Treasury Secretary Steven Mnuchin said in a statement to the Senate Banking Committee on Thursday that the Trump administration and Democratic leaders are set to revive negotiations on a coronavirus relief bill.
“I've probably spoken to Speaker Pelosi 15 or 20 times in the last few days on the CR, and we've agreed to continue to have discussions about the CARES Act,” Mnuchin said.
The CARES Act, signed by President Trump at the end of March, was drafted as a $2.2 trillion relief bill containing, among other measures, a $600 weekly enhancement to unemployment benefits. This lapsed in July, to be replaced by a £300 weekly enhancement issued via a presidential memorandum in August. This, too, will expire before the end of the month unless further measures are instated.
Negotiations regarding potential follow-up stimulus halted in late August as House Speaker Nancy Pelosi refused to go lower than her party’s proposed $2.2 trillion stimulus package, while Republicans have refused to consider a bill greater than $1.1 trillion.
Pelosi confirmed Mnuchin’s suggestion of further negotiations, telling reporters on Thursday, “We’ll be hopefully soon to the table with them.”
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The need for further stimulus has grown more urgent during September, with economic recovery slowing and more than 870,000 new unemployment claims being filed in the US during the past week.
Both Mnuchin and Federal Reserve Chairman Jerome Powell have stated that the government’s main priority should be to give further support to the millions of Americans who are currently unemployed, both to bolster the economy and prevent the continued spread of coronavirus cases.
Powell noted: "If people start to run through it what resources they have, they're at risk of losing their homes or having to move out of the place they're renting, maybe move back in with family, and those things are not necessarily good for controlling the spread of the virus.”
New figures released by the United States Department of Labor on Thursday revealed that 1.3 million people filed for unemployment benefits in the past week – 50,000 more than the expected 1.25 million.
Coinciding with a spike of 75,000 coronavirus cases in the US, the highest single-day increase yet recorded, the disappointing unemployment statistics had a knock-on effect on investor enthusiasm that soon became visible in the markets. The Dow and S&P both opened down 0.7%, and the Nasdaq saw a loss of 1.1%.
“The mild risk-off tone to the start of the US session is keeping stocks in the red after a softer European session,” commented Neil Wilson, remarking that the prominence of US unemployment figures “cast a shadow” over global markets.
Outside the US, surprising slides were also seen in prominent Asian markets, with a fall of 4.5% in the Shanghai Composite, 5.3% in the Shenzen Component and 1.6% in the Hong Kong Hang Seng. After reports emerged of better-than-expected Chinese GDP, indicating an 11.5% month-on-month increase in economic output in June, these stock market tumbles were especially jarring.
Even less-affected European markets still saw a decline, with a 0.3% slip recorded in both the FTSE 100 and the DAX and a drop of 0.4% in the CAC 40 by the afternoon.
Detsche Bank strategist Jim Reid commented on Friday that the Chinese markets’ loss could be attributed to a 1.8% dip in June retail sales, adding that a recent jump in confirmed COVID-19 cases in the region “seems to also be acting as an overhang.”
Members of the Democratic party in the US have called for a temporary ban on mergers and acquisitions (M&As) in America. The proposed ‘Pandemic Anti-Monopoly Act’ would freeze mergers and acquisitions made by companies and financial organisations with more than US$100 million in revenue or market capitalisation.
In Europe, national governments and the EU have expressed concerns that foreign investors may try to take advantage of the financial impact caused by COVID-19 to acquire domestic businesses of strategic interest. The key point for acquirers to note is that deals may be subject to greater challenge from governments.
The over-riding notion to ban M&As is to avoid predatory acquisitions. The belief is that companies experiencing financial distress during the pandemic have less negotiating power when it comes to striking deals. In theory, struggling businesses are more inclined to accept the terms presented to them, meaning they may not realise their true value and could perhaps achieve a more attractive deal in non-pandemic times.
The Democrats in the US also argue that a temporary ban on M&As amongst large corporations would avoid long-term economic consequences, which would be caused by less market competition in the future.
While it seems understandable to relate to the sentiment of such proposals, they will do much more harm than good, and will only contribute to the economic consequences of COVID-19.
An outright ban on M&As could mean that struggling businesses have less opportunity to survive. With an acquisition off the table, a company more realistically faces insolvency. This could result in people losing jobs, while an element of competitiveness will disappear from the market and the government and the country’s road to economic recovery could become tougher.
In theory, struggling businesses are more inclined to accept the terms presented to them, meaning they may not realise their true value and could perhaps achieve a more attractive deal in non-pandemic times.
There is the consideration that the talent who have lost jobs because of the insolvency, then go on to find new employment with a company who may have been a prospective acquirer. This same acquirer may also have the opportunity to purchase the insolvent company’s assets and Intellectual Property (IP) rights at a later date, as administrators look to repay debts. This would be subject to complex negotiations but could essentially mean that after a period of disruption and lost time, the acquiring business still achieves its same objectives at a lower price, whilst the smaller struggling business ends up as the biggest loser.
An M&A ban could also prove counter-productive for any economy that chooses to enforce it. The laws underpinning a ban in one country may not be applicable, or certainly open to a greater challenge, in another geography. This would likely lead to companies looking to invest outside of their home country, creating jobs elsewhere and making financial contributions to another government and economy.
A governing body looking to ban M&As is also likely to be open to challenges from corporations under anti-competition laws. While there will be differences in the policies of these laws around the world, they are often bound by a similar premise of ensuring fair competition and promoting competition for the benefit of the market.
If a large corporation was prevented from taking part in a merger, whilst other companies could make acquisition offers because they had a lower turnover, it is reasonable to assume the excluded company has grounds to make a case of anti-competitiveness. Similarly, if a struggling company faces going out of business and has no option for survival through lack of acquisition opportunities, it’s questionable whether anti-competition policies are being upheld. After all, the ban would be contributing to lesser market competition when a business ceases trading.
Challenges under anti-competition laws would require careful consideration. This could have further negative economic impacts as an acquisition becomes long and drawn out. This may mean a struggling business running out of time to be acquired, resulting in job losses and insolvent debt. The latter can quickly ripple effect throughout supply chains, risking financial losses for other companies and putting further jobs under threat.
Should the ban be viewed as anti-competitive, a government would also need to consider how this impacts its relationship with large corporations. If companies feel trading conditions penalise their success, they may well decide to relocate their operations to another country. This could mean job losses in the home country and a decline in economic contributions, which may impact GDP.
Governments and anti-trust bodies are right to review M&As but it is draconian and short-sighted to consider banning them during the pandemic. It’s impossible to know how long the economic impact and business disruption of COVID-19 will last and freezing M&As until some level of financial stability and prosperity returns is likely to contribute to a higher risk of business failures. It’d be more effective to focus on upholding the laws designed to facilitate fair and competitive M&As.
US
In the US, all 50 states have declared emergencies with governments at the local, state and federal level taking action to ease the financial burden on Americans. Trump’s administration and Congress agreed on a $2 trillion stimulus package, which includes income support of $1,200 per adult and $500 per child and starts phasing out for individuals who earn $75,000 per annum or $150,000 for couples. Loans worth $367 billion have been offered to small businesses struggling with the immediate drop in revenue due to the pandemic. The government will not expect the businesses to pay the money back if they manage to retain most of their employees over the next six months.
In the form of loans, loan guarantees and purchases of companies’ corporate debt, the legislation provides a total of $454 billion which will help large and medium-sized business access capital during the crisis. $58 billion have been set aside to help American airlines through loans and grants and $17 billion will be provided to help companies that are critical to maintaining national security.
UK
In March, UK Chancellor Rishi Sunak announced a £350 billion emergency package for the economy[1] which consists of state loan guarantees worth £330 billion along with a further £20 billion of handouts for struggling businesses. He also promised £12 billion in emergency support in the budget, a one-year abolition of property taxes for all companies in affected sectors and suspended business rates for many firms.
The Chancellor also added a generous £9 billion scheme to support up to 3.8 million self-employed workers hit by the impact of the pandemic. 95% of the country’s self-employed people are able to access a grant of 80% of their recent average profit (capped at £2,500).
The government also announced a job retention scheme which offers compensation in full for employment costs of up to 80% of salary bills for workers that companies can’t provide work for, but are kept on payroll.
Germany
The German finance and economic ministers have vowed to make unlimited financing available to individuals and businesses as part of the country’s efforts to immunise Europe’s largest economy from the COVID-19 impact. The government promised that there will be no upper limit on the aid that will be offered to companies that are affected by the crisis.
The government has set aside a “supplementary” €156 billion budget for 2020[2], which includes a €50 billion plan to provide direct grants to small businesses and self-employed people who can’t access bank credit. Businesses with up to five employees are eligible for a one-off grant of €9,000 for three months, whilst those with up to ten employees will receive €15,000.
The government has also set up a €500 billion bailout fund to recapitalise big companies with more than 250 employees that face struggles due to the crisis. Landlords are also not allowed to evict tenants who fail to pay their rent due to the pandemic.
The country’s also expanding its programme of export credits and other additional guarantees to help struggling companies and has committed to deterring “billions of euros” in tax payments. Germany is also compensating individuals who are sent home by their employers due to the lack of work for them. The government anticipates that the scheme will cost the Federal Labour Office €10.05 billion.
France
Like many of his colleagues from across the globe, French President Emmanuel Macron has guaranteed that the French Government will offer unlimited support for individuals and companies that have been affected by the global pandemic, which will cost the country €45 billion. He’s also committed to offering grants to workers who have found themselves in unemployment due to the pandemic crisis. France’s Minister of the Economy and Finance has also promised €300 billion of French state guarantees for bank loans to companies, as well as €1 trillion of such guarantees from European institutions.
The government has also suggested the possible rescue of companies such as Air France, which have state shareholdings, and has deferred company tax and social security payments. It’s also offered sick leave payments to parents who have to stay at home to take care of their children due to school closures.
Economists have warned that the damage from the coronavirus crisis could be similar to that from the 2008 recession.
Italy
Italy has begun distributing funds from the fiscal rescue package, totalling up to €25 billion, promising that “nobody will be left alone”. €1.15 billion of this has been distributed to their health system and €1.5 billion has been offered to the civil protection agency, which has been working on Italy’s coronavirus response.
Additionally, self-employed people have been promised one-off payments of €500 per person, companies that pay redundancy payments to their employees have been offered support, there’s been a freeze on any worker lay-offs, and people who are still working during this time have been offered bonuses.
Businesses hit by the pandemic have been promised loan guarantees and a moratorium on loan and mortgage payments is expected to be put in place. Financial support will be offered to families with children, as well as taxi drivers and postal workers who have to continue working during lockdown. The government also announced plans to financially support Italian airline Alitalia.
Spain
Spanish Prime Minister Pedro Sánchez has described the government’s coronavirus rescue package as the “biggest mobilisation of resources in Spain’s democratic history”. It includes €100 billion of state loan guarantees for companies aimed at ensuring liquidity, specifically for small and medium-sized companies. The whole package will amount to €200 billion.
Mr Sánchez has also announced a moratorium on mortgage payments for people who have been hit hard by the pandemic and a similar moratorium for utility bills. He’s also suspended some social security payments and has set aside €600 million to help people who depend on social services.
[1] https://news.sky.com/story/coronavirus-330bn-of-government-backed-loans-for-businesses-11959156
[2] https://www.ft.com/content/26af5520-6793-11ea-800d-da70cff6e4d3
The VIX volatility index – which is commonly used to gauge the fear level among investors – jumped by 36%, leading the markets to become particularly volatile. Losses have been widespread. In the week of the 5th of August alone, the NASDAQ plunged 3.5%, the S&P 500 and Dow Jones both dropped 3%, the FTSE 100 fell by 2.5% and both the French CAC 40 and German DAX 30 saw decreases of around 2%.
With neither side willing to be the first to blink, investors are increasingly seeking out ways to properly insulate themselves from the instability of the market. However, given the unpredictability of the conflict itself, this is no simple task. So, to help you make the best decisions that you can, here André Lavold, CEO of Skilling, takes a look at what has gone on and how some key stakeholders have reacted.
The present state of play: tariffs, tweets and devaluations
Under this current American administration, trade conflicts are never truly resolved; instead being defined by periods of escalation and détente. May saw the US choose to increase the levels of tariffs on $200 billion of Chinese goods, to which the Chinese responded by raising tariffs of its own on $60 billion of US goods. At the G20 summit in Osaka, both sides publicly agreed to a ‘truce’, however this was almost immediately reneged upon by the Americans after the President tweeted that he would levy an additional tariff of 10% on $300 billion of Chinese goods.
This brings us to the current state of play. While the US and China have always treated each other in an adversarial fashion, the latest measures have escalated the conflict to a new level of significance. The latest round of tariffs, most of which will be introduced in the autumn and winter of this year, now focus on consumer-facing goods like electronics and clothing. Companies with significant exposure to China – such as Nike and Apple, who saw their stock prices fall by 3% and 5.2% respectively – were especially affected. With importers likely to pass on the price rise to consumers, these new measures will likely negatively impact consumer spending. With the US household being the backbone of the American economy, the odds of a severe economic slowdown or recession are increased.
Companies with significant exposure to China – such as Nike and Apple, who saw their stock prices fall by 3% and 5.2% respectively – were especially affected.
Knowing that this was likely to hurt its export-reliant economy, the Chinese took action. The People’s Bank took the strategic decision to allow the Yuan to depreciate below the seven per dollar rate for the first time since 2008. Being a floor that the Chinese Government had vigorously defended in past, many have suggested that this was a retaliation against the latest round of tariffs. While it’s only possible to speculate on whether this was indeed retaliation, there would be scores of evidence to suggest so. The positive current account balance which China maintains with the US means that its own tariffs are not as effectual as those implemented by the United States. However, by letting the Yuan weaken, this not only reduces the price of Chinese exports but also reduces the profit of American companies with operations in China.
Spillover: has a trade war become a currency war?
Having considered China’s actions as combative, the United States took the historic decision of labelling China as a currency manipulator; the first time it had done so since the Clinton administration in 1994. The President has also previously attacked the Federal Reserve for not choosing to cut interest rates, stating that this has led to an appreciation in the value of the dollar; making American organisations uncompetitive on the global market.
His rhetoric, combined with the greater chances of a global economic slowdown, suggests that a devaluation in the dollar could be forthcoming. A tough business environment would vastly increase the likelihood of intervention – be it quantitative easing, or lower interest rates – and this would result in the dollar losing value.
With both sides now flirting with the idea of a currency ‘race to the bottom’, this could develop into a very dangerous game of chicken.
With both sides now flirting with the idea of a currency ‘race to the bottom’, this could develop into a very dangerous game of chicken. While China has much to gain from a devaluation, it also has much to lose. Let the currency slide too far, and there is a great risk of capital flight. Similarly, as previously mentioned, given that the US retains a trade deficit of approximately $488 billion, it will be hard to let the dollar fall without impacting its own businesses.
The ultimate effect of this will be volatility in the currency markets, especially in the USDCNY pair, and for traders, this can create lots of opportunities.
Wider reactions
With such unpredictable market forces at play, currencies and commodities that are considered ‘safe havens’ such as the Japanese Yen, the Swiss Franc and Gold have seen rises, as traders look for ways to protect their earnings. As long as the market remains volatile, they will continue to be good prospects. However, with the Japanese economy also being very reliant upon exports, traders should be wary of potential intervention.
The conflict has also led to lower oil prices, as doubts have been expressed in the general economic climate. This has impacted commodity currencies such as the Canadian Dollar and Norwegian Krona. The Australian Dollar has been doubly impacted as, in addition to being relatively reliant on natural resource exports, its economy is also uniquely exposed to the Chinese market.
Given the present impasse, it’s becoming increasingly likely that the trade war will not cease for some time. With both sides willing to dig their heels in, it may take a governmental change for the situation to develop any further. However, in the meantime, there are steps that you can take to protect your earnings. Minimise the risk of loss by auditing your portfolio and making sure that you’re comfortable with its allocation. By doing so, you ensure that you continue to earn at your fullest potential.
Trump vs. China
Back in 1930, the US introduced the Smoot-Hawley Tariff Act, which raised their already high tariffs, triggering a currency war and, as economists argue, exacerbating the Great Depression. With President Donald Trump’s threat to put 10% tariffs on the remaining $300 billion of Chinese imports that aren’t subject to his existing levies, sending markets tumbling from Asia to Europe, the question on everyone’s lips is: Is history about to repeat itself?
In August, in a bid to hit back against Trump’s administration, Beijing allowed the Chinese yuan to plummet past the symbolically important $7 mark. Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
As protectionist actions escalate and US-China relations continue deteriorating, investors and markets have been growing increasingly concerned even though Trump has delayed the imposition of his new tariffs until December. A full-blown trade war wouldn’t be good news to anyone and could seriously weaken the global economy, as the IMF has warned, making the world “poorer and more dangerous place”. Both sides are expected to experience losses in economic welfare, while countries on the sidelines could experience collateral damage. Furthermore, if tariffs remain in place, losses in economic output would be permanent, as distorted price signals would prevent the specialisation that maximises global productivity. The one thing that’s certain, no matter how things pan out, is that there will be no winners in this war.
Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
Cyberattacks & data fraud
Millions, if not billions, of people’s data has been affected by numerous data breaches in the past couple of years, whilst cyberattacks on both public and private businesses and institutions are becoming a more and more frequent occurrence. With the deepening integration of digital technologies into every aspect of our lives and the dependency we have on them, cybercrime is one of the greatest threats to every company in the world.
Cyberattacks are rapidly increasing in size, sophistication and cost, as cybercrime and data breaches can trigger extensive losses. In 2016, Cybersecurity Ventures predicted that cybercrime will cost the world $6 trillion annually by 2021, up from $3 trillion in 2015. According to them, ”this represents the greatest transfer of economic wealth in history, risks the incentives for innovation and investment, and will be more profitable than the global trade of all major illegal drugs combined”.
Emerging Markets crisis
Since the early 1990s, emerging markets have been a key part of investors’ portfolios, as they have been offering strong returns and faster growth. However, global trade tensions, a stronger US dollar and rising interest rates have hit emerging markets hard. Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns. Emerging markets are the ones feeling the strain and financial panic has been gripping some of the world’s developing economies.
With political instability, external imbalances and poor policymaking which has led to full-blown currency crises in the two nations, Turkey and Argentina have been at the centre of an emerging market sell-off last year. But they are not the only emerging economies faced with a currency crisis – according to the EIU, some economies which are already in the danger zone and could suffer from the same currency volatility include Brazil, Mexico and South Africa.
Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns.
If the currency crises in Turkey and Argentina continue and develop into banking crises, analysts predict that investors could abandon emerging markets across the globe. “Market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect”, the EIU explains.
Climate crisis
In recent months, the media is constantly flooded with reports on the horrifying environmental risks that the climate crisis the Earth is in the midst of poses, but we’re also only starting to come to grips with the potential economic effects that may come with it.
Despite the significant degrees of uncertainty, results of numerous analyses and research vary widely. A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP. The Stern Review, presented to the British Government in 2006, suggests that this could happen because of climate-related costs such as dealing with increased extreme weather events and stresses to low-lying areas due to sea level rises. These could include the following scenarios:
- Decrease in agricultural areas crop yields due to hotter weather and draught.
- Rebuilding roads that have been destroyed by flooding caused by rising seas and more frequent hurricanes.
- Having to build more efficient power grids because the existing ones are not able to withstand extreme weather conditions.
Due to climate change, low-lying, flood-prone areas are currently at a high risk of becoming uninhabitable, or at least uninsurable. Numerous industries across numerous locations could cease to exist and the map of global agriculture is expected to shift. In an attempt to adapt, people might begin moving to areas which will be affected by a warmer climate in a more favourable way.
A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP.
All in all, the economic implications of the greatest environmental threat humanity has ever faced range from massive shifts in geography, demographics and technology – with each one affecting the other.
Brexit
Fears that the UK could be on the brink of its first recession in 10 years have been growing after figures showed a 0.2% contraction in the country’s economy between April and June 2019. A weakening global economy and high levels of uncertainty mean the UK’s economic activity was already lagging, but the potential of a no-deal Brexit and the general uncertainty surrounding the UK’s departure from the EU, running down on stock built up before the original 29th March departure date, falling foreign investment and car plant shutdowns have resulted in its GDP decreasing by 0.2% in Q2. This is the first fall in quarterly GDP the country has seen in six and a half years and as the new deadline (31st October) approaches, economists are concerned that it could lead to a second successive quarter of negative growth – which is the dictionary definition of recession.
And whilst the implications of Brexit are mainly expected to be felt in the country itself, the whole Brexit process displays the risks that can come from economic and political fragmentation, illustrating what awaits in an increasingly fractured global economy, e.g. less efficient economic interactions, complicated cross-border financial flows and less resilience and agility. As Mohamed El-Erian explains: “in this context, costly self-insurance will come to replace some of the current system’s pooled-insurance mechanisms. And it will be much harder to maintain global norms and standards, let alone pursue international policy harmonisation and coordination”. Additionally, he goes on to note that tax and regulatory arbitrage are likely to become more common, whilst economy policymaking could become a tool for addressing national security concerns.
“Lastly, there will also be a change in how countries seek to structure their economies”, El-Erian continues. “In the past, Britain and other countries prided themselves as “small open economies” that could leverage their domestic advantages through shrewd and efficient links with Europe and the rest of the world. But now, being a large and relatively closed economy might start to seem more attractive. And for countries that do not have that option – such as smaller economies in east Asia – tightly knit regional blocs might provide a serviceable alternative.”
Market Outlook
Mihir Kapadia, CEO and Founder of Sun Global Investments
When it comes to investment trends, every year appears to have a certain theme which dominates the markets and beyond throughout the course of those twelve months. 2017 was largely a stock market year, with global markets closing at record highs thanks to a booming global growth rate, loose tax and monetary policy, low volatility and ideal currency scenarios (for example, a weaker pound supporting inward investments). It was also a crazy year in the consumer segment with market momentum captivated with crypto assets, leading to established financial services firms to create special cryptocurrency desks to monitor and advise. Today, things are looking very differently.
Markets have since moved from optimism (led by stock markets) to a cautious tone (with an eye out for safe haven assets). This is largely due to the concerns over slowing global growth rates (especially from powerhouse economies like Germany and China), volatile oil markets and Kratom Powder For Sale induces significant market threats with the likes of Brexit and the trade wars. The rising dollar has also not helped much, with Emerging Market and oil importing economies suffering with current account deficits.
At the World Economic Forum’s annual meeting in Davos last month, the International Monetary Fund (IMF) has warned of the slowdown, blaming the developed world for much of the downgrade and Germany and Italy in particular. While the IMF does not foresee a recession, the risk of a sharper decline in global growth is certainly on the rise. However, this risk sentiment doesn’t factor in any of the global triggers – a no-deal Brexit leading to UK crashing out of the EU or a greater slowdown in China’s economic output.
While the IMF does not foresee a recession, the risk of a sharper decline in global growth is certainly on the rise.
Volatility expected
We have lowered earnings expectations globally due to more subdued revenue and margin assumptions. We believe investors will be confronted by increased volatility amid slower global economic growth, trade tensions and changing Federal Reserve policy. Our base case relies on the view that the US may enter a recession in 2020. As the market dropped 9% in December, the worst market return in any 4th Quarter post World War II, many risks are starting to be discounted by the market. We have reduced industrials, basic materials and financials due to heightened risks.
There are a number of factors that are driving this view, but it is important to note that upsides to the risks do exist:
- The Fed: The Fed’s slow pace of hiking interest rates is meant to be just enough to keep wage inflation from accelerating, but not so much that it crushes business and consumer spending. It’s a difficult balancing act.
- Fiscal stimulus: The tightening of fiscal conditions has already created a slowdown that only time and lower rates will heal. The impact from the US Government’s lower tax rates and higher spend will end when 2019 does.
- Trade and China: The lack of clarity on trade has created an ‘uncertainty tax’, forcing companies to seek alternative means of procurement, adding to inefficiencies and holding back some investment decisions. China is trying to stimulate its consumer sector, but the country is already weighed down by high debt and defaults, and it has limited ability to create demand at present.
- European politics: Brexit negotiations and Italy’s budget situation have added to the political fog affecting investor confidence.
In uncertain markets like these, we should look to do three things: reduce risk, focus on high quality and stay alert for opportunities due to dislocations.
So what do you do?
We have dialled down risk in 2018 and will likely continue to do so in 2019 as we expect global growth to slow. However, the expected volatility could cause dislocations that are not fundamentally driven, resulting in tactical opportunities to consider.
The best piece of advice to be relayed is: “Don’t run for the hills”. In uncertain markets like these, we should look to do three things: reduce risk, focus on high quality and stay alert for opportunities due to dislocations.
It would be ideal to shift allocations from cyclical to secular exposures, especially away from industrials, basic materials, semiconductors and financials due to heightened risks. It would also be ideal to focus on high-quality companies with secular growth opportunities that can generate dividends as well as capital appreciation.
Two sectors stand out as both strategically and tactically attractive - aging demographics and rapidly improving technology are paving the way for robust growth potential in healthcare. Accelerating growth in data, and the need to transmit, protect, and analyse it ever more quickly, make certain areas in technology an attractive secular opportunity as well. Where possible, our advice to investors is to maintain a tactical portion of their risk assets, because volatility may give them the opportunity to find mispriced sectors, themes and individual securities.
Still, in this climate, the bottom line is that you should be increasingly mindful of risk in your portfolio so that you can reach your long-term investment goals. 
Eastern Economies vs. Western Economies: Countries, Sectors and Projects to Watch
Dr. Johnny Hon, Founder & Chairman, The Global Group
The global economic narrative in 2018 was characterised by growing tensions between the US and China, the world’s two largest economies. The US imposed 10% to 25% tariffs on Chinese goods, equivalent to more than $250bn, and China responded in kind.
This had a seismic effect on global economic growth which, according to the IMF, is expected to fall to 3.5% this year. It represents a decline from both the 3.7% rate in 2018 and the initial 3.7% rate forecast for 2019 back in October.
Although relationships between Eastern and Western economies are currently strained, suggestions that a global recession is on the horizon are exaggerated. China’s economy still experienced high growth in 2018.
However, it is clear that trade wars have no winners. The rise of protectionism in the West is creating more insular economies and we are at a time when increased efforts are needed for mutual understanding. There are still enormous opportunities across the globe: India is among several global economies showing sustained high growth, and innovations in emerging markets such as clean energy or payments systems continue to gather pace. Investors who are savvy and businesses with true entrepreneurial flare can triumph at a time when others may be stagnating.
The rise of protectionism in the West is creating more insular economies and we are at a time when increased efforts are needed for mutual understanding.
Here are the exciting countries, sectors and projects to look out for in 2019:
Countries
Recent trends in foreign direct investment (FDI) reveal a growing trend to support developing economies. In the first half of 2018, the share of global FDI to developing countries increased to a record 66%. In fact, half of the top 10 economies to receive FDI were developing countries.
This trend will accelerate in 2019 - the slow economic global growth, and subsequent currency depreciation means the potential yield on emerging market bonds is set to rise dramatically this year. More and more investors are realising the great potential of these developing economies, where the risk versus reward now looks much more attractive than it did in recent years. Asia in particular has benefited from a 2% rise in global FDI, making it the largest recipient region of FDI in the world.
India and China are both huge markets with a combined population of over 2.7 billion, and both feature in the world’s top 20 fastest growing economies. However, the sheer quantity of people doesn’t necessarily mean the countries are an easy target for investment. There are plenty of opportunities in both India and China, but it takes a shrewd investor with a good local business partner to beat the competition and find the right venture.
Other Asian economies to invest in can be found in Southeast Asia, including Vietnam, Singapore, Indonesia and Cambodia. In a recent survey by PwC, CEOs surveyed across the Asia-Pacific region and Greater China named Vietnam as the country most likely to produce the best investment returns – above China.
Investors who are savvy and businesses with true entrepreneurial flare can triumph at a time when others may be stagnating.
Sectors
One sector in particular which remained resilient to the trade wars throughout 2018 was technology. By mid-July, flows into tech funds had already exceeded $20bn, dwarfing the previous record amount of $18.3bn raised in 2017. This was a result of the increased accessibility and popularity of technologies in business.
In the area of Artificial Intelligence (AI) for example, a Deloitte survey of US executives found that 58% had implemented six or more strains of the technology—up from 32% in 2017. This trend is likely to continue in 2019, as more businesses realise AI’s potential to reduce costs, increase business agility and support innovation.
Another sector which saw significant investment last year was pharmaceuticals and BioTech. By October, these had already reached a record high of $14 billion of VC investment in the US alone. One particular area to watch carefully, is the rising demand for products containing Cannabidiol (CBD), a natural chemical component of cannabis and hemp. Considering CBD didn't exist as a product category five years ago, its growth is remarkable. The market is expected to reach $1.91 billion by 2022 as its uses extend across a wide variety of products including oils, lotions, soaps, and beauty goods.
Projects
At a time of rising trade tensions and increased uncertainty, cross-border initiatives are helping to restore and maintain partnerships and reassure global economies. China's Belt and Road Initiative is a great example of how international communities can be brought closer together. From Southeast Asia to Eastern Europe and Africa, the multi-billion dollar network of overland corridors and maritime shipping lanes will include 71 countries once completed, accounting for half the world’s population and a quarter of the world's GDP. It is widely considered to be one of the greatest investment opportunities in decades.
The Polar Silk Road is another international trade initiative currently being explored. The Arctic offers the possibility of a strategic commercial route between Northeast Asia and Northern Europe. This would allow a vast amount of goods to flow between East and West more speedily and more efficiently than ever before. This new route would increase trading options and would make considerable improvements on journey times – cutting 12 days off traditional routes via the Indian Ocean and Suez Canal. It could also save 300 tonnes of fuel, reducing retail costs for both continents.
Since founding The Global Group - a venture capital, angel investment and strategic consultancy firm - over two decades ago, I have seen the global economic landscape change immeasurably. The company is built around the motto ‘bridging the frontiers’, and now more than ever, I believe in the importance of strong cross-border relationships. Rather than continuing to promote notions of protectionism, we must instead explore new ways of achieving mutual benefit and foster a spirit of collaboration.
Brexit, Trade Wars and the Global Economy
Robert Vaudry, Chief Investment Officer at Wesleyan
If there’s one thing that financial markets do not like, it is uncertainty - which is something that we’ve faced in abundance over the last couple of years.
The UK’s decision to leave the European Union and President Trump’s 2016 election in the US, sent shockwaves through markets, and the two years that followed saw increased volatility across asset classes. This year looks set to be fairly unpredictable too, but in my view there are likely to be three main stabilising factors. Firstly, I expect that the UK will secure some form of a Brexit deal with the EU – whatever that may look like – which will give a confidence boost to investors looking to the UK. Secondly, the trade war between America and China should also come to an end with a mutually acceptable agreement that further removes widespread market uncertainty. Thirdly, the ambiguity surrounding the US interest rate policy will abate.
The Brexit bounce
A big question mark remains over whether or not the UK is able to agree a deal with the EU ahead of the 29th March exit deadline. However, with most MPs advocating some sort of deal, it’s highly unlikely that the UK will leave without a formal agreement in place. So, what does this mean? Well, at the moment, it looks more likely than ever that the 29th March deadline will need to be extended, unless some quick cross-party progress is made in Parliament on amendments to Theresa May’s proposed deal. While an extension would require the agreement of all EU member states, this isn’t impossible, especially given that a deal is in the EU’s best interests as the country’s closest trading partner.
The ambiguity surrounding the US interest rate policy will abate.
The result of any form of deal will be a widespread relief that should be immediately visible in the global markets. It will bring greater certainty to investors, even if the specific details of a future trading relationship between the UK and EU still need to be resolved. Recently, it was estimated that Brexit uncertainty has so far resulted in up to $1trn of assets being shifted out of the UK, and I personally don’t see this as an exaggeration. Financial markets have been cautiously factoring Brexit in since the referendum vote in 2016 and, if we can begin to see a light at the end of the Brexit tunnel, it is likely that some of these vast outflows will be reinvested back into the UK. We can also expect to see a rise in confidence among UK-based businesses and consumers, at a time when the unemployment rate in the UK is the lowest it has been since the mid-1970s.
All of these outcomes would help lead to a more buoyant UK economy and the likelihood that UK equities could outperform other equities – and asset classes – in 2019.
Trade wars – a deal on the table?
Looking further afield, the trade tensions that were increasingly evident between the US and China last year could also be defused. The last time that China agreed to a trade deal, it was in a very different economic position – very much an emerging economy, with the developed world readily importing vast quantities of textiles, electronic and manufacturing goods. However, given China’s current position as one of the world’s largest economies, it has drawn criticism from many quarters regarding unfair restrictions placed on foreign companies and alleged transfers of intellectual property.
Either way, global financial markets are eager for Washington and Beijing to reach a mutually agreeable trade deal to help stimulate the growth rates of the world’s two largest economies.
It was estimated that Brexit uncertainty has so far resulted in up to $1trn of assets being shifted out of the UK.
Be kind to the FED
2018 saw an unprecedented spat between the US President and his Head of the Federal Reserve. What began as verbal rhetoric quickly escalated into a full-frontal assault on Jerome Powell, and the markets were unimpressed. With the added uncertainty about the impact of a Democrat-led US House of Representatives, we headed into a perfect storm, and equity markets in particular rolled over in December. Ironically, this reaction, coupled with a data showing that both the US and the global economy are generally slowing down – albeit from a relatively high level – has resulted in a downward revision of any US interest rate rises in 2019. The possibility of up to four US interest rate rises of 25bps each during 2019 is now unlikely – I expect that there will only be one or two rises of the same level.
Transitioning away from uncertainty
So, in summary, 2019 is set to be another big year for investors.
The recent protracted period of uncertainty has hit the markets hard, but we’ll have a clearer idea of what lies ahead in the coming months, particularly regarding Brexit and hopefully on the US and China’s trade relations too. If so, this greater certainty should pay dividends for investors in the years to come. UK equities are expected to strongly bounce back in 2019, which is a view that goes against the current consensus call.
There is a common misunderstanding about how tax brackets work in the US, and it’s causing us to have uninformed debates about taxes. In this video, Vox explains this misconception, where we’re going wrong, and how it actually works.
There have been a number of high profile stock market crashes over the years often resulting in huge losses for both individual investors and businesses. Although there is no specific number that determines when a stock market crashes, a crash occurs when there is a significant decline in the share prices. Usually it becomes a crash when one of the major stock market indexes loses over 10% of its value. Most of the major stock market crashes are preceded by a long bull market and they often result in panic-selling by investors attempted to liquidate their stocks to avoid further losses.
The stock market fluctuates daily, but on some occasions the crashes can be seismic and cause long lasting effects. Here we take a look at 10 of the biggest stock market crashes in history.
1. The 1673 Tulip Craze
In 1593 tulips were first brought to The Netherlands from Turkey and quickly became widely sought after. After some time, tulips contracted a non-fatal tulip-specific mosaic virus, known as the ‘Tulip breaking virus’, which started giving the petals multicolour effects of flame-like streaks. The colour patterns came in a wide variety, which made the already popular flower even more exotic and unique. Tulips, which were already selling at a premium, grew more and more in popularity and attracted more and more bulb buyers. Prices, especially for bulbs with the virus, rose steadily and soon Dutch people began trading their land, life savings and any other assets they could liquidate to get their hands on more tulip bulbs. The craze got to a stage where the originally overpriced tulips saw a 20 fold increase in value in one month.
The 1673 Tulip Mania is now known as the first recorded economic bubble. And as it goes in many speculative bubbles, some people decided to sell and crystallise their profits which resulted in a domino effect of lower and lower prices. Everyone was trying to sell their bulbs, but no one was interested in buying them anymore. The prices were progressively plummeting and everyone was selling despite the losses. The Dutch Government tried to step in and offered to honour contracts at 10% of the face value, which only resulted in the market diving even lower. No one emerged undamaged from the crash and even the people who got out early were impacted by the depression that followed the Tulip Craze.
Tulip Mania; Image credits: Krause & Johansen
2. The South Sea Bubble 1711
Another speculation-fuelled fever occurred in Europe a few decades after the Tulip Mania – this time in the British Empire. The bubble centred around the fortunes of the South Sea Company, whose purpose was to supply 4,800 slaves per year for 30 years to the Spanish plantations in Central and Southern America. Britain had secured the rights to provide Spanish America with slaves at the Treaty of Utrecht in 1713 and the South Sea Company paid the British Government £9,500,000 for the contract, assuming that it could open the door to trading with South America and that the profits from slave trading would be huge.
This was met with excitement from investors and resulted in an impressive boom in South Sea stock – the company’s shares rose from 128 1/2 in January 1720 to over 1,000 in August. However, by September the market had crumbled and by December shares were down to 124. And the reason behind the bubble burst? Speculators paid inflated prices for the stock, which eventually led to South Sea’s dramatic collapse. The economy was damaged and a large number of investors were completely ruined, but a complete crash was avoided due to the British Empire’s prominent economic position and the government’s successful attempts to stabilise the financial industry.
Commentary on the financial disaster of the "South Sea Bubble"
3. The Stock Exchange Crash of 1873
The Vienna Stock Exchange Crash of May 1873, triggered by uncontrolled speculation, caused a massive fall in the value of shares and panic selling.
The National Bank was not able to step in and provide support because it didn’t have enough reserves available. The crash put an end to economic growth in the Monarchy, affected the wealth of bankers and some members of the imperial court and confidants of the Emperor, as well as the imperial family itself. It also led to a drop in the number of the Vienna World Exhibition visitors – a large world exposition that was held between May and October 1873 in the Austria-Hungarian capital.
Later on, the crash gradually affected the whole of Europe.
Black Friday on 9th May 1873 at the Vienna Stock Exchange
4. The Wall Street Crash of 1929
On 29th October 1929, now known as Black Tuesday, share prices on the New York Stock Exchange collapsed - an event that was not the sole cause of the Great Depression in the 1930s, but something that definitely contributed to it, accelerating the global economic collapse that followed after the historic day.
During the 1920s, The US stock market saw rapid expansion, which reached its peak in August 1929 after a lot of speculation. By that time, production had declined and unemployment had risen, which had left stocks in great excess of their real value. On top of this, wages were low, agriculture was struggling and there was proliferation of debt, as well as an excess of large bank loans that couldn’t be liquidated.
In September and early October, stock prices began to slowly drop. On 21st October panic selling began and culminated on 24th, 28th and the fatal 29th October, when stock prices fully collapsed and a record of 16,410,030 shares were traded on NYSE in one day. Financial giants such as William C. Durant and members of the Rockefeller family attempted to stabilise the market by buying large quantities of stocks to demonstrate their confidence in the market, but this didn’t stop the rapid decrease in prices. Because the stock tickers couldn’t handle the mammoth volume of trading, they didn’t stop running until about 7:45 pm. During the day, the market had lost $14 billion. The crash remains to this day the biggest and most significant crash in financial market history, signalling the start of the 12-year Great Depression that affected the Western world.
17th July 2014 Washington DC, USA - A detail from one of the statue groups at the Franklin Delano Roosevelt Memorial that portrays the depth of the Great Depression
5. Black Monday 1987
On 19th October 1987, stock markets around the world suffered one of their worst days in history, known today as Black Monday. Following a long-running rally, the crash began in Asia, intensified in London and culminated with the Dow Jones Industrial Average down a 22.6% for the day – the worst day in the Dow’ history, in percentage terms. Black Monday is remembered as the first crash of the modern financial system because it was exacerbated by new-fangled computerised trading.
The theories behind the reasons for the crash vary from a slowdown in the US economy, a drop in oil prices and escalating tensions between the US and Iran.
By the end of the month, stock markets had dropped in Hong Kong (45.5%), Australia (41.8%), Spain (31%), the United Kingdom (26.45%), the United States (22.68%) and Canada (22.5%). Unlike the 1929 market crash however, Black Monday didn’t result in an economic recession.
Following a long-running rally, the crash began in Asia, intensified in London and culminated with the Dow Jones Industrial Average down a 22.6% for the day – the worst day in the Dow’ history, in percentage terms.
6. The 1998 Asian Crash
The Asian crisis of 1998 hit a number of emerging economies in Asia, but also countries such as Russia and Brazil, having an overall impact on the global economy. The Asian crisis began in Thailand in 1997 when foreign investors lost confidence and were concerned that the country’s debt was increasing too rapidly.
The crisis in Thailand gradually spread to other countries in Asia, with Indonesia, South Korea, Hong Kong, Laos, Malaysia and the Philippines being affected the most. The loss of confidence affected those countries’ currencies – in the first six months, the Indonesian rupiah’s value was down by 80%, the Thai baht – by over 50%, the South Korean won – by nearly 50% and the Malaysian ringgit – by 45%. In the 12 months of the crisis, the economies that were most affected saw a drop in capital inflows of more than $100 billion.
7. The Dotcom Bubble Burst
In the second half of the 1990s, the commercialisation of the Internet excited and inspired many business ideas and hopes for the future of online commerce. More and more internet-based companies (‘dotcoms’) were launched and investors assumed that every company that operates online is going to one day become very profitable. Which unfortunately wasn’t the case – even businesses that were successful were extremely overvalued. As long as a company had the ‘.com’ suffix after its name, venture capitalists would recklessly invest in it, fully failing to consider traditional fundamentals. The bubble that formed was fuelled by overconfidence in the market, speculation, cheap money and easy capital.
On 10th March 2000, the NASDAQ index peaked at 5,048.62. Despite the market’s peak however, a few big high-tech companies, such as Dell and Cisco, placed huge sell orders on their stocks, which triggered panic selling among investors. The stock market lost 10% of its value, investment capital began to melt away, and many dotcom companies went out of business in the next few weeks. Within a few months, even internet companies that had reached market capitalisation in the hundreds of millions of dollars became worthless. By 2002, the Dotcom crash cost investors a whopping $5 trillion.
As long as a company had the ‘.com’ suffix after its name, venture capitalists would recklessly invest in it, fully failing to consider traditional fundamentals.
8. The 2008 Financial Crisis
This market crash needs no introduction - we all must remember how ten years ago Wall Street banks’ high-risk trading practices nearly resulted in a collapse of the US economy. Considered to be the worst economic disaster since the Great Depression, the 2008 global financial crisis was fed by deregulation in the financial industry which allowed banks to engage in hedge fund trading with derivatives. To support the profitable sale of these derivatives, banks then demanded more mortgages and created interest-only loans that subprime borrowers were able to afford. As the interest rates on these new mortgages reset, the Federal Reserve upped the fed funds rates. Supply outplaced demand and housing prices began to decrease, which made things difficult for homeowners who couldn’t meet their mortgage loan obligations, but also couldn’t sell their house. The derivatives plummeted in value and banks stopped lending to each other.
Lehman Brothers filed for bankruptcy on 15th September 2008. Merrill Lynch, AIG, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo Real Estate, and Alliance & Leicester which were all expected to follow however were saved by bailouts paid by national governments. Despite this, stock markets across the globe were falling.
And we all remember what followed… The bursting of the US housing bubble and Lehman Brothers’ collapse nearly crushed the world’s financial system and resulted in a damaged house market, business failures and a wounded global economy.
Don’t miss our articles on the impact of the Lehman Brothers’ collapse:
https://www.finance-monthly.com/2018/09/lehman-brothers-lessons-have-we-learned-anything/
9. The Flash Crash 2010
On 6th May 2010, the US stock market underwent a crash that lasted approximately 36 minutes, but managed to wipe billions of dollars off the share prices of big US companies. The decrease occurred at a speed never seen before, but ended up having a very minimal impact on the American economy.
With the opening of the market on 6th May 2010, there were general market concerns related to the Greek debt crisis and the UK general election. This led to the beginning of the flash crash at 2:30pm - Dow Jones had declined by more than 300 points, while the S&P 500 and NASDAQ composite were affected too. In the next five minutes, Dow Jones had dropped a further 600 points, reaching a loss of nearly 1000 points for the day. By 3:07pm things were looking better and the market had regained much of the decrease and only closed at 3% lower than it opened. The potential reasons behind the crash vary from ‘fat-fingered’ trading (a keyboard error in technical trading) to an illegal cyberattack. However, a joint report by the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) stated that the extreme price movement could have been caused by the combination of prevailing market conditions and the large automated sell order.
As some securities lost 99% of their value in a few minutes, this was one of the most impressive stock market crashes in modern history.
10. 2015–16 Chinese Market Crash
After a few years of being viewed in an increasingly favourable light, China’s Stock Market burst on 12th June 2015 and fell again on 27th July and 24th August 2015. Despite the Chinese Government attempt to stabilise the market, additional drops occurred on 4th and 7th January and 14th June 2016. Chaotic panic selling in July 2015 wiped more than $3 trillion off the value of mainland shares in just three weeks, as fear of complete market seizure and systemic financial risks grew across the country.
Surprise devaluation of the Chinese yuan on 11th August and a weakening outlook for Chinese growth are believed to have been the causes for the crash that also put pressure on other emerging economies.
Sources: https://www.investopedia.com/features/crashes/crashes2.asp https://www.britannica.com/event/South-Sea-Bubble http://www.habsburger.net/en/chapter/crisis-highest-circles-economic-boom-and-stock-exchange-crash https://www.citeco.fr/10000-years-history-economics/industrial-revolutions/crash-of-the-vienna-stock-exchange-in-austria https://www.history.com/topics/great-depression/1929-stock-market-crash https://www.thirteen.org/wnet/newyork/ https://www.britannica.com/event/Asian-financial-crisis https://qz.com/1106440/black-monday-1987-the-stock-market-crash-that-was-so-bad-hospital-admissions-spiked/ https://www.investopedia.com/terms/d/dotcom-bubble.asp https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176 https://www.thestreet.com/markets/history-of-stock-market-crashes-14702941 https://www.sec.gov/news/studies/2010/marketevents-report.pdf https://www.economist.com/news/2015/08/24/the-causes-and-consequences-of-chinas-market-crash
With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.
Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.
As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.
Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.
Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.
Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”
The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.
If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.
In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.
Austin Newkirk began his insurance career at a local agency in his hometown of Toccoa, GA and later on transitioned to Country Financial for an expansion of opportunities. Currently a sales leader for the firm’s local office in Toccoa, his role involves finding new ways to market Country Financial’s products and recruiting new businesses and individuals. Below Austin tells us about his passion for insurance and how this passion changed his life!
What are the typical insurance matters that you assist clients with?
Each day I assist our customers with typical insurance matters such as servicing current policies and making sure that they are taken care of properly. I process payments daily, work on claims and make any policy changes that a client may request - these are just a few of the many things I do for my customers.
What drew you to this field?
Insurance was not my first choice as a career. I am an extrovert and I love to socialise. As I grew older and began college, I started thinking about different career paths that interested me. At that time I had no idea what I wanted to do. While in college, I served as a parts sales manager at AutoZone. I loved the job and the socialising, but there was no opportunity for advancement within that company. I started reading online and the idea about a career in insurance hit me like lightening! I love the customer service side of this job and being able to help people with something that truly makes a difference in their lives is a phenomenal feeling.
What are some of the complexities of working within insurance?
Insurance is very complex and helping people understand it can be just as challenging. When working within insurance, there are so many different aspects to focus upon, but at the same time, so many resources to help you learn. Insurance is constantly changing and there is always something new to learn.
What are the challenges that you’ve been facing recently in relation to changes in what customers expect in terms of insurance products and services?
In the insurance industry, one challenge you will always face in relation to changes in what customers expect are rates – they are constantly fluctuating. It is a battle that all agencies fight. It is especially difficult when a long-term customer with a clean record comes in and we have to tell them that the state has raised the rates. At this point, we, as professionals, have to show these customers value in what we do to keep their business.
Technology and systems are always changing and this can cause customers to be uneasy toward any change - especially when trying to show customers new products and services. Sometimes change must happen due to ever-changing factors in the insurance business and customers’ lives. With these changes, we must prepare to assist our customers with any new updates that are happening frequently. Programs are added and removed, making everything change which, in turn, can upset our customers and sometimes, the agent too. Due to mandated insurance laws, every company and its agents should always be prepared to adapt to new changes in the insurance industry.
What do you hope to accomplish in the future?
Working in insurance has changed my life. My goal is to open my own office in just a few short years and run a successful insurance business of my own. I’m going to continue to love the career path I have chosen and continue to help service my clients to the best of my abilities.
I encourage any person who’s not sure what career path to take to look into the insurance industry. It is a sector that will always be around and there is always opportunity for advancement. The satisfaction of helping a person identify their needs and providing them with a solutions is very satisfying and it makes me feel like I have helped someone in need.
