It is no secret that research from the big brokerage houses once had a reputation for being compromised by investment banking relationships, but following the dotcom bust, the regulatory apparatus assured the investing public those problems were solved. That now seems like a sick-joke perpetrated on unsuspecting investors. Investors who follow the markets closely knew from the start those regulations wouldn’t fix the problem. Wall Street is and always has been in the business of distributing securities. The research-arms of the big banks should be thought of as a branch of the marketing department.
Conflicted Wall Street research is often difficult to detect, but once in a while it is so overt you can’t miss it. Here the Financial Times reports that JP Morgan recently changed a sell recommendation on Indonesian stocks because the Indonesian government cut all ties with the bank following a negative stance on the country only weeks ago.
JPMorgan has upgraded its view on Indonesian stocks just weeks after a negative stance prompted the government to sever all official ties with the bank.
Jakarta stopped using the US investment bank as a primary dealer or an underwriter for sovereign bonds after JPMorgan’s Asia-Pacific equity strategists in November slashed the country’s equity rating outlook by two categories to “underweight”.
In research sent to clients on Monday, however, JPMorgan’s team said it was closing the “tactical underweight” recommendation in place since November and instead advised a “neutral” stance…
Last week, Sri Mulyani Indrawati, Indonesia’s finance minister, defended the decision to cut ties with the bank, saying the downgrade “provoked irrational behaviour” by making negative comments at a time of economic uncertainty following the US election victory of Donald Trump. Research analysts at other institutions have expressed support for their rival.
Governments in Asia have often tried to pressure banks, most recently in late November when Malaysia asked banks to stop trading ringgit derivatives it felt were “speculative and damaging”.
As you can see here, all the blame for Wall Street’s compromised research doesn’t fall on the shoulders of the banks. The issuers of securities use their underwriting fees as a bargaining chip to earn positive recommendations. Unfortunately, that doesn’t change the fact that Wall Street research should always be taken with a grain of salt.
Jeremy Jones, CFA
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