Weekend Reads for Global Investors: Who Will Revive Growth?

The Chinese Lunar New Year holidays this week have been anything but fun — for world financial markets, at least.

This isn’t a complete surprise though. Global equities have been stirring the pot for some time now. January was difficult as global stock indices fell to uncharted negative territory for the month. This week, Japanese 10-year government bonds entered the record books when, for the first time in history, yields touched the sub-zero zone. The pain experienced by portfolio managers last year may turn out to be a happy memory.

Up until now, identifying the darkest worry zones — China, oil, a potential recession — in financial markets has not been a major bone of contention. Take China. Many have opined on the difficulties there. Some experts say that the significant downturn in Chinese equities has little direct impact since stock market financing in China represents just 5% of real economy financing flows there. China’s economy has been one of the biggest drivers of world growth for some time. Are markets worried about the lack of growth support from China or about the lack of information?

The dramatic decline in oil prices has been perceived as a manageable hiccup. Lower oil prices are benefiting economic growth in countries such as India. A sustained decline in oil prices is expected to bring about one of the largest transfers of wealth in history. Interestingly, the significant losses that oil-exporting nations have experienced have yet to elicit the sort of responses one would expect of an urgent crisis. Among their strategic measures thus far, they have resorted to trimming generous subsidies, diversifying away from oil, and keeping oil prices low in order to retain market share, for example.

So perhaps the most pressing issue is about a recession that bond markets are reflecting. Is there a narrative that connects the risks across all the different markets. What is it that is pushing financial markets toward despair?

An internet-driven information revolution defined the economic boom of the late 1990s, and financial engineering coupled with housing prices led to the booms and busts of the 2000s. Will the current cycle be about China or real transformative technological innovations that can have a lasting and beneficial influence on both markets and economic vitality in general?

Or is it still about taper tantrums and dimly understood monetary policy choices, from quantitative easing (QE) to zero interest rate and negative interest rate policies (ZIRP, NIRP), that central banks have adopted (not so successfully) to revive growth? The total assets of the leading central banks have increased five fold, and the monetization of these assets could be forthcoming.

Something else to worry about: Will the lack of growth and ongoing financial market instability express itself in the political arena?

Understanding what the experts believe is an old and useful balm for soothing troubled minds. Hopefully the articles below will help in that regard. These selections span the globe and cover a wide variety of subjects, financial markets among them. So happy reading and have a good weekend!

Markets

• Nassim Taleb and Gregory Treverton highlight the characteristics of fragile states in their comprehensive “Calm Before the Storm.” “Dictatorships that do appear volatile face a larger risk of chaos,” they write. (Foreign Affairs)
• Joseph Stiglitz and Hamid Rashid ask, “What’s Holding Back the World Economy?” and wonder whether monetary policy has delivered anything at all. (The Guardian)
• Global markets and individual economies are increasingly “addled” and “distorted,” according to Bill Gross. Ineffective monetary policy, high government debt to GDP ratios, oil price-fueled bankruptcies, and China are among the key worries from in his latest monthly investment outlook. (Janus Capital Group)
• Are bond markets auguring a period of prolonged economic weakness? (The New York Times)
• Central bank stimulus policies have run their course and policy makers now need to dial them back to prevent dangerous bubbles, according to Reserve Bank of India governor Raghuram Rajan, who expressed his worries at Davos last month: “We don’t really know what the fundamental value of an asset is.” (Wall Street Journal)

Investing

• Eugene Fama and Cliff Asness on the success of momentum investing. (AQR Capital Management)
• Are the rich better investors? (Bloomberg View)
• What is risk parity strategy? (Bridgewater Daily Observations)
• The Economist on negative yields. (Economist)
• The risks in smart beta investing. (Financial Times)
• Indexes have their own shortcomings: What are the downsides of passive investing? (Livemint)

India

• Are e-commerce companies in a bubble? (Business Standard)
• Tried and tested tools to govern India better. (Economic Times)
• Three macro resets: Will the government deliver? (Livemint)
• Start-ups have received a big push from the government. (Livemint)
• Despite 54% expansion in GDP since 2005, job growth in India has been tepid. (The Times of India)

Lighter Reading

• Images of Lunar New Year celebrations from across the globe. (ABC News)
• LIGO hears gravitational waves Einstein predicted (BBC)
• Human brains weigh about 1,400 grams — but the brain’s volume can change after therapy. (PsyPost)
• Psychologists have developed a potential treatment to defeat phobias. (PsyPost)
• “The Secret to Keeping a Family Business Intact across Generations” (Livemint)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/JLGutierrez