Frightened Children - Analysts clinging onto the Mother of Guidance

“A mother understands what a child does not say” – Jewish proverb

 We looked at the growing consensus hugging nature of analysts in Japan who increasingly base their forecasts on a +/-5% range within company guidance.

Fig.1 below shows how the trend has climbed in the past 3 years. Whether one blames compliance or a lack of capability, consensus hugging now pervades over 50% of analysts from around 35% prior to 2013.

Fig.1 : % of Companies with Consensus Estimates less than +/-5% from company Guidance

The study gets worse when we look at it by sector. Since Lehman Shock, 75% of financial analysts in aggregate are within 5% of company guidance from 35% in late 2008. Unsurprisingly after the immediate crash, most analysts were way out of line with company guidance. 

When we broadened the study to +/-10% of guidance, nearly 70% of analysts are holding within that range. Has the hollowing out on the sell-side of more experienced analysts caused the trend? Naturally, the compression of commissions has forced many firms to cut overhead and the trend toward less experienced analysts has grown.

Fig. 11 % of All stocks estimates +/10% of company guidance

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