Do Global Brokerages Really Predict Markets? Rethinking Institutional Calls on Indian Equities

SYNOPSIS

International brokerage reports influence investor sentiment, but are only modestly predictive. Negative reports from analysts such as JPMorgan and HSBC may come too late, as the Nifty 50 has gained despite the gloom. Influenced by herd mentality and groupthink, these reports capture the status quo rather than the future, so investors should focus on fundamentals and long-term perspectives.

When global giants downgrade a market, is it a warning or just a delayed reaction to what the market already knows?

Reports from global brokerages are often regarded as authoritative signals, shaping investor behaviour, market flows and short-term market direction. These firms are respected for their research and their global reach, but predicting the future depends on the timeliness and assumptions about the future. In India, past experience indicates that such brokerage calls might not always be in line with market realities. This matter has recently come into the spotlight.

International brokerage firms like JPMorgan and HSBC have revised their stance on Indian stocks down, revising down their targets on key indices such as the BSE Sensex. This has led to a short term pessimistic outlook. But a closer look at previous occasions shows this hasn't necessarily been the case.

In August 2011, during global turmoil, market experts like Morgan Stanley downgraded their outlook for Indian markets. The Nifty 50 was trading around 4,990 at the time. Contrary, the index has climbed to about 5,360 in the past year, returning a gain of 10%. To see a more striking example, consider August 2013, when there was macroeconomic uncertainty and the currency had depreciated significantly. International agencies, such as Citigroup, revised down their outlook for India. Yet in the past 12 months the Nifty surged from almost 5,300 to nearly 7,950 to provide a return of almost 50%.

In contrast, between October 2021 and March 2022, many international brokerages, including Nomura and UBS had a neutral to negative view of the Indian equity market. At that time, the Nifty, at levels of approximately 17,857 mainly fluctuated in a narrow band in the next 12 months. The market didn't go up too much, but neither did it go down. So their forecasts were not entirely accurate, as the market remained relatively stable rather than going up or down dramatically.

International brokerage firms have difficulty recognising market inflexion points or periods when the market is changing its direction. Their forecasts are more descriptive than prescriptive, reflecting market sentiment rather than predicting future changes. Behaviourally, this can be attributed to herd behaviour and consensus bias, as explored by Daniel Kahneman. The larger firms, because of their risk and reputation concerns, tend to herd. Consequently, these downgrades often serve as confirmations of trends that took place in the past rather than indicators of future movement.

Another crucial aspect is delayed information. When brokerages make calls, the information they consider be it macroeconomic data, expected earnings or exchange rates is already publicly available. Markets are forward looking and move quickly to reflect such information.

Although international brokerage reports serve as useful sources of information on macroeconomic developments and valuation models, they should not be regarded as a crystal ball for market direction. It would be prudent for investors to also consider incorporating independent analysis which would place emphasis on fundamentals, long-term growth prospects and valuation. Their real value is in the story they tell, not as signals. Hence, global brokerage downgrades reveal an important point: while markets are not driven by consensus, they are driven by expectations that go beyond consensus.

Ayushi Vora