Is this the most important meeting of the year?
With The Trading Point (and Trading Point Pro), our focus is largely on the UK markets but, to paraphrase the English Jacobean poet, John Donne:
“No (man) market is an island, entire of itself…”
What Donne was getting at here, was that none us of live completely in isolation and that we are all part of some larger whole.
If that was true of Jacobean life, it is certainly true for today’s connected society…
For better or worse, globalisation has brought us all closer together and social media and the communications revolution (smart phones, broadband, 4G networks) mean we are rarely unconnected.
The same is true of the markets, which have become icons of globalisation.
Just consider the makeup of the FTSE 100…
6% of the market capitalisation of this index is made up of miners who may be listed and perhaps headquartered here in London, but who have few, if any, actual operations here.
Instead they are scattered around the globe in Africa, South America, Australia and many other countries.
Nor is this trend confined to raw materials…
HSBC – usually considered the UK’s largest listed company – earns the vast bulk of its revenues overseas, principally in Asia. Its UK banking arm is almost a bolt-on to the rest of the group’s activities.
Royal Dutch Shell and Unilever are global businesses too, with an Anglo-Dutch heritage.
And pharmaceutical giant, Glaxosmithkline, has a UK heritage but operates in 150 countries, with 87 production facilities spread across the globe.
The UK is perhaps an extreme example of this trend, but most blue chip equity indices will contain significant global elements within their constituents.
Against this background then, we would expect to find interconnectedness amongst the world’s markets and we do.
The lifeblood of this pan-global creature is, of course, money, or to be more precise: international flows of capital that move around the globe looking a new home – for which we should read as the next big thing.
Capital has always tried to find the best returns throughout history and many fortunes, both metaphoric and real, have been made and lost in its pursuit.
But over the last few decades many barriers to trade and the flow of money have been removed. Businesses large and small have been encouraged to seek out new markets abroad and to invest directly into these local economies.
“Made in China” is now a ubiquitous label on many of the goods we buy and consume. The internet has become the shop window for the world and complex chains of logistics have sprung up to fulfil our every desire.
For example, a freight train now runs directly between Essex and China. It’s a 7500 mile, 15 day journey that traverses two continents. No surprise then that this undertaking has been likened to the ancient silk road, along which caravans of traders travelled during the middle ages.
China has dispatched more than 1700 freight trains to various destinations across Europe in the last year alone.
This is one reason why the rise of populism in Europe and the USA had worried the markets, because in their eyes populist politics goes hand in hand with protectionism and the re-erection of trade barriers.
Of course this has not yet materialised, though it’s a clear concern that runs right through impending Brexit negotiations and the forthcoming general election.
Investors can’t get enough of these…
In terms of the world’s stock markets, one of the biggest if not the biggest boon to interconnectedness has been the emergence of ETFs or Exchange Traded Funds.
ETFS, which are generally passive or tracking investments, are created to invest in a specific country’s index, sector or strategy, or a combination of these and other factors.
ETFs often mirror an underlying index or strategy and create a portfolio of investments to replicate or track price movements or the performance of the underlying.
Other investments and funds have tried to do this in the past, but the big difference with ETFs is that these individual funds are themselves traded – just like stocks – on exchanges around the globe, unlike mutual funds and other investment products that went before them, which often had weekly liquidity at best.
Now to put the growth in ETFs in context we need to look at some figures…
The chart below, courtesy of the Financial Times, shows the inflows (net new money), in US dollar, into ETFS.
After a dip in activity in 2015/16, money has roared back into these instruments with a vengeance.
The chart, created in March, shows us that more US $120 billion dollars had been put into ETFS by that stage of 2017.
But by the end of April that figure has reached US $170 billion.
US financial news network, CNBC, calculated that if inflows continued at that pace we would end the year with $500 billion having flowed into ETFs.
The sources of the capital are varied. Flows come from private investors, institutions and sovereign wealth funds, amongst others.
Many are attracted to the low fees associated with investing in ETFS. Others are drawn to the passive nature of the product, i.e. tracking investments, rather than trying to out-perform them. That means you will do no worse than the benchmark for your investment.
But some money, in fact rather a lot of money, has come into ETFs for a very different reason…
The Bank of Japan has been buying, or putting money into, ETFs for the last seven years, as part of its program of QE or Quantitative Easing.
Under which, the central bank prints money with which to buy assets in the hopes of stimulating the local financial markets and in turn the real economy.
According to data from Bloomberg, the BOJ now owns around 67% of the Japanese ETF market. Such has been the scale of these purchases; the BOJ is now amongst the largest owners of Japanese equities.
Bloomberg reported that the BOJ was a top five shareholder in 81 of the Nikkei 225 companies and in some cases was even the number one shareholder.
I find it highly ironic that a passive product, which is merely meant to reflect the natural ebb and flow of the investments it tracks, should be part of an attempt to actively stimulate an economy (or should that read inflate the stock market?).
To my mind this experiment is unlikely to end well.