ANALYSIS: ANALYSTS AREN’T ANALYZING ENOUGH

Securities houses may be alienating some of their biggest customers when it comes to providing research on companies in emerging markets.

According to a survey sponsored by Reuters Holdings PLC of London, fund management groups investing in emerging markets want analysts to double the time they spend on fundamental research.

Managers of the 61 international funds participating in the survey said they would like brokers’ analysts to devote nearly half their time to examining balance sheets and income statements in an effort to forecast stock price movements.

Too much marketing?

Fund managers, according to the 1997 Reuters Survey of Global Emerging Markets, believe that the analysts spend only a quarter of their time on such research, with the rest devoted to marketing to institutional clients, arranging meetings between company and fund managers, corporate finance and new issues and meetings with fund managers.

Firms participating in the three-month survey, released in December and conducted by Tempest Consultants Inc. of London, also included 373 of the largest companies in emerging markets. The study puts emerging markets in three categories: Latin America; Europe, the Middle East and Africa; and Asia.

Emerging market companies and fund shops that participated in the survey ranked New York-based Merrill Lynch & Co. No. 1 in terms of its products and services. But the two groups had vastly different opinions of New York-based Salomon Smith Barney. Fund managers ranked it 20th, but the emerging market companies placed it second. Capital Group, based in Los Angeles, was the companies’ choice as best fund management group for global emerging market equities.

While the study cites a gap between “what fund management groups want and what securities houses provide,” it also reports that managers aren’t sitting around waiting for the situation to improve.

Asia, here they come

During the next months, about 70% of fund management shops plan to ratchet up the resources devoted to in-hou
se research. The fund managers also say they plan to increase the number of direct meetings held with executives at emerging market companies, especially in battered Asia. During the last year, managers of funds investing in Asia met with representatives of 221 companies on average, and 95% of them plan to have even more direct contact this year, the survey says.

“One of the most striking features (of emerging markets) is a shortage of reliable and meaningful information for financial audiences,” according to the report. “In short, there is a knowledge problem which causes many share prices to be driven by stories and speculation as opposed to fundamentals.”

With the Asian debacle putting this knowledge problem in the spotlight, nearly a quarter of the emerging market companies participating in the survey say they expect to adopt international accounting standards this year.

“Foreign investors clearly bring a high standard of operation and promote greater transparency, higher accounting standards, better regulations and even better enforcement of regulations,” commented Jemal-ud-din Kassam of the International Finance Corp. when the study was released last month. “We were happy to see that one of the findings of the survey is that the number of companies in the emerging markets planning to adopt international accounting practices is going up significantly.”

Mr. Kassam is vice president/operations of the IFC, an arm of the World Bank in Washington.

For 1997, through Dec. 1, stock prices in Asia plunged 52.4%, while they were up 20.7% in Latin America and 5.7% in Europe, the Middle East and Africa.