How Speculators Disrupt and What To Do
Staff reporter |
17 July 2013
The biggest problem for super fund investors is understanding what causes sudden and unpredictable changes in the assets in which they invest. Simon Bond, for RBS Morgans comments that financial markets are driven by traders. The tail is wagging the dog:
"These days the overwhelming majority of financial transactions are purely speculative, made by traders, speculators or hedge funds that look to control or corner markets. This makes many markets purely speculative and in effect nothing more than expensive gambles that serve no useful purpose and have no positive social impact on society."
It is certainly a problem and it poses a threat to capitalism. The financial markets are supposed to support and serve business and the economy, not the other way around. But they have become so large that the relationship has been reversed. Bond says investors miss out on many opportunities because it is difficult to distinguish fact from distorted reality.
"The disconnect between the financial and the real economy produces the bubbles that keep on plaguing the global economy. In effect money flows the wrong way as smaller more innovative businesses have less access to capital in constrained markets and economies. Smaller projects that involve people without a long track record barely get off the ground if Banks won’t fund them as they are seen as below the risk line acceptable line.
In many large financial institutions we are plagued by “intellectual bankruptcy”."
So what are self managed super investors to do, given that they cannot marshal the huge sums of money required to move markets, nor do they have access to privileged information? One obvious answer is be cautious and recognise that you are not "in the know".
Another point is to try to pick trends that are likely to remain strong, irrespective of teh volatility in the financial markets. If companies or sectors stay strong enough for long enough, the financial markets are probably going to fall into line eventually.
One of those trends may be infrastructure investment. Opposition leader Tony Abbott has highlighted the importance of this sector to him if he wins the election. Bond likes the investment implications as the mining boom in Australia starts to ease:
"This may herald the long awaited change in our growth prospects from the mining industry to other East Coast concentrated businesses. Who wins? For a start companies like Leightons, Telstra, Cardno, Adelaide Brighton Cement and the like would be set to benefit.
And of course the Banks."