RISK MANAGEMENT

Why Research Matters
in the Equities Space

Niel Venter

Head: South Africa Equity Research
Absa Corporate and Investment Banking

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Equity research analysts deliver a vital service to South Africa’s institutional investors – but how do they know whose analysis to trust?

When it comes to investments and in particular equities, everybody has an opinion. But while some private investors might feel comfortable taking a chance on a gut feeling or a hot tip from a friend at a braai, institutional investors insist on having access to reliable, well-researched recommendations from experienced and qualified professionals. As they should.

That’s where equity research analysts come into the picture. “Our equity research analysts, or financial statement analysts, look at listed companies – on a Pan-African basis – and analyse those companies, their industries, and the various local and global issues and factors that will impact their future,” says Niel Venter, Head of Equity Research at Absa Group.

“We also gather information from unlisted companies and include that in our analysis so as to provide a broader view of the industry,” he adds. “Based on our analysis we produce a research report, which includes a recommendation to buy, hold or sell shares in the company, as well as a target price (what it’s selling for and what we believe it’s worth) and earnings forecasts.”

That research product is sold to Absa’s institutional clients, who purchase similar reports from other brokers, and use the information to develop their own recommendations for buying and selling shares.

“We also distribute our research products to our internal client base, who use it to deepen understanding and knowledge of the banks’ corporate client base, to identify opportunities for mergers and acquisitions (M&A), to identify corporate derivative opportunities, and so on,” Venter adds.

Financial Mail Top Analyst Awards

How do clients know whose research to trust? “In any industry, everybody will tell you that their product is the best,” says Venter. “Financial analysis is no different. That’s why you need a scorecard, available to the public, that provides an independent ranking system.”

The Financial Mail Top Analyst Awards provide that ranking. The awards – which mark their 46th year in 2022 – are based on a survey that provides a reliable and independent ranking of skills in the industry. Consulting firm Intellidex conducts that survey through confidential questionnaires that cover about 90% of South Africa’s institutional stockbroking market.

The awards are comprehensive. In 2021 the survey assessed 40 research and six non-research categories, and received 378 sell-side analyst nominations and 131 buy-side nominations. Numerous analysts were assessed and ranked within various sectors, from General Mining to Luxury Goods; and within a range of categories, from Quantitative Analysis to Risk Management.

“There’s a direct correlation between how much a firm gets paid and the rankings of its analysts,” says Venter. “Our clients keep a close eye on the awards – and especially on the Top 5 rankings in each category. If you don’t win a category but have a top three or four in the Top 5, that’s also significant.”

New generation of expertise

One of the most keenly watched categories at the annual Financial Mail Top Analyst Awards is Young Analyst of the Year. “The category was introduced in 2016 to recognise excellence among South Africa’s up-and-coming researchers, and you have to be younger than 30 to be eligible,” says Venter. In 2020, Absa Capital’s Khayelihle Mthembu won the Young Analyst of the Year award in the equities category for his paper on South African banks, which featured a unique take on relative valuation.

“Samantha Naicker is in the running for the award in 2022,” Venter says. “This particular category is very important for Absa and for the industry as a whole, just in terms of transformational development. The financial research industry has found transformation very difficult to achieve, but Absa is making big strides in that regard within our research franchise.”

Niel Venter

Head: South Africa Equity Research Absa Corporate and Investment Banking

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