tag:theconversation.com,2011:/us/topics/investment-risk-6921/articlesinvestment risk – The Conversation2024-01-25T20:45:23Ztag:theconversation.com,2011:article/2181142024-01-25T20:45:23Z2024-01-25T20:45:23ZWhat do I need to know before investing in ETFs and what are the risks?<p>Exchange-traded funds (ETFs) are tradeable units that have different types of investments all bundled by a professional fund manager into a single investment. In the “bundle” you might have shares, bonds, property investment and other types of investments. </p>
<p>That means people who hold ETFs are investing in a diverse collection of assets across various sectors, markets, companies and regions. With a single ETF you can own a piece of multiple companies or bonds.</p>
<p>They are issued by financial services companies, such as Blackrock, Vanguard, and State Street, and managed by professional fund managers. You can buy and sell units in an ETF fund through a stockbroker; many people use an online broker such as CommSec, CMC Markets, eToro or others.</p>
<p>ETFs can be traded on the Australian Securities Exchange (ASX), or another exchange. The market price of an ETF, which is disclosed daily, will typically follow other benchmarks in the market such as the ASX200 or the S&P500.</p>
<p>ETFs have grown very <a href="https://www.investordaily.com.au/markets/54140-how-australia-s-etf-industry-grew-from-100k-to-over-150b">popular</a> over the last two decades, especially among <a href="https://www.asx.com.au/investors/learn-about-our-investment-solutions/etfs-and-other-etps/20-years-of-etfs-on-asx">younger investors</a>. But what are the potential <a href="https://www.asx.com.au/investors/learn-about-our-investment-solutions/etfs-and-other-etps/benefits-and-risks">benefits and risks</a> of ETFs?</p>
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Read more:
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<h2>What are the potential benefits?</h2>
<p>In traditional shares investing, you might research one company and if you believe it will do better, you buy shares in it in the hope its share price rises.</p>
<p>With ETFs, you buy a “bundle” (a number of units) of shares and other securities, that is put together and managed by a professional fund manager. If the market goes up, the value of the ETF should too. </p>
<p>This means investing in ETFs can allow you to spread your risk across a lot of different regions and different markets (such as shares, bonds, property, companies and so on). You aren’t putting all your eggs in one basket. And you can let a professional fund manager worry about selecting the various investments and managing them. You don’t need to be an expert on one particular company or industry.</p>
<p>ETFs also offer flexibility to respond to market trends. They are usually easier to sell quickly than many other types of investments, such as property. This offers freedom to adjust your investment portfolio often and as you like.</p>
<p>Many ETFs that distribute dividends allow the investor to reinvest these dividends automatically to benefit from compound growth over time. </p>
<p>ETFs can also be cost-effective, because the administration is handled by the exchange (such as the ASX).</p>
<h2>What are the risks?</h2>
<p>Like any investment, ETFs carry risk.</p>
<p>A lot depends on the type of ETF and underlying assets in the “bundle”.</p>
<p>If you aren’t careful, you can end up buying a higher-risk ETF without realising it. So it pays to know what types of investments and in what proportions are in your “bundle” (which is known as your asset allocation).</p>
<p>Asset allocation should be aligned with your risk tolerance. Investors have different tolerances for risk depending on their age, financial goals, investment time horizon, preferences and personal comfort with market volatility. Knowing your risk tolerance helps you manage your emotional reactions during market downturns. </p>
<p>A retiree with a likely low tolerance to taking risks might choose an asset allocation that exposes them to low-risk assets. Someone saving for retirement might have more riskier share investments as they aim to grow their nest egg.</p>
<p>Just like shares, ETFs are subject to market fluctuations. If the market experiences a downturn, then the value of the ETF may decline too (depending on what’s in your ETF). Much of the risk depends on what type of assets the ETFs hold.</p>
<p>And in times of market stress, ETFs may not be as easy as they normally are to convert into cash. </p>
<p>Some financial products bought and sold every day on the market include debts or derivatives (futures and options investments). If your ETFs contain in the “bundle” some debts or derivatives, there is always the risk the party on the other side of a financial transaction may default on their debt obligations.</p>
<p>Growth in Australian exchange-traded funds under the management of a professional ETF manager has been robust in recent years. Market capitalisation stood at <a href="https://www.asx.com.au/content/dam/asx/issuers/asx-investment-products-reports/2023/pdf/asx-investment-products-oct-2023.pdf">A$145.83 billion</a> in October 2023, up 13.55% since October 2022.</p>
<p>But before you dive in, remember that ETFs come with their own risks.</p>
<p>Carefully research and select ETFs that are aligned with your investment goals, preferences, time horizon and risk tolerance or see a professional for advice.</p>
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<p class="fine-print"><em><span>Angelique Nadia Sweetman McInnes has received funding from the Accounting and Finance Association of Australia and New Zealand, Central Queensland University. She is a member of Accounting and Finance Association of Australia and New Zealand, the Financial Advice Association of Australia, the Society for Trusts and Estate Planning, the Financial Planning Academic Forum, Cooperative Research Australia, the Association of Computing Machinery, the Health Informatics Knowledge Management Steering Committee, and the Australasian Society for Computers in Learning in Tertiary Education.</span></em></p>Exchange-traded funds allow you to spread your risk across many different regions and markets (such as shares, bonds, property and companies). You aren’t putting all your eggs in one basket.Angelique Nadia Sweetman McInnes, Academic in Financial Planning, CQUniversity AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2147042023-10-19T07:25:32Z2023-10-19T07:25:32ZExtreme weather could burn investment portfolios by mid-century<p>Climate change is one of the most pressing challenges facing humanity today, with potentially severe implications for infrastructure assets. Infrastructure investments such as roads, bridges, ports, airports, and power plants have long lifetimes, typically spanning several decades, and are designed to operate under specific climatic conditions. However, climate change is causing more frequent and intense extreme weather events, such as floods, droughts, heat waves, and storms, which can damage or disrupt infrastructure assets. These physical risks can lead to direct losses, increased maintenance costs, and lower asset values.</p>
<p>At the same time, climate change induces changes in policy, technology, and consumer preferences that can impact the value of infrastructure assets. This is known as transition risks. For example, new regulations and carbon-pricing schemes could make carbon-intensive infrastructure assets less attractive or even “stranded”, leading to significant financial losses . Additionally, changes in consumer behaviour, such as a shift toward electric vehicles or renewable energy sources, could render certain infrastructure assets obsolete.</p>
<h2>50% potential loss of value</h2>
<p>If the energy transition has a cost for private investors (transition risks), so does climate change (physical risks). Extreme weather events, which <a href="https://reseauactionclimat.org/rapport-giec-climat-2021/">experts predict will increase over the next few years</a>, thus greatly increase the risk of losing value in portfolios.</p>
<p>In an August 2023 study, <a href="https://edhec.infrastructure.institute/wp-content/uploads/2023/07/p1102.pdf">“It’s getting physical”</a>, EDHEC Infrastructure and Private Assets Research Institute shows that some investors could see the value of their portfolio fall by more than 50% before 2050. The average investor’s portfolio, which generally holds around 10 assets, could drop by a quarter.</p>
<p>The reason is that over the past two decades, institutional investors – such as insurance companies, mutual and pension funds – have been allocating more and more capital to private infrastructure companies, which operate motorway toll roads, airports, power stations, bridges, pipelines, wind and photovoltaic farms, and so on. This represents a total value of 4.1 trillion dollars in the 25 most active markets. These markets include sectors like renewable energy projects, sustainable infrastructure development, clean technology ventures, electric vehicle manufacturing, carbon offset trading, and green real estate investment, among others. These infrastructures are particularly exposed to climate risks.</p>
<p>In the aftermath of the Covid-19 pandemic, public spending on physical infrastructure has persistently failed to keep up with economic growth; the United States spends only <a href="https://www.worldbank.org/en/news/press-release/2023/04/24/data-show-private-infrastructure-investment-continues-to-improve-following-pandemic-slump">2.3% of its GDP on infrastructure, compared to 5% for European countries and 8% for China</a>. Still, private-investor exposure appears to be considerable. </p>
<h2>27% loss of value on average</h2>
<p>To measure the likely losses of infrastructure investors, we randomly constructed thousands of portfolios. To do this, we included hundreds of assets belonging to infrastructure investments across eight industrial superclasses, including transport (air, rail and road), power generation (gas- and coal-fired, nuclear, etc.), renewable energy (wind, solar, hydroelectric, etc.), network utilities (electricity, gas or water distribution), water resources (oil, gas or water pipelines, gas or liquid storage), etc. For all these assets, it is possible to obtain information on the associated climate risks in EDHEC’s <a href="https://edhec.infrastructure.institute/get-started/">InfraMetrics database</a>.</p>
<p>Overall, we observed a high concentration of risk. Most infrastructure investors generally have few assets in their portfolios (between 5 and 20 on average). Their portfolios are poorly diversified, with a relatively limited number of assets held directly by each investor.</p>
<p>Furthermore, portfolios containing infrastructure assets are often concentrated in a single sector – for example, wind farms. In practical terms, an investor who started building a portfolio in 2018 and plans to hold the assets for another 30 years is exposed to losses solely due to physical risks ranging from -54% to -10%, depending on the number of assets held.</p>
<p>In addition, the loss in value of assets exposed to climate change is -27% on average [by 2050]. In a scenario where temperatures rise faster than expected, they could reach 54% for the most-concentrated portfolios. For instance, the <a href="https://www.ngfs.net/ngfs-scenarios-portal/">“Hot House World” scenario</a> predicts a rise in temperatures of about 3.2ºC above pre-industrial levels by 2100.</p>
<p>Some sectors are also more exposed to climate risks than others. In the transport sector, for example, the loss in net asset value would be four times greater than in the renewable energies sector. Investors in developed countries – in particular the United States, Europe and Australia and others – are the most exposed to losses in value worldwide. Indeed, the more valuable assets are concentrated in a given location, the greater the risk of value destruction.</p>
<h2>More inaction, even greater risk</h2>
<p>This study shows the scale of the potential losses that investors will have to face. And that’s before the 2050 deadline, as long as climate change predictions remain unchanged. Without action from governments and other stakeholders, climate risks could have a major impact on the overall value of investments, and on the economy as a whole.</p>
<p>However, there is still a glimmer of hope: if the stakeholders manage to organise an effective transition to a low-carbon economy, the losses mentioned in the article could be halved for all investors. All that remains – and this is undoubtedly the most difficult part – is to take action.</p><img src="https://counter.theconversation.com/content/214704/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>According to a study by EDHEC, some investors could see the value of their portfolios plummet by 50% by 2050 as a result of the multiplication of extreme weather events.Noël Amenc, Professeur de finance, EDHEC Business SchoolAbhishek Gupta, Associate Director at the EDHEC Infrastructure Institute, EDHEC Business SchoolBertrand Jayles, Senior Sustainability Data Scientist, EDHEC Infrastructure & Private Assets Research Institute, EDHEC Business SchoolDarwin Marcelo, Project Director at the EDHEC Infrastructure & Private Assets Research Institute, EDHEC Business SchoolFrédéric Blanc-Brude, Directeur de l'EDHEC Infrastructure Institute, EDHEC Business SchoolLeonard Lum, Data analyst, EDHECinfra, EDHEC Business SchoolNishtha Manocha, EDHECinfra Senior Research Engineer, EDHEC Business SchoolQinyu Goh, MSc Urban Science, Sustainability Data Scientist at the EDHEC Infrastructure & Private Assets Research Institute, EDHEC Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2063622023-06-05T15:57:29Z2023-06-05T15:57:29ZWhy saving for a pension has become more risky<figure><img src="https://images.theconversation.com/files/528068/original/file-20230524-33669-p13c5d.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4992%2C2979&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/vector-illustration-risk-challenge-business-concept-714831775">inamar/Shutterstock</a></span></figcaption></figure><p>How much money are you going to have to live on in retirement? Perhaps, just like <a href="https://www.unbiased.co.uk/news/financial-adviser/one-in-three-brits-don-t-know-how-much-pension-to-save">one in five Britons</a>, you do not know. </p>
<p>This is not a surprise since there are so many shifting factors, or risks, to consider when thinking about retirement finances. You need to think about how much you’ll earn during your life, to what your employer will decide to contribute towards your a pension, and how much tax you will have to pay. </p>
<p>And then, even for the (fairly simple) <a href="https://www.gov.uk/browse/working/state-pension">state pension provided by the government</a>, there is “policy risk” to think about. This refers to how big your pension pot will be by the time you retire, not to mention <a href="https://www.ageuk.org.uk/information-advice/money-legal/pensions/state-pension/changes-to-state-pension-age/">when you will able to claim it</a>.</p>
<p>What this uncertainty means is that, almost irrespective of how much you earn, <a href="https://ifs.org.uk/pensions-review">most of us face a lot of risks</a> when it comes to our retirement finances. And unfortunately, you are likely facing more now than perhaps your parents did 25 years ago.</p>
<p>Back then, most of the uncertainty around pension pots came from not knowing how much you would earn over the course of your career. People typically had traditional occupational pensions, known as <a href="https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/defined-benefit-or-final-salary-pensions-schemes-explained#:%7E:text=A%20defined%20benefit%20(DB)%20pension%20scheme%20is%20one%20where%20the,year%20in%20line%20with%20inflation.">defined benefit</a> or final salary pensions. These were basically a promise from an employer that they would invest enough money to ensure their employees were paid a particular amount from retirement at 65 until death. That amount would depend on a person’s earnings and length of service. </p>
<p>Some people did not have occupational pensions, but instead had <a href="https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/what-is-a-serps-pension">state earnings-related pensions</a>. With this type, higher earnings meant paying more in national insurance contributions, resulting in a higher state pension in retirement.</p>
<p>And so, 25 years ago it didn’t really matter how well the stock market did – if an employer’s investments did not cover their pension promise to employees, they had to top it up (and often did so, leading to companies having “<a href="https://www.investorschronicle.co.uk/news/2022/05/12/ftse-350-firms-pension-deficits-shrink-to-lowest-level-in-two-years/">pension deficits</a>”). But for employees, it didn’t matter if they lived longer than expected, their company, or the government, would pay their pension for as long as they lived. </p>
<p>These risks – investment risk (how well the stock market and other assets do) and longevity risk (the risk of living much longer than expected and running out of money) – were not a big concern for people with pensions in the past. But the changing nature of UK pensions in recent years has caused these risks to be transferred from the government and companies to anyone saving into a future pension pot.</p>
<h2>New retirement risks</h2>
<p>For a variety of reasons (including the amount of risk employers had to bear in the past) <a href="https://www.pensionspolicyinstitute.org.uk/media/3916/20210923-the-dc-future-book-2021-final.pdf">barely any organisations</a> outside the public sector offer traditional defined benefit pensions these days. Instead, on top of a state pension – which is now a flat-rate, no longer earnings-related – most people saving for retirement do so in a <a href="https://www.pensionbee.com/pensions-explained/pension-types/what-is-a-defined-contribution-pension">defined contribution</a> pension. </p>
<p>At its core, a defined contribution pension is a tax-advantaged savings account that you and your employer contribute to, and which you can only access in your late 50s. When you do access it, you simply have a pot of money. </p>
<p>If you are very lucky in terms of what you have chosen to invest in (Amazon shares in the early 2000s maybe), your pot will have done very well. If you are unlucky (and you owned funds which were invested in companies that went bust, for example), you won’t have done as well as an Amazon-owning colleague – even if you contributed the same amount.</p>
<p><strong>Amazon’s rising share price</strong></p>
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<span class="caption">We’d all like some Amazon in our pension pots.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/chart/">TradingView</a></span>
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<p>Longevity risk is also now a factor to consider. This is the risk that you will live for a very long time and run out of money. </p>
<p>One reason for this is that, <a href="https://www.theguardian.com/money/2014/mar/22/death-compulsory-annuities-pension-revolution">since 2015</a>, retirees no longer have to turn their “pots” of defined contribution pension savings into an “annuity”. This is a stream of income that’s guaranteed until death. </p>
<p>Instead, most people simply spend their pensions pots any way they like now. But this means living much longer than expected increases the risk of completely depleting your private pension savings.</p>
<h2>Pension risk transfer</h2>
<p>One obvious question is: if pensions are now so risky, why don’t people pay to guarantee an income in retirement? That is, why doesn’t the government bring back annuities? When they were required, many people felt they weren’t getting a good <a href="https://www.moneymarketing.co.uk/opinion/steve-webb-keep-your-eyes-on-comeback-kid-annuities/">deal out of these products</a> – they were paying a lot upfront for only a small guaranteed annual income. </p>
<p>But while removing compulsory annuitisation is generally thought to be a popular policy – and it certainly gives people the freedom and opportunity to match their income with the way they want to spend in retirement – it also increases the risk of running out of private resources before you die.</p>
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<span class="caption">Risk-free retirement living?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/surfer-nice-beach-1212137647">Rawpixel.com/Shutterstocl</a></span>
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<p>In the past 25 years there has been a big transfer of investment and longevity risk from employers (who used to provide occupational pensions), from the state (who used to provide earnings-related state pensions) and from insurance companies (who typically used to sell annuities) on to people saving for retirement. </p>
<p>Managing these risks is now very important, especially as many working-age people may not realise just how much risk they are facing when it comes to ensuring financial security in retirement.</p><img src="https://counter.theconversation.com/content/206362/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Cribb receives funding from the Economic and Social Research Council, abrdn Financial Fairness Trust and Nuffield Foundation. </span></em></p>Making sure you have enough set aside for a long retirement has become more difficult over the past 25 years.Jonathan Cribb, Senior Research Economist, Institute for Fiscal StudiesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1999162023-02-19T16:59:37Z2023-02-19T16:59:37ZThe rise of renewables is not without risk for investors<figure><img src="https://images.theconversation.com/files/510584/original/file-20230216-28-kllla6.jpeg?ixlib=rb-1.1.0&rect=0%2C0%2C1200%2C607&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Reaching net-zero by 2050 will require 2,000 billion dollars' worth of investment in clean electricity per year, according to the International Energy Agency.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/sunciti_sundaram/14355126874">Suncit/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Given the urgent need to combat climate change and put an end to the exploitation of fossil fuels, it would appear renewable energies have a bright future. Having grown steadily for several years, they accounted for <a href="https://www.statistiques.developpement-durable.gouv.fr/les-energies-renouvelables-en-france-en-2020-suivi-de-la-directive-200928ce-relative-la-promotion">19.1% of gross final energy consumption in France</a> in 2020. Across the Channel, <a href="https://www.nationalgrid.com/stories/energy-explained/how-much-uks-energy-renewable">43% of the energy consumed in oot twhe UK</a> now comes from renewable sources such as wind, solar and hydroelectric power.</p>
<p>That said, it is essential we step up green investment even more if we are to sustain low-carbon economic growth. According to the International Energy Agency, more than <a href="https://www.la-croix.com/environnement/Climat-lAgence-internationale-lenergie-prevoit-pic-emissions-CO2-liees-lenergie-2025-2022-10-27-1201239635">$2 trillion in annual investment in clean electricity</a> will be needed by 2030 to achieve carbon neutrality. The war in Ukraine has also highlighted the risks posed by states’ dependence on imported hydrocarbons, making the energy transition not only an economic and ecological imperative, but a political one.</p>
<p>However, we note in an <a href="https://edhec.infrastructure.institute/wp-content/uploads/2022/11/EDHECinfra_Research_Does-the-rise-of-renewable-energy-create-new-risks-for-investors.pdf">EDHECinfra study</a> that there are a number of risks inherent in this type of investment. Our work has tracked 20 years of energy transition in the UK, an example of an economy that has successfully moved away from coal and made a rapid transition to renewables, while relying on limited hydro and nuclear power.</p>
<h2>The risk premium increases</h2>
<p>As in most developed economies, the growing share of intermittent renewables in the energy mix has created new challenges:</p>
<ul>
<li><p>an increase in development costs;</p></li>
<li><p>an increase in production volatility;</p></li>
<li><p>an increase in market price volatility.</p></li>
</ul>
<p>So while renewables are enjoying record profits (a recent <a href="https://edhec.infrastructure.institute/paper/the-pricing-of-green-infrastructure/">EDHECinfra research note</a> showed that returns on European renewable energy assets reached 16% in 2020, up from 10% in 2015), the risks faced by investors are also increasing.</p>
<p>And while interest remains strong, the risk premium demanded by the market in unlisted wind and solar projects has started to rise again since the beginning of 2022, after a decade of decline. This premium now stands at 700 basis points for wind projects in the most developed economies, according to our data provider <a href="https://edhec.infrastructure.institute/get-started/">infraMetrics</a>, up from just over 500 at the end of 2020. </p>
<p>The impact on investors of a rapid transition to intermittent renewable energy generation is therefore notable. First up, there is the instability of the energy system to contend with, but also the increase in the value of gas production, which remains one of the main sources of energy, increased price volatility, and of course, a negative impact on the returns expected by investors.</p>
<p>To rebalance the risks, investors and consumers could turn to price stabilisation mechanisms.</p>
<h2>The storage capacity strategy</h2>
<p>For investors, this is an opportunity to better think about and manage the risks to which they are exposed. Part of these risks can be managed by investing in the technologies that seem to be most needed today, such as those that increase storage capacity. To date, the majority of new investments have been directed toward intermittent energy production (such as wind and photovoltaic). However, storage capacity is struggling to develop at the same rate, which makes the supply chain more fragile.</p>
<p>But other tools than the investment strategy can also be mobilised. In this respect, diversification can be mentioned. For example: combining investments in several types of renewable energy, such as wind and solar, or in several European countries.</p>
<p>Investors can also opt to use hedging strategies such as hedging (insurance or guarantee contracts against risk). Power Purchase Agreements (PPAs) and Contracts for Difference (CfDs), financial instruments designed to limit the risk of losses, can also be used.</p>
<h2>The urgent need to stabilise prices</h2>
<p>While investors have the leverage to control the risks to which they are exposed, strong public intervention remains necessary to accelerate the development of renewable energies. Firstly, it is necessary to protect consumers from soaring prices <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/articles/costoflivinginsights/energy">(+65.5% for electricity in the United Kingdom</a> over the period from November 2021 to November 2022, <a href="https://www.service-public.fr/particuliers/actualites/A15944">+15% in France</a> from January 2023 thanks to the tariff shield).</p>
<p>Thus, the preservation of existing price stabilisation mechanisms such as the tariff shield in France, the “contracts for difference”, or the end of price coupling between gas and electricity seems essential.</p>
<p>This type of measure would indeed make it possible to compensate for the deficiencies of a market which is increasingly based on the production of renewable energies, but where gas remains, paradoxically, the measure of all things.</p><img src="https://counter.theconversation.com/content/199916/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>Market volatility and rising development costs have led to an increase in the risk premium in recent years.Frédéric Blanc-Brude, Directeur de l'EDHEC Infrastructure Institute, EDHEC Business SchoolLaurence Monnier, Research Associate and member of the EDHECinfra Advisory Board, EDHEC Business SchoolLeonard Lum, Data analyst, EDHECinfra, EDHEC Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1690152021-10-05T19:10:59Z2021-10-05T19:10:59Z5 reasons why the Morrison government needs a net-zero target, not a flimsy plan<p>Prime Minister Scott Morrison may be warming to a net-zero emissions target by 2050, but Australia is still far from adopting it – largely thanks to <a href="https://theconversation.com/the-nationals-signing-up-to-net-zero-should-be-a-no-brainer-instead-theyre-holding-australia-to-ransom-168845">resistance</a> from the National Party.</p>
<p>Should Morrison fail to get the policy over the line, he will no doubt point to the government’s <a href="https://theconversation.com/angus-taylors-tech-roadmap-is-fundamentally-flawed-renewables-are-doable-almost-everywhere-146352">low-emissions technology roadmap</a> as evidence the government still has a climate plan.</p>
<p>But a vague plan is not enough. That was confirmed by a <a href="https://climateactiontracker.org/countries/australia/">recent analysis</a> showing Australia’s climate policies are insufficient and have inevitably led to investment in new fossil fuel projects.</p>
<p>Reaching net-zero emissions will require intense policy focus, private investment and clear accountability – conditions only a firm numerical target can provide. Here are five reasons the Morrison government must, at a minimum, set a target of net-zero emisisons by 2050.</p>
<figure class="align-center ">
<img alt="suburban scene with smoke stacks" src="https://images.theconversation.com/files/424626/original/file-20211005-15-1vd74g7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/424626/original/file-20211005-15-1vd74g7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=334&fit=crop&dpr=1 600w, https://images.theconversation.com/files/424626/original/file-20211005-15-1vd74g7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=334&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/424626/original/file-20211005-15-1vd74g7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=334&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/424626/original/file-20211005-15-1vd74g7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=419&fit=crop&dpr=1 754w, https://images.theconversation.com/files/424626/original/file-20211005-15-1vd74g7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=419&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/424626/original/file-20211005-15-1vd74g7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=419&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Only a net-zero target will create the conditions needed for emissions reduction.</span>
<span class="attribution"><span class="source">Rob Griffith/AP</span></span>
</figcaption>
</figure>
<h2>1. Give certainty to investors</h2>
<p>Australia’s business community has been <a href="https://www.smh.com.au/politics/federal/business-urges-government-to-take-net-zero-pledge-to-un-climate-talks-20210831-p58nma.html">urging</a> a national net-zero target to create certainty for investors.</p>
<p>In just one example, the A$2 trillion Investor Group on Climate Change recently called on the Morrison government to adopt a stronger climate policy. As chief executive Rebecca Mikula-Wright, <a href="https://www.theaustralian.com.au/business/investors-say-climate-targets-will-trigger-investment-wave/news-story/b87848df7ceb324ea13155e240964e04">told The Australian</a>:</p>
<blockquote>
<p>we have to be able to invest with certainty for the long term if we’re going to invest billions of dollars in capital.</p>
</blockquote>
<p>The New South Wales Coalition government has set <a href="https://www.abc.net.au/news/2021-09-29/nsw-new-carbon-emissions-reduction-target-for-2030/100498444">a target</a> of net-zero emissions by 2050, with an interim target of 50% emissions reduction by 2030. It expects those targets will stimulate up to <a href="https://www.nsw.gov.au/media-releases/nsw-set-to-halve-emissions-by-2030">$37 billion</a> in private-sector investment. </p>
<h2>2. Guide government policy</h2>
<p><a href="https://theconversation.com/against-the-odds-south-australia-is-a-renewable-energy-powerhouse-how-on-earth-did-they-do-it-153789">Research</a> into emissions reduction in South Australia shows how setting a strong emissions-reduction target provides a framework for government policy.</p>
<p>In 2002, the state’s then Labor government adopted a target of 26% renewables generation by 2020. It marked the beginning of consistent and coordinated climate policy, making the state more attractive to investors than other states with weaker policies. </p>
<p>The target was backed by government action. New laws encouraged wind farms in areas away from towns and homes, and the projects were underwritten by state government supply contracts. And as coal generators closed, the state government funded new employment opportunities for affected workers.</p>
<p>The state now has a <a href="https://www.abc.net.au/news/2021-02-26/against-the-odds-south-australia-renewable-energy-powerhouse/13193210">target</a> of 100% electricity from renewables by 2030 – one that has been embraced by the current Liberal government. It continues to create the market conditions for increased investment in renewables technology.</p>
<p>Likewise, in NSW the net-zero target has triggered supportive government policy, such as seeking <a href="https://www.energy.nsw.gov.au/renewables/clean-energy-initiatives/hydro-energy-and-storage">private investment</a> in pumped hydro storage schemes and planning for massive investment in solar and wind. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/against-the-odds-south-australia-is-a-renewable-energy-powerhouse-how-on-earth-did-they-do-it-153789">Against the odds, South Australia is a renewable energy powerhouse. How on Earth did they do it?</a>
</strong>
</em>
</p>
<hr>
<h2>3. Ensure government accountability</h2>
<p>A numerical emissions target means a government can be held to account. When targets are accompanied by the appropriate reporting mechanisms, it’s clear if they’re being met. </p>
<p>This accountability can be seen in the United Kingdom. There, a group of climate scientists <a href="https://www.newscientist.com/article/2281950-uk-risks-missing-2035-climate-target-by-huge-margin-advisers-warn/#ixzz78Kkk5hX8">recently warned</a> the nation risked missing its 2035 emissions-reduction target by a long way because government policies were insufficient, and new commitments too slow. </p>
<p>The UK has set a target of net-zero by 2050, and missing its interim targets would put that longer-term goal at risk. </p>
<p>Such targets acts as a gauge against which government progress can be evaluated. In Australia, this happens in other policy areas such as regular <a href="https://ctgreport.niaa.gov.au">Closing the Gap</a> reports, which measure progress towards targets in areas such as health, education, employment and life expectancy.</p>
<p>And following delays in getting people vaccinated against COVID-19, Australia’s vaccination targets now establish benchmarks against which governments are being assessed.</p>
<h2>4. Boost trade and international relations</h2>
<p>If Australia continues to lag the world on climate policy, we will suffer a real economic cost. </p>
<p>From 2026, the European Union will apply <a href="https://ec.europa.eu/taxation_customs/green-taxation-0/carbon-border-adjustment-mechanism_en">border charges</a> to carbon-intensive goods from countries such as Australia without a carbon price or a 2050 net-zero emissions target. Other nations are considering similar measures.</p>
<p>Australia already has a <a href="https://paperbackbooks.com.au/p/australian-non-fiction-living-in-the-hothouse">poor reputation</a> on climate action, dating back to the 1997 Kyoto conference where the Howard government demanded special treatment. Among the demands were a uniquely generous target whereby our national emissions would actually <a href="http://unfccc.int/kyoto_protocol/items/3145.php">increase</a> by 8% above 1990 levels.</p>
<p>Our international reputation as a climate pariah has only worsened in the decades since. Now, even <a href="https://theconversation.com/spot-the-difference-as-world-leaders-rose-to-the-occasion-at-the-biden-climate-summit-morrison-faltered-159295">key allies</a> such as the United States and UK are calling on Australia to lift its game. </p>
<p>Australia must urgently change the way it’s perceived on the world stage, by setting a net-zero target that shows we’re making a serious contribution to the global climate effort.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/spot-the-difference-as-world-leaders-rose-to-the-occasion-at-the-biden-climate-summit-morrison-faltered-159295">Spot the difference: as world leaders rose to the occasion at the Biden climate summit, Morrison faltered</a>
</strong>
</em>
</p>
<hr>
<figure class="align-center ">
<img alt="man sits in front of TV screens" src="https://images.theconversation.com/files/424624/original/file-20211005-17-1123yb9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/424624/original/file-20211005-17-1123yb9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/424624/original/file-20211005-17-1123yb9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/424624/original/file-20211005-17-1123yb9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/424624/original/file-20211005-17-1123yb9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/424624/original/file-20211005-17-1123yb9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/424624/original/file-20211005-17-1123yb9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Even our key allies want to know when Australia will produce a credible climate policy.</span>
<span class="attribution"><span class="source">Mick Tsikas/AAP</span></span>
</figcaption>
</figure>
<h2>5. Give the government credibility at home</h2>
<p>Setting a net-zero target would give the Morrison government some chance of restoring its credibility on climate policy before the next election.</p>
<p>At the 2019 general election, <a href="https://www.theguardian.com/global/2019/may/18/australian-election-tony-abbott-loses-his-warringah-seat-to-zali-steggall">the loss of</a> Tony Abbott’s seat of Warringah to pro-climate independent Zali Steggall sent a warning to Liberal MPs, even those in blue-ribbon seats, that they’re vulnerable on climate policy. </p>
<p>The 2019-20 bushfire season was a brutal reminder to Australian voters that climate change is happening now. The federal government is yet to show the community it understands the need to respond. </p>
<p>Even if Australia adopts a 2050 target, however, it’s not enough. The timeline is so long, today’s politicians can get away with doing very little now. And by the time 2050 rolls around, it will be all but impossible to hold them to account for today’s failures. Very few will still be in public life, if they’re alive at all. </p>
<p>So if the Morrison government does want to show it takes climate policy seriously, it must set a credible 2030 target. The current goal – a 26-28% emissions reduction based on 2005 levels – is <a href="https://climateactiontracker.org/countries/australia/">totally inadequate</a>. </p>
<p>A responsible target, with a finish line just eight years away, would give the Morrison government the laser focus it needs to get Australia on the path to net-zero.</p><img src="https://counter.theconversation.com/content/169015/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Lowe received funding from the National Energy Research, Development and Demonstration Council in the 1980s for a study of Australia's energy needs to 2030. He is a past president of the Australian Conservation Foundation.. </span></em></p>Reaching net-zero emissions will require intense policy focus, private investment and clear accountability – conditions only a firm numerical target can provide.Ian Lowe, Emeritus Professor, School of Science, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1678682021-09-22T13:14:02Z2021-09-22T13:14:02ZHarvard’s decision to ditch fossil fuel investments reflects changing financial realities and its climate change stance<figure><img src="https://images.theconversation.com/files/422454/original/file-20210921-21-1f8rw8a.jpg?ixlib=rb-1.1.0&rect=0%2C882%2C4439%2C1663&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Students had demanded for years that Harvard University divest from fossil fuels.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/students-demanding-that-harvard-university-divest-from-news-photo/660543058">Keith Bedford/The Boston Globe via Getty Images</a></span></figcaption></figure><p>Harvard University will keep <a href="https://www.thecrimson.com/article/2021/9/10/divest-declares-victory/">phasing out all investments tied to oil, gas and coal</a>, it announced on Sept. 9, 2021. When <a href="https://www.harvard.edu/president/news/2021/climate-change-update-on-harvard-action/">Larry Bacow</a>, the school’s president, announced this plan, he cast it as a response to climate change – part of a broader trend that’s gaining steam among <a href="https://www.cnn.com/2020/05/20/us/university-of-california-divest-fossil-fuels-trnd/index.html">many large institutions with endowments</a>.</p>
<p>“We must act now as citizens, as scholars and as an institution to address this crisis on as many fronts as we have at our disposal,” he wrote. </p>
<p><a href="https://www.thecrimson.com/article/2021/9/10/divest-declares-victory/">Climate activists on and off Harvard’s campus</a> called the announcement a victory in response to their yearslong campaign demanding fossil fuel divestment.</p>
<p>But as a law professor who writes and researches about the role <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=557612">climate change considerations can play in investments</a> held by universities, foundations and other large institutions, I instead see it as part of a bigger story. Investing with climate change in mind is now an accepted practice for endowments, whether or not an institution uses the word divestment to describe this strategy. </p>
<h2>No quick shift</h2>
<p>Interestingly, Bacow didn’t say Harvard is divesting from fossil fuels.</p>
<p>Instead, he explained that less than 2% of its <a href="https://finance.harvard.edu/files/fad/files/fy20_harvard_financial_report.pdf">roughly US$42 billion endowment</a> is connected to those industries, through stakes in <a href="https://www.investopedia.com/ask/answers/121614/what-difference-between-hedge-fund-and-private-equity-fund.asp">private equity funds</a>. These indirect investments will soon be phased out, and Harvard will not acquire any new assets with fossil fuel exposure in the future, its president said.</p>
<p>“We do not believe such investments are prudent,” Bacow said.</p>
<p>And that is not a sudden change. The university’s declared intention to shed its fossil fuel holdings is the continuation of a longstanding strategy. Several months earlier, in <a href="http://www.hmc.harvard.edu/content/uploads/2021/02/2021-Climate-Report.pdf">February 2021</a>, Harvard had said it no longer “had direct exposure to companies that explore for or develop further reserves of fossil fuels.”</p>
<p>The term divestment is generally <a href="https://www.investopedia.com/terms/d/divestment.asp">used in business</a> to refer to selling an asset or the division of a company. In this context, it means selling off stocks, bonds and other assets held in an investment portfolio tied to a specific industry <a href="http://www.jstor.org/stable/44282151">based on ethical reasons</a> – rather than for financial motives.</p>
<p>Some schools, including <a href="https://www.rutgers.edu/news/rutgers-divest-fossil-fuels">Rutgers University</a> and <a href="https://www.insidehighered.com/quicktakes/2020/04/22/american-u-divests-fossil-fuels">American University</a>, have followed a strategy similar to Harvard’s and called it “divestment.” </p>
<p>Harvard, however, has refused – even now – to use that word. As a result, students, faculty and others had continued to <a href="https://www.npr.org/2021/09/10/1035901596/harvard-university-end-investment-fossil-fuel-industry-climate-change-activism">pressure Harvard to divest</a>, even after it began to <a href="https://www.harvardmagazine.com/2021/09/did-harvard-climate-announcement-mean-divestment">move in this direction in 2008</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Harvard University President Larry Bacow speaking before a microphone" src="https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/422456/original/file-20210921-21-7nhawy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Harvard University President Larry Bacow avoided the word ‘divestment’ when he explained what the school’s investment strategy is for fossil fuels.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/HarvardMedalists/cdc849fc4b554de899b01bb7547e94eb/photo?boardId=37be9465fcce45d283d5431cccb20a6a&st=boards&mediaType=audio,photo,video,graphic&sortBy=&dateRange=Anytime&totalCount=179&currentItemNo=1">AP Photo/Elise Amendola</a></span>
</figcaption>
</figure>
<h2>What changed?</h2>
<p>Investing with climate change in mind, or, more broadly, the use of strategies for sustainable and responsible investing, has <a href="https://dx.doi.org/10.2139/ssrn.2656640">undergone a transformation</a> and <a href="https://www.marketwatch.com/story/esg-investing-now-accounts-for-one-third-of-total-u-s-assets-under-management-11605626611">become far more common</a> in recent years.</p>
<p>Investing that incorporates <a href="https://www.cfainstitute.org/en/research/esg-investing">environmental, social and governance</a> factors into decision-making, known as ESG investment, may mean avoiding a company because that information indicates uncompensated financial risk.</p>
<p>Since many people are used to thinking of climate or environmental factors as nonfinancial, the idea of using environmental information in an investment decision sounds risky, but it need not be. The environmental information is added to traditional financial metrics, with a goal of improving financial returns or reducing financial risk.</p>
<p>Efforts to act on concerns about climate change and its <a href="https://www.weforum.org/agenda/2021/06/impact-climate-change-global-gdp/">serious financial consequences</a> are creating good investment opportunities that might help investors make money too. A study that looked at 35 university endowments that divested from fossil fuels – whether they called it that or not – found that refraining from investments in those industries <a href="https://dx.doi.org/10.2139/ssrn.3501231">generally didn’t affect endowment performance</a> from 2011 to 2018.</p>
<p>Aligning an organization’s investments with its mission has also become a more common and accepted practice for charities – a <a href="https://www.charitynavigator.org/ein/042103580#:%7E:text=Harvard%20University%20is%20a%20501,and%20donations%20are%20tax%2Ddeductible.">category of nonprofits that includes Harvard</a> and thousands of other universities.</p>
<p>The <a href="https://nonprofitlawblog.com/foundation-new-rules-mission-related-investments/">Internal Revenue Service has issued guidance</a> regarding how charities, as long as certain conditions are met, may use investments to help carry out their missions – not just to produce income. Indeed, the IRS said that some charities can earn a <a href="https://www.irs.gov/pub/irs-drop/n-15-62.pdf">below-market return on their investments</a> due to practices that are tied to their missions. </p>
<p>For example, a charitable organization seeking to improve air quality can invest its holdings in wind, solar and other forms of renewable energy. Even if those investments might appear bound to produce a smaller return than other kinds of assets, which <a href="https://www.investopedia.com/investing/wind-stocks/">could prove to be an unfounded fear</a>, the investment should nonetheless be considered prudent because it carries out the organization’s mission.</p>
<p>That is why I was intrigued to see that <a href="https://www.harvard.edu/president/news/2021/climate-change-update-on-harvard-action/">Bacow’s open letter</a> to the Harvard community recognized that seeking to slow climate change is connected with the university’s mission. Its endowment “is building a portfolio of investments in funds that support the transition to a green economy,” he wrote.</p>
<p>The letter also emphasizes Harvard’s mission: “The principal way we influence the world is through our research and teaching,” Bacow wrote.</p>
<p>As complicated as strategies for using a university’s endowment to address climate change may prove, I expect to see other schools following Harvard’s lead.</p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/167868/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Susan Gary has served on the Steering Committee of the Intentional Endowments Network and currently serves on the Fiduciary Duty and Policy Group of that organization. She has served on the Advisory Committee of the NYU National Center on Philanthropy and the Law. In 2017 she received a grant from the Rockefeller Foundation to be an Academic Writing Resident Fellow at the Bellagio Center, where she worked on an article about fiduciary duties and ESG investing.</span></em></p>The announcement didn’t use the word ‘divest.’ A legal scholar explains why that shouldn’t matter.Susan Gary, Professor Emerita of Law, University of OregonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1445672020-09-13T19:50:08Z2020-09-13T19:50:08ZIn gold we trust: why bullion is still a safe haven in times of crisis<figure><img src="https://images.theconversation.com/files/357569/original/file-20200911-21-nk2wy8.jpg?ixlib=rb-1.1.0&rect=0%2C113%2C5050%2C2963&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>“Gold” said famed investor <a href="https://quoteinvestigator.com/2013/05/25/bury-gold/">Warren Buffett in 1998</a>, “gets dug out of the ground in Africa or someplace, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”</p>
<p>Yet for all that, we remain in love with gold – especially in times of uncertainty.
With the COVID-19 crisis, interest in gold has soared, driving its price to historic highs (eclipsing its past record set <a href="https://money.cnn.com/2011/08/22/markets/gold_prices/index.htm">back in August 2011</a>).</p>
<p>Even Buffett seems to have softened his longstanding antipathy, with his company Berkshire Hathaway <a href="https://www.wsj.com/articles/warren-buffetts-berkshire-hathaway-joins-the-gold-rush-11597682998">acquiring</a> a US$565 million stake in the world’s second-largest gold miner, Canada’s <a href="https://www.barrick.com/English/home/default.aspx">Barrick Gold Corporation</a>. </p>
<p>Owning shares in a gold-mining company, though, is not the same thing as owning actual gold. Since gold shares are linked both to gold prices and to the broader share market, they tend to move with the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3677925">market when it falls sharply</a>. That deprives gold shares of a key feature of gold bullion – its safe haven property.</p>
<h2>What is a safe haven?</h2>
<p>A safe haven is an asset that holds its value in extreme, unexpected events.</p>
<p>It is different from a “safe asset” that provides a guaranteed return, such as government bonds. In buying such a bond you effectively lend money to the government in return for a promise it will repay that money (with interest) in the future.</p>
<p>Safe assets, in other words, are “fixed income” assets, and their prices are relatively stable.</p>
<p>The price of a safe haven asset, on the other hand, will fluctuate, rising in periods of heightened uncertainty, when other investments suffer extreme losses, but may also fall when the uncertainty reverts to more normal levels.</p>
<p>We can see this in the price of gold over the past two decades, both in the wake of the Global Financial Crisis beginning in 2008 and now with the COVID-19 crisis. </p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/356481/original/file-20200904-18-l8hxik.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The only deviation from gold’s traditional role as a safe haven asset was a price fall over March, as global stock markets crashed. This deviation underlines the uncertainty that gripped investors that month, with some gold owners presumably selling bullion to cover losses or to increase cash holdings.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-sandp-500-nears-its-all-time-high-heres-why-stock-markets-are-defying-economic-reality-142707">The S&P 500 nears its all-time high. Here's why stock markets are defying economic reality</a>
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</em>
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<hr>
<h2>Why is gold a safe haven?</h2>
<p>The simple answer is that it has worked in the past. Based on past experience in a crisis, people believe in the safe haven feature of gold and it works because they believe in it.</p>
<p>Gold has been used since ancient times as a store of value. Helping it achieve this status is its aesthetic appeal, malleability (with a relatively low melting point making it easy to produce coins or jewellery), virtual indestructibility (almost all the gold that has ever been found or mined is still around) and, most importantly, rarity. Though hundreds of thousands have dug and panned for it over history, the amount of gold mined has never been enough to devalue it. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/from-medicine-to-nanotechnology-how-gold-quietly-shapes-our-world-110515">From medicine to nanotechnology: how gold quietly shapes our world</a>
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<p>Because of these features, gold became the basis for money and played a formal monetary role during the gold standard, which required nations to hold gold reserves as a backing of their currency. </p>
<p>Central banks still hold huge gold reserves. Of 197,576 tonnes of gold mined throughout history, the <a href="https://www.gold.org/goldhub/data/above-ground-stocks">World Gold Council</a> says 17.2% is held (as bullion or coins) by governments and central banks, 21.6% by private investors, about 47% as jewellery, and 14.2% has gone to other uses (such as in electronics).</p>
<p>So while gold, silver, palladium and platinum are all “precious metals” the latter three are not commonly accepted safe havens because they played a different monetary and investment role in the past.</p>
<h2>‘Nobody understands gold prices’</h2>
<p>Gold may also be a safe haven because it is simple and well-known, the first thing that comes to mind when investors are faced with extreme uncertainty.</p>
<p>This apparent simplicity, paradoxically, does not mean easy-to-understand gold prices. </p>
<p>Some factors influencing its price are tangible, such as physical supply and demand. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-the-coronavirus-pandemic-has-disrupted-the-global-mining-industry-137384">How the coronavirus pandemic has disrupted the global mining industry</a>
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</em>
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<p>But many factors influencing gold’s price are less tangible, such as changing perceptions, preferences and market sentiment. </p>
<p>As then US Federal Reserve chairman Ben Bernanke said <a href="https://www.cnbc.com/id/100898244#:%7E:text=%22Nobody%20really%20understands%20gold%20prices,gold%20prices%20have%20been%20volatile.&text=%22Lower%20gold%20prices%20have%20spurred%20even%20stronger%20demand%20by%20Asian%20investors">in 2013</a>: “"Nobody understands gold prices, and I do not pretend to understand it either.”</p><img src="https://counter.theconversation.com/content/144567/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In times of trouble people still turn to gold. What makes it a safe haven? Largely perceptions, based on its historical mystique.Dirk Baur, Professor of Finance, The University of Western AustraliaAllan Trench, Professor, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1220032019-08-21T12:32:30Z2019-08-21T12:32:30ZHow to invest if you’re worried a recession is coming<figure><img src="https://images.theconversation.com/files/288605/original/file-20190819-123727-5d7g7l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Even the pros don't know what's up. </span> <span class="attribution"><span class="source">AP Photo/Richard Drew</span></span></figcaption></figure><p>Although the U.S. economy <a href="https://www.cnbc.com/2019/07/26/us-gdp-second-quarter-2019.html">continues to grow</a> and <a href="https://finance.yahoo.com/news/july-2019-jobs-report-bls-215030223.html">add jobs</a>, <a href="https://www.cnbc.com/2019/08/15/trump-wants-fed-rate-cuts-unclear-if-they-would-help.html">talk</a> of a <a href="https://finance.yahoo.com/news/recession-will-be-a-slow-motion-accident-strategist-131602319.html">recession</a> is <a href="https://trends.google.com/trends/explore?date=all&geo=US&q=Recession">increasingly in the air</a> due to a number of worrying signs.</p>
<p><a href="https://www.bloomberg.com/opinion/articles/2019-08-14/u-s-businesses-are-stuck-in-trade-war-uncertainty">Business investment</a> and <a href="https://www.bloomberg.com/news/articles/2019-08-16/trump-economy-loses-luster-for-independents-in-2020-warning-sign?srnd=premium">consumer confidence</a> are taking a hit due to the growing economic jitters and uncertainty over the ongoing trade war with China. An important bond market recession warning – known as an <a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=mtiz">inverted yield curve</a> – <a href="https://www.washingtonpost.com/business/2019/08/14/stocks-tank-another-recession-warning-surfaces">is spooking investors</a>. And policymakers are actively taking steps to bolster the economy, such as the Federal Reserve’s recent decision to lower short-term borrowing costs. The Trump administration <a href="https://www.washingtonpost.com/politics/trump-confirms-hes-considering-a-payroll-tax-cut-amid-mounting-economic-concerns/2019/08/20/2c97e500-c37a-11e9-9986-1fb3e4397be4_story.html">is even mulling a payroll tax cut</a> to avert a downturn. </p>
<p>A question I’m often asked as a <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">finance professor</a> and a <a href="https://www.cfainstitute.org/en/programs/cfa/charter">CFA charterholder</a> is what should people do with their money when the economy is slowing or in a recession, which typically causes riskier assets like stocks to decline. Fear causes many people to run for the hills. </p>
<p>But the short answer, for most investors, is the exact opposite: Stick to your long-term plan and ignore day-to-day market fluctuations, however frightening they may be. Don’t take my word for it. The tried and true approach of passive investing is backed up by a lot of evidence.</p>
<h2>Most of us have money at risk</h2>
<p>While we usually associate investing with hotshot Wall Street investors and hedge funds, the truth is most of us have a stake in financial markets and their ups and downs. <a href="https://www.federalreserve.gov/publications/files/scf17.pdf">About half of American families own stocks</a> either directly or through institutional investment vehicles like mutual funds. </p>
<p>Most of the invested wealth average Americans hold is managed by professional investors who look after it for us. But the <a href="https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-which-changed-how-americans-retire.html">continued growth</a> of defined contribution plans like 401(k)s – which require people to make choices about where to put their money – means their financial security increasingly depends on their own investment decisions.</p>
<p>Unfortunately, most people are not good investors. Individual investors who trade stocks <a href="http://dx.doi.org/10.2139/ssrn.219228">underperform the market</a> – and passive investors – by a wide margin. The more they trade, the worse they do. </p>
<p>One reason is because the pain of losses is about <a href="https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/">twice as strong</a> as the pleasure of gains, which leads people to act in counterproductive ways. When faced with a threatening situation, our instinctive response is often to run or fight. But, like trying to outrun a bear, exiting the market after suffering losses is not a good idea. It often results in selling at low prices and buying higher later, once the market stress eases.</p>
<p>The good news is you don’t need a Ph.D. in finance to achieve your investment goals. All you need to do is follow some simple guidelines, backed by evidence and hard-earned market wisdom. </p>
<h2>Investing checklist</h2>
<p>First of all, don’t make any rash moves because of the growing chatter about recession or any wild gyrations on Wall Street. </p>
<p>If you have a solid investment plan in place, stick to it and ignore the noise. For everyone else, it’s worth going through the following checklist to help ensure you’re ready for any storm on the horizon.</p>
<ol>
<li><p>Define clear, measurable and achievable investment goals. For example, your goal might be to retire in 20 years at your current standard of living for the rest of your life. Without clear goals, people often approach the path to getting there piecemeal and end up with a motley collection of investments that don’t serve their actual needs. As baseball legend Yogi Berra <a href="https://www.goodreads.com/quotes/499411-if-you-don-t-know-where-you-re-going-you-ll-end-up">once said</a>, “If you don’t know where you are going, you’ll end up someplace else.” </p></li>
<li><p>Assess <a href="https://www.investopedia.com/articles/pf/07/risk_tolerance.asp">how much risk</a> you can take on. This will depend on your investment horizon, job security and attitude toward risk. A good rule of thumb is if you’re nearing retirement, you should have a smaller share of risky assets in your portfolio. If you just entered the job market as a 20-something, you can take on more risk because you have time to recover from market downturns. </p></li>
<li><p><a href="https://money.usnews.com/investing/investing-101/articles/why-diversification-is-important-in-investing">Diversify your portfolio</a>. In general, riskier assets like stocks compensate for that risk by offering <a href="https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp">higher expected returns</a>. At the same time, safer assets such as bonds tend to go up when things are bad, but offer much lower gains. If you invest a big part of your savings in a single stock, however, you are not being compensated for the risk that the company will go bust. To eliminate these uncompensated risks, diversify your portfolio to include a wide range of asset classes, such as foreign stocks and bonds, and you’ll be in a better position to endure a downturn. </p></li>
<li><p>Don’t try to pick individual stocks, identify the <a href="https://www.vanguard.com/pdf/icrwmf.pdf">best-performing actively managed funds</a> or time the market. Instead, stick to a diversified portfolio of passively managed stock and bond funds. Funds that have done well in the recent past <a href="https://www.thebalance.com/past-performance-is-no-guarantee-of-future-results-357862">may not continue to do so</a> in the future. </p></li>
<li><p>Look for low fees. Future returns are uncertain, but investment costs will certainly take a bite out of your portfolio. To keep costs down, invest in index funds whenever possible. These funds track broad market indices like the Standard & Poor’s 500 and tend to <a href="https://www.thebalance.com/investing-in-low-cost-index-funds-357951">have very low fees</a> yet <a href="https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html">produce higher returns</a> than the <a href="https://ssrn.com/abstract=1356021">majority of actively managed funds</a>. </p></li>
<li><p>Continue to make regular contributions to your investments, even during a recession. Try to set aside as much as you can afford. Many employers <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/">even match</a> all or some of your personal retirement contributions. Unfortunately, most Americans are <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/#retirement">not saving enough</a> for retirement. <a href="https://financialengines.com/docs/financial-engines-401k-match-report-050615.pdf">One in 4 Americans</a> enrolled in employer-sponsored defined contribution plans does not save enough to get the employer’s full match. That’s like letting your employer keep part of your salary. </p></li>
<li><p>There’s one exception to my advice about standing pat. Let’s suppose your long-term plan calls for a portfolio with 50% in U.S. stocks, 25% in international stocks and 25% in bonds. After U.S. stocks have a good run, their weight in the portfolio may increase a lot. This changes the risk of your portfolio. So <a href="https://www.vanguard.com/pdf/ISGPORE.pdf">about once a year</a>, rebalance your portfolio to match your long-term allocation targets. Doing so can make a <a href="https://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/#1fc4f9548393">big difference in performance</a>.</p></li>
</ol>
<p>Always keep in mind your overall investment plan and focus on the long-term goals of your portfolio. Many market declines that were scary in real time look like small blips on a long-term chart. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Warren Buffett knows a thing or two about investing.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Earns-Berkshire-Hathaway/d7c1206a7ac2405ca58abc0667ae43e1/57/0">AP Photo/Nati Harnik</a></span>
</figcaption>
</figure>
<h2>Turbulence ahead</h2>
<p>In the long run, this approach is likely to produce better results than trying to beat the market – which <a href="https://www.investopedia.com/ask/answers/12/beating-the-market.asp">even pros</a> tend to have a hard time doing.</p>
<p><a href="https://www.cnbc.com/2017/10/03/after-winning-bet-against-hedge-funds-warren-buffett-says-hed-wager-again-on-index-funds.html">Billionaire investor Warren Buffett</a> demonstrated this by easily winning a bet that a simple S&P 500 index fund could beat a portfolio of hedge funds – <a href="https://www.investopedia.com/articles/investing/042015/10-most-famous-hedge-fund-managers.asp">supposedly the savviest investors</a> out there, at least judging by the high fees they charge.</p>
<p><a href="http://jasonzweig.com/a-note-on-benjamin-graham/">In the words</a> of legendary investor Benjamin Graham: “The investor’s chief problem and even his worst enemy is likely to be himself.” Graham, who mentored Buffett, meant that instead of making rational decisions, many investors let their emotions run wild. They buy and sell when their gut – rather than their head – tells them to. </p>
<p>Trying to outsmart the market is <a href="https://ssrn.com/abstract=1622184">akin to gambling</a> and it doesn’t work any better than playing a lottery. Passive investing is admittedly boring but is a much better bet long-term. </p>
<p>But if you follow these guidelines and fasten your seatbelt, you’ll be able to ride out the current turbulence. </p>
<p>[ <em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em> ]</p><img src="https://counter.theconversation.com/content/122003/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov 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>A growing number of investors, policymakers and others say the US economy may be at risk of spiraling downward. A finance professor explains how to ride it out.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1122912019-03-06T23:51:36Z2019-03-06T23:51:36ZIntroducing gender lens investing. It’s more than pink-washing<figure><img src="https://images.theconversation.com/files/262334/original/file-20190306-48429-1q5lyoe.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What if investors could identify risks from companies' approaches to gender early?</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Since mid-last year, Wall Street investors in sensitive industries have been insisting on so-called “<a href="https://www.bloomberg.com/news/articles/2018-08-01/-weinstein-clause-creeps-into-deals-as-wary-buyers-seek-cover">Weinstein clauses</a>”, that allow them to claw back their money if revelations of inappropriate behaviour damage the business.</p>
<p>It’s a mere part of something bigger, called gender lens investing, that goes way beyond the earlier concept of <a href="https://www.smh.com.au/money/investing/female-investors-want-more-than-pink-washing-products-20180418-p4zaej.html">pink washing</a>.</p>
<h2>What is gender lens investing?</h2>
<p>Gender lens investing incorporates an analysis of gender risks in investment decisions in the same way as an analysis of other risks.</p>
<p>The <a href="https://sf.wharton.upenn.edu/story/7-takeaways-from-project-sage-2-0-the-global-scan-of-gender-lens-private-equity-vc-and-private-debt-funds/">Wharton Business School</a> identified 87 private equity, venture capital and debt funds that apply a gender lens, up from 58 in 2017. </p>
<p>The uptake is supported by conferences on “<a href="http://www.unwomen.org/en/news/stories/2018/11/announcer-gender-smart-investing-summit-in-london">gender smart investing</a>”, new gender-sensitive <a href="https://www.prnewswire.com/news-releases/idb-invest-and-opic-launch-first-gender-lens-investment-fund-for-latin-america-and-the-caribbean-300723173.html">international development funds</a> and an increasing numbers of investor gender <a href="https://sites.duke.edu/casei3/2018/10/03/registration-open-getting-gender-smart-course-in-march-2019/">training programs </a>. </p>
<h2>How does it work?</h2>
<p>The non-profit <a href="https://criterioninstitute.org">Criterion Institute </a> works with Australia’s <a href="https://dfat.gov.au/aid/topics/investment-priorities/gender-equality-empowering-women-girls/gender-equality/Pages/gender-initiatives.aspx">Department of Foreign Affairs and Trade</a> on <a href="https://investinginwomen.asia/partner/criterion/">impact investing programs</a> in the Asia Pacific, a strategy established under former Australian Foreign Minister <a href="https://foreignminister.gov.au/speeches/Pages/2016/jb_sp_160229.aspx">Julie Bishop</a>. </p>
<p>In applying a gender lens it suggests asking:</p>
<ul>
<li><p>What gender patterns are at play in the market that could impact both opportunity and risk of the investment? Are, for example, girls’ education rates or domestic violence rates an investment risk at the national or industry level, or at the organisational level in terms of <a href="https://impactinvestingaustralia.com/blog/investing-gender-lens/">absenteeism and presenteeism</a>? </p></li>
<li><p>What is the gender (and diversity for that matter) composition of the people screening initial investment opportunities? Is there a risk that opportunities will be missed through too narrow a focus?</p></li>
<li><p>Do you have enough information? If not, do you need other partners or sources?</p></li>
<li><p>Do processes such as tight turnaround times lead to quick but poorly informed decisions, <a href="https://www.theguardian.com/business-to-business/2018/apr/23/meet-the-women-challenging-the-gender-investment-gap">amplifying gender bias</a>? </p></li>
</ul>
<p>The <a href="https://www.theguardian.com/lifeandstyle/2019/feb/23/truth-world-built-for-men-car-crashes">gender data gap</a> shows the dangers inherent in ignoring the specific requirements of females for sectors such as health, medical and scientific product design, development and testing. For example, there is a heightened risk of injury for women in car accidents due to seat belt design being based on the average male body shape and size. </p>
<p>The absence of a gender lens also means missed product opportunities. </p>
<p>For example, approximately US$1 billion has been invested in <a href="https://navigatingimpact.thegiin.org/strategy/gli/increasing-products-and-services-the-respond-to-gender-inequities/#overview">women’s health technology</a> over the past three years, and “femtech” is estimated to grow into a US$50 billion industry by 2025. </p>
<h2>Where is the new money flowing?</h2>
<p>Increasingly, it is going to firms led and founded by women.</p>
<p>Research finds strong returns from lending firms led by women, with a recent report concluding that “<a href="https://www.bcg.com/en-au/publications/2018/why-women-owned-startups-are-better-bet.aspx">women owned start-ups are a better bet</a>”.</p>
<p>A survey of Australia’s top 10 venture capital funds found that of 448 investments made in the inception stage of firms, <a href="https://www.afr.com/technology/brandon-capital-rampersand-artesian-lead-local-vc-gender-diversity-push-20181004-h16812">35%</a> had female co-founders in 2018, up from 26% in 2017. </p>
<p>Startup accelerator programs such as <a href="https://sbeaustralia.org">Springboard</a> and <a href="https://www.shestarts.com">SheStarts</a> are also identifying and supporting firms with female founders. </p>
<p>Historically, the inequity has been stark, with estimates suggesting that companies with female founders have received only 4.4% of venture capital deals, and those companies have garnered only <a href="http://fortune.com/2019/01/28/funding-female-founders-2018/">about 2% of all capital invested</a>. </p>
<p>Bright signs have been the emergence of <a href="https://www.nytimes.com/2019/03/01/business/female-founders-venture-capital.html">female owned VC firms</a> that invest in women such as US firm <a href="https://www.cnbc.com/2018/03/27/krawchecks-ellevate-rolls-out-funds-to-invest-in-women.html">Ellevest</a>. </p>
<h2>Where to now?</h2>
<p>There has always been a moral case for gender lens investing, but <a href="https://www.uts.edu.au/node/273516/social-entrepreneurship-and-impact-investing-report">research by us</a> and others is increasingly finding <a href="https://thegiin.org/gender-lens-investing-initiative">a business case</a>.</p>
<p>Gender analysis is pointing to risks and opportunities. Smart investors are paying attention.</p>
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Read more:
<a href="https://theconversation.com/explainer-the-rise-of-social-impact-investing-73357">Explainer: the rise of social impact investing</a>
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<img src="https://counter.theconversation.com/content/112291/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danielle Logue receives funding from the Australian Research Council and has previously received research funding from InnovationXChange, Department of Foreign Affairs and Trade, and the Department of Social Services.</span></em></p><p class="fine-print"><em><span>Gillian McAllister has previously worked on projects funded by innovationXchange, a unit within the Department of Foreign Affairs and Trade, and the Department of Social Services.</span></em></p>Gender lens analysis identifies risks and opportunities early. It is catching on.Danielle Logue, Associate Professor in Innovation, Entrepreneurship and Strategy, University of Technology SydneyGillian McAllister, Senior Research Analyst, Centre for Business and Social Innovation, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/991342018-07-12T03:19:38Z2018-07-12T03:19:38ZThink carefully before buying Bitcoin – and don’t buy the ‘safe haven’ claims<p>The sharp rise and subsequent fall in Bitcoin’s value places it among the greatest market bubbles in history. It has outpaced the 17th-century tulip mania, the South Sea bubble of 1720, and the more recent Japanese asset price and dot-com bubbles. </p>
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<p>The rapid price rise garnered attention from an increasing number of academics and investment advisers. Some have suggested that Bitcoin improves portfolio performance and can even be used as a potential “safe haven” asset in <a href="https://www.sciencedirect.com/science/article/pii/S0378426609003343">place of gold</a>. </p>
<p>Our work finds that much of this research is <a href="https://www.sciencedirect.com/science/article/abs/pii/S1544612317305093">flawed</a> and overlooks some <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3204237">important attributes</a> that any investor should consider before allocating funds to such a speculative investment. </p>
<p>This is particularly relevant if investing in Bitcoin is rationalised as a prospective <a href="https://theconversation.com/explainer-what-are-safe-haven-investments-9146">safe haven</a> in times of market turmoil.</p>
<h2>Hard to value</h2>
<p>The first attribute investors consider is how to value Bitcoin. Typically, assets are valued based on the cash flows they produce. Bitcoin lacks this property. </p>
<p>This leads to ongoing debate as to the true value of Bitcoin and other cryptocurrencies. Some, such as the Winklevoss twins and other <a href="http://time.com/money/5002207/richest-people-with-bitcoin/">Bitcoin entrepreneurs</a>, believe the price will soar far higher. Others, including Nobel prize winner <a href="https://cointelegraph.com/news/nobel-prize-winner-eugene-fama-on-bitcoin">Eugene Fama</a> and esteemed investor Warren Buffett, believe the real value is closer to zero. Another Nobel winner, <a href="https://www.nytimes.com/2017/12/15/business/bitcoin-investing.html">Robert Shiller</a>, suggests the correct answer is “ambiguous”. </p>
<p>There is even wide variation in price across the various Bitcoin exchanges. This is common in fragmented markets and makes it difficult for an investor to find the best market price at any point in time – a process called price discovery.</p>
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<h2>High price volatility</h2>
<p>Bitcoin prices also have a high level of variation (volatility) when compared to other possible investments including bonds, stocks and gold. Even tech stocks such as Twitter, which are considered relatively volatile, are found to have less price variation. This adds to the difficulty investors face when trying to value Bitcoin and any portfolios that contain it. </p>
<p>This is of particular concern given the large daily losses that Bitcoin has experienced in its relatively short life. The largest one-day decline experienced by the popular S&P500 index since 2011 is 4.2%. Bitcoin has had nearly 200 days that were worse (and over 60 days worse than the biggest decline in the gold price of 10.2%).</p>
<p>Put another way, Bitcoin has had 200 days worse than the worst day on the stock market. This hardly seems like an enticing investment for most.</p>
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<h2>Low liquidity</h2>
<p>Investors should also consider the ease with which they are able to buy and sell any assets in which they invest. One method used to measure this liquidity attribute is the bid-ask spread – the difference in the price at which one is able to buy and sell the asset. </p>
<p>More liquid assets have a narrow bid-ask spread. Bitcoin’s bid-ask spread varies from one exchange to another, but in general it is much larger than for other assets.</p>
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<p>While bid-ask spreads provide one measure of implicit trading costs, investors also consider the explicit transaction fees they are charged when trading. Transaction fees for trading traditional investments are typically well known and have trended down over time. </p>
<p>While Bitcoin fees have recently declined, they have proven to be highly variable, ranging from over $30 to under $1. The time taken to process a transaction can also be greater than 78 minutes. This is much longer than for stocks or bonds and creates another layer of uncertainty for investors.</p>
<h2>Only for the most risk-loving</h2>
<p>Bitcoin is harder to value, more volatile, less liquid, and costlier to transact than other assets in normal market conditions. Potential investors should be wary and carefully consider whether such highly speculative assets are appropriate additions to any portfolio. </p>
<p>Given safe havens are typically in demand during financial crisis, when markets are more volatile and less liquid, it is highly unlikely that Bitcoin is even worth considering as a safe-haven asset.</p><img src="https://counter.theconversation.com/content/99134/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>Bitcoin’s rise and fall to date already makes it one of the greatest market bubbles in history. In turbulent times, some have suggested it as a substitute for gold, but it lacks some vital attributes.Lee Smales, Associate Professor, Finance, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/971162018-06-03T19:15:16Z2018-06-03T19:15:16ZThe academic world must take action for more responsible, sustainable finance<figure><img src="https://images.theconversation.com/files/220794/original/file-20180529-80623-vg61xe.jpg?ixlib=rb-1.1.0&rect=1%2C25%2C1196%2C714&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">European Commission vice-presidents Valdis Dombrovskis and Jyrki Katainen present new EC initiatives on sustainable finance in 2018. </span> <span class="attribution"><a class="source" href="https://ec.europa.eu/commission/news/capital-markets-union-2018-mar-08_en">Thierry Monasse/EC</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>While once considered a niche market for responsible investors, sustainable finance is today in a phase of expansion and acceleration. The best example is the recent announce of the European Commission around its action plan on <a href="https://ec.europa.eu/clima/news/sustainable-finance-commissions-action-plan-greener-and-cleaner-economy_en">sustainable finance</a>, based on the findings of the High-Level Expert Group (HLEG), at a conference with heads of state and high-level financiers, including French president Emmanuel Macron and former New York mayor Michael Bloomberg. The objective is clear and ambitious: around 180 billion euros of additional investments a year are needed to <a href="https://www.novethic.com/sustainable-finance/isr-rse/jour-de-gloire-pour-la-finance-durable-a-bruxelles-145632.html">achieve the EU’s 2030 targets</a> agreed in Paris, allowing a broad part of the EU budget (40%) “toward financing the transition to a low carbon and inclusive model, but also the remaining 60% towards not harming it”.</p>
<p>This announcement echoes and gives meaning to the numerous initiatives taken by certain financial players to transform their business model. And messages are not only coming from businesses, with the voices of political bodies and central banks also being heard. Just recently, the governor of the Bank of England, Mark Carney, called for the financial system to adapt quickly, smoothly and effectively to social needs and particularly to climate-change issues. The Banque de France, which has just announced a responsible investment charter, is committed to taking things even further than supporting green assets to actually <a href="https://www.novethic.com/sustainable-finance/isr-rse/the-central-banks-of-france-and-england-call-for-more-regulation-against-climate-change-145719.html">penalising climate-damaging ones</a> (“brown assets”). These messages and positions are part of strong ethical and sustainable investment policies already adopted by certain sovereign funds such as the Norges Bank Investment Management (Norwegian sovereign wealth fund).</p>
<h2>Sustainable finance goes mainstream</h2>
<p>As for private initiatives, these have been being structured for many years, primarily by asset managers and institutional investors. But acceleration and transformation are now common and bringing sustainable finance out of its niche to make it mainstream and unavoidable. French bank La Banque Postale recently announced plans to manage all its assets using socially responsible methods by 2020, <a href="http://www.investmenteurope.net/regions/france/lbpam-to-become-full-sri-manager-by-2020/">representing 220 billion euros</a>.</p>
<p>Blackrock, the largest investor in the world with its $6 trillion in assets under management, has just announced its intention to exclude firearms manufacturers and retailers where this activity represents more than 5% of their revenue, targeting <a href="https://www.reuters.com/article/us-usa-guns-blackrock/blackrock-to-offer-gun-free-investment-strategies-etfs-idUSKCN1HC21M">Walmart and Kroger point-blank</a>. No longer are activist shareholders content just to draw dividends, now demanding answers about the corporate strategy and the ethical and responsible position, even if it means divesting from certain companies. As is the case with Nordea Asset Management, which has just withdrawn all of its Facebook shares following the <a href="https://www.bloomberg.com/news/articles/2018-03-21/facebook-is-blacklisted-at-nordea-s-sustainable-investment-unit">Cambridge Analytica data scandal</a>.</p>
<p>Beyond climate change and ethical issues, the challenge lies in raising the moral standards of financial capitalism. The EU’s action plan on sustainable finance recommends getting the ‘finance river’ back on course so that it may serve society. This line of thinking is more aligned with the ideas of Hungarian intellectual Karl Polanyi, who explained in his book ‘The Great Transformation’ (1944) that society guides and is embedded within the economy, and therefore finance. Finance is a strategic tool for the benefit of the economy, which in turn works for the benefit of society. Social issues therefore must guide economic decisions and projects, with the aim of committed social planning.</p>
<h2>Putting social issues in the curriculum</h2>
<p>In June 2016, David Pitt-Watson, executive fellow at London Business School, published an opinion piece in the <em>Financial Times</em>, explaining that master’s in finance graduates need to learn the real role of finance, and that finance-degree programmes need to include society’s issues in the economic relations within their teaching. In order to train responsible financiers capable of meeting the new social challenges of tomorrow, universities and business schools need to reassess how they are teaching financial practices and show greater responsibility. This is vital if we are to avoid repeating the mistakes of the past and educating players who are completely disconnected from the issues of the real economy and incapable of grasping the consequences of their decisions on businesses, and thus the men and women who depend on them.</p>
<p>Even today, too few higher education establishments have committed their finance programmes to these issues, preferring rather to rely on quantitative and mathematical approaches, despite them having shown their limitations during the previous financial crises and failing to address the economic challenges of the future. Students in financial markets masters are now chosen for their abilities to produce and encode distributed algorithms for high frequency trading servers. The choice of their job is not based most of the time on passion or engagement, but mainly on the quest for financial success, only guarantee of credibility in their eyes.</p>
<p>But the culprits are first the academics. Their inability to call themselves into question, preferring teaching economic and financial theories that have generated crises rather than creating new innovative courses linked with the needs of economy and society, show that the academic community is also guilty of all the actors trained during the last 30 years and directly involved in all recent known crises. The academic world has the power to transform events in redefining its social mission, by responding to this highly ambitious EU action plan with the emergence of courses that match the expectations not only of businesses but, above all, society.</p><img src="https://counter.theconversation.com/content/97116/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christophe Revelli est administrateur du Forum pour l'Investissement Responsable (FIR, French SIF).</span></em></p>Once a niche market, sustainable finance is now expanding and accelerating, yet too few universities have committed their finance programmes to these issues. The time has come for change.Christophe Revelli, Professeur de finance responsable et directeur du MSc Corporate and Sustainable Finance de Kedge Business School, Kedge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/914422018-02-09T17:03:31Z2018-02-09T17:03:31ZThe EU wants to fight climate change – so why is it spending billions on a gas pipeline?<figure><img src="https://images.theconversation.com/files/205470/original/file-20180208-180813-ifievy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:TAP_in_Albania.jpg">Albinfo/Wikipedia</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Over the past few years there has been <a href="https://www.enelgreenpower.com/media/news/d/2017/12/renewables-exponential-growth">exponential growth</a> in clean energy investment – while fossil fuel assets are increasingly considered to be <a href="https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf">risky</a>. Yet, on February 6, the European Investment Bank, the EU’s long-term lending institution, voted to provide a <a href="http://www.eib.org/infocentre/press/releases/all/2018/2018-030-eib-backs-eur-6-5-billion-energy-sme-transport-and-urban-investment">€1.5 billion loan</a> to the controversial Trans Adriatic Pipeline (TAP).</p>
<p>The TAP is the Western part of a larger Southern Gas Corridor proposal that would ultimately connect a large gas field in the Caspian Sea to Italy, crossing through Azerbaijan, Turkey, Greece and Albania. And while gas might be cleaner than coal, it’s still a fossil fuel. </p>
<p>So how does the EU’s support for this major project fit in with its supposed goal of addressing climate change?</p>
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<a href="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205365/original/file-20180207-74487-1cg5u8d.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The proposed Trans Adriatic Pipeline will run nearly 900km from Greece to Italy.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Trans_Adriatic_Pipeline.png">Genti77 / wiki</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<h2>Influencing investors</h2>
<p>A key problem is the message this sends to the private sector, where renewable energy is increasingly seen as a good investment. Technologies once perceived as too risky and too expensive are now delivering worthwhile returns thanks to reduced costs and breakthroughs in energy storage. The price of electricity generated by solar, wind or hydro is now comparable with the national grid. Over the past decade, investor meetings have shifted from discussing whether the transition to a low carbon economy will start before 2050, to whether it will be completed in the same period. </p>
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<p>But there is still not enough money being spent on renewables. While clean energy investment in 2017 <a href="https://about.bnef.com/blog/runaway-53gw-solar-boom-in-china-pushed-global-clean-energy-investment-ahead-in-2017/">topped US$300 billion for the fourth year in a row</a>, this is far short of what is needed to unlock the technology revolution necessary to tackle climate change. There is clearly a gap between what is required and what is being delivered. </p>
<p>The private sector will continue to invest significant capital into energy projects over the next few decades, so one issue facing policy makers is how to influence investors away from fossil fuels and <a href="https://www.sciencedirect.com/science/article/pii/S0301421511005064">towards renewable projects</a>. To really scale up investment into renewable infrastructure, <a href="http://www.unepfi.org/fileadmin/documents/Investment-GradeClimateChangePolicy.pdf">long-term and stable policy is required</a> – which investors <a href="https://www.sciencedirect.com/science/article/pii/S0959652615006277">see as clearly lacking</a>. </p>
<p>By funding the Trans Adriatic Pipeline, the EU’s investment bank is hardly signalling to the private sector that governments are committed to a green energy transition. </p>
<h2>Risky business</h2>
<p>If Europe really was to follow through and successfully switch to green energy – and such a transition is partially underway – then the pipeline project may even represent a risk to public finances.</p>
<p>Studies on climate change point to the need for a greater sense of urgency and ambition and, to stay within its “carbon budget” under current agreed emissions targets, the EU needs to be <a href="http://www.foeeurope.org/sites/default/files/extractive_industries/2017/can_the_climate_afford_europes_gas_addiction_report_november2017.pdf">fossil fuel free by 2030</a>. </p>
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<p>So any large oil and gas infrastructure projects with investment returns beyond 2030 are saddled with risk. In just a decade or two, super-cheap solar and wind power could mean that gas pipelines such as TAP would no longer make financial sense and would become worthless “<a href="https://www.carbontracker.org/terms/stranded-assets/">stranded assets</a>”. Yet TAP backers are touting economic benefits for countries such as <a href="http://www.oxfordeconomics.com/Media/Default/economic-impact/economic-impact-home/Economic-Impact-trans-Adriatic-Pipeline.pdf">Albania</a> extending to 2068 – well beyond the date when Europe must entirely ditch fossil fuels.</p>
<p>The EU’s official stance is to hail natural gas as a cleaner “bridge fuel” between coal and renewables. But <a href="http://science.sciencemag.org/content/343/6172/733.summary">high leakage rates</a> and the <a href="http://www.climatechange2013.org/images/uploads/WGIAR5_WGI-12Doc2b_FinalDraft_All.pdf">potent warming impact</a> of methane (the primary constituent of natural gas) means that the Southern Gas Corridor’s climate footprint may be <a href="https://bankwatch.org/publication/smoke-and-mirrors-why-the-climate-promises-of-the-southern-gas-corridor-don-t-add-up">as large, or larger, than equivalent coal</a>. Abundant natural gas is also highly likely to <a href="http://iopscience.iop.org/article/10.1088/1748-9326/9/9/094008/meta">delay the deployment of renewable technologies</a>. </p>
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<p>For the first decade of this century Europe prided itself on leading the political debate on tackling climate change. Now, it appears to be losing its boldness. To drive through a new technology revolution, the public sector needs to lead from the front and take bold decisions about its energy strategy.</p>
<p>A gas pipeline is not a technology of the future. If California can release <a href="https://www.youtube.com/watch?v=HSKcvoBKYxc">YouTube videos</a> describing the importance of considering stranded assets during this energy transition, and New York City can announce plans to <a href="https://twitter.com/NYCMayor/status/952216497123835906">divest from fossil fuels</a>, then maybe it is time for the EU to turn off the TAP.</p><img src="https://counter.theconversation.com/content/91442/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Aled Jones 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 European Investment Bank’s funding of the Trans Adriatic Pipeline will harm the climate and makes little financial sense.Aled Jones, Professor & Director, Global Sustainability Institute, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/891212017-12-19T01:41:32Z2017-12-19T01:41:32ZExxon Mobil’s about-face on climate disclosure<figure><img src="https://images.theconversation.com/files/199517/original/file-20171215-17842-1eenolt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Protesters have sought for years to force Exxon Mobil to disclose the risks it faces due to climate change and to do more to minimize them. </span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/AP-A-TX-USA-F-EXXON-MOBIL-SHAREHOLDERS/68229895bcf0da11af9f0014c2589dfb/26/0">AP Photo/LM Otero</a></span></figcaption></figure><p>Exxon Mobil Corp. has vowed to do a better job in <a href="https://www.sec.gov/Archives/edgar/data/34088/000003408817000057/r8k121117.htm">disclosing the risks</a> it faces from climate change starting “in the near future” after bucking pressure to do that for years.</p>
<p>Until now, shareholders and bondholders had no choice but to rely on informed guesswork by outsiders to divine how the nation’s <a href="https://www.reuters.com/finance/stocks/overview/XOM.N">largest fossil fuel company</a> was retooling for the future – a time when taxes, regulations and competition from renewable energy and other new technology alternatives are likely to thin consumers’ demand for its products. </p>
<p>In other words, investors and the rest of the public had little way of knowing how much these changes will affect Exxon Mobil’s bottom line. </p>
<p>Why did the company make this move now and who stands to benefit? </p>
<h2>Shareholder pressure</h2>
<p>Scores of <a href="https://www.eenews.net/assets/2017/05/15/document_cw_01.pdf">investor-activists</a> have sought to force Exxon – along with the entire global industry – to change its ways for nearly three decades. <a href="https://www.ceres.org/news-center/press-releases/investors-welcome-exxonmobil-commitment-enhanced-climate-disclosure-push">They welcomed</a> the news regarding Exxon Mobil’s upcoming climate change risk report.</p>
<p>But this change of course did not surprise all of them because it occurred three days before the deadline for shareholders to submit resolutions to be voted on at its 2018 <a href="https://www.ucsusa.org/press/2017/exxonmobil-s-pledge-disclose-climate-risks-significant-short-details#.WjRAfkqnFPY">annual meeting</a>.</p>
<p>Exxon Mobil’s latest move may prevent another episode like what happened in May, when <a href="https://insideclimatenews.org/news/31052017/exxon-shareholder-climate-change-disclosure-resolution-approved">some 62 percent</a> of the company’s shareholders – including the massive <a href="https://www.cnbc.com/2017/08/31/investing-power-vanguard-votes-against-exxon-mobil-on-climate-change.html">Vanguard mutual fund company</a> – voted in favor of a resolution demanding that it publicly state how climate change is affecting its operations and bottom line.</p>
<p>Exxon Mobil itself indicated that <a href="http://www.osc.state.ny.us/press/releases/dec17/121217.htm">shareholder pressure</a> prompted its reversal, specifically from the New York State Common Retirement Fund, which manages roughly US$200 billion in assets on behalf of 1 million state and local government employees and retirees and their beneficiaries.</p>
<h2>Getting accurate information</h2>
<p>New York Attorney General Eric T. Schneiderman has also targeted the company. A lawsuit he filed in June 2017 accuses Exxon Mobil of committing fraud and inflating its stock price by <a href="https://www.nytimes.com/2017/06/02/business/energy-environment/exxon-mobil-climate-change-lawsuit.html?_r=0">keeping two sets of books</a>.</p>
<p>Schneiderman alleges that one set of books, made public, is predicated on there being little risk that climate policies would interfere with the company’s future ability to profit from its investments in oil and gas projects. The other alleged set of books, kept hidden, accounts for those policies leading it to <a href="http://loe.org/shows/segments.html?programID=17-P13-00024&segmentID=3">earn less money</a>, according to court filings. </p>
<p>Based on my research on how climate change affects corporate accounting, I also suspect that Exxon determined that disclosing its climate-related risks would help all of its shareholders and other stakeholders such as lenders, suppliers and consumers.</p>
<p>Ample research, including my own on the <a href="http://www.sciencedirect.com/science/article/pii/S0278425413000033">climate-related information U.S. companies voluntarily disclose</a>, indicates that stock prices rise when outside investors have – or anticipate getting – more accurate information about plans and strategies to manage climate change risk.</p>
<h2>Behind the curve</h2>
<p>On top of bowing to demands from investors, Exxon Mobil needed to catch up with its competitors.</p>
<p><a href="http://www.conocophillips.com/environment/climate-change/climate-change-strategy/carbon-scenarios/">ConocoPhillips</a>, <a href="http://www.shell.com/sustainability/environment/climate-change.html">Shell</a>, <a href="https://www.total.com/en/commitment/environmental-issues-challenges/climate-change?gclid=EAIaIQobChMIyNytjoyL2AIVkl5-Ch0RMQ4QEAAYASAAEgJTxPD_BwE&gclsrc=aw.ds">Total</a>, <a href="https://www.statoil.com/en/how-and-why/climate-change.html">Statoil</a> and <a href="https://www.bp.com/en/global/corporate/energy-economics/energy-outlook/a-lower-carbon-world.html">BP</a> already assess and report on their climate risks, along the lines of how Exxon Mobil plans to undertake this task.</p>
<p>In short, Exxon Mobil’s executives may have realized that not disclosing risks that its peers already acknowledge would potentially hurt its stock price more than airing the information.</p>
<p>Had it not bowed to pressure to start disclosing its climate risks, investors could have construed that Exxon Mobil has something to hide, whether true or not. </p>
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<h2>Mounting legal woes</h2>
<p>Exxon Mobil also faces multiple lawsuits tied to its climate-related business practices, some of which also target other oil and gas majors.</p>
<p>At least <a href="https://www.reuters.com/article/usa-oil-climatesuits/san-francisco-oakland-sue-oil-firms-alleging-climate-change-costs-idUSL2N1M11LR?feedType=RSS&feedName=companyNews&rpc=31">two are pending</a> <a href="https://dockets.justia.com/docket/california/candce/3:2017cv06011/318403">in California</a>, a class-action suit is underway <a href="https://www.pacermonitor.com/public/case/19782210/Ramirez_v_Exxon_Mobil_Corporation_et_al">in Texas</a> and the state attorney general of <a href="https://www.reuters.com/article/exxon-mobil-climatechange/exxon-climate-change-probe-goes-to-massachusetts-top-court-idUSL1N1O30AC">Massachusetts</a>, like her counterpart in <a href="https://insideclimatenews.org/news/30112017/exxon-climate-fraud-investigation-judge-court-hearing-schneiderman-new-york-healey-massachusetts">New York</a>, is suing the oil and gas company.</p>
<p>It is possible that the information Exxon Mobil now plans to make public for the first time will bolster the <a href="https://insideclimatenews.org/news/18112016/exxon-climate-change-research-oil-reserves-stranded-assets-lawsuit">mounting number</a> of <a href="https://www.reuters.com/article/us-exxon-mobil-climatechange/texas-judge-kicks-exxon-climate-lawsuit-to-new-york-court-idUSKBN1710AC">lawsuits</a> it faces by plaintiffs who allege that it has harmed them as investors by withholding information, disclosing misleading climate data or revealing those details too late.</p>
<p>But it is also possible that the disclosure will help resolve some of the company’s legal problems.</p>
<h2>An SEC investigation</h2>
<p>Meanwhile, the Securities and Exchange Commission is investigating how Exxon Mobil calculates its vast <a href="https://www.wsj.com/articles/sec-investigating-exxon-on-valuing-of-assets-accounting-practices-1474393593">oil and gas reserves</a> in light of how climate risks are changing the industry’s outlook.</p>
<p>The SEC apparently wants to know how the company calculates the cost of complying with climate change regulations when it evaluates the potential revenue streams from its planned and ongoing projects around the globe.</p>
<p>These climate-related costs could also hurt its balance sheet due to the abandonment of oil and gas projects after investing billions of dollars that <a href="https://www.bloomberg.com/news/articles/2017-02-22/exxon-takes-historic-cut-to-oil-reserves-amid-crude-market-rout">never yield a dime</a> in profits. This is already happening: Exxon Mobil wrote off a $16 billion investment in Canadian tar sands in early 2017 due to the project’s high cost per barrel of oil.</p>
<p>However, shareholders could lose money if the company ends up revealing proprietary information that aids its competitors when it discloses its climate-related risks.</p>
<p>I believe Exxon Mobil has resolved to disclose more of these risks because it judges that it has more to gain by reporting on its climate plans than it stands to lose by not becoming more open.</p>
<h2>Voluntary yet consistent</h2>
<p>In an earlier article I wrote for <a href="https://theconversation.com/should-oil-companies-like-exxon-be-forced-to-disclose-climate-change-risks-66961">The Conversation</a> with energy and sustainability expert <a href="https://www.cfr.org/experts/amy-myers-jaffe">Amy Myers Jaffe</a>, we urged the SEC to establish a voluntary disclosure program for major oil and gas corporations. We proposed that the SEC establish a common framework for reporting on climate change risks and that it use its moral authority and enforcement powers to encourage full compliance.</p>
<p>This approach would bring about a steady and predictable flow of consistent and comparable information on climate change policies and outcomes. Currently, all companies are essentially on their own to disclose whatever they please whenever they feel ready to do it.</p>
<p>This is not always helpful for markets. When companies disclose information that investors and analysts cannot easily compare it is costly and unwieldy for them to cross-reference it.</p>
<p>In a recent paper, presented at the Journal of Corporate Finance <a href="mailto:http://www.af.polyu.edu.hk/conference_pages/detail/70">conference on sustainability</a>, <a href="https://www.bu.edu/questrom/profile/estelle-yuan-sun/">Estelle Sun</a> at Boston University, <a href="https://www.uakron.edu/cba/about-us/directory/profile-detail.dot?u=tneururer">Thaddeus Neururer</a> at the University of Akron and I show that when the cost of processing environmental information increases, analysts lose interest in dealing with it.</p>
<p>This means analysts issue fewer and less timely reports, to the detriment of outside investors and others, who are deprived of market prices reflecting the most up-to-date data and information.</p>
<p>In short, the public cannot rely only on the private sector to provide consistent and comparable information regarding the effects of businesses on climate change. </p>
<p>Even with Exxon Mobil’s about-face, I still believe the SEC needs to create a voluntary disclosure program to correct the private sector’s failure to establish a common standard for comparing climate change data as soon as possible.</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/1QulBp0OVcc?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Senator Tim Kaine, a Virginia Democrat, urged former Exxon Mobil CEO Rex Tillerson to discuss the company’s climate track record during a confirmation hearing for the Trump administration’s secretary of State.</span></figcaption>
</figure><img src="https://counter.theconversation.com/content/89121/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Griffin 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>The oil giant is bowing to pressure exerted by shareholders and the authorities as it tries to catch up with its competitors.Paul Griffin, Distinguished Professor of Management, University of California, DavisLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/815162017-07-28T14:55:41Z2017-07-28T14:55:41ZBritain’s £246m battery challenge won’t solve energy storage problem<figure><img src="https://images.theconversation.com/files/180187/original/file-20170728-31781-15pvcc9.jpg?ixlib=rb-1.1.0&rect=91%2C22%2C4893%2C3128&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/abstract-blurry-bokeh-background-image-production-617080772?src=lVIVp5Ked-Cy5j1zN_YRuQ-2-80">Fishman64/Shutterstock</a></span></figcaption></figure><p>Renewable energy’s share of British electricity generation from wind and solar technologies reached <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/622841/Energy_Trends_June_2017.pdf">record levels of 26%</a> in the past year. This is excellent news for our national carbon emissions, but the grid is under increasing pressure to manage this intermittent power supply. </p>
<p>The on-and-off nature of renewable energy means that to avoid unexpected blackouts and surges it must be integrated into the national electricity grid <a href="https://www.scientificamerican.com/article/battery-storage-needed-to-expand-renewable-energy/">alongside</a> energy storage. That is the challenge that lies in the background as the UK government announced it will invest £246m in research funding on a four-year energy storage strategy focusing on battery innovation.</p>
<p>It is hoped that the “<a href="https://www.gov.uk/government/news/business-secretary-to-establish-uk-as-world-leader-in-battery-technology-as-part-of-modern-industrial-strategy">Faraday Challenge</a>” will break down barriers to new battery technologies and introduce new business models. The plan is to establish a Battery Research Institute and drive innovation, particularly for the electric vehicle industry. However, the plan’s size and scope sends mixed signals to the energy storage sector and brings confusion on the longer-term direction. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=654&fit=crop&dpr=1 600w, https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=654&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=654&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=821&fit=crop&dpr=1 754w, https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=821&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/180189/original/file-20170728-23805-1eblsx7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=821&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Legacy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/michael-faraday-picture-meyers-lexicon-books-88369744?src=pWdj4P1cnKgCI5DsNSj0og-2-37">Nicku/Shutterstock</a></span>
</figcaption>
</figure>
<p>The Faraday Challenge is focusing on known technology, looking for innovation in established and publicly recognised lithium-ion batteries. But on top of the well-known lead-acid (car) and lithium-ion (electronics) batteries, <a href="https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-er-energy-storage-tracking-technologies-transform-power-sector.pdf">there are many</a> alternative technologies for energy storage. </p>
<p>These include a range of other electrochemical storage devices, such as sodium-sulfur, metal-air, sodium-ion, flow batteries, and supercapacitors, as well as other energy storage devices such as pumped-hydro, flywheels, compressed-air (CAES), and superconducting magnets (SMES). </p>
<p>As shown in the graphic below, these technologies can be assessed by their power output and by the duration for which they can deliver this power (energy stored). </p>
<p><a href="https://www.scientificamerican.com/article/world-s-largest-storage-battery-will-power-los-angeles/">The US</a>, Germany, Australia, South Africa, <a href="http://www.renewableenergyworld.com/articles/2016/03/south-korean-grid-will-soon-boast-world-s-largest-energy-storage-system.html">Korea</a> and China <a href="http://www.energystorageexchange.org/projects">are all ahead</a> of the UK in lithium-ion technology. The government’s intervention is dwarfed by Tesla’s Gigafactory, built for <a href="https://www.forbes.com/sites/greatspeculations/2014/03/11/gigafactory-will-cost-tesla-5-billion-but-offers-significant-cost-reductions/#e2af482ebefa">US$5 billion</a> (£3.8 billion) to produce half a million car batteries a year when in full production – and by the recent announcement about the world’s largest lithium-ion battery in <a href="https://www.nytimes.com/2017/07/07/world/australia/australia-tesla-lithium-ion-battery-north-korea.html">Australia</a>. China <a href="https://1reddrop.com/2017/07/03/chinas-lithium-ion-battery-production-plans-outstrip-tesla-gigafactory-ambitions/">produces 55%</a> of all lithium-ion batteries globally. These are daunting glimpses of the scale at which competing nations are tackling battery storage technology.</p>
<p>In truth though, it is not investment in more lithium-ion research that would give Britain a foothold. It should be genuinely original and fundamental research into new, breakthrough technologies, perhaps with a focus on sustainable and low-cost materials. The Faraday Challenge fund, so far, does not seem to consider real innovation, but is looking for ready-to-roll technology – it is more like a grid subsidy, cloaked as a research fund. </p>
<p>No surprise then, that within a day of the Faraday Challenge launch, <a href="http://www.bbc.co.uk/news/uk-40723581">the government announced</a> a ban on new diesel and petrol cars from 2040, coupled with a £255m fund for councils to tackle emissions. With such a deadline – and rising demand for electric vehicles globally – is the government forcing the hand of energy storage researchers to focus solely on lithium-ion innovation? Furthermore, the <a href="https://www.greentechmedia.com/articles/read/uks-national-grid-goes-big-into-energy-storage-with-201mw-of-fast-acting-ba">National Grid committed</a> more than £66m to deploying medium-scale frequency response energy storage projects last year, all based on lithium-ion technology.</p>
<p>The Faraday Challenge fund is tentatively aimed at two niches for the UK market, automotive batteries and domestic storage. These are both sectors where lithium-ion batteries have proven to be good, albeit expensive, options when <a href="https://www.nature.com/articles/nenergy2017110">there are potentially</a> better and cheaper candidates for stationary storage such as flow batteries or compressed air storage. </p>
<h2>New technology</h2>
<p>We believe that a breakthrough to new markets in energy storage will be a move away from lithium-ion – a manufacturing market in which the UK simply cannot compete globally. And if it did want to take on the <a href="http://en.cnesa.org/featured-stories/2017/7/11/cnesa-white-paper-2017">well-established Asian nations</a>, then it would need a lot more than £246m. </p>
<p>So which innovative fields offer a chance for leadership? Well, redox flow batteries are not included in the fund description, despite having been a leading technology for decades – and one which specifically targets the sweet spot in energy storage from very small communities to city grid scale. It was also a <a href="http://webarchive.nationalarchives.gov.uk/20100919182219/http://www.ensg.gov.uk/assets/dgdti00055.pdf.">leading technology</a> for energy storage more than 13 years ago. </p>
<p><a href="https://www.youtube.com/watch?v=0Uk0GQNgtqg">Flow batteries</a> work entirely in the liquid phase, with the soluble charged materials staying in solution. Unlike conventional batteries, the electrodes do not contain the active materials – and energy storage can be separated from power generation in the battery. It is much like heating water over a heating element and storing the hot water in a separate tank until it is needed. </p>
<p>This is a key advantage of a flow battery as it allows flexible systems to be manufactured to suit a wide variety of energy needs, from 5 kWh systems that would serve a few average homes, to 10s of MWh systems suitable for grid storage, their storage capacity being dictated by the size of the storage tank, not the electrodes. </p>
<p>The wealth of alternative chemistry that may be used in a flow battery is also a major selling point. The possibility of using abundant, low cost, <a href="http://www.telegraph.co.uk/business/2016/08/10/holy-grail-of-energy-policy-in-sight-as-battery-technology-smash/">organic materials</a> to power the batteries is increasingly clear. But flow batteries, along with many other electrochemical storage technologies, only work as stationary storage. It seems the government’s prime concern is with the automotive industry, where lithium-ion has the edge. Long-term stationary storage is still not truly being considered.</p>
<p>Frankly, the UK’s investment is not enough to make a step-change in the energy storage industry. That is especially true if the genuine intention is to set up manufacturing streams, establish an institute to facilitate innovative battery research and to explore fundamental science. The government’s intentions are not clear. Are they looking to kickstart venture capital to subsidise the industry? In the first half of 2017, <a href="https://www.pv-magazine.com/2017/07/25/vc-funding-for-battery-smart-grid-and-efficiency-tech-tops-1bn-in-h1-2017-finds-mercom-report/">more than US$1 billion</a> (£760m) was raised this way for battery, smart grid and energy-efficiency technologies in the US. </p>
<p>Is this a first phase of investment? How will the technology be retained in the UK once innovations are made? Does the government want frontier research and new market breakthroughs, or something quick? Those are almost always mutually exclusive. In order to establish and grow companies that will create or dominate new markets, we need long-term investment into frontier research, not a four-year business plan for tech in which plenty of other countries have already built up a commanding lead.</p><img src="https://counter.theconversation.com/content/81516/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kathryn Toghill receives funding from EPSRC.
Kathryn Toghill coordinates a national redox flow battery network in the UK.</span></em></p><p class="fine-print"><em><span>Dénes Csala 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 UK is about to miss an opportunity if it tries to take on the giants of the lithium-ion battery industry.Kathryn Toghill, Lecturer in Chemistry, Lancaster UniversityDénes Csala, Lecturer in Energy Storage Systems Dynamics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/774022017-05-24T20:16:04Z2017-05-24T20:16:04ZInvestors are exploiting returns on debt financing to muscle out home buyers<p>Investors have played an increasingly important role in the Australian housing market in recent years. Our new, yet-to-be-published research shows the actual return rate for housing investors almost doubled a layman’s expectation. Experienced investors are taking advantage of the knowledge gap and might continue to price out other housing buyers. </p>
<p>The sharp <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5609.0February%202017?OpenDocument">increase in investor credit</a> in recent years could be partly attributed to the strong growth of housing prices, particularly in Sydney and Melbourne. However, the <a href="https://www.corelogic.com.au/research/monthly-indices.html">reported capital gains</a> might not have fully reflected investors’ actual returns as the impact of debt financing in property investment has been neglected. </p>
<p>Since housing investors typically use large amounts of debt to fund their investment, using the return on equity (after adjusting for debt financing) more accurately reflects their actual return. </p>
<p>In recent years, regulators such as the Australian Prudential Regulation Authority and lenders have <a href="http://www.apra.gov.au/MediaReleases/Pages/17_11.aspx">implemented measures</a> to moderate the growth of investor lending. Despite these efforts, investors have come back into the housing market since the second half of 2016. </p>
<p><strong>Proportion of housing investment loans</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=176&fit=crop&dpr=1 600w, https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=176&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=176&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=221&fit=crop&dpr=1 754w, https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=221&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/170496/original/file-20170523-8895-1g4m2hp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=221&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5609.0February%202017?OpenDocument">ABS, Housing Finance, Australia: February 2017</a></span>
</figcaption>
</figure>
<h2>Higher returns come with greater risk</h2>
<p>Our research sampled properties in 14 suburbs across Sydney, using the <a href="http://www.pia.com.au/en/">Property Investors Alliance</a> database. The results provide some empirical evidence to demonstrate the housing return on equity with debt financing is significantly higher, at an annual return of nearly 14% per year, than the housing return on property without debt financing of about 7% per year.</p>
<p>This could explain the increasing proportion of investment loans in the housing market. The knowledge of investors’ advantage should also be used to inform the ongoing debate about regulating investment housing loans to enhance housing affordability for first home buyers in particular.</p>
<p>It is important to highlight the effect of debt financing on decisions to invest in housing. The results clearly show the enhanced returns are likely to have an acute impact. </p>
<p>At the same time, a <a href="http://www.emeraldinsight.com/doi/abs/10.1108/IJHMA-07-2016-0052">higher risk level</a> as a result of the use of debt financing has also been documented. This highlights that housing investors should closely manage their exposure to financial risk from using debt financing by using a prudential risk-management tool.</p>
<p><strong>Returns and risk on housing portfolios: 2009-2015</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/168869/original/file-20170511-21598-1gyjv43.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/168869/original/file-20170511-21598-1gyjv43.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=111&fit=crop&dpr=1 600w, https://images.theconversation.com/files/168869/original/file-20170511-21598-1gyjv43.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=111&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/168869/original/file-20170511-21598-1gyjv43.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=111&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/168869/original/file-20170511-21598-1gyjv43.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=139&fit=crop&dpr=1 754w, https://images.theconversation.com/files/168869/original/file-20170511-21598-1gyjv43.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=139&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/168869/original/file-20170511-21598-1gyjv43.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=139&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">Author provided</span></span>
</figcaption>
</figure>
<h2>Explaining the increased rate of return</h2>
<p>We used an assumption of 20% equity to demonstrate the impact of debt financing, which is in line with the current deposit requirement from major banks. Here’s an example to demonstrate the effect of debt financing. </p>
<p>Say an investor buys a house for A$1 million. The investor provides a 20% deposit ($200,000); therefore $800,000 was borrowed. The investor took an “interest-only” loan with an interest rate of 5% per year – so the interest cost is $40,000 per year. The investor also receives a net rental income of $30,000 in Year 1.</p>
<p>A year later, the investor decides to sell the property for $1.1 million (its value having increased by 10% over the year). The traditional performance analysis of property (without debt financing) would show the return on this housing investment is 13%: ($1,100,000-1,000,000+$30,000)/$1,000,000 = 13%. </p>
<p>Given the housing investor used debt financing, 13% is not the actual return for the investor. The investor’s actual return on equity for the investor is 45%: ($300,000-$200,000)+($30,000-$40,000)/$200,000 = 45%. </p>
<p><strong>Property returns vs equity returns</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/170219/original/file-20170520-12263-sf1nd0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/170219/original/file-20170520-12263-sf1nd0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/170219/original/file-20170520-12263-sf1nd0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/170219/original/file-20170520-12263-sf1nd0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/170219/original/file-20170520-12263-sf1nd0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=527&fit=crop&dpr=1 754w, https://images.theconversation.com/files/170219/original/file-20170520-12263-sf1nd0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=527&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/170219/original/file-20170520-12263-sf1nd0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=527&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">Author provided</span></span>
</figcaption>
</figure>
<h2>Experienced investors exploit their advantage</h2>
<p>Overall, the results suggest the actual return rate for housing investors is significantly higher than the layman might expect from the major housing index providers. </p>
<p>The documented returns may not be applicable, however, to owner occupiers who are also using debt financing, via mortgages, to buy their property. There are two main reasons for this:</p>
<ul>
<li><p>owner occupiers mainly use their houses for their own residency purposes, so no rental income will be generated to offset the mortgage repayment; and</p></li>
<li><p>housing investors are able to sell their properties whenever they want to realise gains in value, while owner occupiers do not have that flexibility.</p></li>
</ul>
<p>Importantly, experienced housing investors, in the current low interest rate environment, have realised the benefits of debt financing and taken advantage of the knowledge gap to exploit the higher returns available to them.</p>
<p>These findings also highlight the need for an <a href="https://www.ahuri.edu.au/research/position-papers/166">innovative product to assist home buyers</a> to enter the housing market. </p>
<hr>
<p><em>This article was co-authored by Justin Wang, the managing director and founder of Property Investors Alliance (PIA). He has contributed in many ways to this research project, particularly the formulation of the concept of equity return.</em></p><img src="https://counter.theconversation.com/content/77402/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chyi Lin Lee receives funding from Property Investors Alliance. PIA is one of the largest property consultation companies in Sydney. The views in this article are those of the authors and do not represent the views of Western Sydney University and/or PIA or any of their affiliates</span></em></p>New research shows the actual returns on equity for housing investors are higher than most people realise. This helps explain why investors are able to out-compete other home buyers.Chyi Lin Lee, Associate Professor of Property, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/777042017-05-16T02:44:59Z2017-05-16T02:44:59ZAustralia risks missing out on China’s One Belt One Road<p>Australia is late to the party in only recently expressing real interest in China’s One-Belt, One-Road initiative (OBOR). And if Australian businesses don’t take advantage of the opportunities available in this project now, there are plenty of regional competitors that will take their place. </p>
<p>Australia became an unofficial OBOR partner in 2016, with the launching of a public-private NGO known as the Australia-China OBOR Initiative (ACOBORI), less than a year after the signing of the China-Australia Free Trade Agreement. </p>
<p>Australia has so far declined China’s offer to formally link the <a href="http://northernaustralia.gov.au/">Northern Australia Project</a> to OBOR. However, more recently Trade Minister Steve Ciobo, <a href="http://www.abc.net.au/news/2017-05-14/ciobo-sees-merit-in-chinas-new-silk-road-initiative/8525440">has said he sees merit and opportunities</a> for collaboration (particularly around the northern Australia initiative) arising from OBOR, adding the caveat that decisions about such collaborations would be taken “on the basis of what is Australia’s national interest”. </p>
<h2>Following the old silk road</h2>
<p>China’s One-Belt, One-Road initiative (OBOR) <a href="https://www.lowyinstitute.org/publications/understanding-belt-and-road-initiative">comprises a land belt and a sea road.</a> The land belt connects China’s underdeveloped hinterland to Europe, traversing 65 countries across the land terrain of the ancient Silk Road land route. The sea leg comprises a network of railways and ports crossing an ocean route that connects Europe with the Middle East, Africa and Southeast Asia. </p>
<p>OBOR has significant backing in China, including from the China-led Asia-Infrastructure Investment Bank (AIIB). </p>
<p>OBOR is backed not just by the AIIB, but also by two other recent development finance initiatives - the Silk Road Infrastructure Fund and the New Development Bank. The infrastructure fund is made up from Chinese foreign exchange reserves and will act like a Chinese sovereign wealth fund. The bank was established by the BRICS nations (Brazil, Russia, India, China and South Africa) in 2014. </p>
<p>For the government, OBOR provides a policy tool for channelling investment from China’s wealthy seaboard provinces to the under-developed central and western regions. It channels China’s investment into projects that will have longer-term benefits, and not just into assets that are vehicles for parking hot money. All at a time when China is seeking to curb the flight of money from the country. </p>
<h2>Australian business involvement</h2>
<p>There are many risks and challenges to be faced in such a vast initiative as OBOR - with its cross-border projects involving a variety of different countries, each with its own historical baggage and current preoccupations. </p>
<p>An <a href="http://www.australiachinaobor.org.au/#report">inaugural ACOBORI report</a> identified a number of established and emerging sectors of opportunity for Australian industry arising from OBOR. Both inbound and outbound trade and investment with China can, importantly, pave the way for greater diversification of the Australian economy. </p>
<p>University of Melbourne <a href="https://bluenotes.anz.com/posts/2016/03/why-business-should-get-behind-a-one-belt-one-road-china/">affiliate, Asialink, identifies</a> opportunities in sectors such as: agriculture, financial and legal services, education, tourism, healthcare, energy, architecture engineering and planning expertise. </p>
<p>The Australian services sector has so far demonstrated the keenest interest in OBOR, especially in finance and law. The list of those already involved include three of the big four banks, law firms King Wood and Mallesons and Minter Ellison, and global engineering consulting firms Worley Parsons, SMEC and Norman Disney & Young. </p>
<p>It’s the smaller firms and those in challenged sectors (particularly manufacturing) that appear less willing to investigate the risks and opportunities. This isn’t helped by the Australian government, which appears to be torn between a fear of Chinese influence and a desire not to miss out on potential opportunities for lucrative involvement in OBOR projects. </p>
<p>There are two key reasons why Australia needs to remain involved in both the AIIB and OBOR. The first is the risk of missing out if Australian businesses don’t take advantage of the opportunities available. </p>
<p>Foreign firms are already taking advantage of the situation. For example, Hutchinson Ports, controlled by CK Hutchison Holdings of Hong Kong’s richest man Li Kashing, <a href="http://www.scmp.com/business/companies/article/2093995/hutchison-ports-sails-winds-belt-and-road-initiative">already operates ports at 22 locations</a> in 18 countries along the OBOR route. Hutchinson Ports is planning to start operations in another three countries along the route in 2017, and enlarge capacities of existing terminal facilities to ride on growing demand. </p>
<p>At the moment researchers describe the situation surrounding China’s OBOR as <a href="https://link.springer.com/article/10.1007/s11558-014-9188-2">“contested multilateralism”</a>. This is where states and businesses use new multilateral institutions to challenge established institutions, rules, practises or missions. </p>
<p>The AIIB has been seen as a <a href="https://www.novapublishers.com/catalog/product_info.php?products_id=59901&osCsid=536d7ca51d0bc9d29e4b334cc6d03420">challenge to the established institutions</a> of the (US-dominated) World Bank and (Japan-dominated) Asian Development Bank. China’s OBOR initiative can similarly be seen as a challenge to the dominance of US and European investment presence in the region. </p>
<p>In such a world, clever businesses are not seeing any need to choose sides. So far as possible, they are playing the field; taking advantage of opportunities as they arise, all the while keeping careful track of changing risks. </p>
<p>The second reason why Australian businesses need to remain actively engaged, is to ensure that the country is in a position to influence the longer-term future of the region. Australia should be using its influence to emphasise the potential for OBOR initiatives to <a href="http://www.un.org/sustainabledevelopment/sustainable-development-goals/">help achieve the sustainable development goals</a> including reducing hunger, poverty and inequality, to name a few.</p><img src="https://counter.theconversation.com/content/77704/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alice de Jonge 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>Australia has so far declined China’s offer to formally link the Northern Australia project to OBOR. But it risks losing out on trade and investment if the government doesn’t take a stronger approach.Alice de Jonge, Senior Lecturer, International Law; Asian Business Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/756922017-04-10T20:15:27Z2017-04-10T20:15:27ZExplainer: shadow banking and where it came from<p>The term “shadow banking” often has connotations of dodgy lending and borrowing practices, out of reach of regulators. And while its use may contribute to risk, in reality shadow banking does serve a purpose in our economy, one that is increasingly connected to our day-to-day lives.</p>
<p>Shadow banking affects not only the property market, but also superannuation, central banking policy and, increasingly, fiscal and social policy. It refers to the non-bank financial intermediaries that supply services similar to commercial banks. </p>
<p>This system provides funding for credit, by converting risky and long-term assets that can’t be sold quickly or easily (like mortgages) into a money-like, short-term debt (like mortgage-backed securities). </p>
<p>Shadow banking is not a bank in the sense that we know it but more a strategy or accounting technique. A range of institutions deploy these strategies including superannuation funds, insurance companies and <a href="http://www.corrs.com.au/publications/tgif/federal-court-sets-the-standard-with-standard-and-poors/">local governments</a>. Asset managers, like Macquarie Group in Australia and BlackRock in the United States, also employ these techniques. </p>
<p>In short, shadow banking provides institutions the means to create accounting entities to isolate risks, transfer profits, avoid regulation and increase the range of money-like financial products available for investment. </p>
<h2>Where shadow banking came from</h2>
<p>There are both supply and demand reasons for the emergence of the shadow banking system. Shadow banking has emerged as a means for financial firms to bypass regulation (for example by using tax havens) and increase opportunities for financial innovation and speculative activity. </p>
<p>Banks have an incentive to lower the number of risky assets on their balance sheets, in order to reduce the amount of capital they need to hold to cover these risks. Because of this the banks create off-balance sheet entities (assets that use shadow banking).</p>
<p>Shadow banking also offers a means for investors to access different forms of money across the financial system. Institutional investors trade in volume, and cannot physically <a href="https://www.financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_ShadowBankingTheMoneyView.pdf">“handle billions in cash in the form of currency”</a>.</p>
<p>This type of finance is normally best met by Treasury bills and government bonds (which presently offer low returns) and repurchase agreements - a form of short-term borrowing in these sorts of bonds. The shadow banking system then fills the gap in the absence of availability of other secure assets.</p>
<p>However these supply and demand explanations only tell part of the story. </p>
<p>The global environment is characterised by a <a href="https://www.nytimes.com/2016/01/24/magazine/why-are-corporations-hoarding-trillions.html">small population</a>) of individuals and institutions with large pools of money seeking safe returns; and, cash-poor individuals with stagnant incomes and a need for credit. One example of this is the growing investment class of securities based on private debt, for example credit cards, mortgage debt and <a href="http://www.smh.com.au/small-business/finance/pretty-close-to-extortion-mars-kelloggs-and-fonterra-pushing-loans-on-small-business-20170331-gvb56f.html">small business loans</a>.</p>
<p>Low inflation across the globe and governments not spending or encouraging investment in assets that offer good returns, means investors are limited in the ways they can currently make money.</p>
<h2>The problems with and solutions for shadow banking</h2>
<p>Shadow banking has made the task of governments more difficult. However it would be mistaken to assume that governments do not have some control over shadow banking. All levels of government are already linked to aspects of shadow banking whether they like it or not. </p>
<p><a href="http://www.theaustralian.com.au/business/legal-affairs/councils-win-landmark-case-against-standard-and-poors-abn-amro/news-story/ec62f52b82a904467f0019635aa54773">Local governments</a> were stung by exposure to shadow banking practices in the lead up to the global financial crisis. Councils were persuaded to invest in a structured financial product that offered unrealistic, and deceptive returns. </p>
<p>The NSW government is currently following shadow banking trends by borrowing and <a href="http://www.afr.com/street-talk/macquarie-gets-westconnex-funding-talks-underway-20160620-gpnt9p">partnering with asset managers</a> to build long-term infrastructure like Westconnex and the Sydney Light Rail. </p>
<p>At the national level, the Rudd-Gillard Government followed trends that originated in shadow banking by developing institutions like the <a href="http://www.cleanenergyfinancecorp.com.au/">Clean Energy Finance Corporation</a> and the National Broadband Network. Both policies tried to diversify the investment base in Australia, but have been held up by the Abbott-Turnbull governments.</p>
<p>Australia can’t do much to remedy global uncertainty. However, policies it pursues do link into shadow banking practices in multiple ways. </p>
<p>Policies that erode the standard employment relation and <a href="http://www.smh.com.au/federal-politics/political-news/former-rba-governor-bernie-fraser-says-penalty-rate-cut-will-produce-inequality-not-jobs-20170406-gvezd1.html">cut pay rates</a> increase consumer demand for <a href="http://www.news.com.au/finance/money/costs/payday-loan-mountain-to-top-1-billion-as-irresponsible-lending-skyrockets/news-story/e875ffc54b981d25df6fd3b779708824">short-term credit</a> products. This increases private debt for consumers, but feeds its attractiveness into an asset class for institutional investors.</p>
<p>Reserve Bank of Australia Governor, Phillip Lowe, was surprisingly strident in his <a href="http://www.abc.net.au/news/2017-02-24/philip-lowe-house-committee-economics/8299714">critique</a> of the cut to corporate tax rates and negative gearing last week. Reading between the lines you can sense frustration with the lack of attention on how Australia stands to benefit or lose from current global investment trends. </p>
<p>Institutional investors don’t need more piles of cash (via company tax cuts), they need ways to invest it. If you think about Australia from the perspective of institutional investors, it lacks a diverse range of assets (besides property!).</p>
<p>Australia only registers <a href="https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/Australian-Innovation-System/Australian-Innovation-System-Report-2014.pdf">17 specialised goods industries compared</a> with 35 for New Zealand and 44 for Canada. Consequently, real estate and infrastructure debt are some of the only things available to sop up the pile of <a href="https://www.ft.com/content/9ab40034-a4db-11e6-8898-79a99e2a4de6">cash</a> currently sloshing around the global economy. </p>
<p>This leads to <a href="http://www.brokernews.com.au/news/breaking-news/smsfs-and-property-a-ticking-time-bomb-224584.aspx">claims</a> that self-managed super funds (those run by institutional investors) are potentially exacerbating Sydney and Melbourne’s already expensive property market. </p>
<p>There are three growing areas of shadow banking: catastrophe bonds, which bet on the risk of natural disasters; renewable energy infrastructure banks, and <a href="http://www.telegraph.co.uk/business/2017/04/09/legal-general-biggest-house-builder-never-heard/">build-to-rent</a> investments. These examples offer the two sides of shadow banking.</p>
<p>Catastrophe bonds are parasitic in the way they provide finance - betting on the destruction from disasters. Renewable energy and build-to-rent show the potential for using finance for potentially progressive outcomes, to provide sustainable energy and housing. Australia could harness this progressive side of finance to create a more diverse economy.</p><img src="https://counter.theconversation.com/content/75692/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Huon Curtis 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>Shadow banking provides investors with the means to isolate risks, transfer profits, avoid regulation and increase the range of money-like financial products available for investment.Huon Curtis, Senior Research Analyst, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/735232017-02-26T19:05:25Z2017-02-26T19:05:25ZTrade data shows Australia can get more out of a deal with the EU than the UK<p>Australia should prioritise a free-trade agreement with the European Union to capitalise on <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/2012-2013/EUAustUpdate">historically optimal relations</a>, rather than with the United Kingdom, immediately after a hard Brexit. A hard Brexit would see a sudden exit of the UK from the EU and now seems more likely given <a href="http://www.bbc.com/news/world-europe-38650877">UK Prime Minister Theresa May’s line on this</a>.</p>
<p>As part of our <a href="http://www.aph.gov.au/DocumentStore.ashx?id=31bb0b0c-6366-4674-b65a-789ed513f082&subId=463805">submission</a> to a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Foreign_Affairs_Defence_and_Trade/tradewithUK">parliamentary inquiry</a> we examined data on the flow of trade in goods and services between all three regions, separating out the UK from the EU. </p>
<p>The <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Foreign_Affairs_Defence_and_Trade/tradewithUK">inquiry</a> is examining Australia’s trade and investment relations with the UK post Brexit, in particular the merit and risks of a possible bilateral free-trade agreement.</p>
<p>Australia should be striving to gain an advantage in any trade agreement, this means cooperating with a trade partner so that there is more crossover of exports and imports between the two countries and less competition.</p>
<p>When we looked at the data and when we compared Australia and the EU, there was much more crossover and less competition, than with the UK.</p>
<h2>Australian investors exposed</h2>
<p>We also compared the data on trade in goods and services to that of Australian investments in the UK and in the EU, and vice versa. We specifically separated out the UK from the EU to get an accurate picture of the post Brexit risks. </p>
<p>We examined two aspects of capital investment. Firstly the exposure of Australian investors who hold stocks and bonds in the the UK and EU financial markets and secondly any investor in the UK and EU who holds stocks and bonds in Australia.</p>
<p>The market volatility created by the hard Brexit will have a significant direct negative bearing on both the Australian financial market and to some extent on Australian portfolios abroad. </p>
<p>Notably, for the past decade the average exposure of Australian portfolios in the EU stocks and bonds markets (minus the UK) is worth nearly double than that in the UK. Overall the UK and EU stocks and bonds portfolios we studied jointly account for approximately more than one-fifth of all asset holdings in Australian financial markets. </p>
<p>Our analysis also highlights the importance of London as a gateway for the UK and EU funds destined for the Australian financial market. The future positioning of London post-Brexit can have deeper long-term implications for patterns of financial flows, and ultimately for Australia’s financial solidity.</p>
<p>Given the political uncertainty of <a href="http://www.politico.eu/article/brexit-trade-deal-ratification-could-take-until-2020-ex-ambassador/">post-Brexit negotiations between the UK and EU</a>, Australia’s <a href="http://dfat.gov.au/trade/economic-diplomacy/Pages/economic-diplomacy.aspx">economic diplomacy</a> should be mindful of sequencing trade and investment negotiations in ways that minimise financial exposure and maximise trade competitiveness with the various European partners.</p>
<h2>Likelihood of a hard Brexit</h2>
<p>No formal Australian trade negotiations with the UK can be pursued until the conclusion of its withdrawal process from the EU. Only then the UK will become a separate customs entity and so being entitled to negotiate international trade agreements.</p>
<p>Considering the present political climate and <a href="http://www.politico.eu/article/brexit-negotiation-issues-worrying-the-european-parliament/">technical difficulties</a>, it appears <a href="http://www.politico.eu/article/uk-will-leave-eu-before-trade-agreement-in-place-van-rompuy/">unlikely that the UK and EU will finalise an agreement before the two-year term</a> set by Article 50 of the EU Treaty. This is also even unlikely to happen before the advance of the <a href="http://dfat.gov.au/trade/agreements/aeufta/Pages/aeufta.aspx">Australia-EU free trade agreement</a>.</p>
<p>Without a timely agreement, the UK and EU will revert by default to the multilateral <a href="https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm">rules of the World Trade Organisation</a>. </p>
<p>For Australia’s trade and investment relationship with the UK, this reset would be an improvement from the present subordination to the European single market. However, it’s uncertain whether this regulatory levelling would necessarily improve Australia’s economic outcomes. </p>
<p>Nonetheless, pundits in both hemispheres are calling for a <a href="http://www.express.co.uk/news/uk/744863/Australian-High-Commissioner-free-trade-prosperous-Brexit">quick bilateral deal</a> to counter the uncertainties of the Brexit process. Yet, there is no clear evidence of economic gains to be reaped from a new bilateral free trade agreement immediately after the Brexit process concludes. </p>
<p>In fact, as established by the <a href="http://www.pc.gov.au/inquiries/completed/trade-agreements">2010 Australian Government’s Productivity Commission Report</a>, bilateral and regional free trade agreements “can significantly increase trade flows between partner countries, although some of this increase is typically offset by trade diversion from other countries”. </p>
<p>It’s crucial to ensure that any future preferential trade and investment arrangements with the UK and EU will be negotiated in Australia’s economic interests with a rigorous and transparent evidence-based approach.</p>
<p>Australia should avoid multilateral options and hasty blanket deals with the UK. Instead, Australia’s end game should be at separate bilateral levels in carefully targeted sectors with both the UK and EU, in order to achieve more favourable trading terms than the UK can score with the EU and vice versa.</p><img src="https://counter.theconversation.com/content/73523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Treisman is affiliated with the Contemporary European Studies Association of Australia (CESAA) and the Royal Geographic Society</span></em></p><p class="fine-print"><em><span>Giovanni Di Lieto is affiliated with the Australian Institute of International Affairs (AIIA), with the Contemporary European Studies Association of Australia (CESAA), and with NOMiT Inc (Network of Italians in Melbourne).</span></em></p>Analysis shows there’s less competition and more cross over in trade between Australia and the EU, making a trade deal more appealing.David Treisman, Lecturer in Economics, Bachelor of International Business, Monash Business School, Monash UniversityGiovanni Di Lieto, Lecturer, Bachelor of International Business, Monash Business School, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/714132017-01-17T17:10:19Z2017-01-17T17:10:19ZWhy junk status still hangs over South Africa<figure><img src="https://images.theconversation.com/files/153041/original/image-20170117-2750-1oupxky.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Although South Africa <a href="http://mg.co.za/article/2016-12-02-reprieve-for-south-africa-as-sp-leaves-credit-rating-unchanged">avoided a downgrade</a> to non-investment grade, or junk status, in 2016, the country is not yet out of the woods and may be downgraded this year. The reasons for this are ongoing political risk as <a href="https://theconversation.com/ministers-call-for-zuma-to-resign-signals-internal-rebellion-in-south-africas-cabinet-69663">factional battles</a> in the governing African National Congress intensify, policy inconsistencies and low economic growth. </p>
<p>The effects of a sovereign credit rating downgrade would be significant for all South Africans. It would drive up borrowing costs, which in turn would have a negative impact on the government’s finances. It could also lead to foreigners leaving South Africa’s capital markets as well as driving the rand weaker. And it would in-turn push interest rates up, which would hurt ordinary South Africans.</p>
<p>But there are some possible steps the country can still take to avert a downgrade. These would include underscoring that Finance Minister Pravin Gordhan is secure in his job, and cutting wasteful expenditure.</p>
<h2>Impact on the markets</h2>
<p>South Africa’s public debt stands at 50.1% of the country’s GDP, <a href="http://www.tradingeconomics.com/south-africa/government-debt-to-gdp">nearly double what it was in 2006</a>. If the government’s borrowing position is not controlled it runs the risk of running up debts that it can’t service. An over-borrowed government is also perceived to be risky, which increases the cost of additional borrowing because lenders demand a premium. On top of this the country’s fiscus is under pressure from low revenue collection as a result of the slowing economy. </p>
<p>A downgrade to junk status is also likely to trigger significant capital flight. This is because sovereign downgrades typically have a direct impact on bonds and other fixed income securities making them less attractive to foreign bond investors. The likely outcome is that they will take their money to markets that offer better returns. This would be bad news for the country as <a href="https://www.wits.ac.za/news/latest-news/in-their-own-words/2016/2016-11/south-africa-needs-tougher-exchange-controls-before-junk-status-hits.html">foreign investors hold</a> about R62 billion (USD4.5 billion) in government securities. </p>
<p>A downgrade may not affect equity holders to the same extent as bondholders. Of the 472 companies listed on the Johannesburg Securities Exchange, <a href="http://www.fin24.com/Markets/Equities/dual-listed-shares-shine-on-the-jse-20160510">39 are dual listed</a>. These have primary or secondary listings in South Africa, London and New York. Companies listed abroad will be less vulnerable because most of their earnings are from abroad and in foreign currencies. But companies listed solely in South Africa would be affected by the country’s poor economic performance and a weaker currency. This is likely to drive them to internationalise which would mean a loss to South Africa. In addition, their valuations would be negatively affected by the higher cost of capital.</p>
<p>As the bond market reacts to the sovereign downgrade, the ripple effect would extend to the rand, causing it to weaken against other major currencies. The rand averaged R14/USD at the end of 2016 but a downgrade this year would be likely to push it beyond its lowpoint of about <a href="https://businesstech.co.za/news/finance/116372/rand-vs-the-dollar-1978-2016/">R16.80/USD</a>, possibly beyond the R20/USD level in the medium term). It plunged to this level in December 2015 after President Jacob Zuma announced he was removing then Finance Minister <a href="https://theconversation.com/the-removal-of-south-africas-finance-minister-is-bad-news-for-the-country-52170">Nhlanhla Nene</a>. </p>
<h2>Ordinary people</h2>
<p>According to the World Bank <a href="http://siteresources.worldbank.org/EXTAFRSUMAFTPS/Resources/chapter2.pdf">South Africans are the biggest borrowers in the world</a>. The country’s National Credit Regulator Statistics has reported that approximately <a href="http://www.ncr.org.za/documents/pages/Annual%20Reports/NCR%20Annual%20Report%202015-16.pdf">20% of consumers are three months in arrears</a>. </p>
<p>A Adowngrade would drive up debt servicing costs. In addition, the fiscus would be under pressure due to higher interest costs on debt repayments coupled with lower economic growth. The government’s response would then be to raise taxes. The choices would between the politically unpalatable option of raising the value added tax rate, which would hit the rural poor and the lower-middle class urban consumers, or increasing personal taxes on the already <a href="http://www.fin24.com/Economy/sa-is-an-overtaxed-nation-says-outa-20160403">over-taxed working middle class</a>. As the <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2016/08/12/here-are-4-reasons-that-south-africas-african-national-congress-lost-ground-in-this-months-election/?utm_term=.70e8eaf46612">recent local government elections have shown</a> this could also have political ramifications for the governing party.</p>
<p>With budget deficits for the past 20 years <a href="http://www.tradingeconomics.com/south-africa/government-budget">averaging -3.24%</a>, a rating downgrade would force the government to either embark on injecting new money into the economy or <a href="http://www.capetalk.co.za/articles/1576/south-africa-s-government-is-running-out-of-money-sairr">borrowing</a> more. Injecting new money into the economy would fuel inflation and exert pressure on the exchange rate. The central bank would then have to respond by raising interest rates, again hitting consumers.</p>
<p>Further borrowing is also risky as it could lead to a possible debt trap where the government is no longer able to service its debts. </p>
<h2>Momentous year</h2>
<p>This is a momentous year for the country, with the <a href="https://theconversation.com/zuma-lives-to-fight-another-day-but-fallout-from-latest-revolt-will-live-on-69587">factional battles</a> and ANC contestation gathering momentum, and for the world with the inauguration of President Donald Trump and uncertainties around <a href="https://theconversation.com/brexit-shows-economic-costs-of-pursuing-populist-policies-like-trumps-62407">post-Brexit</a> trade policies. In such an uncertain environment, South Africa must rectify the four mistakes that have led it to drift to the point of a downgrade. </p>
<p>First, government policy needs to be clear, consistent and growth-oriented. Second, rather than considering further borrowing or increasing taxes, the government must cut non-productive spending and restructure the non-viable state-owned entities (especially those that rely on bailouts or have become too large to manage). Third, the authorities need to ensure that <a href="https://www.businesslive.co.za/bd/national/2017-01-06-sarss-luther-lubelo-should-not-have-attacked-rating-agencies-says-gordhan/">business confidence</a> doesn’t deteriorate further. It can do this by desisting from issuing <a href="https://www.dailymaverick.co.za/article/2016-12-22-we-want-the-rand-to-fall-so-that-when-it-rises-we-will-control-the-economy-maine/#.WHYPZVN97IU">conflicting political statements</a> which cause investors to panic. And lastly, the presidency must quell the uncertainty around the finance minister’s position. </p>
<p>If South Africa continues to get <a href="http://blackopinion.co.za/2016/12/05/south-africa-ruled-rating-agencies/">these wrong</a>, it’s likely that it will be downgraded this year. Since it takes <a href="http://www.cnbcafrica.com/news/southern-africa/2016/06/03/south-africa-to-regain-investment-rating/">an average of seven years for a country to regain its investment grade</a>, South Africa would be stuck in a <a href="https://theconversation.com/south-africa-can-expect-zero-growth-its-problems-are-largely-homemade-62943">middle-income trap</a> until at least 2024. Under this scenario it would be unable to move out of low-level manufacturing, unemployment levels would remain high and the economy would remain stagnant.</p><img src="https://counter.theconversation.com/content/71413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town. </span></em></p><p class="fine-print"><em><span>Misheck Mutize 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 effects of a sovereign credit rating downgrade would be painful for all South Africans.Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape TownSean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/703252016-12-14T01:23:51Z2016-12-14T01:23:51ZPoliticians who tweet-shame risk economic damage<p>President-elect Trump has recently tweet-shamed several companies. This sort of attack has a real impact on the company and its shareholders, sending shares nosediving and discouraging investment. So perhaps politicians should think twice before releasing critiques into the twittersphere.</p>
<p>The most recent Trump tweet attacked security tech multinational Lockheed, <a href="https://twitter.com/realDonaldTrump/status/808301935728230404">stating</a> its “F-35 program and cost is out of control”. After this tweet Lockheed shares fell around 2.5%. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"808301935728230404"}"></div></p>
<p>This is not the first of his tweets directed at companies. He also <a href="https://twitter.com/realDonaldTrump/status/806134244384899072">attacked</a> aerospace company Boeing over claims about an overly expensive US$4 billion Air Force One contract. According to fact checkers this claim was only “<a href="http://www.politifact.com/truth-o-meter/statements/2016/dec/06/donald-trump/fact-checking-donald-trumps-tweet-air-force-one-bo/">half-true</a>”. Boeing’s share price fell around 1% immediately after Trump’s tweet, recovering after Boeing could refute it. While Boeing’s price has risen to above its pre-Tweet level, this is in spite of (not because of) the tweet and does not lessen the harm to investors in its immediate aftermath.</p>
<p>Trump has also attacked <a href="https://twitter.com/realDonaldTrump/status/804884532671430658">Rexnord</a> and Ford, thereafter <a href="http://www.nytimes.com/2016/11/18/us/politics/donald-trump-takes-credit-for-helping-to-save-a-ford-plant-that-wasnt-closing.html?_r=0">falsely claiming credit</a> for preventing Ford closing a plant. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"804884532671430658"}"></div></p>
<p>It seems that tweet-shaming is a bipartisan affliction. Former presidential candidate Hillary Clinton <a href="https://twitter.com/HillaryClinton/status/768508732623970304">attacked</a> pharmaceutical company’s Mylan’s epipen price increases, sending its share price 5% lower. In 2015, before she secured the Democratic nomination, Clinton also <a href="https://twitter.com/HillaryClinton/status/645974772275408896">attacked</a> the pharmaceutical industry over prices. Afterwards the index composed of biotechnology and pharmaceutical equities listed on the NASDAQ (<a href="https://www.ishares.com/us/products/239699/ishares-nasdaq-biotechnology-etf">the IBB</a>) fell nearly 5%. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"768508732623970304"}"></div></p>
<p>This is not isolated to the US either. In Australia, Bill Shorten <a href="https://twitter.com/billshortenmp/status/805999915994185728">tweeted that Australia’s big four banks</a> were “calling the shots” over the government establishing a banking ombudsman, despite such an ombudsman being <a href="http://www.afr.com/news/politics/ian-ramsay-review-finds-no-need-for-a-new-bank-tribunal-20161205-gt4pxr">recommended by an expert report</a>. </p>
<p>These tweets can pose direct threats to the value the public and shareholders see in these companies.</p>
<h2>When the government directs investment</h2>
<p>Government directed investment tends to generate less value for a company. This is <a href="http://www.nber.org/papers/w20930">one of the reasons</a> state-owned enterprises tend to underperform. These problems extend to private companies when politicians direct the investments of these companies. </p>
<p>Such government-directed investment can encourage firms to maintain unviable projects, such as facilities that are unprofitable and uncompetitive. This is arguably the case with United Technologies Corp’s Carrier plant in Indiana in the US: the associated jobs were retained only with the help of up to <a href="http://fortune.com/2016/12/02/indiana-carrier-jobs-tax-breaks-mexico/">US$7 million in tax breaks</a>. </p>
<p>Politicians, increasingly via tweet shaming, implicitly exert pressure on companies to maintain such unviable investments. They do this by turning public opinion (and thus sales) against companies. </p>
<p>In doing so, they also raise the threat of regulatory intervention. This inhibits legitimate business decisions that are necessary to maintain profitability and are in investors’ and employees’ long term interests. </p>
<p>This drains the capital that companies would otherwise spend on innovation and value creation. This, in turn, hampers economic growth.</p>
<h2>Risk the government will rip up contracts</h2>
<p>Tweet shaming raises the risk that governments will not uphold their end of a contract with a business, or will seek to amend it. Trump specifically stated that he could cancel a contract with Boeing. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"806134244384899072"}"></div></p>
<p>The risk of governments cancelling, or renegotiating, contracts makes them less reliable. This causes firms to charge more for government work by pricing in the costs of contract failure. These include both the work done and the opportunity cost of foregoing other contracts. This could raise prices in the long term. </p>
<p>This could be a risk in Australia too, although Australian governments have not so far used social media in the same way to strong-arm companies. Australian state governments have abandoned infrastructure contracts at huge cost. </p>
<p>The Victorian Labor government abandoned the East-West road project at a <a href="http://www.theage.com.au/victoria/victorian-government-settles-east-west-link-claim-for-339m-20150414-1ml9bz.html">cost of A$339 million</a>. The then NSW Labor government <a href="http://www.drive.com.au/motor-news/cross-city-tunnel-road-closures-reversed-20060707-13yk1">backed out of conditions</a> on the Cross-City Tunnel project. This makes contract-related tweets especially sensitive. </p>
<h2>Tweets that discourage investment</h2>
<p>The above problems have follow-on consequences for investment. If a politician turns public sentiment against the company, or <a href="http://www.politico.com/story/2016/12/trump-boeing-ceo-dennis-muilenburg-232305">coerces</a> suppliers into less profitable arrangements, it affects investment.</p>
<p>The companies who are the targets of these tweets face stiff competition. In the case of US company Carrier, it responded to overseas competition by reducing labour costs and offshoring production to Mexico while retaining higher skilled jobs in the US. If companies must absorb higher labour costs, then they become less profitable and have less cash to reinvest in expansion and innovation. Firms shouldn’t be forced into similar situations because of tweets.</p>
<p>These tweets could also discourage or reduce investment from international businesses. Overseas firms will be <a href="http://www.mitpressjournals.org/doi/abs/10.1162/rest.90.2.347#.WEgNavl95PY">less likely to invest</a> in countries that face high degrees of political risk. Alternatively, they will factor in government risk when making investment decisions, causing them to <a href="http://www.sciencedirect.com/science/article/pii/S092911991500156X">value the project less</a>. </p>
<h2>Tweets are not the best way to discipline and monitor companies</h2>
<p>One argued advantage of such political tweets is that they might help to hold companies to their contracts, or to discipline companies for malfeasance. </p>
<p>This advantage is an illusion. In countries like the US, regulators and (where relevant) private citizens, can discipline companies. </p>
<p>This can come in the form of <a href="http://dx.doi.org/10.1016/j.jfineco.2007.06.003">SEC enforcement actions</a> and <a href="http://dx.doi.org/10.1016/j.jfi.2011.09.001">securities class actions</a>. The US government can sue for breaches of contract much as any citizen. It can also pursue firms for breaching regulations through the courts or through penalty mechanisms. </p>
<p>Tweets are arbitrary. Indeed, as some of Trump’s Boeing tweet indicates, they can rest on half truths. </p>
<p>They involve castigating companies even if there is no actual legal wrongdoing. Tweets also constitute an arbitrary form of surveillance. </p>
<p>The pattern of tweet shaming has serious repercussions for the economy. It deters companies form investing. It raises risks for investors in those companies, and is an arbitrary way of disciplining companies.</p>
<p>This is in addition to the latent unfairness of such attacks. It constitutes both an attack on investors and on employees and politicians should avoid it.</p><img src="https://counter.theconversation.com/content/70325/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner 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>Tweet-shaming from politicians isn’t the best way to regulate companies – it hurts investments, shareholders and ultimately the economy.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/560992016-05-03T10:30:45Z2016-05-03T10:30:45ZHow disruptive tech is forcing investors to rethink their strategies<figure><img src="https://images.theconversation.com/files/120186/original/image-20160426-1352-xj1l46.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Dabarti CGI</span></span></figcaption></figure><p>The increasing pace of technological change is obvious. Much sought-after and expensive electronic gadgets are <a href="http://www.theguardian.com/sustainable-business/2015/mar/23/were-are-all-losers-to-gadget-industry-built-on-planned-obsolescence">out of date within months of purchase</a> and obsolete a few years later. This shortening of product life-cycle, combined with increasing emphasis on innovation <a href="http://www.ft.com/cms/s/0/cd299944-5d0b-11e4-9753-00144feabdc0.html#axzz46vPxakmc">has made fund managers apprehensive</a>. Gone are the days of medium to long-term investments that incurred little risk.</p>
<p>Fund managers are not the preserve of wealthy organisations with profits to reallocate. As developed countries lumber towards <a href="http://www.dailymail.co.uk/news/article-369633/Pensions-A-crisis.html">state pension crises</a>, the need for citizens to have private income in old age is becoming of paramount importance. Such private financial security relies heavily on the effective utilisation of pension funds and associated products.</p>
<p>Pension funds traditionally have been invested in one of two ways, either through specialist funding of fixed assets to maximise returns, or more often, spread across a wide spectrum of bonds and shares that reduce overall risk.</p>
<p>The content of such funds usually contain fixed assets that include bricks-and-mortor investments in domestic and commercial property. However, as location independent working and the long-since forgotten promise of “<a href="https://www.theguardian.com/technology/2002/feb/01/internetnews.publicsectorcareers">telecottaging</a>” has morphed into a practice of <a href="http://www.bbc.co.uk/news/business-27694938">working from home or public spaces</a>, the need for large-scale commercial edifices has dwindled outside of London and other major cities.</p>
<p>In addition, a <a href="https://econsultancy.com/blog/66007-uk-online-retail-sales-to-reach-52-25bn-in-2015-report/">proliferation in online shopping</a> has seen city centres hard hit by high rents and low footfall. These conditions have resulted in less than attractive investment opportunities for those charged with managing our retirement funds.</p>
<p>Investments in tech companies has <a href="http://www.ft.com/cms/s/0/fad8a17a-b38e-11e5-b147-e5e5bba42e51.html">risen to such an extent</a> that some people are predicting another dotcom bubble due to unrealistic appraisals of social media and app-based start-ups. These elements have combined to provide an uncertain future for traditional investment portfolios as the internet completely redefines human behaviour and spending patterns.</p>
<p>Since the 1990s <a href="http://time.com/3741681/2000-dotcom-stock-bust/">dotcom bubble</a> and resultant downturn, it has become increasingly difficult to predict complex technologies. And with the advent of <a href="http://www.businessnewsdaily.com/5647-blue-ocean-strategy.html">blue ocean technologies</a>, for which the market is virgin territory, it has become more of a challenge to model risk.</p>
<p>The near exponential growth of technological development and innovation has seen new markets emerge, rise to prominence and disappear, almost without trace. A mere generation ago, the idea that a majority of the workforce would be engaged in computer-based activity was unthinkable to many. However, now computer-based jobs dominate in developed countries while many traditional jobs in heavy industry <a href="http://www.bbc.co.uk/news/uk-politics-35927542">have been consigned to history</a> in Europe and beyond.</p>
<h2>Age of uncertainty</h2>
<p>With such a huge shift in workforce and product, it is little wonder that financial institutions struggle to keep up with the rate of change. The risk models upon which they rely are often based on established paradigms that may no longer hold true. Newer risk models lack the certainty of reliable data gathered over a long period. Thus, risk has increased in line with uncertainty as investment profiles have had to encompass as yet unrealised investment opportunities. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/120190/original/image-20160426-1319-1kd6d75.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/120190/original/image-20160426-1319-1kd6d75.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=460&fit=crop&dpr=1 600w, https://images.theconversation.com/files/120190/original/image-20160426-1319-1kd6d75.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=460&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/120190/original/image-20160426-1319-1kd6d75.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=460&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/120190/original/image-20160426-1319-1kd6d75.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=578&fit=crop&dpr=1 754w, https://images.theconversation.com/files/120190/original/image-20160426-1319-1kd6d75.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=578&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/120190/original/image-20160426-1319-1kd6d75.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=578&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Commercial property: still as safe as houses?</span>
<span class="attribution"><span class="source">Jeremy Reddington</span></span>
</figcaption>
</figure>
<p>New models must be sought that factor in such mathematical functions as <a href="http://www.doc.ic.ac.uk/%7End/surprise_96/journal/vol2/jp6/article2.html">fuzzy logic</a> to integrate uncertainty into the very fabric of risk analysis while being able to make predictions base upon ever-decreasing traditional data sets.</p>
<p>While the time period over which useful data may be collected is decreasing in line with shorter product life-cycles, the ability to gather, collate and disseminate information is growing due to the rise of “big data” and real-time communications technologies that will power an emerging “internet of everything”.</p>
<h2>Risky business</h2>
<p>As there is an interdependency between innovation and investment, a solution must be sought that allows fund managers to assess risk and allocate financial resources in order to fuel innovation that, in turn, increases wealth generation.</p>
<p>Investor sentiment has been in turmoil in recent times as inflated stockmarket flotations see IPOs that conflate rational financial profiling with value-added elements that contain little more than observer bias. Such short-termism has resulted in large fluctuations in share price for new public companies, thereby reducing their attractiveness to long-term fund managers for whom volatility increases risk to an unmanageable level.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/120161/original/image-20160426-1330-nb8sm3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/120161/original/image-20160426-1330-nb8sm3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/120161/original/image-20160426-1330-nb8sm3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/120161/original/image-20160426-1330-nb8sm3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/120161/original/image-20160426-1330-nb8sm3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/120161/original/image-20160426-1330-nb8sm3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/120161/original/image-20160426-1330-nb8sm3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Built-in obsolescence is a major problem for investors.</span>
<span class="attribution"><span class="source">dwphotos</span></span>
</figcaption>
</figure>
<p>The lack of such a solution has created a gap in the market that has prompted the appearance of “kickstarter” investment models, enabling multiple donors to ascribe small amounts of money to an online account. </p>
<p>Tech company start-ups have used this model widely, but the impact of such an investment strategy reaches much further. Barack Obama’s presidential campaign of 2008 benefited from an online contribution of more than $28m – 90% of which was derived from donations of less than $100. This is <a href="http://www.ft.com/cms/s/0/f2640506-6cf4-11e5-aca9-d87542bf8673.html#axzz46vPxakmc">increasingly becoming a model</a> for political fundraising.</p>
<p>But models such as this are all about individuals contributing to projects they approve of, rather than from which they hope to derive a return. Such investment alternatives have seen an entirely new market evolve around the small investor. This only serves as further testament to citizens becoming co-creators of innovation projects, news items, art critique and political mobilisation.</p>
<p>Pension funds are the largest investment most people make outside of property, so the need to minimise risk is paramount when managing them. The future of risk assessment may be in question but the need to allocate resources in an effective manner is more important than ever. Therefore, fund managers and the algorithms that support decision making must be capable of modelling risk within a fast-paced and uncertain environment if innovation is to maintain the investment it requires in order to flourish into the future.</p><img src="https://counter.theconversation.com/content/56099/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Richards 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>Pensions and other long-term investments are struggling in this new age of uncertainty.Alan Richards, Principal Project Lead, Disruptive Media Learning Lab, Coventry UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/483772015-09-30T04:25:43Z2015-09-30T04:25:43ZExplainer: Glencore and why analysts move stock markets<p>Mining giant Glencore, and its Australian counterparts Rio Tinto and BHP have today gained back some of the billions of dollars wiped off their market capitalisation this week following a <a href="http://www.standard.co.uk/business/glencore-may-be-worthless-says-investec-a2957141.html">negative research note</a> from a London-based analyst.</p>
<p>In his note, Investec mining analyst Hunter Hill reportedly wrote that if commodity prices remained at current levels, almost all of Glencore’s <a href="http://www.bloomberg.com/news/articles/2015-09-28/glencore-drops-to-record-low-as-investec-sees-value-evaporating">value could be wiped out</a> unless the company undertook a major restructure. In the hours following the <a href="http://www.smh.com.au/business/mining-and-resources/clearly-it-hit-a-nerve-the-surprised-analyst-who-sparked-a-55-billion-asx-selloff-20150929-gjxkcy.html">release of the note</a>, Glencore saw its shares plunge by 30%.</p>
<p>Stock market prices have long been recognised as being more volatile than is really justified by the underlying performance of the companies. Company profitability changes slowly but stock prices jump around every day.</p>
<p>There are many reasons for this excessive volatility. An important one to recognise is that the stock market is basically a market for second hand goods: the only way one can normally buy a stock is to buy it from an existing seller. So stock market volatility can be driven both by changes in the willingness of buyers to purchase and also by changes in the willingness of owners to sell. </p>
<p>Prices swing a lot because at the very time buyers are keen, thinking they have seen value in a stock, the existing owners suspect the value has gone up and hence are less willing to sell. Essentially supply goes down when demand goes up, causing a price spike. Equally at the very time when sellers want to unload stock, buyers flee the market.</p>
<h2>Perceptions and fear</h2>
<p>Both supply and demand then are driven by people’s perception of value. The main component of this perception is the actual performance of the company concerned. When people perceive that China might demand less steel, they expect this to lead to lower profit for iron ore producers, and hence mark down the value of the stock concerned.</p>
<p>One of the key roles of market analysts is to understand the businesses in the sector they focus on, to understand market conditions, to review the quality of management, etc, and to form a view on the fair value of a stock. Part of their role is to make markets operate more efficiently by revealing what they consider to be true prices. They convey this information to their clients, who then move to buy (or sell) the stock concerned, which leads to its price rising (or falling). Virtually all analysts will have at some time moved the market in a particular stock.</p>
<p>Of course when you or I see the price of the stock concerned rising (or falling), all we know is that someone has started to buy (sell) it. We do not have access to the particular analyst’s recommendation. Seeing the price move up we suspect that someone has done some analysis and realised it is under-priced. We infer that a price moving up means the stock concerned is undervalued, and a price moving down means it is overvalued, and buy or sell accordingly. This creates a momentum effect. It mainly involves uninformed investors following a trend. It can add to the wild gyrations of the market and its tendency to overshoot and undershoot. Automatic computerised trading can have similar effects.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/96722/original/image-20150930-19533-1nlofwh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/96722/original/image-20150930-19533-1nlofwh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/96722/original/image-20150930-19533-1nlofwh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/96722/original/image-20150930-19533-1nlofwh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/96722/original/image-20150930-19533-1nlofwh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/96722/original/image-20150930-19533-1nlofwh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/96722/original/image-20150930-19533-1nlofwh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Both analysts and investors exhibit herd-like behaviour.</span>
<span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Herd thinking</h2>
<p>Analysts are not immune to momentum effects. There is a fair bit of evidence that analysts tend to herd in the sense that their recommendations tend to move together. This can be explained by a human tendency to prefer not to be exposed as an outlier unless one is very sure of one’s prediction. It’s like the old adage that no one ever got sacked for buying IBM computers.</p>
<p>There is also <a href="https://books.google.com.au/books?id=b3osLtBsYqcC&pg=PA435&lpg=PA435&dq=analyst+performance+between+firms&source=bl&ots=X_S0IS3UeE&sig=wdOdrHREzB2TAirfbXw9rnG_dkM&hl=en&sa=X&ved=0CDYQ6AEwA2oVChMI6J3OpNidyAIVg6eUCh23pgE8#v=onepage&q=analyst%20performance%20between%20firms&f=false">evidence</a> that the performance of star analysts declines when they move to other businesses. They might be right a couple of times, whether because of skill or luck, but this outperformance does not usually persist over time or across employers. There is also a lot of evidence that fund managers who follow stock recommendations and invest consistently find it very hard to perform better than the market average for any sustained period.</p>
<p>Equity strategists play a similar role to analysts but focus on whole markets or market segments. Anticipating a fall in the Australian dollar, equity strategists will probably have suggested people move their portfolios from the resources sector to the retail, construction or banking sectors. Some will be bullish on emerging markets, some on the US, others look at currencies, and so on. Functionally they are doing the same sorts of things as stock analysts, just looking at investible categories rather than companies. And they can have similar impacts.</p>
<p>So, can analysts move markets? Yes, they can when they bring new information or additional insights to valuations. They perform an important role in pointing out mis-priced stock. There is much less evidence that they can do so consistently, and it is very difficult to make excess return from following the advice of even the best when trading costs are taken into account.</p><img src="https://counter.theconversation.com/content/48377/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock 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>Did one negative analyst note on mining giant Glencore really wipe billions off the markets?Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/445322015-07-21T05:17:54Z2015-07-21T05:17:54ZChina’s attempt to control hot markets only fans the flames<p>The economic progress of China over the past 40 years or so has been remarkable. Part of that success has been due to the role that the state has played in creating a stable, long-run environment for business to grow and flourish, able to take advantage of the globalisation of economic activity. </p>
<p>The Chinese government has just seen confirmation that it is far harder to marshal the <a href="http://www.forbes.com/sites/jessecolombo/2015/07/19/is-chinas-stock-market-crash-over/">competing forces in financial markets</a>.</p>
<p>Simply put, the sector suffers from inefficiency and distortions built in to its current structure. The stock market – <a href="https://theconversation.com/explainer-whats-the-turmoil-in-the-chinese-stock-market-all-about-44457">which has suffered such a jolt in recent weeks</a> – is a relatively small part of the picture. Banks are still the predominant source of finance and can be asked to act as policy mechanisms to fund the state’s favoured projects. </p>
<p>Restrictions on the official banking sector, meanwhile, have led to a rise of an unregulated shadow banking system. There remains limited access to household finance and a lack of short and longer-term corporate debt markets. Add to this mix the absence of full <a href="http://www.scmp.com/business/banking-finance/article/1824483/china-close-its-goal-full-yuan-convertibility-its-capital">capital account convertibility</a>, which would allow limit-free conversion of yuan holdings into foreign currency for investment. The continued restrictions might offer some protection from events such as the global financial crisis, but they still isolate China from financial globalisation.</p>
<h2>Taking stock</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=311&fit=crop&dpr=1 600w, https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=311&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=311&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=391&fit=crop&dpr=1 754w, https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=391&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/88984/original/image-20150720-12558-1oh2opr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=391&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.google.co.uk/finance?cid=7521596">Google Finance</a></span>
</figcaption>
</figure>
<p>The Chinese stock market has provided a good example of how markets can deviate significantly from rational valuation. If we go back 10 years, we see an overheated market between 2005 and 2007. After the bubble burst, the market drifted as Chinese investors looked to real estate as a way of making good investment returns – and indeed it was a highly successful strategy. The 150% rise in the Shanghai stock index during 2014-2015, which preceded the recent collapse, was a result of the cooling of the real estate market and consequent re-emergence of share buying, assisted by an increase in lending.</p>
<p>Now, investors are looking to sell stock as the market tumbles, with the losses experienced in 2007 at the forefront of their attention. So two bubbles and, in between, a market in the doldrums is the experience from which investors are making their decisions. Participants in the Chinese stock market are used to volatility and level of prices which in no way reflect the true value of the stocks they hold. Short-term profit-taking and loss-minimisation is the focus for buying and selling activity. </p>
<h2>Value judgments</h2>
<p>This is the environment into which China’s policymakers have stepped in recent weeks. They have found, as King Canute attempted to show his obsequious courtiers, that the sea will not obey. It should by now be clear that trying to influence the waves of selling created by highly disturbed financial markets is a task beyond even the most powerful. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=324&fit=crop&dpr=1 600w, https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=324&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=324&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=407&fit=crop&dpr=1 754w, https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=407&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/88987/original/image-20150720-12540-3nyqua.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=407&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Not waving…</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/notionscapital/7317607942/in/photolist-5jhXBT-4kfim1-avwxyW-c38mcj-c9CDUb-6V13em-c38p6b-c38fSq-c38k1Q-c38nZW-c38hSm-huFVBa-6qzH9y-hhurYD-hhuHFw-9vjbma-7pUwtq-hge5R5-FHYpP-9uxhoE-4Q9zkL-8ADaX5-9uu3MV-9uudP8-booj-9rnssH-9CYgqf-pcEx5W-oXdtFE-peqJUP-per2m6-peqChk-peqY8n-oXc9dp-oXdoy5-99Ye1Q-6GEzDz-6GEyrT-9t2mTB-9uu2Qr-9uucLP-9uxc3G-9uxcdm-9uughv-9ux56s-7UYUau-Pxro7-oQaid-7dvtfT-5f17dC">Mike Licht</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Chinese investors reacted to various policy measures and exhortations with further unloading of stocks and even the <a href="http://www.reuters.com/article/2015/07/20/markets-china-stocks-close-idUSZZN2RI60020150720">injection of huge support</a> has only served to leave traders skittish and susceptible to rumour. </p>
<p>Rational investors regard buying stocks now as highly risky given the sentiment of small investors and the desire to cash in on some profits while they still exist. Yet, why would policymakers expect anything less when the market, for a long time, has been driven by anything but a rational assessment of the long-term value of holding stocks.</p>
<p>There have been some attempts to explain what has happened. One tactic has been to blame professional fund managers who are using the <a href="http://www.bloomberg.com/news/articles/2015-07-09/china-security-agency-to-investigate-malicious-short-selling">recently introduced capability to short-sell</a> – essentially betting on stocks to fall. But, in truth, fund managers have followed policy strictures not to abuse this new market mechanism – and my contacts in China have said there has been little evidence of the use of short-selling since the measure was introduced. Another approach has been to blame foreign investors, but again this lacks credibility given the small amount of such investment allowed and the strict controls on it.</p>
<p>The past few weeks have taught policymakers that they can create as well as reduce volatility. By intervening, cajoling and blaming international investors and fund managers, the rational element of financial markets have priced in additional risks. In other words, the market is betting that if policies to stabilise the market eventually fail, then the result will be more draconian measures which will have negative consequences for the markets and financial institutions. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=374&fit=crop&dpr=1 600w, https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=374&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=374&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=470&fit=crop&dpr=1 754w, https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=470&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/89006/original/image-20150720-12540-11ex2d1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=470&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Ground zero for stock bubbles.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/aarongoodman/3640971950/in/photolist-6xJW7s-35bZTR-9AoNPG-p2p62-p2vET-5y68qX-cbcfvS-6xJKR1-6xE9Ue-6xJZLs-6xEBCa-6AyDYV-6x3FmM-6zWd3y-6zW9m7-6xEMXa-6x7YxS-6zS5cX-6xEycX-6xJGa3-6xJxMo-6zSd4V-6LYVWG-6xJMX1-6zS7g6-6xJMiA-6xEtEr-6xK1pJ-6xJTaq-6xJPoo-6xEHfV-6xEDCc-6zS9uR-6LUYMC-6xEJWr-6xJPZS-6xJQCJ-6xJt5Y-6xJpXs-6xEswe-6xJKf9-6xEyGg-6xJrTo-6xK2LJ-6xELPk-6xETTP-6xETpH-6xENBX-6xEJrp-6xJoiU">Aaron Goodman</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>And they are right to do so. One response from policymakers was the introduction of restrictions to <a href="http://www.telegraph.co.uk/finance/economics/11726040/Chinese-stocks-put-on-ice-in-attempt-to-stem-market-crash.html">stop major investors selling stocks</a> altogether. That does appear to have prevented market meltdown for now, but the problem with returning to this solution is that the state is not in charge of what happens once trading is allowed again, or crucially, how such intervention affects the longer-term view of investors.</p>
<h2>Norse play</h2>
<p>Policy makers in China, as they have done previously, will learn from the experience. They may think they understood what has driven economic development, but doing the same for the financial markets is a much more difficult task. It has been an awareness of this, coupled with fear of exposing the economy to unshackled markets, which has delayed liberalisation efforts. It will be a pity if recent events encourage policy-makers to postpone reforms necessary to bring China’s financial system into the 21st Century, to join the country’s real economy. </p>
<p>China’s recent roleplay as a beach-bound Norse king should push policy-makers to create financial markets that take the long view. The key is to encourage investors to build portfolios that deliver long-run risk management, rather than portfolios which attempt to second guess how Beijing will next interfere. This means some serious institution building and financial market reforms. It won’t exempt China from volatile financial markets and short-term decision-making but it would deliver a more predictable environment that allows angry small investors to take less risky positions to avoid the vagaries of short-term financial market behaviour. </p>
<p>Choice and freedom to make mistakes is as important in financial markets as it is in any part of the economy; China should recall that even Canute got his feet wet in the end. The difference is that he knew he would.</p><img src="https://counter.theconversation.com/content/44532/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Dickinson 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>Beijing needs to learn to let go of untameable markets and allow the sector into the 21st century.David Dickinson, Professor of Economics, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/257262014-04-23T14:36:44Z2014-04-23T14:36:44ZTo know whether we face a new dot com bubble, look at how we work and consume<figure><img src="https://images.theconversation.com/files/46679/original/6ghw2ycg-1397732430.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ready to pop? </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/evanrude-/8526446897/in/photolist-dZsgB8-3ofH3z-7mH577-8P8u1d-ao79J6-jxtLZR-5Y5uY-4wMG9t-59XuR4-9sMbNi-4rNuxQ-reFoi-8F56pL-2KywW-B6uzp-6anCpu-6mpUGg-7QCJ1n-aCqrzh-7yVJaC-2eNea-7ywNf-6aitt6-5MfqrY-b7eCpV-e6gecb-5kMsxg-4P5qck-4kRZVZ-6kWPEv-7zJVDZ-7zNGwN-7zNF83-7zNFAu-7zNF11-7zJVcF-7zNFXA-7zJW3r-7zNELC-7zNGps-8tqSYN-7Mrue-8vY4u8-s14d1-4HBZb7-5nA3VM-9r2BL2-6DAxQX-7or2Vn-7VAWr">Stephen Nesbit</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The ongoing <a href="http://www.reuters.com/article/2014/04/21/us-funds-fidelity-contrafund-idUSBREA3K0UC20140421">weakness in tech stocks</a> brings with it the inevitable portent that <a href="http://www.telegraph.co.uk/finance/markets/10749492/UK-companies-succumb-to-tech-bubble-fears.html">we are witnessing</a> the bursting of a new <a href="http://en.wikipedia.org/wiki/Dot-com_bubble">dot com bubble</a> akin to that of the late nineties and early noughties.</p>
<p>Shortly before the latest instability peaked, commentators sensed <a href="http://www.bbc.com/news/business-26847204">something in the offing</a>. As early as 2011, <a href="http://www.theguardian.com/business/2011/feb/20/is-this-the-start-of-the-second-dotcom-bubble">signals</a> sounded that a bubble might inflate due to the market’s thirst for fertile pastures after the collapse of the housing boom.</p>
<p><a href="http://www.theguardian.com/business/2014/apr/13/tech-stocks-boom-lessons-from-2000">The figures</a> lend support to this outlook. The Nasdaq index, on which many US tech companies trade, reached a 14-year high at the beginning of March, but has suffered reversals since then. </p>
<p>On 10 April, the index dropped 3.1%, a one-day fall unmatched since 2011. Facebook lost 17% on its April high. Twitter’s value fell a quarter. UK internet companies Just Eat and Boohoo plunged to recent flotation prices. Others dipped below their initial valuations. Overall, the Nasdaq has lost 5.4% of its value since those highs of a month or so ago.</p>
<p>And hints of future turmoil abound. <a href="http://www.bbc.com/news/business-27058146">Google and IBM have both reported falls in revenue</a>, compounding bleak expectations for tech stocks. <a href="http://www.ft.com/cms/s/0/4ecc199e-c5af-11e3-a7d4-00144feabdc0.html%E2%80%8E">Chinese web firm Weibo’s IPO</a> raised far less than anticipated.</p>
<p>Things may or may not be as bad as Marc Faber, <a href="http://www.cnbc.com/id/101573688">the editor and publisher of the Gloom, Boom & Doom Report</a>, suggests. But the so-called “<a href="http://news.sky.com/story/1238932/nasdaq-tech-wreck-cuts-web-giants-value">tech wreck</a>” offers an opportune moment to revisit the period, roughly stretching from 1995 until 2003, when we last saw a crash based on the falling fortunes of fledgling US tech and new media start-ups.</p>
<h2>Working and consuming</h2>
<p>Looking at the everyday sociological factors that underpin the movements of high finance, <a href="http://www.francoangeli.it/riviste/Scheda_Rivista.aspx?IDArticolo=50610&Tipo=Articolo%20PDF&lingua=en&idRivista=83">my research on the first dot com boom and bust</a> suggests two things about today’s potential tech bubble. On one hand, we should consider the work that people do in the businesses subject to these feverish valuations. On the other, we should understand the way people use and consume what these businesses produce.</p>
<p>Flexible working hours are common in tech and social media. And most importantly, the work performed has an immaterial and intangible quality. These factors provide an uneasy basis for the measurement and projection of output, productivity and value.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/46712/original/9gx8d2g3-1397752825.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Keep on clicking.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/spencereholtaway/3376955055/in/photolist-8em2UZ-69pM62-dzYfbV-adoZPv-3bMSAz-74nZEq-d4UxD1-7Jph4H-e1BbSx-dUnPaB-9Y9tKy-5sJqaW-c39g6C-abD2ku-7HqPca-97UDHf-61YYmz-9yaonN-5YYqyh-61NnQD-4bEBbC-8e6g3c-ech2HP-5VjTF4-3g7wLd-73j7i3-gFHatQ-gFHau1-6Px4X4-8TCxvT-gGiUEk-cduBpG-37MbJM-7LuEfb-3W6sxM-4cixig-8dL83E-3euK71-6XWbcn-8LFfQs-873F1R-63r44H-e1RTgA-gdMjbc-4xpFjF-3WaHJd-bv1qKw-e3Auqg-8TCTBB-8TG2aq">Spencer E Holtaway</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>If it is hard to track the productivity of the flexible-working producers, then it is nigh on impossible to measure the contribution of the consumers. As <a href="http://mitpress.mit.edu/books/crisis-global-economy">Tiziana Terranova suggests</a>, the wealth creation of firms such as Google and Facebook takes place largely outside the workplace. Instead of relying solely upon the exploitation of the time of employees, the time of web users is monetised too. Clicks, comments and views on social media sites transcend the capacity of the companies and their investors to keep tabs on what precisely is being generated.</p>
<p>Hence, the value of what is produced seems expansive, and, perhaps, beyond measure. The <a href="http://mitpress.mit.edu/books/capital-and-language">work</a> of <a href="https://mitpress.mit.edu/books/violence-financial-capitalism">Christian Marazzi</a> responds radically to this condundrum. In immeasurability, he says, lies the origin of present-day stock market exuberance and uncertainty.</p>
<p>Some accounts suggest that exuberant, uncertain valuations represent misapprehensions of the nitty-gritty of production. Marazzi, however, reckons that these valuations show the difficulty of establishing a clear picture of what is produced and consumed where immaterial commodities are created and used. Nowhere is this more profound than in the tech sectors seeing their stock prices head skywards.</p>
<p>Despite this difficulty, Marazzi claims, the financial markets do still constitute a flexible enough framework for repeated attempts at establishing the worth of this immeasurable expanse of time and effort. The first dot com boom and bust seems to have been one such attempt. Recent movements suggest that we may be living through the unravelling of a second attempt, bearing potentially similar consequences to the first.</p>
<h2>Work and non-work</h2>
<p>The early dot com enterprises displayed features which exemplify radical changes in how, when and where production takes place in contemporary capitalism. </p>
<p>Andrew Ross’s ethnography of the <a href="http://www.temple.edu/tempress/titles/1785_reg.html">typical dot com firm of the nineties and noughties</a> reported several key trends. Fun, flexible working practices promised greater freedom to workers whilst inducing greater commitment. Jobs revolving around the creation and manipulation of symbols and emotions blurred the boundaries between work, leisure and life itself. Mobiles and laptops encouraged constant connection to networks and the extension of work outside the workplace and into the home.</p>
<p>The everyday conditions in work and consumption from which the first boom and bust arose have been progressively augmented. In recent years, the conditions that made the dot com firms so hard to quantify and value have only become more insistent. New ways of working incubated in Silicon Valley have attained a far broader status in many other industries and professions. And that has helped to make all of us potential producers, at all times, as the lines blur between work and non-work.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/46711/original/hm446zfk-1397752331.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Work-life balance.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/thelifeofbryan/133627349/in/photolist-fU3gq-hkyhxP-cNSKP-7Yj6Cp-7Ynj17-7YnjG9-7YniLj-7YnkmE-wWzZr-7Ynk4A-69kvEJ-fvqk9j-6eqMLk-4Wm1WQ-46tsy-7LtYto-5akVGf-6tu7GZ-7FsVVj-7Fp1mP-cxVpB7-4xZLLV">Bryan</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>In the UK, for example, we can see the <a href="http://www.theguardian.com/uk-news/2014/mar/10/rise-zero-hours-contracts">spread of zero-hours contracts</a> and an increase in <a href="http://www.telegraph.co.uk/finance/jobs/10646975/Mini-jobs-signal-restructuring-of-way-we-work.html">part-time</a> and <a href="http://www.ft.com/cms/s/0/fce447ea-b8f3-11e3-98c5-00144feabdc0.html%E2%80%8E">freelance</a> working practices. My own research has suggested lip-service, at the very most, is paid to the fun, flexible work regimes of Silicon Valley which sparked the change. And the development of online social networks and handheld digital technology continues apace, <a href="http://www.theguardian.com/money/2014/jan/02/working-from-home-communications-technology-bt-futurologist">enabling endless virtual access</a> to the production and consumption of whatever the tech firms are creating for us.</p>
<p>All this only shows the proliferation of the raw material with which investors and markets operate when they make enthusiastic and sometimes ill-fated attempts to measure what is happening. The objective conditions for a bubble are still there in the stuff of everyday life, perhaps even more so than before.</p>
<p>Valuations of tech and dot com stocks are not inflated distortions of the underlying reality of the “real economy”, but rather are imperfect reflections of actually-existing trends in the way that goods and services are produced.</p>
<p>One response to the 2008 financial crisis has been to hanker for a return to the safe haven of “making things”, unsullied by the supposed corruption of the financial system and the intangibility of tech. This is a myth. The production and consumption of commodities are part and parcel of the exuberant valuations of tech stocks, and cannot be sequestered away. </p>
<p><a href="http://www.theguardian.com/business/2014/apr/13/banks-rome-financial-crisis">If there is to be a crisis</a> on the back of <a href="http://www.businessinsider.com/stock-market-crash-2014-4">the bursting of this new bubble</a>, we should steel ourselves in advance to acknowledge that we cannot escape this supposedly “false” economy through the resurrection of a non-existent “real” one. They are now one and the same.</p><img src="https://counter.theconversation.com/content/25726/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Frederick H. Pitts receives funding from the Economic and Social Research Council.</span></em></p>The ongoing weakness in tech stocks brings with it the inevitable portent that we are witnessing the bursting of a new dot com bubble akin to that of the late nineties and early noughties. Shortly before…Frederick Harry Pitts, PhD Researcher, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/252752014-04-08T20:09:02Z2014-04-08T20:09:02ZWhy your bank account should come with a risk rating<figure><img src="https://images.theconversation.com/files/45753/original/5hkxtwxx-1396852018.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">All banking comes with risk, but it could be better disclosed.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com">Shutterstock</a></span></figcaption></figure><p>What is the interest rate on your savings account? If you don’t know, you can easily find out. Banks advertise their rates prominently. They want you to know what they’re offering. After all, the interest rate is the price a bank pays you for your savings.</p>
<p>Now ask yourself: What level of risk is your bank taking in order to generate these interest payments?</p>
<p>Banking is an inherently opaque industry. Even credit rating agencies struggle to reach a consensus when it comes to pricing bank risk. This is why the banking sector is subject to an additional layer of regulation, known as prudential regulation.</p>
<p>It is the Australian Prudential Regulatory Authority’s (APRA) job to examine the books of each Australian bank, assessing its overall risk of failure. We never learn the outcome of APRA’s investigations. APRA uses its statutory powers to prevent its assessments from becoming public. Instead, APRA prescribes minimum standards for banks, and helps a bank to restructure its assets if its risk of failure is too high.</p>
<p>The existing system of prudential regulation results in a “one size fits all” banking system. The regulator determines the maximum level of risk that a bank can carry. Because banks generate returns by taking risks, the regulator is effectively capping the interest rates available on savings accounts. As a consequence, there is little difference between the products being offered by Australia’s banks.</p>
<p>So, what is the alternative?</p>
<h2>APRA should empower savers</h2>
<p>In a recent <a href="http://fsi.gov.au/files/2014/04/Byford_Martin_submission.pdf">article</a> published in Economic Papers, Sinclair Davidson and I argue that APRA should use the information it gathers to empower depositors. We propose that APRA assign each bank a “Financial Stability Rating” (FSR) — a number out of 100 — based on its overall risk of failure. Under our proposal the FSR would be linked to the Deposit Insurance Scheme. In the event of a bank failure, the scheme would guarantee a percentage of each deposit equal to the bank’s FSR. If, for example, you had A$10,000 deposited in a bank with a rating of 87, $8,700 of your funds would be protected.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/45754/original/tcn28kf6-1396852055.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/45754/original/tcn28kf6-1396852055.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/45754/original/tcn28kf6-1396852055.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/45754/original/tcn28kf6-1396852055.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/45754/original/tcn28kf6-1396852055.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/45754/original/tcn28kf6-1396852055.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/45754/original/tcn28kf6-1396852055.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bank statements don’t tell the full story.</span>
<span class="attribution"><span class="source">Finnur Magnusson/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
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</figure>
<p>Our proposal links the returns a depositor receives to the risks a bank takes on the depositor’s behalf. If a bank wants to increase the interest rate it offers on deposits, it must increase its holdings of risky assets such as unsecured loans. In turn, this results in a lower FSR, meaning that depositors will lose a greater fraction of their saving in the event that the bank collapses. In this way, depositors are given an incentive to consider both sides of the risk-reward trade off when selecting a bank.</p>
<p>Of course, the incentives work both ways. Banks requires deposits. Therefore, our proposal provides banks with the incentive to tailor their products to match the preferences of depositors.</p>
<p>Depositors who are primarily concerned with the security of their savings will favour banks with high FSRs. In order to compete for these deposits banks would have to reduce their risk above the minimum standard dictated by the regulator. In effect, competing to be safe.</p>
<p>Of course, there will be other depositors who are willing to risk a portion of their savings in return for a higher interest rate. It’s likely some banks will structure their products to target these consumers. Overall, we would expect to see a greater variety of products on offer.</p>
<h2>Benefits for all</h2>
<p>Our proposal has a number of other advantages. First, it would likely reduce the cost of the <a href="http://www.guaranteescheme.gov.au/qa/deposits.html">deposit insurance scheme</a>. On the one hand, banks competing to be safe are less likely to fail. On the other hand, the insurance scheme has reduced liability when a bank decides to carry a higher level of risk.</p>
<p>The scheme also has benefits for individuals and institutions who hold bonds or shares issued by a bank. Bondholders and shareholders are not protected by deposit insurance. Nevertheless, their investments are on the line if the bank fails. Providing investors with greater certainty about a bank’s behaviour would help financial and stock markets to better price the associated risk.</p>
<p>Finally, we believe our proposal would help free up credit to marginal borrowers. Our scheme allows banks to match depositors with a preference for high-risk/high-return investments, with borrowers with limited access to credit. In this way, we expect our proposal would promote the establishment and expansion of small businesses, in particular, with the consequent advantages to employment and economic growth.</p><img src="https://counter.theconversation.com/content/25275/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Martin Byford 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>What is the interest rate on your savings account? If you don’t know, you can easily find out. Banks advertise their rates prominently. They want you to know what they’re offering. After all, the interest…Martin Byford, Lecturer, Economics, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.