Two years ago, broking firms were enjoying a period of unusual prosperity. Trading volumes were high, earnings were rising in most sectors and investment analysts could often do well simply by following the bullish trend.
The past 12 months have been very different. The world economy is in a severe downturn, earnings forecasts are often more like guesstimates and investment is more risky.
"Volatile currencies and quick cuts in interest rates were part of a changing and more difficult environment for analysts," says UBS Securities research head John Slettevold.
WHAT IT MEANS
 Good calls by analysts add value
Innovation may make the difference
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For brokers' analysts, conditions are more challenging and more testing. These are also the times when the best analysts can add the most value for their clients, the institutional fund managers.
The FM's latest rankings of "sell-side" analysts (as they are known in industry jargon) and broking firms show which analysts have distinguished themselves for their performance in the bear market.
These rankings, which the FM has published annually since 1977, are based entirely on the opinions of domestic institutional investors.
Dr Duarte da Silva
The upper levels of the firms' overall research rankings - compiled from sectoral results - are dominated this year by three firms. And the tables again show that the multinational firms, which often led the rankings over the past decade, are being overtaken in some areas by the domestic teams.
The local firm Barnard Jacobs Mellet (BJM) again leads the firms' overall research ranking based on unweighted sectoral points. BJM is ranked first (based on weighted fund manager votes) in nine sectors, more than any other firm.
In some respects, the firm's position as a local player has underpinned its success in this area. It does not have the large balance sheet and distribution capacity of the multinationals, but it can focus on quality research, with broad coverage of the local market. "We do go out with research as a flagship product," says BJM CE Andile Mazwai.
UBS Securities leads the weighted equities ranking and the overall research ranking, with all sectors weighted. Its strong performance in the weighted table was helped by high rankings in high-value sectors such as general mining (second), gold mining (third), banks (second), beverages (first) and telecommunications (second).
Macquarie First South Securities (MFSS) is second in all three of the firms' overall research rankings based on weighted fund manager votes.
This marks a quick rise up the rankings by MFSS since the firm was founded in 2005 as a joint venture between Australia's Macquarie Group and locally based First South Financial Services.
With David Pleming again first in the general mining sector, David Hall first in gold mining and Macquarie's Jim Lennon first in commodities, the firm has broad strength in the resources sectors. It also has lead positions in other sectors such as real estate and telecommunications.
Chairman Duarte da Silva says MFSS decided in 2006 to invest in hiring more people and expanding the business. Benefits have come in the past year through gains in market share, he says.
Deutsche Securities, which led the tables for many years, has slipped in the rankings this year, after losing several of its more experienced analysts.
However, Deutsche is second in the sales teams ranking, based on weighted fund manager votes, and on the same basis is first in fixed-interest securities dealing. Deutsche is also ranked first this year for administration.
Merrill Lynch has held its top ranking, on weighted votes, for equities dealing, and Cadiz Securities retains the top spot it has held for many years in derivatives dealing.
The research rankings cover 40 equity and other sectors. Respondents are asked to vote separately for analysts and broking firms, based on research produced over the previous 12 months.
This may result in apparent anomalies where a firm has one analyst in a sector and the analyst and firm may in some cases be ranked differently. But the method has significant advantages, as it allows respondents to give credit to teams (or individuals) where they choose to do so. Conditions for analysts may be tougher, but many of the sector leaders are unchanged from last year. This could be viewed as reflecting a "halo effect" in the voting. But it may also be regarded as a validation of last year's results. The best analysts tend to be consistent and are more likely to anticipate or respond successfully to changes in trends.
"In a bull market it can be difficult to distinguish between the trend and innovation," says Mazwai. "In a bear market the cream rises to the top. Analysts who have more flexibility in their models and in their thinking tend to do better. That often comes down to experience."
A market adage says the trend is the investor's friend. But the good analysts are aware of the dangers in this rule, in bull and bear markets.
"You've got to be careful about how you structure your research process and make sure you don't become momentum-driven," says MFSS research head Julian Wentzel.
Unlike some similar surveys, these rankings are not based simply on quantitative evaluations of analysts' forecasts and recommendations, though respondents may take these into account in their evaluations - and in some cases may regard them as the key criteria.
But that's left to the institutional investors that do the rankings. They take diverse factors into account, including innovative thinking and useful ideas, which can add considerable value in an industry that's often described as having become commoditised.
Both aspects are vital, as is breadth of thinking. It seems no coincidence that Citigroup's Henry Hall, who has been the top-ranked banks analyst for many years, also leads this year's ranking for innovative research and is third for research relating to corporate governance.
Respondents were invited to comment on analysts they ranked. One mentioned Hall's "very good" thematic reports, titled SA Banks, Their Homes are their Castles; Banks' Bad Debt Cycle will be Longer and Deeper; and Hybrid Tier One Capital, a Contradiction in Terms.
However, the leading research firms can also cite examples of outstanding calls made by their analysts.
Mazwai mentions the BJM macro team's accurate pricing of Eskom's debt, and early sell calls on Barloworld and Imperial Group by diversified industrials and transportation analyst Cerie Moodie, who again leads in her sectors.
Slettevold cites UBS Securities' calls in the gold sector and its buy recommendations on AVI and Tiger Brands, which were followed by significant outperformance.
Wentzel refers to Macquarie's outperform call on Grindrod by analyst Fabrice Ndjodo and underperform calls on African Rainbow, Kumba Iron Ore and BHP Billiton by general mining leader David Pleming.
Analysts at other firms gained plaudits in many sectors. Citigroup's Gerhard Engelbrecht, who has covered Sasol for many years, remains the top analyst in the oil, gas & chemicals sector.
Lars Kjellberg of Credit Suisse Standard Securities leads in the weighted ranking for the forestry & paper sector, though MFSS's Caroline Learmonth is first on unweighted votes.
Citigroup's Marcelle Jankelow is again first in health-care providers & pharmaceuticals, a position she has held for several years.
In some sectors, the brokers' analysts face strong competition from analysts employed at banks, who are doing similar work for institutional clients. The weighted ranking for fixed-interest securities research is won this year by Rand Merchant Bank's Bulent Badsha. In the credit analysis sector, which was included in the survey last year, Standard Bank's Raven Moodley has overtaken Absa Capital's Kate Rushton.
Merrill Lynch, which reduced its local research coverage some years ago, is first in the international markets & economies sector, where the firm's David Rosenberg is top analyst. The firm also leads in investment strategy.
