17 Mar 2020

Changing Dynamics of Equity Research in Global Investment

Technology, sustainability, and eCommerce are topping some of today’s most urgent global investment trends. Leading economists also predict that alleviation of trade tensions will impact global recovery and present new investment outlooks, leading to 3.2% GDP growth this year, and 3.55% in 2021.

Independent research firms are becoming a primary source of information on the majority of stocks because of the information gaps created by Wall Street research firms, who now focus on big-cap stocks that create highly profitable trades and banking deals. This contributes to the changing role of equity research in global investments. 

As firms move to capitalize on investment opportunities, they’re increasingly reliant upon equity research to provide data-backed recommendations related to global market activity and uncover lucrative investment strategies related to both domestic and foreign stocks, mergers and acquisitions, and trade brokering.

What Is Equity Research  

Equity research is a conduit between an investor and corporations; it offers insights about a company or sector to facilitate trades, securities sales, stock placement, and exit opportunities. This complex task involves everything from aligning research to specific investment objectives, to understanding global market dynamics, to being responsive to new stock and market developments the moment they emerge. 

Compounding this complexity is the various types of equity research:

  • Equity Valuation Models There arethree main models, cost, discounted cash flow (DCF), and comparable, which provide insights into the value of specific stocks. Depending on model, approaches like P/E ratios and PBV ratios are used to evaluate how a company is doing compared to rivals, and for determining stock opportunities, respectively. This is a critical aspect of equity research because investors can position themselves to profit based on stock value.
  • Stock Analysis Assesses the stock market so investors can make decisions regarding buying and selling stock shares and gain a market edge. This uses fundamental analysis to hone data in economic reports, market share, and financial records, and analytics metrics surrounding a company’s finances. Technical analysis is also used to evaluate historical market action to forecast future price movements.
  • Portfolio Analysis and Modeling A major component in global investment decisions, this should adhere to the values and approach of the specific investment firm. It includes the tax consequences of investments and is an ideal way to apply analysis and assessment of key sets of stocks according to a certain group or style.
  • Forecasting Equity research covers forecasting of data over specific time periods, such as quarterly or semi-annually, using top down or bottom up forecasting. The former examines the industry, like size, pricing, and growth, then figures out how much market share a company will potentially have before moving on to revenue. The latter begins the revenue drivers, like the number of customers, then moves up to revenue forecasts.
  • Equity Research Reports Ideally, equity research should accumulate in a comprehensive report that details crucial information, including the financial history of the targeted company, financial forecasts, stock valuations, investment risk, and buy or sell recommendations. Investors rely on this to digest multidimensional investment data and support their decisions.

Equity Research Influences Global Investment

In global investment, equity research pinpoints valuations of companies on stock exchanges. The amount of available information about individual companies and markets has recently skyrocketed alongside evolving data processing and storage capabilities. Without equity analysis to optimize investment performance, this abundance of data goes untapped, and the likelihood of risks and monetary loss significantly increases.  

However, with equity research, investors can pursue opportunities that yield competitive results:

  • Growth and Decline Signifiers Investors can maneuver based on signifiers that indicate potential growth or decline in company share prices. Share prices are driven by likely financial and operational performance of the company and can help build a foundation for trustworthy decisions.
  • Prudent Recommendations Equity analysis can target the big picture of investor strategies and make prudent buy, sell, or hold recommendations based on investor position. This also allows research to focus on financial patterns of companies and ensure it meets specific investment objectives.
  • Navigate Rising Market Volatility Investors depend on equity research to estimate share values of a specific company given the volatility and fluctuations of global markets. Furthermore, insights can predict potential future directions of fair prices.
  • Strategic Information Collection Equity research overcomes one of the biggest challenges global investors face; succumbing to the swamp of available data. Using process documentation allows equity researchers to collect the most valuable information to better curate reports and ensure investors aren’t missing opportunities based on too many broad insights.
  • Identify Subtle Red-Flags Equity research reports are extremely useful for investors to identify nuanced red-flags that wouldn’t be easily apparent without combing through extensive financial filings. This could entail reporting changes, off-balance sheet items, or governance and compliance problems.
  • Idea Generation This is a critical element of equity research because it’s impractical for many investment firms and companies to cover entire investable global markets and sectors. This gap can be filled by identifying promising stocks or analyzing market newcomers and bringing the information to the attention of investors for additional scrutiny.

Regulations Related to Equity Research and the Impact

The Securities and Exchange Act, 1934 (SEA)

Roosevelt’s administration instituted SEA in response to the 1929 stock market crash, which was generally viewed as the result of irresponsible financial practices.

It was enacted to promote a fair investment environment, reduce instances of fraud, and govern securities transactions within the secondary market. Any company listed on a stock exchange is required to abide by the SEA guidelines.

This led to the creation of the Securities and Exchange Commission (SEC), the SEA’s regulatory branch that governs securities, including bonds, stocks, markets, and codes of conduct for brokers, investment advisors, and dealers. 

Today, the impact continues to ensure greater transparency in investment practices, and investigates violations, like insider trading or misusing customer funds.

US Investment Advisors Act, 1940

This defines the responsibilities and roles of investment advisors and provides a legal foundation for financial professionals who advise about individual and institutional investing. It qualifies investment advice and ensures that professionals register with state and federal regulators.

Today, it continues to protect consumers against fraudulent investment advice by regulating specific parameters for investment advisors: the kind of advice provided, how the advisor is paid, and if the bulk of the advisor’s income stems from investment advice.

US Investment Company Act, 1940

U.S. Congress enacted this to help establish a stable financial market regulatory framework for retail investment products. It oversees investment company organization and their activities, while promoting industry-wide standards. 

It ensures that investment companies follow clear requirements for publicly traded investment products, such as unit investment funds. Investment companies must publicly disclose their investment policies, and register with the SEC.

Today, this act continues to ensure investment companies abide by the investment product securities they offer and enforces their adherence to industry frameworks.

Reducing Risk Exposure and Increasing Investment Performance

Equity analytics demands powerful data analytics tools combined with authoritative, industry leading research that can gather, screen, and produce valid, insights and reports. Equity research companies examine specific global investment trends and related equity to reduce exposure to investment risks and provide a robust understanding into changing market dynamics that impact investment portfolios.

As an equity research and investment research service provider, Research Optimus (ROP) aids in anticipating investment risks and opportunities to strengthen investment performance with key services, including equity research services, investment research, cashflow analysis, market forecasting, idea generation, and more. Our expertise is supplemented by macro and micro insights into global capital markets and equity portfolios, and an exhaustive approach to fundamental client criteria, market scenarios, and position sizing. 

– Research Optimus

Disclaimer:All the product names, logos, trademarks, and brand names are the property of their respective owners. All the products, services, and organization names mentioned in this page are for identification purpose only and do not imply endorsement.

Related Posts