ANALYSIS:You want a moribound group invariably wrong in their forecasts? Meet the market analysts, writes PROINSIAS O'MAHONY

“MARKETS SPIN on a coin. Analysts move more slowly.” That’s the conclusion of a new Citigroup report which finds that analysts invariably “struggle at turning points” and which confirms that their inability to predict the financial crisis is just the latest in a long line of forecasting misadventures.

The Citi research looked at analyst recommendations over the last 15 years. It found that analysts were at their most bullish at the end of 1999, despite the fact that price-earnings ratios suggested markets had never been so over-valued. The dotcom crash in early 2000 triggered a vicious three-year bear market during which analysts grew progressively bearish. This bearishness increased even as the market bottomed in the autumn of 2002. Bullishness took root as the market rose over the following five years, peaking just prior to the outbreak of the financial crisis. Since then, analyst bearishness has risen inexorably.

The report also looked at the difference in performance between the stocks most favoured by analysts and the stocks least favoured by analysts. It found that the furious global rally off the March bottom has caught analysts completely by surprise, with forecasters more off the mark than at any other time during the period under study.

This is despite the fact that savvy commentators had noted that markets were ripe for a major rally. Technical analysis shows that markets were more oversold in March than at any time since the 1930s (excluding similar readings registered in November, just prior to another major bounce).

Similarly, cyclical price-earnings ratios show that markets were cheaper in March than at any time since the early 1980s.

The Citi report said that contrarian-minded investors could profit by buying the stocks most hated by analysts.

The report is far from unique in its findings. The Financial Times reported this month on an academic study that looked at the effect of analyst recommendations on stock prices. It found that “buy” and “sell” tips have little appreciable effect on prices. “Analysts’ revisions are typically information-free,” the study concluded, adding that investors were aware of this.

One analyst who has been consistently critical of his fellow professionals is James Montier of Société Générale. The award-winning analyst said last year that it was “transparently obvious that analysts lag reality”. They “only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly”, he said.

The latter study appears to confirm this – almost 80 per cent of analysts’ changes in recommendations came after major corporate events. Analysts are “like rabbits caught in the headlights”, Mr Montier said, and are “seemingly incapable of any form of independent thought”.

Irish investors are unlikely to disagree with Mr Montier, given the sense of bullishness that prevailed in official quarters long into the financial crisis.

Friday’s announcement by Anglo Irish Bank that it had lost €4.1 billion for the six-month period to March 31st put the spotlight on accounting firm PricewaterhouseCoopers (PwC), who released a report just last February saying that Anglo’s capital ratios would “exceed regulatory minima” at September 2010.

Blogging at irisheconomy.ie, UCD economics professor Karl Whelan noted that Anglo had now “officially blown through essentially all of its capital”.

Clearly unimpressed by the firm’s predictive abilities, Prof Whelan wryly added that “the Government regularly cites PwC’s recent assessment of BoI and AIB’s likely capital needs”.