When equal is not equal

A country saw weak loan growth of 7% on average for around 10 years. Every year people expected growth to pick up only to become disappointed. Then in the beginning of 2016, two analyst’s predicted that loan growth will be 15% which is double the average for the previous decade. At the end of 2015, real growth came exactly similar. Both analysts were correct. Yet, for the purpose of investment management the value of the two forecasts can be starkly different.

Why is this? For the purpose of investment management we need to take action before the event has taken place and potentially before Mr Market has figured this out. For a buy side PM to make this decision he needs to be convinced that this time is indeed different. The analyst who simply projected growth to pick up without backing it up with logic will not help the PM at all. On the other hand a carefully crafted analysis, which explains in great detail the underlying drivers of loan growth, barriers to growth that were present for so long and what has changed will be immensely valuable and most importantly actionable.

There are many types of value added work that can be done to make the case.

1. Combing through the breakdown of loans to see which segments made up bigger piece of the pie. If these segments are not growing it will be hard to move the needle.
2. Checking if any small segments have been growing rapidly and despite being a small part overall may become important enough in influencing the total number.
3. Finding which segments are underachieving and finding the reason for such poor performance. Quite often it could be due to energy and infrastructure bottlenecks. Sometimes industries can go through structural declines as well in which case credit growth might not recover.
4. Understanding the business cycle and interest rate cycle to see if they can explain the underperformance of credit growth.
5. Checking if companies are being able to get alternate sources of financing from international institutions or non-bank finance companies which has eaten into bank loan growth.

The bottom line is that there is no substitute for a deeply researched and well written piece. Buy side PMs often look at the most bullish and most bearish research pieces on a particular company or sector to understand the pros and cons of investing in a sector. A well written research report can be valuable even if ultimately the hypothesis is proven wrong.

Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

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