OUR front page story contains an intriguing scoop : Vince Cable believes that “there is an argument” for applying to all publically listed companies in all industries his idea of disclosing the name of anyone earning £200,000 or more. At the moment, Lib Dem policy is only to do this for the banks; but the fact that he is seriously mulling the idea of extending this is hugely significant. If adopted, it would be a major move towards the abolition of financial privacy. Soon enough, if such a law were passed, those working in privately held firms – such as hedge funds or law firms – would also doubtless come under pressure to disclose individuals’ earnings and the threshold lowered.
Cable’s policy to create a new top rate of capital gains tax of 50 per cent is much better known. But even though he would keep Labour’s £2m entrepreneurs’ allowance, such a tax would throttle small business creation and venture capital. Angel investors know that for every ten new start-ups they invest in, several – and perhaps even the majority – will go bust, costing them the whole of their seed capital; they need to maximise their post-tax gains from their successful ventures to allow them to compensate for all the losses on the failed ones. It is a fine balancing act which would be destroyed by the Lib Dem plan; venture capitalists would need a much greater share of the equity to maintain their return on investment, wiping out entrepreneurs. Taxing capital gains at a lower rate than income was one of the very few successful Labour reforms; it is a shame Cable wants to undo this.
Last week, I reported on research from McKinsey & Co which showed that analysts remain far too bullish. So why is this happening? I had some fascinating feedback from readers. Here are some of the theories.
Analysts’ first client is their internal sales teams. These demand punchy, black and white stories: either a company is doing great, or it is doing badly; either a sector is booming or it is in terminal decline. An analyst must be like a consumer of Marmite: either he loves a stock or he hates it. But what remains unexplained is why this would fuel exuberance – and why bad advice isn’t punished by clients and over-optimistic analysts are not punished by salespeople.
Some sell side firms struggle to make an adequate return on pure secondary commissions. Capital markets transactions are important to their business model – and bad relationships between the firm and the PLCs they need to woo as clients are hardly helpful. So even when analysts are technically and legally independent from the rest of a sell-side firm, they will know – or may be made to feel – that being too harsh towards potential clients is bad for business.
Company management always hate “sell” stances. Analysts worry they will no longer have access to management if they do not agree with them – but to say that this means that analysts are too optimistic would imply that firms themselves are equally over-bullish, which is not always true as corporate over-optimism is invariably punished by stock markets.
One last theory: long-only fund managers crave buy stories: they have money they must invest (they usually can only hold 5-10 per cent in cash). But why would anybody knowingly invest in over-hyped stocks? Do let me know your thoughts.