• Mon
  • Jul 14, 2014
  • Updated: 6:02pm

Ask our experts

PUBLISHED : Monday, 12 December, 2011, 12:00am
UPDATED : Monday, 12 December, 2011, 12:00am

The panel addresses vexing queries of investor interest:

Renuka Fernandez (quantitative strategist for Standard Chartered Bank) is asked: What are central bank liquidity swap lines and how have they been used to ease the euro-zone crisis?

Central bank liquidity swap lines are swap agreements that allow central banks to deliver foreign currency funding to institutions in their jurisdictions.

On the 30 November 2011, the Fed announced in co-ordination with five other central banks, it would lower the pricing on US dollar liquidity swap arrangements by 50 basis points (0.5 per cent) effective on December 7. The new rate would be US dollar OIS (overnight index swap) plus 50 basis points.

This announcement came as the euro zone showed signs of extreme funding stress. The three-month EUR/USD basis had widened 53 basis points over the originally agreed central bank currency swap rate, which was US OIS plus 100 basis points.

In other words a holder of euros who wanted to swap and borrow US dollars, would have paid 163 basis points via the market and 110 basis points via the European Central Bank (ECB) swap lines.

The purpose of the co-ordinated move was to ease pressure on European banks, making it easier for them to access short-term US dollar funding and to provide a backstop to market spreads, which were far in excess of central bank swap rates.

The ECB also cut the margin it was charging on these trades from 20 per cent to 12 per cent, thus reducing US dollar funding costs for European banks further.

Since the announcement the three-month EUR/USD basis has narrowed 50 basis points.

Dr Peter Brooks (head of behavioural finance, Asia Pacific, Barclays Wealth) is asked: What tips would you give for better investor behaviour?

Investing can be difficult as we are influenced by context, emotions and irrational psychological biases that we may not be aware of. Often, even if we are aware of them, we may not be able to control them.

The road to investor success lies not merely in building your optimal financial plan, but more importantly the composure to stick to it though all market conditions. Buy low and sell high sounds like simple advice but we are not emotionally well-equipped to invest in that manner. In fact, our emotions tempt us to do the exact opposite, chasing returns at the top of the market and becoming despondent at the bottom.

At times of stress, telling ourselves to sit tight is likely to be futile. Our desire for short-term comfort will win out against our long-term objectives.

Here are two strategies that can help you stay focused on your longer-term objectives:

First, monitor your portfolio less than you are inclined to do. The more you look at your portfolio value, the more risk you perceive. Frequent monitoring makes it more likely you will succumb to short-term price movements rather than focusing on your long-term strategy.

Second, keep an investment diary. Writing down the reasons for your investments helps you stay focused on your long-term plans. At times of stress or exuberance you can go back and read your investment rationale to see if anything has materially changed. Only trade if your opinion has changed. Don't trade just because you are caught in the moment.

Mark Matthews (head of research Asia, Bank Julius Baer) is asked: Given recent initiatives to attract foreign listings to Shanghai, will the bourse emerge as a global hub for China listings?

In China today, the frenzy for luxury branded goods may make listing there seem like a no-brainer. But so it did probably in Japan in the late 1980s, when dozens of large foreign companies like Barclays, Henderson Land, IBM, and Daimler were listed in Tokyo. The idea behind it was that there would be huge demand for these companies, from a sophisticated institutional investor base. In reality that base did not exist, and Japan's boom proved a bubble. So they hardly ever traded, and were eventually delisted there.

Within Asia, too, we can see that Thai stocks listed in Singapore (like Total Access Communications and Thai Beverages) get abandoned.

Almost all Asian stocks are far more liquid locally than in depository receipt form (with Baidu and Telkom Indonesia the only possible exceptions). It is, after all, locals who know their own companies best.

Stocks are also affected by the beta of the market they are listed in, which explains why multinational corporations with emerging market exposure lack the emerging market 'zing' that their locally listed subsidiaries have.

It's understandable, therefore, why companies might seek to list in Shanghai, where a luxury brand may command a higher valuation than it would in London. But history shows us that fads are temporary, and it is usually not good for a company to stray too far from home.

Share

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

 
 
 
 
 

Login

SCMP.com Account

or