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Commentary: When stock analysts move markets, should retail investors follow?
OCBC and Sheng Siong shares fell after analysts downgraded them, prompting questions about why one recommendation can move a stock and whether retail investors should act on such news. NTU finance professor Roger Loh says investors should be cautious: reports can affect prices when they bring new information, but many recommendations have little market impact.
A study of more than 150,000 recommendation changes for US stocks found that about one in eight led to a large price move in the predicted direction, and nearly all the reaction to influential reports occurred on the issue date and the next trading day. Analysts with a strong track record, contrarian views or revised earnings forecasts were more likely to move prices; smaller and growth companies were also more responsive. The OCBC and Sheng Siong downgrades included lower earnings forecasts, and Citi’s OCBC call went against the more positive consensus, but investors may hear about the news after much of the price adjustment has happened.
In short
- Analyst downgrades can move shares when they add new information.
- Only about one in eight recommendation changes had a large effect in a US study.
- Retail investors may see the news after prices have already adjusted.
Steelman: both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Retail investors can reasonably treat analyst downgrades as useful evidence, especially when they come from analysts with a strong record, challenge the prevailing view or include revised earnings forecasts. Such reports can reveal information that the market has not fully priced in, and responding promptly may help investors reassess a holding’s risks.
The case against
Investors can reasonably avoid following recommendations mechanically: most changes in the cited study did not produce a large move in the predicted direction, and much of any reaction occurred on the day of publication or the next trading day. By the time retail investors hear about a downgrade, the price may already reflect it, while their own goals, time horizon and assessment of a company may differ from the analyst’s.
Explained simply
Stock analysts study companies and publish views on whether their shares may rise or fall. Their reports can include forecasts for future earnings, which give investors new information to assess a company’s prospects.
Investors may react when a report changes expectations, particularly if its author has a strong record or takes a view that differs from the wider market. But many recommendations have little effect, and share prices can move quickly once influential reports are published.
Retail investors are people who buy shares for themselves rather than on behalf of institutions. Understanding how analyst reports affect prices can help them judge what a recommendation adds to what the market already knows.