Thursday, October 09, 2008

The changing landscape of financial markets

I thought this is a very good article about the changes that is happening to the financial markets around the world, post sub-prime and post credit crisis. If you've been living in a cave for the past 1 year, it all began with sub prime borrowers in US unable to pay off their housing loans. Then because of the way the lenders 'diversified' and spread their risks to other companies and other countries by selling instruments linked to such debts, all of these holders started to fall like dominoes. Banks also fear lending to each other, leading to the current credit crisis, where there are lots of fear lingering around.

Read this:
By Rita Raagas De Ramos, | 9 October 2008

Fidelity International’s global head of institutional investment, Michael Gordon, says the events of the past few weeks are changing the financial landscape in ways that few thought possible.

The impact of the current financial markets turmoil must not be underestimated, says Michael Gordon, London-based global head of institutional investment at Fidelity International. He shares his views on what he believes are the seven ways by which the global financial landscape will change forever as a result of recent market events.

First, expect the financial world to become more local. Investors will favour local, home-country stocks over international investments as emotion overrides reason. Home is where the heart is and we should expect investors to feel safer in their own backyards for a while. They will feel most confident holding domestic stocks where their governments will protect both them and their institutions. And these institutions and those who trade for them are also likely to prefer local counterparties where they are available.

Second, financial industries have become political. The public is looking to governments to act and politicians have shown they will not let the electorate down. We should remember that governments are local, not international. While information and intelligence are shared internationally, decisions are made at the country level.

Third, complexity is out and simplicity is back in. Investors, firms and regulators will have a newfound desire to understand fully what they are buying and will favour those investments they can adequately control, understand and monitor. For many financial instruments, underlying exposures and leverage have moved beyond the understanding of those who
bought them and also those who had the responsibility of governing the institutions who traded and marketed them. Firms will now become more focused on what they can do well and what they can adequately control and monitor.

Fourth, models are out and people are back in. Investors will shift away from models – quantitative or otherwise – and swing back to human beings, where their level of understanding is greater. Many such models rely on past relationships between securities, markets and asset classes. Theory and practice can be strange bedfellows as many investors are now finding
out. Market participants have learned now how leverage has overridden historical correlations so that everything now seems one-directional.

Fifth, innovation is out and experience is back in. Funds will flow to those with experience in the traditional practices of traditional markets and investors will be wary of anything new. This was already a trend emerging this year but last week’s events have cast it in stone – at least for the foreseeable future. Smart will be replaced by sensible, while trust and experience will be at a premium.

Sixth, transparency trumps opacity. Investors will demand transparency from the firms managing their money and in the products that they market.

Seventh, oversight will be as valuable as insight. Compliance will become even more critical in firms and those companies that have relegated this function will need to redress the balance. Oversight will become as important as insight in the new world of investing.