Page 9 - ISLA SL Report March 2019
P. 9

Global Market Dynamics


        As we look back at 2018, some of the challenging and   between an active QE environment and the performance
        different  themes  identified  in  our  last  mid-year  report   of stock markets.
        played  out  in the  global  equity  markets  during  the
        remainder of the year. 2018 was the worst year for global   Some commentators argue that QE pushes interest
        stock markets in ten years. In North America, the Dow fell   rates down causing investors to look for higher yielding
        6%, the S&P500 was down 6% and the Nasdaq fell 4%.   investments, typically in the equity markets. This in turn
        It was the worst year for stocks since 2008 and only the   pushes these markets higher.
        second year in the past decade that both the Dow and
        the S&P500 fell. December was a particularly challenging   There is some evidence to support these ideas and we
        month for investors, as the S&P500 was down 9% and   await to see if the wind down of these QE programmes
        the  Dow  was  down  nearly  9%.    The  worst  December   does lead to a more volatile bear market picture.
        performance since 1931.
                                                    Securities made available by institutional investors for
        Volatility returned to markets in 2018 amid signs of a   lending,  showed  a  marginal  fall  from  €17.4  trillion  to
        global  economic  slowdown, concerns about  monetary   €16.6 trillion. However, it should be noted that during
        policy, political dysfunction, inflation worries and fears of   this period the S&P500 fell by some 9%. With over 66%
        increased regulation in the technology sector.  of all securities being made available for lending being
                                                    classified as equities, the reported fall in overall lendable
        Investors in Europe and the rest of the world were not   supply appears to be driven by falling asset valuations
        immune to reacting to these fears, with the unrealized   rather than assets leaving lending programmes.
        impacts of Brexit on the UK and Europe as well as the
        slowdown in the economy.                    If  anything,  anecdotal  evidence  from  our  broader
                                                    membership suggests that interest in securities lending
        The FTSE All-World index, which tracks thousands of   remains high and is increasing. Here again, the continued
        stocks  across  a  range  of  markets  plummeted  12%  in   flow of retail investments into passive or tracker funds
        2018, the index’s worst performance since the global   is likely to be fueling this increasing focus on securities
        financial crisis.                           lending as asset managers look to deliver upper quartile
                                                    returns to their investors.
        Aligned to the ongoing debate around the trade war
        between the US and China, the apparent slowing of the   Notwithstanding the marginal fall in the value of securities
        world’s second largest economy further darkened the   being made available for lending, on-loan balances at
        mood of investors. Closer to home here in Europe amid   the 31st December remained broadly unchanged over
        a backdrop of sluggish growth across the Eurozone, the   the year-end.
        Italian economy technically entered recession shrinking
        for the second consecutive quarter at the end of the year.   The ISLA Securities Lending Aggregate  (Fig 1) showed
        This raises questions not only for the economies of the   a  marginal  4%  increase  over  the  period,  rising  to
        Eurozone but also the direction of travel of the current   €2.2 trillion as at 31st December from €2.1 trillion 6
        populist government in Italy.               months earlier.

        The second half of 2018 also saw the end of the European   Although we did see a marginal increase in overall
        Central Bank’s Quantitative Easing (QE) programme.   balances over the period, we also saw from our
        As these asset buyback programmes come to a close,   analysis that banks and other institutions actively
        the impact on the broader economy is still to be fully   reduced securities lending in the run up to the year-
        determined.  There  is  a  loose  but  positive  correlation   end.  As we  have  seen before,  this appears  to  have


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