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Global Market Dynamics  Set against something of a mixed economic and geopo-  to €21 trillion, an increase of some 7% over the six month
                                                 period to 31 December 2019. Over the same period, the
      litical backdrop, and as discussed earlier in this review,
      securities lending revenues in 2019 reflected these same   DJIA increased in value by an estimated 6.8%, suggesting
      uncertainties. It is worth noting however, that although   most if not all of the increase in the value of securities
      2019 was a year which failed to compare to 2018, in many   being made available for lending, related directly to price
      ways it still delivered the second highest annual revenues   inflation rather than new assets flowing into programmes.
      to the industry in the last decade. One of the bright spots   This view tends to be supported by government bonds
      within the market, notably in North America, was the per-  within lending programmes, which remained relatively
      formance of Initial Public Offerings (IPOs). The primary   flat over the period, increasing by only 3%.
      objective of an IPO is to raise new capital to facilitate the
      growth of a company. There are many factors that deter-  With asset price inflation pushing equity values higher
 In many ways, 2019 was something of an investment   are preferring to leave that money at the Fed rather than   mine the price of an IPO, including investor demand and   and a broadly flat government bond picture, the ISLA
 conundrum, as investors shrugged off trade tensions   invest liquidity in the repo markets.   the company’s growth prospects. If an IPO is priced too   Securities Lending Aggregate (see Fig 1) posted a marginal
 and warnings of a global slow down by pushing markets   high, it may be seen as irrational by some investors who   3% increase, rising to €2.3 trillion as at the end of the year.
 towards their best year since the end of the financial cri-  As liquidity becomes more prominent in the context of   may seek to borrow shares immediately in the second-
 sis a decade ago.   systemic risk, this raises important questions for secu-  ary market, in anticipation of the price settling at a lower   In previous reports, we have talked about how the securi-
 rities lending. Albeit for subtly different reasons, we can   level. In effect, the securities lending market can act as   ties lending markets trade into the regulatory constraints
 The MSCI World Index, which tracks stocks across the   see clearly how an absence of liquidity can fundamentally   either a break on excessive valuations or dampen down   of year end. With many prudentially regulated institutions
 developed world jumped by almost 24% during 2019, its   undermine the operation of the government bond repo   prices and trading levels that do not reflect the under-  moving to daily or average balance sheet reporting, the
 strongest performance since 2009. A surge in US tech-  markets. Securities markets are in many ways no differ-  lying fundamentals of the company. As Europe’s CMU   stresses seen ahead of the year and other key regulatory
 nology giants combined with a strong recovery in Asian   ent. The provision of trading liquidity to market mak-  project continues to evolve, it is important that the role   reporting dates, appear to be lessening.
 stocks and the Eurozone, drove the rally.   ers through access to securities lending, allows them to   that securities lending plays around IPOs and secondary
 actively make two-way prices in securities without nec-  market liquidity is properly recognised.   Review of the data for December 2019 suggests similar
 As commentators have looked more closely at the driv-  essarily holding them as inventory. If Europe is to push   trading patterns to those seen in other years, but with
 ers behind this resurgence however, questions about   ahead with its ambitious plans to develop a fully autono-  Securities being made available by institutional investors   the quantum and volatility in the final few weeks at lower
 its sustainability have been raised. It would appear that   mous capital markets framework, the broader participa-  for lending, showed a considerable rise from €19.6 trillion   levels (see Fig 2).
 investors are increasingly immune to poor economic data,   tion of institutional investors, including UCITS funds will
 as they see it as a signal for more central bank interven-  be of critical importance.   Fig 1: ISLA Global Securities Lending Aggregate
 tion pushing liquidity into the markets and inflating asset
 prices further. As central banks are increasingly active in   Strong equity market performance, combined with the
 the money markets, many have described this as ‘stealth   political uncertainties around Brexit and the ongoing   €2.4 T
 Quantitative Easing (QE)’. It has been suggested by some   trade spat between the US and China, appeared to lead to
 that by the end of January, the Fed’s balance sheet will   a loss of conviction in and around the alternative invest-
 surpass what it was at the height of the vast QE program   ment communities. Market level data provided by the   €1.6 T
 instigated after the global financial crisis in 2008.   Alternative Investment Management Association (AIMA)
 indicated that alternative managers saw net outflows
 The other factor that is cited by many commentators is   across all investment strategies in the first three quar-
 the post-crisis regulatory regime that is designed to curb   ters of 2019. The Sharpe Ratio which indicates how well   €0.8 T
 risk taking and thereby disincentivise banks to support   a particular asset or a given portfolio’s return compen-
 trading liquidity, particularly across critical regulatory   sates for the risk taken by the investor, also fell across the
 reporting dates.   alternative investment sector in the first nine months of   0
 2019. This suggests that some of these outflows could be   Dec 2014  Jun 2015  Dec 2015  Jun 2016  Dec 2016  Jun 2017  Dec 2017  Jun 2018  Dec 2018  Jun 2019  Dec 2019
 Quite simply, as large banks have more than enough   connected with either a slowing of returns or an increase   *see Data Methodogies for full details on page 36  Source: ISLA
 excess liquidity to meet regulatory requirements, they   of risk within various strategies.


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