 9th April 2018, the Financial Times reported that UBS “would suspend data feeds to third party platforms such as Bloomberg that do not meet UBS’s requirements”. While these requirements were not disclosed, they are likely to include payment and distribution restrictions.

Other banks and brokers could follow suit. The “grace period” allowed both buy and sell sides by the FCA in terms of MiFID II compliance is now at an end. As a result, we believe that the impact of the new rules will become more apparent. One of the first could be the public provision of market expectations.

From our surveys last year, Capital Access Group understands that fund managers pay fewer than 10 brokers on average to provide research under MiFID II. They are likely to have been chosen for their breadth of coverage as well as the quality but this number does not constitute “whole of market”. Specifically, it does not allow for the “exogenous shock” of an analyst taking a contrary view, often against company guidance, which trend appears to be more prevalent post MiFID II.

Historically, the impact of a single, contrary analyst has been “diluted” by the scale of the total number of those covering the stock. According to Bloomberg data, FTSE 100 constituents are covered by an average of 22 analysts and the FTSE 250 by 10. Thus, the public impact of a single “rogue” forecast has been often mitigated pre-MiFID II.

This is at risk under the new rules. The total number of analysts contributing to the public consensus may be bolstered somewhat by the limited “broker exemption” which allows analysts to distribute research on corporate clients widely and for free. However, many of the “Bulge Bracket” have eschewed this approach, preferring to maintain an independent investment view for their fund management clients. Like UBS, the higher profile research departments are likely to move further behind a paywall for the purposes of distributing their output.

Thus, we believe that the number of publicly available analysts’ forecasts will fall over the remainder of 2018; potentially halving by the end of the year.

Why is this important?

Aside from the heightened impact of single analysts’ views on share price volatility, UK listed companies regularly report their operational and financial performance against “market expectations”. These expectations are rarely quantified. Instead, these companies rely on the third-party provision of consensus data to their stakeholders.

If this is undermined by MiFID II, we argue that companies need to consider whether they provide this data to the market themselves. After all, they have a right to see analysts’ forecasts on the basis that they need to report progress against them. While there are legal issues around the promotion of such forecasts, they can be disclaimed.

Currently, only 38 FTSE 100 constituents provide any form of analyst data on their web sites. Within the FTSE 250, just 17 constituents provide similar data. In other words, less than 20% of the 350 largest listed companies in the UK provide data on the market’s expectations of them. If public provision of this data is compromised, how will companies and investors respond?

Capital Access Group is keen to understand how the landscape for market expectations will evolve under the new rules. Specifically, how the investment community uses consensus forecasts, how much it relies on public provision and whether it believes that companies could fill the gap potentially created by MiFID II.

We are launching a survey today which poses these questions. It will run for the next 10 working days after which we will publish our findings in our latest Quarterly Survey.

There is a plethora of surveys sent to investors. However, we believe that this is an important issue and investors’ views could make a difference to how companies manage and report against market expectations.

The survey can be found here. We are grateful for your input.