The Seen and the Unseen-5: Research backed share manipulation
By Ishara Gamage
Investment research is crucial to the smooth functioning of the capital market. Good research forms the basis of sound investment decisions. The proper dissemination of investment research reports helps level the playing field between retail investors on one hand and well informed high net-worth and institutional investors on the other.
However, with the latest bull run seen in the Colombo Stock Exchange (CSE), the quality and objectivity of investment research reports published by local stockbroking firms leaves much to be desired. It seems that we have entered an age of ‘research backed’ share manipulation.
The reports put out by the research units of some firms are dripping with a new level of criminality. Let me get straight to the point with some examples. A case in point is Tokyo Cement (TKYO). Shares of TKYO, which was down to the mid 20’s is now trading in the mid 60’s. One stock broking firm has continuously revised its target price for the TKYO share from 38 to 44 to 66 and now to 88, within a span of around 3 months.
Are we to believe that the fundamental business dynamics of the local cement industry or the Tokyo cement company have dramatically improved in less than 3 months? Keep in mind that cement is a price controlled product. One analyst quipped that the target price of TKYO given by this broking firm is like a divergent mathematical series. One story touted by these so-called investment research experts is that TKYO can use fly ash to partially substitute clinker and gain margin benefits. What these research ‘pundits’ have forgotten or willfully leave out is the fact that Sri Lankan building standards are based Ordinary Portland Cement (OPC). This means that all GoSL projects should be constructed using OPC and not blended cement (which is based on fly ash). OPC is based solely on clinker.
Another stock that has received a ‘research backed boost’ is EXPO. For starters, EXPO had reported great 1st quarter results this year. However, a significant portion of this was attributable to the charter income from air freight of Personal Protection Equipment (PPEs) related to the COVID-19 crisis. What we have seen in the financial and valuation forecast put out by broking firms is the assumption that these one-off businesses will continue. This is nothing short of shoddy research at best or willful share price manipulation at worst.
RCL is another of the gems unearthed by the research teams at these large stock broking firms. The main point touted is the fact that tile imports have been banned by the GoSL. Yet another set of stocks to receive a research fillip are banking sector stocks. While a debt moratorium was imposed by the CBSL and the WB, IMF and very senior local economists and bankers voiced concerns over credit growth, asset quality etc, a very large stock broking firm with a predominantly foreign institutional investor client base, continued and still continues, to promote the banking sector. Interesting, even after Moody’s recently downgraded HNB, this firm has issued a buy recommendation on HNB. It seems the current wave of ‘nationalist fervour’ sweeping through our political and social landscape has reached the Research Departments of local stock broking firms. It reminds me of a simple equation: Nationalism + Capitalism = Crony Capitalism; the hapless victims is the common man.
The top research ‘pundit’ in a large stock broking firm even took to putting misleading information in the firm’s equity strategy that was widely circulated on social media. It blatantly stated that Sri Lanka would offer currency protection to foreign investors in both the equity and bond markets. Fortunately, State Minister Cabraal set the record straight soon afterwards.
To make a long sordid story short, stockbrokers now have a powerful and ruthless ally; crooked research analysts, who are willing to stoop to any level to push and shove fairytale investment thesis, dodgy financial forecasts and fancy target prices, wrapped up, sugar coated research reports to gullible investors. These are indeed ‘Financial WMDs’ (Weapons of Mass Destruction). It remains to be seen, how many of these eloquently written criminal masterpieces will receive CFA Society research awards.