Technological transformations, strained geo-political situations, and the changing face of the global economy have led to uncertainty in financial markets. A conspicuous example is the on-going US−China economic conflict, which has created turmoil and affected markets across the globe. In such scenarios, timely and adequate in-depth research guides investors to take informed decisions. The analysis needs to include a decrypt of the developments as well as their expected effects. This need is fulfilled by equity research firms and their analysts.
Stock prices are impacted by a wide range of events, ranging from macroeconomic regulatory events to industry-specific trends to company-related developments. Equity research involves conducting crucial analysis to derive the fair value of a company’s stocks, considering the possible effects of all such events. The evaluation also estimates the potential increase or decrease of these stock prices.
It is historically proven that share prices are influenced by a company’s operational and financial performance. Equity research analysts use this as the fundamental basis to take decisions. The equity analysts regularly meet the senior management of companies and also conduct their own research based on various traditional and alternate sources of information. As a result, they have access to significant details of the companies. As a part of their research brief, equity research analysts also interact with asset managers, the decision makers for buying/selling stock, which helps them identify key areas of concerns for specific stocks and monitor these key areas for situations that may lead to these concerns. The analysts delve deep into the sector they are studying and conduct a thorough analysis that enables them to identify the right stock to invest in within the sector or industry. They attempt to discern the “value” of a company, independent of its “price.”
The research is especially important when a market is transitioning from a bull market to a bear market. Investors can arrive at objective decisions as opposed to decisions based on “gut feeling” or hearsay. In bull markets, the hype created around the so-called “hot sectors” results in their stock prices surging. However, when the market turns bearish, these stock prices plunge. Some examples of such fluctuations have been observed during the 2008 US financial crisis and the ongoing emerging market currency crisis that started in 2016. Although such hype sometimes influences research, the divergent views of the analysts draw attention and provide investors opportunities to consider alternate views. However, investors are expected to be disciplined enough to take investment decisions only after being armed with research.
The importance of in-depth equity research has not declined in today’s fast-paced equity markets that react instantaneously to the ever expanding number of triggers, from central bank announcements to presidential tweets. Overall, equity research, when conducted in a systematic manner, is a powerful tool that enables sound investment decisions.