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News and discussions from Novus Capital

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Living in a VUCA World

Gavan Farley - Wednesday, November 23, 2016

Living in a VUCA World

Today I was fortunate enough to be invited by a good friend and associate at Cube Capital Hani Iskander to attend a quick briefing by the owner of Williams Inference, John Trudgian. Williams Inference, a business intelligence service, was started 1965 in the USA by James Williams and is based around the idea that by observing human behaviour, looking for anomalies, one could spot trends early and take advantage of them to build into your investment strategies. The service is subscribed to mainly by major fund managers, and they get a quarterly presentation from John or one of the team, which distils collates and interprets information from over 200 publications, financial markets, books film TV and the web.

A world wind one hour ride

John took us on a ample ride through his most recent quarterly report. We only had an hour… (it normally takes two or three) The theme of this report, which was written before Trumps upset victory is summarised in the following quote…:

“We are moving from a world of problems, which demand speed, analysis and elimination of uncertainty, to a world of dilemmas, which demand patience, sense making and engagement with uncertainty” – living in a VUCA world

Birds are Singing Earlier

We started with…. Noise and a story about how naturalist are observing how birds are beginning their dawn chorus some two hours before sunrise. The reason given is that we humans are making so much noise, that the birds have to start earlier and earlier, in order to be heard… this story lead onto developments in technology designed to bring back some peace and quiet. Noise cancelling head phones, especially amongst professionals such as pilots is a big and developing market…

Talking not Typing

the noise theme then morphed into new ways to interface between our ever-present device, and the problems of using Siri, Cortana and other voice user interfaces in our devices. It turns out that the main reason that these devices don’t work as well as they should is due to background noise. Aftercall we can speak on average 150 words a minute but type at less than 40 wpm. This lead to an article about a firm called Kopin that has a completely new approach and can achieve accuracies over 90% in standard environments… Kopin predicts that this breakthrough will mean that by 2020 50% of queries will be voice generated.

Augmented Workforce

From Voice and smartphones, we made a small leap to augmented reality and its use, not in gaming but in industry, healthcare, training for high risk jobs, and inevitably … to how the porn industry is adopting to this new technology….

No Sex in Japan

From there we were lead across the se to Japan where changes in demography and family structure such that 70% of Japanese under 34 are single and 40% are still virgins, and just across from Japan, China is experiencing significant declines in marriage rates and increasing divorce rates. India the same. So what, you might say; these things have been happening in the west for decades, but that’s the point, what has taken two or three generations to happen in the west, is happening in these counties within one generation. What concerns, opportunities can be inferred by these trends….

The Device Man

And now our next stop on this whirlwind tour was around the theme of device people… our addiction to phones and online communication and how it is changing how humans interact. I commented to the group on how some people check the current weather on their phone, while sitting next to a window. People sit at the same table, texting each other…

Serial Dating – Serial jobs

this led to dating sites, the gig economy, the lack of security, permanence, planning for the future, even how the use of cosmetics has spiked as people (men and women) put on makeup, not to look better in person, but to make them look better in photos, selfies. Did you know that campus bookstores in the USA now have large cosmetic sections., which then led to a story on how Deutsche Bank is now using technology for matching people on dating sites to match new recruits. our hour was almost up… and we looked at the gender gap in the work force particularly in the upper echelons, and why it is so persistent… but no time to pause and we had to move on… we touched on money, dynamic pricing, such as Ubers surge, Amazons variable pricing, and the feedback loop to earlier mentioned trends of piece meal work,, the zero hour on-call work contract, instant and serial dating…

The VUCA World

and finally at the 55th minute… we arrive at the VUCA world. VUCA.. purportedly a US military acronym… coined at the end of the cold war, standing for Volatile, Uncertain, Complex and Ambiguous.

Thus our journey ended, but it was an amazing trip that generated so many ideas m of how things connect, or not. The skill in investment management is to try to take a view of what all these things going on around us might mean. We are often so busy, just doing our daily routines, living in our bubble, we can’t get out. We should do it more. You can get more info on John @ http://competitiveintelligence.ning.com/profile/JohnTrudgian. The web site http://www.williamsinference.com/ is undergoing a re-vamp but there is some great archival material there

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Why Stock Market Panic can Signal a good time to Buy

Gavan Farley - Tuesday, November 01, 2016

Explainer: why stock market panic can signal a good time to buy

Lee Smales, Curtin University

Financial markets around the world are responding to current political uncertainty in both Australia and the UK by sending stocks, bonds and currencies on a rollercoaster ride.

The far-reaching implications of Brexit caused the S&P/ASX 200 volatility index (A-VIX) to spike to the highest level since the start of 2016. Similarly, the A-VIX jumped 5% in the opening minutes of trading on Monday after it became clear the federal election would remain unresolved.

Investor sentiment (A-VIX) responding to political uncertainty.

The VIX essentially gives an indication as to the market expectation of price volatility over the next 30 days. Since the main participants in the option market tend to be investors seeking protection against declining prices, the VIX tends to rise when investors are anxious about falling markets – giving rise to the colloquial term of the “fear gauge”.

Why investor sentiment is important

In theory, asset values should be determined by competition among rational investors. Such competition makes for prices that reflect “fundamental” values - basically the discounted value of expected cash flows. But in reality we know this is not always the case. For instance, based on the discounted value of rental income, the Australian housing market is currently far above fundamental value. Essentially, “sentiment” reflects the irrational behaviour that pushes prices away from the underlying fundamentals.

The uninformed traders who exhibit this irrationality are often called “noise” traders, and theory suggests that over time they will lose sufficient capital to be forced out of the market. The trouble is, constraints can mean that even the most informed trader could become insolvent before the market reflects fundamental values. With this in mind, it is important to understand what sentiment is, how we can measure it, and how it might impact asset prices.

The theory on investor sentiment suggests that positive sentiment will drive prices above fundamental value and provide above average returns in one period. In the next period, the misvaluation will be corrected. So periods of positive sentiment are followed by periods of below average returns, and vice-versa. That is the theory, but how can we empirically test it?

A self-fulfilling prophecy

A major issue that we have is that sentiment cannot be directly observed, and so we have to use alternate measures as a proxy. A number of alternatives have been suggested, these are often based on surveys (such as consumer confidence) or market variables (such as trading positions) with varying degrees of success in explaining market movements.

A further complication in researching the effect of sentiment is that it is often difficult to disentangle sentiment from market movements as they are often self-reinforcing. To think of why this may be, consider media reporting of movements in the stock market. If the stock market goes up, then the media writes glowing reports and this entices additional “noise” traders into the market. More shares are bought, pushing prices higher, and producing further positive media commentary. This can often continue until we are in bubble territory.

Two important proxies for investor sentiment

Aside from volatility indices like the VIX, there is also a composite index that uses the principal components of six individual proxies related to market activity (this includes share turnover and the number of IPOs).

The researchers that developed this index used it to explain stock returns over a lengthy period running from 1963. They found that investor sentiment had a greater effect on stocks in small, young, and high-growth firms. The index data is available here, but ends in 2010.

Relationship between Baker Wurgler sentiment index and stock market returns.

What the research says about sentiment and returns

Research has shown that VIX and stock prices have a strong contemporaneous relationship, where VIX increases as stock prices fall. Perhaps more importantly, VIX is also useful in forecasting price movements in future periods.

When investor fear is high, stock prices are pushed below fundamental values. In the next period, when the level of risk aversion reverts to some norm, stock prices move back towards the equilibrium level and generate above average returns. This fits well with the underlying theory of investor sentiment.

Relationship between investor fear and stock market returns. Data sourced from DataStream

Interestingly, investor fear in the stock market is also informative for returns in currency markets and bond markets, suggesting that the effect of sentiment is pervasive across asset classes. And sentiment also effects the way in which markets respond to news events, such as economic data releases, with stronger, more volatile responses tending to occur when investor sentiment is low (alternatively, fear is high).

Political uncertainty can drive sentiment

Right now many investors are unsure about how government policy will impact them directly, via taxation and superannuation reform, and indirectly through the effect of policy (or lack of policy) on business investment decisions.

For many investors, this remains a time to be cautious. However, history has shown that the best returns are often to be found by buying when investor fear is at its highest.

The Conversation

Lee Smales, Senior Lecturer, Finance, Curtin University

This article was originally published on The Conversation. Read the original article.

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Asia Pacific Equity Offerings Outpace Prior Year

Gavan Farley - Wednesday, August 12, 2015

Asia-Pacific equity offerings in H1 outpace prior-year period

The amount raised from both common and preferred equity offerings from Asia-Pacific banks increased in the first half compared to the first half of 2014.

In the first half, common equity offerings from SNL-covered Asia-Pacific banks generated US$16.05 billion, an increase of nearly 26.5% from 2014's first-half total common equity raised of US$12.70 billion.

The region's banks raised US$14.20 billion via preferred equity issuances in the first half, compared to US$347.1 million during the 2014 first half. It should be noted, however, that China, which has dominated preferred equity offerings so far in 2015, has only allowed for the issuance of preferred shares since April 2014. In total for 2014, Asia-Pacific banks raised US$29.53 billion through preferred equity issuances.

Banks headquartered in India saw the most common equity offerings in the first half with 15 offerings, followed by Australia and Taiwan with five and four offerings, respectively. Two countries saw banks issue common equity amounting to over 30% of total common equity offerings in the region. Australia led the way with banks issuing US$5.20 billion, or 32.42% of total common equity offerings, while China came in right behind with US$5.10 billion, accounting for 31.78% of all common equity offerings.

China-based CITIC Securities Co. Ltd.'s US$3.50 billion follow-on offering, which was completed June 23, was the largest common equity offering in the first half. The bank said proceeds from the offering will be used to supplement the capital base of the company to help develop its flow-based and cross-border business, build its platform and replenish working capital.

National Australia Bank Ltd.'s rights offering announced May 7, which was broken up into a retail component and a institutional investor component, came in as the second- and third-largest common equity offerings in the first half, respectively. The institutional component raised US$2.12 billion and was completed May 11. The retail component, which completed June 1, raised US$2.17 billion. The bank said proceeds from the offerings will be used to support the demerger of its U.K. banking units.