Retail investors face timing risk after OCBC’s nearly 6% fall

Nanyang Technological University finance professor Roger Loh warned retail investors in a Channel NewsAsia commentary published Nov. 4 against trading on analyst calls after OCBC fell nearly 6% on Oct. 7.

The warning matters because analyst downgrades recently moved two Singapore-listed shares. Loh cited a 2011 study of more than 150,000 US recommendation changes, far broader than those two cases, in which about one in eight coincided with a large share-price move.

“This is why retail investors should be cautious about buying or selling shares simply because they read in the news that an analyst has changed a recommendation,” Loh wrote in the commentary.

OCBC shares fell nearly 6% on Oct. 7 after Citi cut the bank to “sell”, citing softer-than-expected third-quarter earnings expectations, according to Loh. Days later, Sheng Siong fell as much as 3% after Maybank reduced its rating to “hold” and lowered its target price, an analyst estimate of fair value.

The local moves show how analyst calls can affect prices when they add information investors had not already reflected in valuations. Analysts at financial institutions assess listed companies, forecast earnings and issue buy, hold or sell recommendations for investors.

Why some calls bite

Loh’s argument is that most analyst actions do not change prices in a meaningful way. In the 2011 study he cited, most recommendation changes had no discernible effect from the release date through the next trading day.

The same study found one in four analysts never produced a single influential recommendation change. Even among analysts who had moved a stock at least once, only one in five of their recommendation changes were significant, according to Loh.

The recommendations most likely to matter share several traits, Loh wrote. Analysts with prior market-moving calls, awards or a record of acting before peers tend to carry more weight.

Calls that break from consensus can also draw a sharper price response, particularly when accompanied by revised earnings forecasts. Loh said the OCBC and Sheng Siong downgrades both came with lower earnings forecasts, while Citi’s OCBC call ran against more positive views held by other analysts.

Company profile also matters. Loh said analyst recommendations tend to have greater influence on smaller companies, growth stocks and firms where analysts disagree sharply about future earnings.

Retail timing gap

The difficulty for individual investors is speed. Loh wrote that almost all price reaction around analyst recommendations occurs on the report date and the following trading day.

That timing can put retail investors at a disadvantage if they first learn of a downgrade through news coverage after the stock has already moved. Loh also said academic studies have found prices can continue moving in the direction of recommendation changes for as long as a month.

The two points create a practical tension. An investor who sold immediately after reading about a downgrade might avoid further losses, but Loh said one episode would not prove that following analyst calls is a reliable strategy.

To capture returns consistently, Loh wrote, investors would need to respond within about a day and apply the approach across many recommendation changes, not a few selected calls. That is difficult for retail investors after brokerage commissions and other trading costs, he said.

Loh did not argue that retail investors should ignore analyst research. He said its value lies less in the headline rating or target price and more in the assumptions behind the call, including earnings growth, profitability drivers and risks to forecasts.

The evidence Loh cited is based on historical US data, not Singapore market data. He wrote that the economic reasoning may still apply to Singapore, but the commentary does not establish that the US findings translate directly to local shares.