Bitcoin’s Existence and the Banking Industry

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As I’m sure you’re all aware, Bitcoin is a peer-to-peer cryptocurrency, developed mid financial crisis, in 2009. Historically, banks have been cynical and untrusting of Bitcoin and cryptocurrencies, but there are a number of positives to be considered. Despite it being labelled as “a fraud” and “ponzy scheme” by CEO of JPMorgan, Jamie Dimon, it has risen way over $5000 in value. The system uses a shared ledger, known as a blockchain, which maintains and automatically updates a record of all transactions.

What’s so great about Bitcoin?

Well the highly encrypted, anonymous and decentralised cryptocurrency has no need for banks or institutions, meaning no transaction fees and almost instantaneous transfers. This means lower costs, less system based transaction errors and greater transaction transparency, which is beneficial for anyone from the individual to large businesses.

As mentioned, the system uses blockchain technology. If a user decided to change their personal Bitcoin balance, there would be a discrepancy amongst users’ records and the changes made would be ignored. Therefore, Bitcoins can’t be counterfeited, so no one has to worry about dealing with fake Bitcoin.

Although banks were sceptical towards Bitcoin and similar blockchain currencies, there has been increasing interest in the capabilities of the technology. BNP Paribas (France’s biggest bank) has started testing the potential of blockchain technology for post-trade processes. Even JPMorgan has since developed QuorumTM, a new network (with increased security and transaction speeds) using blockchain technology.

Sounds pretty good right, so what’s the problem?

The most obvious issue is its volatility. The market is highly uncertain, due to the lack of regulations regarding profits derived from cryptocurrencies. It’s also worth noting that as Bitcoin transactions declined between May 2017 and July 2017 (figure 1), so did its price. This demonstrates that if the liquidity of Bitcoin were to dry up, there can be a huge drops in value leading to a massive loss for Bitcoin investors.
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One of the other issues, surrounds the poor security of cryptocurrency exchanges. Unlike, non-cryptocurrency exchanges there is a lack of investor protections, leaving the cryptocurrencies open for the taking. There have been numerous hacking heists on cryptocurrency exchanges often resulting in the exchange being shut down and filing for bankruptcy as was the case for Mt. Gox in 2014.

Stocks, commodities, Bitcoin and other cryptocurrencies can all experiencing these dramatic, wild price swings known as “Flash crashes”. However, cryptocurrency exchanges don’t have circuit breakers in place to halt trading during these periods. Kraken (a cryptocurrency exchange) came under attack, resulting in Ethereum (a cryptocurrency) falling by 70% on the exchange and traders’ leveraged positions were automatically liquidated. Naturally, this has a major impact on any portfolio which contains any form of cryptocurrency.

Another concern for the banking industry is the lack of regulation in the cryptocurrency market. Due to the recent fall in the price of Bitcoin, investors are trying to channel into property, but mortgage lenders and brokers who fear breaching anti money-laundering regulations are turning those investors away. Obviously, if the bank were found to have used the same exchanges to trade Bitcoin on behalf of their clients as criminals, then the bank’s reputation would be damaged.

What’s the verdict?

Well it’s clear that investing in Bitcoin is for the more risk-seeking investors. Bitcoins are traded on unregulated exchanges, not backed by any government or central bank. At present, Bitcoin can’t be the solution to creating faster and more secure transactions, as unregulated cryptocurrency exchanges are prone to market manipulation and vulnerable to hackers. Due to the lack of regulations regarding cryptocurrencies, any regulation that comes out will have an impact on the value of these currencies, which makes Bitcoin highly volatile and unpredictable. Currently, there are too many significant drawbacks and risks outweighing the positives, for Bitcoin to be viable as currency or a smart investment decision for banks. That said, there is still plenty to learn from Bitcoin and cryptocurrencies. Although bitcoin has seen sharp falls in recent months it is now starting to hold above $4,000 a coin, but could change at any moment. However, with the major US stock exchange, the Nasdaq intending to launch bitcoin futures in 2019 and bitcoins becoming more widely accepted as a form of payment throughout the world. There’s still hope for the crypto currencies yet…

 

ETF’s & Smart Beta strategies……..do they work?

The banking industry has seen a countless variety of marketable assets and securities. The introduction of Exchange Traded Funds (ETFs) has brought a more passive approach to investing, with lower management fees, whilst still being able to be actively traded, on exchanges. The growing popularity of such products means ETFs now form an integral part of our assets at ΓΙΩ Management. Global ETF assets have risen from $800bn to $4.2tn (£3.2tn) in a 10-year period by the end of August 2017. Here we consider the advantages and disadvantages of ETFs to the banking industry.

ETFs are designed to track an underlying index’s performance. Therefore, only small adjustments are usually required to bring the ETF back in line with the index if deviations occur. As a result, ETFs have lower management fees, which offers further potential for increased profitability. Also they mitigate the element of managerial risk in comparison with an actively managed fund (known as passive management). ETFs are able to be bought on margin, sold short or held for the long term and traded when there’s a need for liquidity. This increased flexibility along with the potential for increased profitability is why ETFs are now becoming increasingly popular.

Figure 1 shows smart beta ETFs are set to take off. These ETFs focus on factor investing rather than pure asset classes. The aim of these ETFs is to replicate hedge fund strategies at a fraction of the fees by looking at fundamental factors of the assets within these smart beta ETFs. The goal of these smart beta ETFs is to provide clients with even larger returns,

reduced risk and lower costs by constructing a more dynamic, precise and balanced portfolio.

Thanks to ETFs banks can also profit from arbitrage. As market makers and institutional investors, banks have the ability to create a basket of stocks and sell the basket for more than they paid for the stocks in the basket. If either the ETF or the stocks are mispriced, banks can profit by buying the undervalued and selling the overvalued.

It can also be argued that the ability for ETFs to be traded on margin and short sold can increase the volatility of the underlying. A study showed that the daily rebalancing activity of leveraged ETFs and inverse leveraged ETFs increased the intraday price volatility of Real Estate Investment Trusts 75% of the time and the Dow Jones Industrial Index 69% of the time. While high volatility is generally positive for ETFs, periods of low volatility negatively impact leveraged ETFs. 21 of the 42 ETFs were leveraged, and closed for trading in September alone. These ETFs tend to perform well when markets are volatile; however, the equities markets have been calm arbitrage which because of this stability there has been little for ETFs to increase in value

ETFs are vulnerable to turbulent price swings. After ‘The Crash of 2:45’ back in May 2010, regulations were introduced such as market-wide circuit breakers; but in August 2015 these were proved inadequate after another flash crash.

During the first 15 minutes of markets opening, there were 1,278 trading halts for 471 different ETFs and stocks meaning it was not possible to calculate the fair value of many ETFs (see figure 2). Technological improvements are needed to refine the trading mechanisms of ETFs. Without this there are likely to be more erroneous and fake trades, which are accepted by the market resulting in another flash crash.

As the banking industry experiences more technological advances, there will be a shift towards alternative, smarter investment strategies, such as smart beta ETFs over the traditional vanilla market capitalisation weighted ETFs. We are only beginning to witness how technology has the ability to transform big data into information for investors. These new ideas can heavily impact how the banking industry and in particular, ΓΙΩ Management, strategizes to maximise returns for clients. The market for ETFs is set to grow and there may be increased volatility and more innovative forms of ETFs being introduced. Either way, we will seek to capitalise on any arbitrage opportunities. It is unclear whether there currently exists an ETF bubble; however, ΓΙΩ Management believes ETFs can bring a positive change to the banking industry if closely monitored and supported by new regulations.

All the best & have a good day

Stuart

CEO

Farringdon Group

 

 

UK ‘Shatters’ Tax Secrecy of Offshore Territories

 

The tax secrecy practices of Britain’s Overseas Territories have been “shattered” by the UK government, which in a dramatic turn of events, put its support behind an amendment that will introduce public ownership registers.

 

In the House of Commons today (1 May) foreign office minister Alan Duncan said the government would not oppose an amendment to the anti-money laundering bill, tabled by Labour MP Margaret Hodge and Conservative MP Andrew Mitchell.

 

Lifting the veil

The government’s decision to support the amendment means British Overseas Territories must introduce public registers that disclose who owns the assets in companies registered in the jurisdiction.

If a territory fails to introduce such a register by the end of 2020, they would be forced to through a Privy Council order.

Before supporting Hodge’s amendment, the government tried to thwart it, by tabling its own watered-down version.

However, in dramatic scenes, the government missed the tabling deadline for their amendments meaning they were not eligible for consideration.

Richard Murphy, tax transparency campaigner and director at Tax research UK, told International Adviser the government had to support the amendment after realising it faced imminent defeat.

“I guess the mess up meant there was nowhere to go,” Murphy said.

 

Crown Dependencies excluded

The Crown dependencies of Jersey, Guernsey and the Isle of Man were not included in the amendment, however Mitchell said he expected them to follow suit.

Murphy said he believed the dependencies were excluded because there could be uncertainties over constitutional arrangements between the jurisdictions and the UK.

“However, in the Overseas Territories it is absolutely unambiguous that the UK can do this.

“British Virgin Islands (BVI), Cayman Islands, Bermuda and so on are all now subject to this stage in the law, they will have to have open registers, it shatters their secrecy for good,” Murphy said.

Despite not being included, Murphy said he believes the Crown dependencies will be forced to eventually follow suit.

“I think there could be a private members bill, or another amendment the government might put forward to make them comply.

“I don’t think the UK is going to put up with the overseas territories having one standard and the Crown dependencies having another,” he said.

 

Opposition

Foreign Office minister Alan Duncan told the House of Commons it was not clear that the UK could enforce such a register on the territories.

He made a point of noting that overseas territories were not represented in the UK parliament.

“Legislating for them without their consent effectively disenfranchises their elected representatives.

“We would have preferred to work consensually with the British Overseas Territories to make those registers publicly available.”

 

Industry reaction

Geoff Cook, chief executive of Jersey Finance, told International Adviser the island was absolutely in line with the UK in its commitment to combat money laundering and financial crime.

“Information on our central register, which is tried and tested for almost three decades, is available to the people who need that vital information and we are constantly working with law enforcement agencies and other relevant authorities to ensure they have everything they need.

“Our position is clear: we don’t allow the identities of beneficial owners to be hidden, and you can’t buy or form ‘shelf’ or ‘shell’ companies in Jersey.

“We’re proud to have a rigorous checking process, and that means we’re one of the few jurisdictions that can have absolute certainty about its business practices, and who it works with – now, and in the future,” Cook said.

Courtesy of International Adviser

 

All the best

Stuart

CEO

Farringdon Group

+60 3 2026 0286

Week 15 2018 – In Review

 

Stocks recorded solid gains and reversed the previous week’s losses. Markets remained volatile, however, as investors appeared to remain focused on the turbulent political environment rather than the upcoming release of first-quarter corporate earnings reports. The Nasdaq Composite Index performed best, helped by a rally in Facebook shares as investors seemed to react favorably to Facebook CEO Mark Zuckerberg’s testimony before Congress on Tuesday and Wednesday. While tech shares performed well, energy stocks led the gains in the S&P 500 Index, helped by a rally in crude prices to their highest level since late 2014.

 

Syria Fears Grow

Concerns over growing trade tensions with China continued to weigh on sentiment, although investors appeared to grow more optimistic that a full-scale trade war involving the world’s two largest economies would be averted. Chinese President Xi Jinping provided another boost to sentiment later in the week after he repeated a vow to ease access to sectors ranging from banking to auto manufacturing and to protect intellectual property in a “new phase of opening up.”

 

Even as the trade backdrop brightened a bit, new geopolitical clouds darkened the horizon. Stocks fell sharply in early trading Tuesday, following a tweet from President Trump threatening a missile strike on Syria in response to the Assad regime’s alleged chemical attack on dissident areas the previous weekend. Investors also appeared to be unsettled by tweets from the President attacking the Mueller investigation following the FBI’s seizure of documents from his personal attorney, Michael Cohen. Stocks rallied on Thursday after the President appeared to calm tensions on both fronts, tweeting that a Syria strike might not be imminent and that he would have already fired Mueller if he were planning such an action. Finally, reports surfaced on Thursday that the President was considering having the U.S. re-enter the Trans-Pacific Partnership, a multilateral trade agreement that could offer lower trade barriers to U.S. exporters.

 

Europe

With geopolitical tensions in focus, European stock markets ended the week higher as the start of earnings season and positive economic news countered some investor reluctance about the attractiveness of equity markets. As in the U.S., investor concern about the prospects of a trade war or the ramifications of a military confrontation centered on Syria seemed to ebb as the week progressed.

 

The European STOXX 600 Index advanced around 1% for the week. Germany’s exporter-heavy DAX 30 also rose for the week, despite news that the country’s exports plunged in February, largely due to a strengthening euro. German markets were supported by news that consumer price inflation accelerated in March, and they were also lifted by a report that China’s imports increased in the latest period. The UK blue-chip benchmark, the FTSE 100 Index, rose about 1%, but the index has been underperforming its European counterparts largely due to the strong pound, which weighs on the companies that convert non-UK profits back into the sterling. News of a decline in factory output did not seem to unsettle investors. Benchmark indexes in Spain, France, and Italy also ended the week higher.

 

According to its policy minutes published this week, the European Central Bank (ECB) pointed out that a strengthening euro and an increased risk of a global trade war could detract from the economic recovery currently underway in the eurozone. Following the ECB’s warning, European markets were somewhat volatile as investors weighed the impact.

 

Japan

Haruhiko Kuroda recently started his second five-year term as the Bank of Japan’s (BoJ) governor. Kuroda’s goal when he was first appointed in March 2013 was to snuff out deflation and to achieve an annual inflation rate of 2% in two years. In what became known as the “Kuroda Bazooka,” Kuroda implemented an aggressive quantitative easing program on a much larger scale than anyone had anticipated. Deflation has been vanquished, and while the 2% inflation goal has been elusive, Japan’s economy has flourished. Gross domestic product has expanded for eight consecutive quarters through December 2017, corporate earnings are booming (setting record highs in each of the past two years), and unemployment touched a 24-year low. The central bank’s easy money policies weakened the yen and spurred stock prices to multiyear highs.

 

At a news conference following his reappointment, Kuroda said, “There is still some distance to achieving the inflation target,” which confirmed for the markets that there would be no change in the central bank’s monetary policy stance in the near term. It seems that that was the desired goal because Kuroda may be concerned that interest rates could spike if the markets suspected an end to the current policy stance. The yen strengthened in 2017 and has continued its ascent in 2018, which poses a risk for the economy. Investors are also worried about the protectionist policies of U.S. President Donald Trump, as well as the threat of trade wars. These concerns showed up in the latest Tankan survey, which revealed that large manufacturers’ sentiment turned lower for the first time in about two years—possibly a sign that economic growth is peaking after the longest period of expansion in three decades.

 

All the best

Stuart

CEO

Farringdon Group

+60 3 2026 0286

Market Wrap Q1 2018

 

The first quarter of 2018 has been one of the most challenging quarters for global asset markets since the 2008 Financial crisis. However, despite falling asset values in most developed and developing markets the global economic picture remains healthy with robust growth figures being reported worldwide.

 

North America

After a substantial rally in 2017, US stocks have dropped by 10% since their highs on the 26th of January; the Dow jones is down by 2,684 points. However, much of this drop can be explained by simple profit taking from last year’s bull market which was the biggest since 1987.  Bonds have also continued to underperform in the US on concerns that the US economy is overheating, and higher inflation will lead to higher rates.

Ultimately, we see the events of Quarter 1 as a positive; there was no doubt that the market had risen too much and a moderate contraction in asset prices will likely serve to release dangerous pressure from the market. The underlying economic picture remains healthy with record high employment levels. There may be a need to consider selling down in 2019 but for now, moving away from tech stocks and towards more traditional companies and shorter-dated bonds would seem to be enough of a defensive play.

Trump’s looming trade war with China may also cause concern, however we feel that it is likely to be a short spat between China and the USA which will ultimately dissipate with only minor economic impact.

 

UK

UK stocks have finished an abysmal year with the FTSE 100 dropping by 9% since a brief high on the 12th of January. This has been caused by concerns over future Brexit deal, a rising pound and concerns over future interest rate rises affecting high-quality assets. At today’s prices FTSE 100 stocks are at the same levels they were at May 2015, nearly 3 years ago.

However, with the political capital gained by the UK over the poisoning of an ex-Russian spy it seems a decent Brexit deal is increasingly possible. While we expect to see the pound rising further we may also see an uplift in key resource and financial companies that make up much of the FTSE 100.

 

Europe

As growth continues to slow and Europe continues to experience the rise of alternative political parties we expect to see European assets and the Euro under-perform.

 

Emerging Markets

The contraction in offshore US dollar liquidity will continue to pose a threat to emerging markets, especially those linked to China and Hong Kong. However, global growth remains strong and we expect to see broad-spread EM assets perform well.

 

All the best

Stuart

CEO

Farringdon Group

+60 3 2026 0286

Week 14 2018 In Review

 

Trade Tensions Continue to Influence Markets

The major benchmarks ended lower after another week of significant volatility. Heightened trade tensions between China and the US continued to dominate sentiment during the week. Stocks sold off sharply on Monday, following China’s announcement that it would retaliate on US aluminum and steel tariffs with $3 billion in new tariffs of its own, targeting roughly 130 U.S. products and concentrated on agricultural exports. On Tuesday, the US further upped the ante, outlining a list of $50 billion in proposed tariffs on 1,300 Chinese products, and China responded on Wednesday with its own $50 billion list of tariffs on US soybeans, cars, and aircraft.

Investor patience reached a breaking point on Thursday evening after President Trump raised the stakes even further by ordering the consideration of an additional $100 billion in tariffs on Chinese goods. Stocks futures fell in response, and on Friday morning, Chinese officials struck back—a notable departure from their delayed and guarded response to earlier U.S. tariff announcements. Commerce Ministry spokesman Gao Feng threatened a “fierce counter strike” and stated that negotiations were unlikely in the current environment. US stocks appeared to fall further in response.

Another factor that may have weighed on sentiment Friday was the Labor Department’s monthly employment summary, which showed a much smaller rise in payrolls than expected (103,000) and revised lower the previous months’ gains.

 

European Stocks End the Week Higher

European stocks weathered a volatile week as trade hostilities between the US and China prompted investor sentiment to dampen. The pan-European STOXX 600 Index ended the week higher due to a rally on Thursday that produced the biggest one-day percentage gain in nearly two years. The economic recovery in Europe continued to strengthen, according to some measures. Unemployment in the 19 countries that use the euro fell to its lowest level since December 2008, according to Eurostat. But inflation remains well below the European Central Bank’s target of just under 2%. Wage growth was also lackluster. Weak domestic demand caused German industrial production to fall 1.6% in February versus expectations that it would rise 0.2%.

 

Japanese Stocks Still down for the Year

Japanese stocks posted a modest gain for the week, with the Nikkei 225 Stock Average returning 0.53%. However, all the major Japanese market indexes remain substantially in the red for the year to date. The Nikkei is off 5.3%, the broad-based TOPIX Index is down 5.4%, and the TOPIX Small Index has declined 4.2%. The yen weakened slightly and traded on Friday at ¥107.11 per US dollar, which is about 5% stronger than the ¥112.7 per dollar level at the end of 2017.

 

Elsewhere in Markets

Brazil’s stocks rallied after Brazil’s Supreme Court refused Luiz Inacio Lula da Silva’s appeal of his corruption conviction and ordered him jailed. The move will effectively eliminate him as a contender in the country’s October presidential election.

The central bank of Brazil, which only recently emerged from recession, eased reserve requirements for the banking sector one week after it reduced its key lending rate to a record low in an effort to boost liquidity and ultimately spur growth and it should make Brazilian banks more stable. Brazilian banks had previously faced some of the highest loan-to-deposit ratios in the region, over 150% on average, but they have already turned to other funding sources. The cut in reserves will, at most, shift the funding mix toward more deposits, but the impact on actual loan origination growth will be primarily driven by the banks’ risk appetite and expected return on risk-weighted assets. Ultimately, the cut in reserve requirements eliminates a historical distortion and is good for funding stability, as deposits will become a greater percentage of the total bank funding. However, Yago doubts the change will have a meaningful impact on lending policies.

All the best

Stuart

CEO

Farringdon Group

+60 3 2026 0286