NO 233 – JULY 2012
Half year market highlights

SEARCH
Notice: Undefined variable: indexpage in /home/wfe/public_html/focus/2012-07/header.php on line 76
WFE Focus July 2012
MEASURING THE NEW NORMAL
Peter Clifford
Deputy Secretary General, WFE

The new normal forecasted an extended period where the economy de-leverages, policy-makers       re-regulate and political pressure is applied to de-globalize trade.

The term ‘the new normal’ comes to mind when sifting through the statistics from the first half of 2012. The expression ‘the new normal” dates back to the end of the last decade, and is said to be coined by Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., PIMCO and popularized in the frequent publications of his colleague, co-chief investment officer and founder of money management firm, Bill Gross.

The new normal forecasted an extended period where the economy de-leverages, policy-makers re-regulate and political pressure is applied to de-globalize trade. Back in a 2010 Pimco newsletter, a more detailed prediction states “While the economy de-levers, private credit demand is anemic. Without net increases in private investment, the recovery in household income needed to close the gap between cyclically stimulated consumption and structurally low employment will prove elusive. The lack of income growth will put pressure on public sector budgets, which in turn will force the economy to turn toward fiscal austerity just as underlying economic growth begins to stagnate again.”

The concept caught on because it provides a overarching thesis towards investing world. A defining characteristic of the new normal was that for the largest economies would that this would be a long term situation.

Returning to the World statistics, it is now common to see exchanges from Asia dominating the top lists of largest markets by size and trading. But it was still a surprise to see NSE India claim the top stop this quarter. Likewise in the derivative markets the total number of contracts traded is a rough guide to liquidity given the different sizes of options and futures contracts. But that does not diminish the achievement of BMFBOVESPA’s steady climb towards the top.

More of a concern for the exchange industry is that parts of the exchange-traded futures on option markets, which had a prolonged period of double digit growth, are on track to break that string of success unless the second half of the year picks up considerably.

In a separate report on the over-the-counter (OTC) derivatives market that WFE is preparing to publish, the Tabb Group has equally surprising findings. The exchange-traded derivative world seemed to be a cusp of new business as plain vanilla products started to trade more in transparent venues and to be cleared. However, more recent data shows that the OTC markets are again expanding, but futures and option markets do not seem to be sharing the usual symbiotic relationship.

With regard to the cash equity business, as we see on the cover the overall market capitalization (or size) of the world’s market has been stuck for several years. New listings in many major markets are slow, and indices restricted to a narrow band.

it is now common to see exchanges from Asia dominating the top lists of largest markets by size and trading.

In addition to the macro-economic drivers of financial world, recent regulation may also be making trading in stocks more expensive and harder to accomplish. Duncan Niederauer outlines the impact of dark liquidity which account for around 50% of trades for more than 1,200 equities. ‘Dark pools’ and the trade execution practices by some brokers may be putting retail investors at a disadvantage. The research done by the Capital Markets CRC in Australia points to similar concerns. After citing earlier studies that equated fragmentation with higher cost of trading for investors in the US, he ran similar studies in Australia. The conclusion was that the impact is even greater in smaller markets. For ASX investors, the result could an increase in trading costs more than three times the size of the fee  charged by the ASX.

The new normal may be a prolonged economic phenomena – and the new PIMCO forecast for a ‘paranormal economy’, where low interest rates making lending unprofitable, is even more dire. But within that context, the ability to measure the impacts of market structure is crucial if policy makers have evidence on which they can improve the environment for investors and restore trust to the markets.

Notice: Undefined variable: indexpage in /home/wfe/public_html/focus/2012-07/footer.php on line 2