tag:theconversation.com,2011:/us/topics/equities-1180/articlesEquities – The Conversation2016-02-11T19:01:43Ztag:theconversation.com,2011:article/545422016-02-11T19:01:43Z2016-02-11T19:01:43ZExplainer: what might upset Australia’s ‘rock solid’ banks<p>Market volatility has affected banks internationally in the US, UK and Europe but even though Australian banks remain insulated from turbulence abroad it might not be all smooth sailing. </p>
<p>The MSCI index of global banks has fallen by 16% since the start of the year, while the S&P index for US banks has fallen by 20%. The chief executive of Deutsche Bank (one of the world’s largest banks) was forced to <a href="https://www.db.com/newsroom_news/2016/ghp/a-message-from-john-cryan-to-deutsche-bank-employees-0902-en-11392.htm">announce </a> that his bank was “rock solid” after the share price had fallen more than 30% from the start of the year and rumours circulated of problems with contingent convertible (<a href="http://www.theaustralian.com.au/news/world/the-times/unwanted-coco-bonds-fall-at-first-hurdle/news-story/a6340e71cd995246de3189a952861722">CoCo</a>) bonds. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=521&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=521&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111098/original/image-20160211-29207-x5swh1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=521&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bank stocks and the cost of CDS insurance.</span>
<span class="attribution"><span class="source">Datastream</span></span>
</figcaption>
</figure>
<p>The fall in international bank stocks has coincided with a perception of rising risk levels within the banking sector. The iTRAXX CDS index indicates the cost of insuring debt for a selection of global banks – the index increases as the cost of insurance becomes more expensive, indicating the market perceives that the debt is riskier. So far this year the index has risen 65% - the sharpest increase since the European sovereign debt crisis of 2011-12.</p>
<h2>Falling commodity prices are the current focus</h2>
<p>The main source of concern for financial markets at the moment is related to the commodity markets. Past high commodity prices encouraged many firms to invest heavily building huge new mines, liquefied natural gas (LNG) plants, and expanding production in shale oil. This investment required large amounts of borrowing, and banks have provided this directly (loans) and indirectly (purchasing bonds).</p>
<p>In the last year, crude oil prices have fallen 54%, LNG prices have fallen 32%, and iron ore prices are down around 30% (according to Datastream). The result is that many of the projects, some of which are still to come online, are not profitable – some may never be profitable – and the debt may not be repaid. </p>
<p>Credit ratings agencies such as <a href="https://www.moodys.com/research/Moodys-reviews-energy-companies-in-the-US-for-downgrade--PR_342569">Moody’s</a> suggests that much of the debt issued by U.S. energy companies will be downgraded to junk in the near future, while Standard & Poor’s stated that debt at Chesapeake Energy (one of the largest US shale producers) is <a href="http://www.bloomberg.com/news/articles/2016-02-09/chesapeake-credit-rating-cut-deeper-into-distressed-level-by-s-p">unsustainable</a>.</p>
<p>Attempts by the Chinese government at <a href="http://www.theguardian.com/business/2016/jan/12/chinese-efforts-to-talk-up-yuan-fail-to-stop-slide-in-oil-and-stock-prices">intervening in the currency markets</a> have also created volatility for banks. This has served to create a sense of uncertainty within the financial markets – and when this is the case there is often a reduction in the willingness to invest in “risky assets” such as stocks. Unlike in 2008, heavily indebted governments will have much less ammunition to bail out banks that fail this time around.</p>
<p>Longer term, the change in the regulatory environment is affecting the risk-taking ability of banks, and reducing profitability (even viability) of many areas. Increased capital requirements, particularly in areas that regulators deem to be <a href="http://www.ft.com/intl/cms/s/0/a79f8a3c-4070-11e5-b98b-87c7270955cf.html#axzz3zpjUSrrR">too risky</a>, mean that many banks are exiting equity, fixed income, and currency trading – divisions that have previously generated substantial profits for banks. </p>
<p>Of course, there is also ongoing regulatory investigation into a variety of cases of apparent financial market manipulation such as the recent <a href="https://theconversation.com/qanda-what-is-the-libor-scandal-and-why-does-it-matter-45662">LIBOR</a>, and Foreign Exchange, fixing scandals that saw heavy fines imposed on US and European banks. This has even spread to Australia, where ANZ appears to be under investigation by ASIC for <a href="https://theconversation.com/years-on-asic-still-grappling-with-swap-rate-fixing-scandal-35851">possible interest rate rigging</a>.</p>
<h2>Meanwhile in Australia</h2>
<p>In Australia, banks have performed very well over the course of the last five years. At one point in 2012 Australian banks were worth more than the whole of the European banking sector! Record levels of profitability in Australian banks have supported large dividend payments to shareholders and helped push share prices to all-time highs in 2015. </p>
<p>Earlier this week, <a href="https://www.commbank.com.au/about-us/shareholders/financial-information/results.html">CBA announced another rise in earnings</a> for the first half of the year – to A$4.8 billion. Much of this profitability is a result of increasing interest margins. As the Reserve Bank of Australia cash rate has fallen, banks have been quick to cut the rates offered to savers, but slow to pass on the rate decrease to borrowers (if they have done so at all). Even a small increase in this margin can boost profits if total assets are measured in the hundreds of billions of dollars.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=335&fit=crop&dpr=1 600w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=335&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=335&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=421&fit=crop&dpr=1 754w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=421&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/111099/original/image-20160211-29172-24l3h9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=421&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Interest margins.</span>
<span class="attribution"><span class="source">rba.gov.au</span></span>
</figcaption>
</figure>
<p>However, this profitability may not last as margins are under pressure on two counts. First, tighter lending standards, particularly for investors, have slowed lending in the housing market. The housing market appears to be <a href="http://www.businessinsider.com.au/anz-australias-softening-housing-market-will-challenge-the-economy-in-2016-2016-1">slowing</a> and this may increase bad debts in the future.</p>
<p>Australian banks are not totally immune to the impact of falling commodity prices, and CBA with ownership of Bankwest may be particularly <a href="http://www.macrobusiness.com.au/2016/02/is-cba-really-worth-it/">exposed</a> to a slowdown in Western Australia.</p>
<p>On the other side of the coin, funding is becoming more expensive for banks at the same time that increased capital requirements require them to hold more. Funding through international sources is particularly scarce (the <a href="http://www.investopedia.com/terms/c/creditdefaultswap.asp">CDS</a> index indicates this is becoming more expensive), and this matters because Australian banks require a substantial amount of offshore funding.</p><img src="https://counter.theconversation.com/content/54542/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Commonwealth Bank’s half year results suggest Australian banks are doing well despite the turbulence affecting banks internationally, however they may not be totally immune.Lee Smales, Senior Lecturer, Finance, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/535602016-01-27T19:10:39Z2016-01-27T19:10:39ZEx machina: are computers to blame for market jitters?<figure><img src="https://images.theconversation.com/files/109291/original/image-20160126-19633-11qy0ax.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is computerised High-Frequency Trading to blame for share market volatility?</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Recent turbulence in the share markets has caused some experts to <a href="http://www.bloomberg.com/gadfly/articles/2016-01-15/robots-are-eating-your-retirement-in-volatile-stock-market">point the finger</a> of culpability at computerised High-Frequency Trading (HFT). There are few complaints about HFT when computers push share markets up, but in the ebbing tide of today’s markets, it’s blamed both for exaggerating the share market dive as well as for the heightened volatility.</p>
<p>The logic behind the fears is this: algorithms and software do not muse about global economic events; they merely chase mechanical patterns that they are programmed to find, such as movements in trend or momentum. They do not make decisions based on real-world eventualities, such as political events.</p>
<p>Can the algorithms express a view on <a href="https://theconversation.com/how-a-chinese-slowdown-will-hit-global-growth-46655">Chinese consumer confidence</a>? The economic impacts of Middle-Eastern <a href="https://theconversation.com/why-saudi-arabia-is-having-such-trouble-with-its-syria-policy-47309">sectarian conflicts</a>? These real world factors aren’t taken into account in the programming of algorithms.</p>
<p>Yet the computers hold substantial sway and can execute a barrage of trades that create unprecedented <a href="http://www.cfapubs.org/doi/pdf/10.2469/cfm.v22.n2.3%22%22">volatility</a> at a rate that human reactions simply cannot match.</p>
<p>What is truly problematic is that the algorithms are not cognisant of when to stop or change a trade and thus can continue to pile money and exaggerate a trade well beyond what the market would consider a correct response. The computers do not have the “<a href="http://www.forbes.com/sites/richardfinger/2013/09/30/high-frequency-trading-is-it-a-dark-force-against-ordinary-human-traders-and-investors/#5b00ecfd51a6">affirmative obligation</a>” to keep the markets orderly.</p>
<p>In fact, this sort of financial competition has been described as “a new world of <a href="http://www.forbes.com/sites/richardfinger/2013/09/30/high-frequency-trading-is-it-a-dark-force-against-ordinary-human-traders-and-investors/#5b00ecfd51a6">a war between machines</a>”.</p>
<p>Research has explained that stock prices <a href="http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=1691679">tend to overreact</a> to news when HFT activity is at a high volume, and that this can have “harmful effects” for capital markets.
Additionally, financial experts have found that HFT “<a href="http://jfin-swufe.springeropen.com/articles/10.1186/s40854-015-0003-8">exacerbates the adverse impacts</a> of trading-related mistakes”, while also leading to “extremely higher market volatility and surprises about suddenly-diminished liquidity”, which in turn “<a href="https://www.fas.org/sgp/crs/misc/R43608.pdf">raises concerns</a> about the stability and health of the financial markets for regulators.”</p>
<p>Officials at the <a href="https://theconversation.com/could-high-frequency-trading-lead-to-our-own-flash-crash-9572%22%22">Australian Securities and Investment Commission</a> have described the possible impact of HFT as “sometimes manipulative or illegal”, but “often predatory”.</p>
<p>In Australia HFT has made significant inroads into the market. In 2015 it accounted for nearly <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2015-releases/15-311mr-asic-publishes-results-of-new-reviews-of-high-frequency-trading-and-dark-liquidity/">one-third</a> of all equity market trades, a level similar to Canada, the European Union, and Japan.</p>
<p>ASIC estimates that HFTs in Australia are collectively earning an <a href="http://download.asic.gov.au/media/3444836/rep452-published-26-october-2015.pdf">not inconsequential</a> $100 million to $180 million annually.</p>
<p>Securities regulators have tolerated HFT so far, but as we may be entering a <a href="https://theconversation.com/market-volatility-is-here-to-stay-but-high-frequency-trading-not-all-bad-46615">“new normal”</a> of higher volatility and with algorithms helping exert a downward pressure on the markets, the regulators may find themselves revisiting the HFT issue.</p>
<p>Australian financial traders may also be put in jeopardy by the sheer magnitude of large foreign-funded HFT players. In recent times, the incursion of HFT into other asset classes such as interest rates futures <a href="http://www.smh.com.au/business/markets/algorithmic-traders-invade-42-trillion-bond-futures-market-20150326-1m8xi4.html">has shown</a> that local traders are being forced out by the computing power of internationally-funded “flash boys”. </p>
<p>Nonetheless, the track record of Australian regulators has been very positive and they <a href="https://theconversation.com/making-sense-of-asics-new-rules-on-dark-liquidity-and-high-frequency-trading-10968">have been proactive</a> about creating mechanisms such as “kill switches” to mitigate potential losses.</p>
<p>From a theoretical standpoint, the proponents of HFT have argued that it provides the most up-to-date information and thus facilitates <a href="https://theconversation.com/flash-crash-jitters-what-to-know-about-high-speed-trading-before-the-next-market-disaster-strikes-37446">price discovery</a>. However, if the algorithms are merely exaggerating sentiments by moving large sums at instantaneous speeds – then they are <a href="http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=1691679">not facilitating price discovery</a> but in fact preventing that goal from being achieved.</p>
<p>The movie, <a href="http://www.nytimes.com/2015/12/11/movies/review-in-the-big-short-economic-collapse-for-fun-and-profit.html?referrer=google_kp&_r=0">The Big Short</a>, based on the book by Michael Lewis, (who also <a href="http://www.nytimes.com/2014/04/06/magazine/flash-boys-michael-lewis.html">wrote about “flash boys”)</a> has infused narratives of the financial world with a “human element”. They have put faces to the names we read about in financial scandals. </p>
<p>However, if HFT grows in size and share markets continue to perform negatively, it may be that the computerised antagonists of finance’s future, the <em>diaboli ex machina</em>, may have no face at all.</p><img src="https://counter.theconversation.com/content/53560/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Usman W. Chohan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Computerised High-Frequency Trading (HFC) has been blamed for recent volatility in the share market, does this represent the new normal?Usman W. Chohan, Economist, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/535022016-01-25T19:21:02Z2016-01-25T19:21:02ZWhy so bearish? How hidden bias is sinking global stocks<figure><img src="https://images.theconversation.com/files/109120/original/image-20160125-417-643q8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The negative sentiment surrounding the stock market is a self-fulfilling prophecy. </span> <span class="attribution"><span class="source">From www.shutterstock.com</span></span></figcaption></figure><p>It’s been a shaky start to 2016 for global stock markets, with substantial falls across all international markets, followed by some weak rallies.</p>
<p>The overall decline has been partly blamed on the price of crude oil, <a href="https://theconversation.com/why-do-oil-prices-keep-going-down-53424">which is hovering around US $30 a barrel</a> down from $100 over a year ago, along with market fears on the overall health of the Chinese economy.</p>
<p><a href="http://www.nytimes.com/2016/01/16/business/energy-environment/oil-prices-one-million-barrel-glut.html">The headlines</a> tell us markets are sinking in the sea of oil. A measure of fear in the stock market, the <a href="http://www.marketwatch.com/investing/index/vix/charts">widely quoted Chicago Board Options Exchange volatility index</a>, is also closely tracking the oil price, adding to the gloomy picture. </p>
<p>However the most likely driver of further market deterioration is not a further decline in oil prices, but the negative sentiment itself. This is due to a flaw in the way analysts ascribe value in markets that <a href="http://www.psychologicalscience.org/pdf/onlyhuman/anchor_adjustment.pdf?q=perspective-taking-as-egocentric-anchoring-and-adj">behavioural economists</a> call “anchoring bias”.</p>
<p>This is the idea that people tend to start from what they know and then attempt to make appropriate adjustments based on this. Over <a href="http://www.sciencedirect.com/science/article/pii/S1053535710001411">40 years of research</a> has found that these adjustments tend to be insufficient.</p>
<p>Everyone can be prone to this bias, there are a few <a href="http://www.psychologicalscience.org/pdf/onlyhuman/anchor_adjustment.pdf?q=perspective-taking-as-egocentric-anchoring-and-adj">studies that demonstrate this</a>. For example, when people were asked which year George Washington became the first US President, most would start from the year the US became a country (in 1776). They would reason that it might have taken a few years after that to elect the first president so they add a few years to 1776 to work it out, coming to an answer of 1778 or 1779. George Washington actually became president in 1789.</p>
<p>Similarly, most people would know the freezing point of water (0 degrees celcius) as compared to vodka. So if they were asked what the freezing temperature of vodka is, they would tend to start from 0 and adjust downwards. The freezing temperature of vodka is around -24 degrees celcius, much lower than what people usually answer.</p>
<p>Both these examples demonstrate how the reasoning associated with anchoring bias leads to people falling significantly short of the right answer. </p>
<p>In the case of the stock market, analysts look to the performance of blue-chip stocks linked to commodities like oil because they are associated with large, well established companies with time-tested business models. There are large data sets available with which to analyse these stocks.</p>
<p>However less than 4% of companies are classified as blue-chips globally. What about the remaining 96%? To value them, analysts may start from the payoffs of blue-chips and then attempt to make appropriate adjustments for size and other differences. </p>
<p>The overreaction of the market in relation to oil prices is further exposed by the fact that lower oil prices aren’t all bad news. Low oil prices can be good for countries that import oil as well as their consumers, retailers and industry. Higher production of goods drives cheaper prices leaving more money in the pockets of consumers to spend.</p>
<p>Other economic indicators also tell a very different story to the oil price. Job numbers are good both in the European region and US, and <a href="http://blogs.piie.com/realtime/?p=5341">growth seems to be picking up</a>. </p>
<p>In fact, based on encouraging data, Fed has <a href="http://www.federalreserve.gov/newsevents/press/monetary/20151217a.htm">recently raised interest rates</a> for the first time after nine years. The <a href="https://theconversation.com/chinas-6-9-gdp-growth-rate-is-not-the-hard-landing-feared-and-australia-can-benefit-53370">slowdown in China</a> is not the giant collapse that some were fearing. </p>
<p>If analysts and investors continue to display anchoring bias and the oil price drops, it could become a self fulfilling prophecy where a prolonged market slump cuts off investment, reduces consumption, and pushes the global economy into a recession. Central banks will do what they can to prevent this from happening by talking of <a href="http://money.cnn.com/2016/01/21/news/economy/ecb-draghi-markets/">quantitative easing</a>. However, the interest rates are already near zero so they do not have much room to move.</p><img src="https://counter.theconversation.com/content/53502/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hammad Siddiqi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Behavioural economics can explain why stock markets have been so closely following the price of oil.Hammad Siddiqi, Research Fellow in Financial Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/532702016-01-19T08:48:10Z2016-01-19T08:48:10ZHow Chinese mix of frugality and risk-taking is driving global stock markets wild<p>Plunging Chinese stocks have been sending worsening ripples across global markets all year, prompting fears of spillovers and <a href="https://theconversation.com/to-avoid-a-2016-crash-the-major-powers-need-to-pull-in-the-same-direction-53059">recessions</a>. </p>
<p>China’s Shanghai Composite Index <a href="http://www.wsj.com/articles/asian-markets-rally-in-early-trading-1452821550">lost 8 percent last week</a> alone and is down more than 20 percent since a recent high in December, putting it in bear-market territory. That slide and the accompanying concerns about the world’s largest economy have sent stocks in the US, Europe and elsewhere into a tailspin. The <a href="http://www.wsj.com/articles/global-stocks-fall-on-oil-and-china-woes-1452850130">Dow Jones Industrial Average and Standard & Poor’s 500</a> are both down 9 percent for the year. </p>
<p>This isn’t the first time in recent memory that tumbling Chinese stocks cascaded across the globe following a sharp rise. The same thing happened last May, in part because China is in the midst of a <a href="https://theconversation.com/chinas-five-year-economic-plan-is-rich-with-symbolism-50001">difficult transition</a> from an economy emphasizing capital investment, exports and savings to one based on innovation, services and greater consumption. </p>
<p>A byproduct of this transition into a more mature economy is slower growth. Typically, as a nation progresses from poor to middle income – and from basic needs and manufacturing toward a service economy that includes more creativity and intellectual assets – growth rates naturally slow down for reasons economists do not fully fathom. </p>
<p>But what’s really behind all this angst, the booms and the busts? And are investors and traders right to be increasingly concerned about a global recession? </p>
<p>A longer-term view suggests the fears are misplaced: the world economy will actually benefit from a successful transition in China, despite a few bumps along the way. </p>
<p>And as for the cause, it helps to examine Chinese culture and history. A heady brew of frugality, wild risk-taking and amateurism has created huge bubbles – ones that were bound to deflate. </p>
<p>These are some of the lessons I’ve learned from following China’s economy for two decades, witnessing firsthand the fascinating transformation of places like Beijing from cities of bicycles with few cars and clear air to ones known for massive traffic jams and ubiquitous face masks. </p>
<h2>China stocks: a brief history</h2>
<p>First let’s take a closer look at the Chinese stock market’s behavior in recent years. </p>
<p>Despite the <a href="https://theconversation.com/chinas-stock-market-is-in-for-a-turbulent-2016-52731">volatility</a>, Chinese stocks have yielded among the best returns in the world. The graph below shows the change in the Shanghai Composite Index since its launch in 1991. Even with the wild swings last May and over the past month, it has returned a compounded average growth rate of 13.1% since it was created, double the rate of return for the Dow in the US and the FTSE 100 in Europe over the same 25-year period. </p>
<iframe src="https://datawrapper.dwcdn.net/98E5r/2/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="500"></iframe>
<p>This kind of performance should be the envy of the world and not cause for fears and sell-offs elsewhere.</p>
<p>So why the angst and hand-wringing? Because Chinese markets also exhibit those distressingly wild swings, in amazingly short time periods. Consider the index’s 259 percent jump from 1,659 on August 6, 2006, to 5,955 on October 1, 2007, and the subsequent 69 percent plunge to 1,821 on December 1, 2008. </p>
<p>More recently, the index was 2,117 on August 1, 2014, but was madly propelled upward to 4,612 by May 1, 2015, followed by a crash to 2,950 on January 13.</p>
<p>Here’s where an understanding of Chinese culture and history comes in.</p>
<h2>A tradition of frugality and savings</h2>
<blockquote>
<p>He who will not economize will have to agonize.</p>
<p>I have … precious things which I hold fast and prize. The first is gentleness; the second is frugality.</p>
</blockquote>
<p>Until a generation ago, most Chinese were poor. Their sages like Confucius (the first quote above) or Lao Tze (the second) wrote proverbs that made a virtue out of sheer necessity. </p>
<p>Mainland Chinese culture today is still in a transition in which sudden affluence has not yet erased the frugal habits of the past. Hundreds of millions in China grew up mainly on noodles or rice, with at best tiny portions (under two ounces) of <a href="http://www.theguardian.com/environment/datablog/2009/sep/02/meat-consumption-per-capita-climate-change">meat served</a> no more than three times a week to accompany the starches. While today they eat better and partake more of flesh, the parsimony of the past lingers in the unusually high savings rate in China. </p>
<p>The average American household – depending on the state of the U.S. economy – <a href="http://www.pgpf.org/chart-archive/0119_international_saving">saves</a> between -2 percent and 4 percent of its income. By contrast, the typical Chinese household <a href="http://www.bloomberg.com/news/articles/2015-05-01/chinese-consumers-cling-to-saving-suppressing-spending">saves</a> about 30 percent of its disposable income. As a result, China has by far the <a href="http://data.worldbank.org/indicator/NY.GNS.ICTR.ZS">world’s highest gross saving rate</a> as a share of GDP, according to the World Bank. </p>
<p>This is something the Chinese government is trying to change by encouraging consumption. But altering this millennia-old habit will take a long time. Meanwhile, the huge savings surplus has to go somewhere. </p>
<p>What choices does a family have to invest its savings? Only so much can go into gold or other valuables. The bank, a relatively new institution in China, offers <a href="http://china.deposits.org/deposits/">meager yields</a> that turn negative when factoring in inflation (meaning when you withdraw your money a month or year down the road, you’ll have less spending power than when you deposited it). Real estate is perceived as an overinflated bubble destined to pop, and government <a href="http://globalbusiness.me/2015/09/11/capital-outflows-from-china-and-the-hidden-story-in-chinas-fdi-statistics/">capital controls</a> prevent investment abroad. </p>
<h2>Frugality and risk-taking: odd bedfellows</h2>
<blockquote>
<p>Pearls don’t lie on the seashore. If you want one, you must dive for it.</p>
</blockquote>
<p>― Chinese proverb</p>
<p>It seems like a paradox that Chinese traditions emphasize frugality, while at the same time its culture lauds risk-taking. </p>
<p>Studies by business professors Elke Weber and Christopher Hsee <a href="http://decisionsciences.columbia.edu/uploads/File/Articles/weber_hsee_mgtsc1998.pdf">concluded</a> that when it comes to social interactions, Chinese are indeed conformist and risk-averse. However, in financial transactions, Chinese are significantly bolder than investors in many western nations, something also corroborated in Chinese proverbs that appear to provide greater risk-taking advice than American proverbs. </p>
<p>Gambling also has a long history in China. Desmond Lam, in his “<a href="http://www.urbino.net/articles.cfm?specificarticle=a+brief+chinese+history+of+gambling">A Brief Chinese History of Gambling</a>,” relates how games of chance began as early as the Shang Dynasty (1700–1027 BC). Gambling became an obsession amongst high officials as well as common folk. Gambling parlors proliferated in the Qing Dynasty, and continue to this day.</p>
<p>The widespread willingness to gamble is also illustrated in a survey (conducted early last year by State Street Corporation) that <a href="http://money.cnn.com/2015/04/01/investing/investing-stock-market-china/?iid=EL">showed</a> that as many as 81 percent of Chinese investors traded at least once a month, which is by far the highest rate in the world. </p>
<h2>Mania over a quick buck</h2>
<p>And that brings us back to the recent volatility.</p>
<p>In April 2015, hairdressers in Shanghai or Shenzhen were <a href="http://money.cnn.com/2015/06/15/investing/china-stocks-10-trillion/">telling</a> their customers how they had doubled their investment in just two months between February and May 2015. The S&P 500, by contrast, barely budged. </p>
<iframe src="https://datawrapper.dwcdn.net/syUZ8/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="500"></iframe>
<p>The mania for a “quick buck” affected all levels of society, down to workers with relatively few savings. It was a wild run-up similar to the tripling of share prices from October 2006 to October 2007, followed by the almost predictable collapse to the original levels by December 2008. </p>
<p>To the <em>nouveau riche</em> in emerging nations, modern finance is a brave new world, leading to speculative excess untempered by losses. The crashes in 2007 and 2015 did not deter new hopefuls from entering this game in China. </p>
<p>That’s at least in part because there is a lot of pent-up money in China, chasing very few options. This, plus the fact that most Chinese investors are novices and are willing to take more risks than Western investors, explains the wild swings in the Chinese markets.</p>
<p>Moreover, the gyrations in the Chinese stock markets have little to do with the actual fundamentals of the economy, despite some recent headlines. That’s the conclusion of a <a href="http://www.saif.sjtu.edu.cn/sites/default/files/images/ymzhou/paper_736.pdf">recent study by scholars</a> at the Wharton School and Shanghai Jiaotong University, calling the typical correlation between stock returns and future GDP growth “statistically insignificant.”</p>
<h2>No need to panic</h2>
<p>So will the behavior of less than one percent of the Chinese population – those who invest in shares – drag China and the rest of the world into a recession in 2016? </p>
<p>The likelihood is low. Too much is being read into the slowdown in inflation-adjusted GDP growth, which is <a href="https://www.imf.org/external/country/chn/">forecast by the IMF</a> at a little over 6 percent this year – still a remarkable performance and among the highest in the world. And as noted above, volatility in Chinese stocks isn’t necessarily a sign of anything in the real economy. </p>
<p>Regulators, in fact, may deserve some of the blame by acting amateurisly with new “<a href="https://theconversation.com/just-another-bad-day-in-the-office-for-chinas-lonely-stock-traders-52756">circuit breakers</a>” that halt trading if the main index falls by more than 7 percent. Doing so may actually be making matters worse by broadcasting a “panic” signal to investors.</p>
<p>True, the Chinese economy is undergoing a tricky transition involving the fundamental restructuring of how it grows. The world will be better for it, thus to investors worldwide: don’t panic.</p><img src="https://counter.theconversation.com/content/53270/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Global stocks have been turbulent all year thanks to jitters about China. But what’s really going on here?Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/528932016-01-12T19:34:29Z2016-01-12T19:34:29ZIs the January barometer providing an early warning for 2016 equity returns?<p>So far, it has not been a happy new year for equity market investors. The Australian equity market <a href="http://www.theaustralian.com.au/business/markets/stocks-slide-on-china-rout-100bn-wiped-off-in-a-week/news-story/0b18c11d4e2a81fada9d9a0f2390cc16">lost A$100 billion in market value</a> in the first week of trading, mirroring a dire global trend.</p>
<p>If we are are to believe the “January barometer”, things may be about to get worse. The January barometer is based on the belief that when the equity market ends in the black for the month of January, the subsequent year will be prosperous for equity markets, while a negative equity market return in January signals a bearish year for stocks.</p>
<p>The barometer was first devised in 1972 by the editor of the Stock Trader’s Almanac, Yale Hirsch. Hirsch claimed that January returns could <a href="http://www.tandfonline.com/doi/full/10.1080/13518470903037953#abstract">accurately predict subsequent equity market returns in 91.1% of years</a>, with the rare failures of this indicator being explained by extreme events such as wars.</p>
<p>If the January barometer were as accurate as has been suggested then this indicator would provide a boon to investors who could use the signal to make asset allocation decisions for the subsequent year. Unfortunately financial markets are like discount airlines; there are no free lunches. Competitive market forces result in investors exploiting, and therefore eliminating, any opportunities to make risk-free abnormal profits. </p>
<p>The weight of academic evidence now shows that the evidence used to justify the January barometer was a statistical anomaly. The result does not appear to hold when a <a href="http://www98.griffith.edu.au/dspace/bitstream/handle/10072/53728/86014_1.pdf;jsessionid=E0DC380CC476BD1ED4522193F8AC37D7?sequence=1">longer sample of years are analysed</a> and there does not appear to be any evidence to support the January barometer <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2443.2007.00069.x/abstract">outside of the US</a>.</p>
<p>An examination of returns on the Australian equity market from 1974 to the present provides a further rebuttal to January barometer. The figure below provides annual average returns across the subsequent eleven months for years in which the return in January is positive and negative respectively.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/107867/original/image-20160112-6972-2z4b3e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/107867/original/image-20160112-6972-2z4b3e.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/107867/original/image-20160112-6972-2z4b3e.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/107867/original/image-20160112-6972-2z4b3e.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/107867/original/image-20160112-6972-2z4b3e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=453&fit=crop&dpr=1 754w, https://images.theconversation.com/files/107867/original/image-20160112-6972-2z4b3e.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=453&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/107867/original/image-20160112-6972-2z4b3e.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=453&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Data used to create this chart was sourced from Datastream.</span></span>
</figcaption>
</figure>
<p>As shown in this figure, the average equity market return in years following a negative January return (5.8%) is actually marginally higher than average returns in years following positive January returns (5.6%).</p>
<p>Recent history is also informative. In 2014 investors had a similarly unhappy start to the year, yet the market subsequently rebounded and ended the year in the black. Last year the market was up 3.2% in January, yet fell by 6.5% over the subsequent eleven months.</p>
<p>It is therefore clear that January returns are not a magic bullet that can be used to forecast stock market performance and make investment decisions. Financial markets are too sophisticated for individual monthly returns to be informative about the future. To borrow a quote from Mark Twain:</p>
<blockquote>
<p>“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”</p>
</blockquote>
<p>Given the January barometer does not have merit as a forecasting tool, many investors will be anxious to know what lies ahead. Recent stock market declines can be attributed to structural problems across global economies. Chinese growth is continuing to weaken and global debt has increased significantly following a sustained period of low interest rates. </p>
<p>Ongoing global security threats were also identified as a <a href="http://www.wsj.com/articles/security-issues-threaten-global-economy-1447687519">potential limit to economic growth</a> at the G20 summit last year. While predicting the direction of stock market returns across 2016 is fraught with danger, the current uncertainty across global markets appears to indicate that whatever the end result, investors are likely to be in for a volatile ride.</p><img src="https://counter.theconversation.com/content/52893/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Docherty receives funding from Platypus Asset Management. </span></em></p>January returns are not a magic bullet that can be used to forecast stock market performance.Paul Docherty, Senior Lecturer, Newcastle Business School, University of NewcastleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/415322015-05-09T14:08:53Z2015-05-09T14:08:53ZFinancial markets’ UK election elation could falter on Brexit and budget fears<p>The <a href="http://uk.reuters.com/article/2015/05/08/uk-britain-election-markets-idUKKBN0NS2IS20150508">post-election rally</a> on UK financial markets was as much a celebration of Labour staying out of power as of the Conservatives regaining it. Labour had scared investors in key sectors with <a href="http://www.labour.org.uk/manifesto">manifesto promises</a> to freeze energy prices until 2017, increase the bank levy, ban zero-hours contracts and raise the National Minimum Wage (currently £6.50 per hour) to over £8 by October 2019.</p>
<p>These were policies that could have dented profitability <a href="http://www.theguardian.com/business/2015/may/08/election-rally-stock-market-winners-in-the-ftse-100-and-ftse-250">in a number of sectors</a> including those most represented on the stock market. These discomforts to business were compounded by planned extra demands on those who earn most from it, notably a restored 50% tax rate on incomes over £150,000, tougher rules for landlords, and a mansion tax. </p>
<p>Some retreat from markets’ initial upswing is likely in the next few days, as investors reflect further on the nature and causes of Conservative victory. David Cameron’s majority is even smaller than the one gained, equally surprisingly, <a href="http://www.civilserviceworld.com/articles/news/election-2015-conservatives-win-surprise-election-victory">by John Major in 1992</a> – a disconcerting precedent for a government that must steer “renegotiated” EU membership terms past some powerful Eurosceptics, <a href="https://theconversation.com/if-a-referendum-were-held-today-our-poll-suggests-britain-would-stay-in-the-eu-41148">then through a referendum</a>, in order to lift the threat of Brexit. </p>
<h2>Balancing act</h2>
<p>Just as efficient markets are <a href="http://www.open.edu/openlearn/money-management/money/accounting-and-finance/the-financial-markets-context/content-section-3">not supposed to let history repeat itself</a>, investors currently seem confident that the Conservatives will learn from the defeat that ended Major’s tenure, and maintain parliamentary unity at least until the referendum is won. But unruly backbenchers aren’t the only ones whose voices are amplified by a wafer-thin majority: <a href="https://theconversation.com/how-the-economics-of-lobbying-make-democracy-about-more-than-votes-40394">the lobbyists</a> that Cameron promised to tame are <a href="https://www.publicaffairsnews.com/articles/opinion/nick-williams-power-backbenchers">anticipating increased influence</a> now that persuading a small number can swing a parliamentary vote. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/81048/original/image-20150508-22752-yswpd0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">An unhelpful precedent.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/chathamhouse/6357734563/in/photolist-aFP3Za-7tt4iR-rVwQuK-aPfigK-qhimsT-dUFRXi-gvpekv-q5pjNf-pzGGX4-BsnxB-8SjKX9-8SgDxM-cRAYcs-cRAXvG-dhQq2L-duM1vM-fh3bQ2-5Dagd4-5xr2iZ-5xvpLE-6ZiNaN-5xr2q6-8njrjo-5xr2aP-no9tKC-no7a6i-no9mto-npSAmH-no9gd3-bCyUXX-e2wZ4W-q7BkcV-eRsTVu-9CWaPz-8gBhA6-ec9E2E-ec8mk9-8Cv1UB-8SjVpG-5jsNbQ-abhwu3-eUanQN-ec9s21-48LUbC-3pHg3m-rGMP58-eap7kH-ie9nby-bCEU95-8j1sLe">Chatham House</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Whether the notoriously <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/253454/bis-12-917-kay-review-of-equity-markets-final-report.pdf">“short-termist”</a> markets’ morning-after rise reflects firm belief in the longer-term outlook is harder to judge. The swing towards the Conservatives (outside Scotland) was motivated in part by an economic recovery <a href="http://npi.org.uk/publications/economic-policy/beneath-bonnet-how-sound-britains-economic-recovery/">that remains far from balanced</a>, uncomfortably reliant on consumer spending and the further growth of household and government debt until the long-delayed revival of business investment. </p>
<p>In its golden scenario, the new government has arrived just as <a href="http://www.bbc.co.uk/news/business-31451879">Eurozone markets come back to life</a>, China arrests its slowdown and UK productivity bounces back, enabling income growth which slaps down that resurgent household debt ratio. This generates the faster GDP growth that now appears essential to <a href="https://s3-eu-west-1.amazonaws.com/manifesto2015/ConservativeManifesto2015.pdf">deliver on a manifesto</a> that conjured a win from some ambitious promises. The new government wants to move the budget into surplus while cutting taxes and ensure that “public investment will be higher on average over this decade, as a percentage of GDP, than under the whole period of the last Labour Government”. Infrastructure spending is earmarked at more than £100 billion in the next Parliament. </p>
<h2>Not all sunshine</h2>
<p>There is a leaden alternative scenario under which last year’s 2.6% GDP growth is as good as it gets and the economy slows again as fiscal stimulus is withdrawn with <a href="http://www.theguardian.com/business/2015/feb/01/loose-monetary-policy-has-not-solved-the-worlds-economic-problems">no scope for further monetary relaxation</a>, while a renewed rise in world interest rates and oil prices rules out export-led growth. Were this to happen, those election-winning fiscal promises – more eye-catching and vote-grabbing than Labour’s – might start to seem too good to be true.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/81049/original/image-20150508-22725-1ljdvgy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Engine of growth?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/dhedwards/6776878213/in/photolist-bjRgMP-qurnBs-pN74aF-oNJ3wx-qiwo9T-fCGZKK-7kBbiZ-gToAde-g7zEKB-3a9DhT-fuSWwU-7kqYHp-oZRR82-nwbgiA-qxMn67-pfGiX8-qoSFZm-dNtpJo-efxJRX-4Zszi5-qUPwoV-fvNPQz-oZcDTF-9kEybN-daqD2P-dNUNPX-aFmicX-bCCaWJ-9zsh6J-kRVLrB-daC2jz-7JamNE-rc9UU7-k2uM8e-dd7Cpy-qUPwgR-b1zN42-an11TN-oRbpq7-8fKDeL-dVzc9K-qnh36c-evtFoP-dKWyiW-4Ksp9z-7SjVZS-i4rYFX-4rmcC1-adCeaA-bSmyUB">Badly Drawn Dad</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>The same 2008 crash that drained Labour’s economic credibility also highlighted the role of London’s financial centre in driving the economic imbalances that eventually gave them cause to collapse. The UK’s longstanding excesses of public spending over tax revenue, investment over saving and imports over exports has been financed by <a href="http://www.ons.gov.uk/ons/dcp171766_365818.pdf">equally persistent inflows of capital</a>, via direct or portfolio investment. Foreign investors’ targeting of the UK for its ability to outgrow the Eurozone contains an element of self-fulfilling expectation, the catch being that market expectation can rapidly and not always rationally change.*</p>
<p>Capital inflow bounced back impressively after 2008, helping the government to finance its rising debt at low cost and ensuring that <a href="http://www.ons.gov.uk/ons/rel/bop/balance-of-payments/q3-2014/sty-current-account--income-balance-and-net-international-investment-position.html">the widening current-account deficit</a> did not constrain the eventual recovery. But a recent global slowdown of <a href="https://ideas.repec.org/p/bou/wpaper/2013-14.html">cross-border investment flows</a>, if it continues, could put the brakes on recovery unless this quickly becomes more investment-driven. </p>
<h2>Rowing back</h2>
<p>Even if it can be implemented without internal rebellions,the Conservatives’ renewed “one-nation” approach stops its agenda being entirely business-friendly. An attack on “aggressive tax avoidance and tax planning” is expected to yield £5 billion of the £30 billion fiscal consolidation promised for the next two years and plans to “make sure our financial services industry is the best-regulated in the world” already strike some as <a href="http://www.cityam.com/article/new-regulation-threatens-success-britain-s-thriving-insurance-sector">too onerous to keep the City thriving</a>. </p>
<p>Market players who celebrated after the count will be hoping that some of these pledges served only to defuse political opposition in England and Wales – and can be diluted dilutable now that victory has been achieved. If the new government means all that it says, the long tradition of <a href="http://www.thisismoney.co.uk/money/markets/article-3027949/The-colour-money-Expert-Laith-Khalaf-examines-party-wins-stock-market-s-vote.html">financial markets doing better under the Conservatives</a> may now be put to the test.</p><img src="https://counter.theconversation.com/content/41532/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Markets were always likely to prefer a Conservative majority to any other result, but they might need some policies diluted for the gains to be sustained.Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/39002011-10-30T19:44:35Z2011-10-30T19:44:35ZChi-X launch - what does it mean for the Australian market?<figure><img src="https://images.theconversation.com/files/4913/original/sharemarket.jpg?ixlib=rb-1.1.0&rect=120%2C83%2C3934%2C2672&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's trading market faces new competition from today.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Today for the first time in its history, the Australian Securities Exchange will face competition in equities trading. </p>
<p>This means that there will now be a choice of trading venue for the execution of orders in ASX-listed stocks. </p>
<p>ASX’s new competitor, <a href="http://www.chi-x.com/resources/au/file/181011%20Press%20Release%20-%20Chi-X%20Global%20Announces%20New%20Equity%20Investors.pdf">Chi-X Australia</a>, will begin trading in just eight stocks, but will quickly expand this to include all ASX/S&P 200 stocks and ASX-listed Exchange Traded Funds. </p>
<p>Twenty two ASX participants, including all of the large brokers, are ready to begin trading with Chi-X from today. </p>
<h2>Who is Chi-X Australia?</h2>
<p>Chi-X Australia is owned by <a href="http://www.chi-x.com/">Chi-X Global</a>, which also operates <a href="http://www.chi-xcanada.com/includes/indexShow.jsp?thePage=/index.jsp">Chi-X Canada</a> and <a href="http://www.chi-x.com/japan/">Chi-X Japan</a>. Until very recently Chi-X Global was a wholly owned subsidiary of the <a href="http://www.nomura.com/">Nomura Group</a>. </p>
<p>However, five additional financial institutions have now taken a minority stake in the company. The new owners are BofA Merrill Lynch, Goldman Sachs, Morgan Stanley, GETCO and Quantlab. </p>
<h2>What can we expect from competition in equities trading?</h2>
<p>Markets overseas have enjoyed competition in equities trading for many years. The overseas experience suggests that the introduction of competition can lead to rapid and significant change. </p>
<p>In the UK, Chi-X Europe captured over 20% of the London Stock Exchange’s (LSE) market share within the first 12 months. </p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/4918/original/lse.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/4918/original/lse.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/4918/original/lse.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/4918/original/lse.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/4918/original/lse.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/4918/original/lse.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/4918/original/lse.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Chi-X challenged LSE’s market share.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>Today, four and a half years after its launch, Chi-X Europe is the largest exchange in Europe by dollar value traded. In Canada, the Toronto Stock Exchange has lost more than 35% the trading activity in its stocks to new trading venues. </p>
<p>Multiple trading platforms also increase the level of high frequency trading (HFT). This is due to the low latency technology offered by the new trading platforms and the arbitrage opportunities created by the existence of multiple venues. </p>
<p>An <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722924">academic study</a> of the launch of Chi-X in the Dutch market shows that Chi-X’s growth in market share was driven by the growth in HFT activity.</p>
<p>The combination of competition and increased HFT has generally led to significant increases in trading activity and decreases in bid-ask spreads. </p>
<p>We can expect similar trends in Australia.</p>
<p>While these changes offer benefits to the market there is some debate about whether reduced spreads have come at the expense of the depth of orders in the market. </p>
<p>There has also been a trend toward lower average trade sizes which potentially makes it more difficult for institutional investors to get large orders filled.</p>
<h2>Are there other benefits?</h2>
<p>Even before the launch of Chi-X, the Australian market has benefitted from the threat of competition offered by Chi-X. </p>
<p>ASX slashed trading fees in July 2010 with the headline fee falling from 0.28 basis points (bps) to 0.15 bps for each side of the trade. ASX also upgraded its trading technology, offered new co-location facilities and introduced a range of new order types to meet the needs of traders and investors. </p>
<p>ASX will also launch its own low latency platform – <a href="http://www.asx.com.au/documents/trading_services/purematch_factsheet.pdf">PureMatch</a> – to compete directly with Chi-X for HFT order flow. PureMatch is set to launch on November 28. </p>
<p>Trading fees will face continued downward pressure. Chi-X is launching with a <a href="http://www.chi-x.com/resources/au/file/Market%20Operations%20Notice%200019-11.pdf">maker-taker pricing model</a>; which means that different fees are charged depending on whether an order provides or takes liquidity from the market. Liquidity demanders will be charged, 0.12 bps and liquidity suppliers will be charged 0.06 bps.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/4914/original/shares.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/4914/original/shares.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=803&fit=crop&dpr=1 600w, https://images.theconversation.com/files/4914/original/shares.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=803&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/4914/original/shares.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=803&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/4914/original/shares.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1009&fit=crop&dpr=1 754w, https://images.theconversation.com/files/4914/original/shares.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1009&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/4914/original/shares.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1009&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The ASX has introduced new services.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>The differential fee is aimed at attracting liquidity suppliers to the new market. The ASX is yet to announce its pricing model for PureMatch.</p>
<h2>What will these changes mean for retail investors trading in the market?</h2>
<p>If overseas trends are followed, retail investors should enjoy the benefits of lower bid-ask spreads. For investors that trade using market orders (which most retail orders do) this will mean a lower cost of trading. </p>
<p>In terms of the trading process for the retail investor, there will be little change, as the decision on where to trade will be made by brokers. </p>
<p>ASIC has introduced new <a href="http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Market%20integrity%20rules">Market Integrity Rules </a>which require brokers to deliver “best execution” for their clients.</p>
<p>For retail orders, this means brokers must ensure the order is routed to the market offering the best price. There is however a 12 month transitional period during which time brokers may
choose to send all orders to ASX.</p>
<p>For brokers who have not connected to Chi-X, ASX is offering an <a href="http://www.asxgroup.com.au/media/PDFs/110713mr_asx_best_and_fidessa.pdf">order routing service</a>. This means that ASX may route the order to Chi-X if Chi-X is offering a better price. </p>
<p>So retail investors should feel confident that they can achieve good trading outcomes in the new trading environment. </p>
<p>It is important to remember, that Chi-X’s trading services are limited to the largest and most liquid ASX-listed stocks. So for smaller stocks, there is no change. </p>
<p>Investors and traders can expect ASX and Chi-X to compete vigorously in the coming months and years. This will ensure continued innovation and competitive pricing for the market.</p><img src="https://counter.theconversation.com/content/3900/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carole Comerton-Forde acts as an economic consultant for the Australian Securities and Investments Commission. She is also an Australian Securities Exchange shareholder.
</span></em></p>Today for the first time in its history, the Australian Securities Exchange will face competition in equities trading. This means that there will now be a choice of trading venue for the execution of orders…Carole Comerton-Forde, Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/27742011-08-11T04:30:16Z2011-08-11T04:30:16ZIreland, Greece … France? Accepting default is Europe’s only option<figure><img src="https://images.theconversation.com/files/2848/original/sarkozyprey.jpg?ixlib=rb-1.1.0&rect=0%2C559%2C2460%2C2063&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The only way out of this crisis is to dishonour some of the debt that is weighing down the global economy</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The dramatic falls in share prices of Greek debt-laden French banks overnight highlights just how closely tied the current market chaos is to the world’s worsening debt woes. </p>
<p>Market crashes like that of 2007-08, when Wall Street’s S&P500 index fell over 50% in 15 months, aren’t normally followed by a repeat performance like the last two weeks. </p>
<p>Even the long slump of 2000-2002, when the S&P 500 fell from 1500 to 800 points, was followed by a five-year boom that pushed the index back to just above its 2000 high.</p>
<p>That is evidence enough that this isn’t a new crisis: it’s a continuation of the old one. The only difference is that this time, governments and the media are focusing on the levels of government debt. </p>
<p>But the real culprit remains the one they briefly shone their torches on in 2007: the level of private debt.</p>
<p>Government bailouts of the private banks shifted some of this debt onto the public account, and desperate stimulus packages to avert a depression created yet more public debt. </p>
<p>But the level of private debt built up chasing Ponzi schemes in shares and housing was so great in the lead up to 2007-08 that its dynamics are still what is driving the global economy back into recession.</p>
<p>The difference today is that private debt is now falling, and as it falls, it is sucking aggregate demand out of the economy. This in turn is causing governments to run fiscal deficits, as tax receipts fall and welfare payments rise.</p>
<p>That gives us one factor reducing aggregate demand — the private sector — and another boosting it — the government. The end result is a slump, but not so nearly as deep a slump as there would be if the government “balanced its budget”.</p>
<p>Unfortunately, politicians are responding to this as they always do — by seeing the government budget as the problem, and ignoring what the private sector is doing. </p>
<p>They therefore compete at being “hairier-chested than thou” in pledging to return the government to surplus. </p>
<p>But the real cause of the crisis is not the government’s balance sheet, but the private sector’s. Government attempts to fix their own balance sheets while the private sector is also trying to reduce debt results in two forces dragging aggregate demand down, which compounds the problem of deficient aggregate demand. A deeper slump is likely to result.</p>
<p>The only way out of this crisis is to dishonour much of the debt that caused this crisis in the first place: the private credit lent to households that financed the bubbles in housing and shares since the early 1980s. </p>
<p>This bubble is so big that future generations will marvel at our inability to see it: share prices have risen sixfold compared to consumer prices since 1980, and house prices have tripled.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/2839/original/stevekeendebt1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/2839/original/stevekeendebt1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=502&fit=crop&dpr=1 600w, https://images.theconversation.com/files/2839/original/stevekeendebt1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=502&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/2839/original/stevekeendebt1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=502&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/2839/original/stevekeendebt1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=631&fit=crop&dpr=1 754w, https://images.theconversation.com/files/2839/original/stevekeendebt1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=631&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/2839/original/stevekeendebt1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=631&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The debt is equally massive—again, future generations will be dumbstruck that we didn’t notice this exponential blowout in private debt, and that we couldn’t understand that the crises since 2007 were caused by this explosion of private debt faltering and then going into reverse.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/2840/original/stevekeendebt2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/2840/original/stevekeendebt2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=512&fit=crop&dpr=1 600w, https://images.theconversation.com/files/2840/original/stevekeendebt2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=512&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/2840/original/stevekeendebt2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=512&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/2840/original/stevekeendebt2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=643&fit=crop&dpr=1 754w, https://images.theconversation.com/files/2840/original/stevekeendebt2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=643&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/2840/original/stevekeendebt2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=643&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Given our blindness to cause and effect, a number of avoidable crises are now likely to unfold. The Eurozone is likely to collapse, since no country in it — except possibly Germany — can avoid default if the terms of the Maastricht Treaty are enforced.</p>
<p>These treaties prevent the European Central Bank from actually behaving like a central bank, and funding the deficits of its nation states, if they exceed 3% of GDP. Instead each European nation has to issue bonds to cover the difference, and since it is now so enormous—often above 10% of GDP—markets doubt their capacity to finance that debt. The result is a blowout in bond rates that makes default a self-fulfilling prophesy.</p>
<p>There is a simple solution to the Eurozone’s fiscal problem: the ECB should actually behave like a Central Bank and finance the debt of its member nations, as economist Yanis Varoufakis <a href="http://www.levyinstitute.org/publications/?docid=1380">suggests</a>.</p>
<p>If it issued the bonds — rather than each country — then the aggregate strength of the Eurozone would be behind the bonds, and rates would remain at the level the US currently faces. Almost all European nations could then fund those bonds easily — the only problem child would be Greece.</p>
<p>But the Eurozone, the US, and the rest of the OECD still face the problem of a private sector reducing aggregate demand by deleveraging. </p>
<p>We’re seeing this now in Australia, where a household sector that is more indebted than US households and paying much higher interest rates has stopped spending, resulting in major retailers like David Jones reporting a 10% <a href="http://www.businessspectator.com.au/bs.nsf/Article/David-Jones-sales-drop-in-Q4-pd20110811-KLV5S?OpenDocument&src=hp6">fall in sales</a>. </p>
<p>Rising unemployment can’t be far behind, despite unprecedented exports to China, as demonstrated by today’s slight increase in the jobless rate to 5.1%.</p>
<p>The only solution to this problem is to dishonour much of this debt — since it was irresponsibly lent in the first place. The private and merchant banks that issued that debt would be sent into receivership, and that would cause substantial economic pain. But it would be a far less long-lasting pain than that of a decade or more of private sector deleveraging.</p><img src="https://counter.theconversation.com/content/2774/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Keen does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The dramatic falls in share prices of Greek debt-laden French banks overnight highlights just how closely tied the current market chaos is to the world’s worsening debt woes. Market crashes like that of…Steve Keen, Associate Professor, School of Economics and Finance, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/27792011-08-10T01:57:00Z2011-08-10T01:57:00ZGlobal economic shakeout: the zig-zag market heralds nasty times ahead<figure><img src="https://images.theconversation.com/files/2791/original/marketpoint.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The share market is often driven back into the black by canny investors looking for a bargain. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>After falling by almost 20% in week-long sell-off, the Australian share market has bounced back and began trade today up more than 3.5%.</p>
<p>The market’s recovery follows a strong comeback on Wall Street overnight, where shares had earlier been battered by negative sentiment about the global economy.</p>
<p>The Australian National University’s Geoff Warren explains what’s driving some of the biggest market swings in decades.</p>
<h2>What is driving this volatility in the markets?</h2>
<p>It’s always hard to know exactly what drives market fluctuations at any one point of time. Markets often seem to be reacting to particular news items. But what actually drives the movement can often be something deeper, such as shifts in portfolios or underlying structural trends.</p>
<p>One way to look at the market movements of the past few days is as follows. Prior to the sell-off there was a sense of complacency, a feeling that things would be OK in the global economy.</p>
<p>A couple of things have shocked the market out some of this complacency, leading to shifts in positions and expectations.</p>
<p>Sitting underneath this sell-off is a change in mood towards an element of underlying fear about the global economy. Recent economic data has been on the soft side. And on top of this there has been the realisation that, if significant problems do emerge, the amount of room to move on policy is somewhat limited in the major overseas economies. In sum, there a growing perception of downside risk.</p>
<p>This has caused the equity markets to sell off, and bond yields to drop as some people unwind positions and the markets re-price. Fears have been fed by the Standard & Poor’s downgrade of US debt and concerns over sovereign debt in Europe, but these might be better seen as catalysts rather than real core events. The real core event here is a shift in expectations about the outlook in the global economy.</p>
<h2>The Australian sharemarket has started the day significantly higher after closing ahead last night, and there were strong gains on Wall Street overnight. What’s driving the comeback?</h2>
<p>This is just the way markets operate. Markets don’t move in a straight line – they move in a zig-zag pattern. When you have a very big fall the market, some see it as a buying opportunity. The reason the market is bouncing back is not because certainty or confidence has returned, but because some people think that the market has become too cheap. That is, they see it as opportunity to buy in because the market is oversold.</p>
<p>I don’t think I’ve read any commentator who hasn’t admitted that there are still uncertainties about the economy. But there is a certain class of investor who see the bad news as discounted in the market, and hence as a time to buy.</p>
<h2>Those people would have made a lot of money in the past few days, wouldn’t they?</h2>
<p>Yes, if they bought in at the bottom. Though a lot would have lost on the way down. For most investors what is happening is an adjustment in market prices, with some trading occuring at the margin.</p>
<h2>How seriously should markets be taken as a measure of the economy more broadly?</h2>
<p>They’re pretty good at signalling the health of the economy. Stock market indicies are included in the leading indicator series for a reason.</p>
<p>The stock market has traditionally been a pretty good indicator of what is going to happen in the economy well before the event. However, it’s not perfect. People make the joke that stock markets have predicted something like nine out of the past five recessions. Stock markets can move for a range of reasons, of which anticipation of a weak economy is one.</p>
<p>But on average it’s a pretty good leading indicator. When stock market falls precipitously and seemingly inexplicably – and you have a downward sloping yield curve in the fixed-income markets – those two things usually amount to a message that bad times are ahead for the economy.</p>
<p>Although we don’t have downward-sloping yield curve globally given very low policy rates in the US and elsewhere, the decline in bond yields is also consistent with the markets anticipating weakness in the world economy.</p>
<p>Overall, the markets seem to be telling us that things might get a bit nasty.</p>
<h2>Given the heavy investment of superannuation funds in equities markets, are Australians more exposed to fluctuations in sharemarkets than investors in other countries?</h2>
<p>To some extent that’s true, but the division seems to be more between the Anglo-Saxon world and the non-Anglo-Saxon world.</p>
<p>Equity weightings are relatively high in the US, the UK and Australia, although they have been trending down in the UK. </p>
<p>In Europe and Japan, funds tend to be more weighted towards fixed-income investments such as bonds.</p><img src="https://counter.theconversation.com/content/2779/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geoff Warren does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>After falling by almost 20% in week-long sell-off, the Australian share market has bounced back and began trade today up more than 3.5%. The market’s recovery follows a strong comeback on Wall Street overnight…Geoff Warren, Senior Lecturer, School of Finance and Applied Statistics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.