This question often dogs the mind – who really calls the shots in the market?
Is it the analysts or the FIIs or DIIs or retail investors or ratings agencies and brokerage houses?
All together have a collective influence but very often, almost on a day-to-day basis, we see individual stocks, with no apparent change in the fundamentals, dancing to the tunes of the brokerage houses. The moment they put out a revised rating, up or down the target price, the stock price gyrates like Shakira!
For instance take the case of IOL Chemicals. The stock has been hitting a new high ever since IOL CARE Ratings revised rating on the long/short term debt and put out a positive note. Today, it hit a 110year high just based on this revised rating.
Gujarat Gas also showed a sudden spike up in price after brokerage house, Equirus Capital put out a research report, maintaining the buy call and upping the target price.
Minda Corp too showed a rise for no apparent reason apart from Edelweiss putting out a report saying that it will be a big beneficiary of the April 2020 Bharat Stage VI implementation. This is not a new development – the Bharat VI was something we all knew but just a report on a known news pushed up the price.
Almost the entire auto sector is out of favour of brokerage houses due to the disappointing offtake during past couple of months plus other reasons like lack of new models, heavy discounts, and increased cost of financing.
That remains the influence of FIIs and brokerage houses – the moment they put out reports, be it buy or sell, the stock price reacts strongly. On the other hand, LIC, which probably has more investing power than all FIIs put together, seems to have no influence.
So it looks like it is brokerage houses which call the shots, putting put ‘notes’ which decides the fate of the stock that day. They are essentially the movers and shakers on the market, which is why the question comes to mind - how much relevance should an investor like me and you give to such rating downgrades/upgrades by brokerage houses? Yes, we do need to pay heed to the concerns being evinced by these brokerage houses as they do an extensive research on the companies and have a very close ear to the ground. Many a times, they get a whiff of things much ahead of others.
There are many who argue that these brokerage houses have vested interests in putting out these reports. Many allege that when they want to sell, the brokerage houses put out “buy” calls and the exact opposite when they want to buy. They trap investors when they want to get out.
But these are not small time brokerage houses that we are talking about. They are of international repute and could not have reached this far without being fair. So to pooh-pooh their reports completely would be naïve and not very smart just as believing that they do not have any vested interest would be.
Yet, one needs to also question – are they always right? As traders, maybe one might need to act as quickly as possible but as investors, one should look at the reasons for the upgrade and downgrade and if there is no monumental, long term impact, they stay invested. Remember, what they “sell” today becomes a “buy” later. Thus best to stay invested if you are a long term investor. Thus one needs to understand the relevance of the reasons and then take an intelligent decision.
This is a worldwide phenomenon where brokerage houses constantly publish upgrades and downgrades. And all over, they are eyed with a lot of suspicion. They are always blamed, like we do here, of having vested interests while putting out these reports. They surely might have vested interests in most of the reports but it is up to us as to how we treat this information.
Maybe if you have conviction in a stock, say like Infosys, when the rating downgrade pushes the stock price down, it could be the best time to actually go contrarian and buy.
Thus it is our decision entirely about how much importance we give to these reports. Brokerages houses, be it domestic or international, are ultimately about making money and all their actions will be about maximizing their returns. We too need to do the same and stop being a cow in a herd.