Evaluating Equity Analyst Forecasts in South Africa

Abstract

Sell-side fundamental analyst reports are highly valued in the financial industry and include three main quantitative components: earnings forecasts, target prices, and buy/sell recommendations. An important question for investment managers is then, how accurate are the forecasts of fundamental analysts? In this research, we tackle this question by investigating a total of 43 086 analyst forecasts made on South African equities over the 15-year period from January 2004 to June 2018.

We examine the statistical performance of 12-month target price forecasts in detail, focusing on point, directional, and term accuracy. Further analysis is then done by grouping forecasts by stock rating, analyst firm, market sector, and market regime. We also conduct a study on the persistence of forecast accuracy across analysts and across stocks over the 15-year period. Finally, in order to determine their economic significance, we categorize the equity universe into quin-tiles based on various analyst forecast values and back-test a range of forecast-driven systematic strategies.

Keywords: Analyst Forecast Accuracy, Fundamental Analysts, Target Price Forecasts, Analyst Skill Persistence

JEL Classification: D80, G10, G14, G15, G24, G29, G32, G38, J44, L20, P50, M40, M41, M45