G20 Leaders hindered by Research Failures?


The G20 convenes in London today, and as such this piece is about a topic that covers the summit, and a subject near and dear to Integrity, the research industry.  Earlier this week, Oxford Analytica published a daily brief detailing the troubles that leaders at the summit will face in coming up with a way to model global economic and financial processes effectively.  The article mentions research quality as well as a number of problems with the incentives of analysts as key factors in the failure to come up with a modeling system as of yet.Oxford Analytica argues that one key problem in coming up with regulatory solutions for the financial sector is the lack of ability by analysts to accurately forecast developments in the global economy.  This leads to a lack of effective asset valuation and a lack of price anchors, the latter being responsible for bubbles and downward asset price spirals.

The reasons behind this lack of quality research are perhaps the more interesting to examine as it doesn’t take a genius to point out system failures in the current environment.  Oxford Analytica points to two factors as contributing to the poor quality of research.  The first factor deals with the fact that investors increased their geographic focus rapidly in a short amount of time, without properly ramping up their in-house research capacity.  Oxford Analytica even goes so far as to say that there is “a complete lack of in-house research capacity in most investment houses.”

The second factor mentioned deals with something on which Integrity has previously pontificated, Chinese Walls.  Oxford Analytica points out that despite regulations which force separation between research and investment activities, the research put out by sell-siders still “tends to be in line with the interest of the banks”. Ratings agencies are also discussed and their motives called into question as the ratings given effect interest premiums and ultimately the happiness of the agency’s paying customers.

The existence of incentive conflicts is nothing new in the research industry and it should come as no surprise that the quality of research is down with cutbacks in budgets and a mass exodus of analysts out of the investment firms (the latest examples of which are illustrated here).  The solution is not an easy one and the position the participants in the G20 currently find themselves is not an enviable one.  Hopefully they have an answer to the problem.


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