Analysts are as bullish as ever on UK stocks for 2023

AJ Bell press comment – 27 January 2023

• 63% of all analysts’ recommendations on FTSE 350 stocks are ‘buys’ entering 2023 and just 8% are ‘sells’
• Analysts’ ‘sell’ ratings were more accurate than their ‘buys’ in 2022
• Investors must now once more consider Warren Buffett’s maxim that, “you cannot buy what is popular and do well”

“As we enter 2023, 57% of all analysts’ recommendations are buys and just 9% are sells for constituents of the FTSE 100, the joint-highest and joint-lowest lowest scores over the past nine years respectively (and they match those of 2022). For the FTSE 350 index 63% of all recommendations are positive ratings and just 8% negative ones, the highest and joint-lowest percentages since we first carried out this survey in 2015,” says AJ Bell investment director Russ Mould. “Momentum players may feel inclined to go with the positive flow, especially as the FTSE 100 and FTSE 250 are off to a good start this year. Contrarians may take the opposite view as they bear in mind legendary investor Sir John Templeton’s maxim that ‘bull markets are founded on pessimism, grow on scepticism, mature on optimism and die on euphoria.’

Source: Refinitiv data, analysts’ consensus

“Traces of euphoria may be hard to find in the UK equity market, especially after its lengthy period of post-Brexit vote underperformance on the global stage, but one way to assess which path may be the best one to follow is the study the efficacy of analysts’ stock recommendations over time and back-test the results.

“The bad news is the analysts’ top picks failed to beat the FTSE 100 index in 2015, 2016, 2017, 2018, 2020, 2021 and now 2022, despite all of their diligence. Only two of the most ten popular names generated positive total returns and beat the index for good measure.

“This is not to poke fun. It just shows how hard picking individual stocks can be, even if it is your full-time job. Markets will tend to do what causes the greatest degree of surprise and analysts do not intentionally set to out to sit on the fence. Their views and research shape the debate and help to form opinion, but markets will price in what is the prevailing consensus pretty quickly. What analysts try to do, and investors must do, is assess what the possible upside and downside surprises to the consensus could be, which is more likely, and what the impact upon a stock could be. Only then can risk and reward be properly measured.

“To further the case for the defence, the least popular names in the FTSE 100 did badly, with an aggregate total return of minus 20.5% against the plus 4.7% provided by the benchmark index. Knowing which names to avoid can be every bit as valuable as knowing which names to buy.

Source: Refinitiv data, analysts’ consensus, Marketscreener.

“Analysts can take a little more satisfaction from how their labours worked out across the FTSE 350. When it came to the broader index, five of their ten most popular names outperformed (although a couple of clunkers meant the group overall did worse than the FTSE 350). The least popular ten stocks did terribly, with an overall negative total return of 28.2%. Only one of the ten least popular names beat the FTSE 350, so the research there was spot on.

Source: Refinitiv data, analysts’ consensus, Marketscreener

“The ultimate conclusion still probably has to be that broker research needs to be treated with a degree of caution (assuming that investors can get their hands on it in the first place), certainly in the cases where stocks seem universally popular. It is, in the end, easy to go with the crowd. It is when analysts publish ‘sell’ ratings that they really stick their neck out. You can argue it is the picks when analysts go against the crowd that come with greater conviction and thus may be worthy of greater attention.

“Anyone prepared to pick their own stocks rather than pay a fund manager or index-tracker fund to do it for them simply must do their own research on individual companies before they even think about buying or selling any of its shares.

“In sum, Warren Buffett seems spot on with his observations that, “you cannot buy what is popular and do well,” and “you pay a high price for a cheery consensus.”

“With those maxims in mind, investors might like to know which stocks are most liked – and disliked – by analysts at the start of 2023. The two tables below list the names which investors may wish to analyse in greater depth, or simply avoid altogether, depending upon their view of the value of the research provided.”

Source: Refinitiv data, analysts’ consensus, Marketscreener. Data as of 6 January 2023.

Source: Refinitiv data, analysts’ consensus, Marketscreener. Data as of 6 January 2023.