1. Introduction to Investments

2. Paradigms may shift but the pendulum is swinging..
Everybody likes to say that Trump is causing a paradigm shift!
Globalization declining?
Financialization peaking?
The precariat rising?
Macro indicators telling?
Homo economicus descending (Dick Thaler wins Economics Nobel).

3. Globalization has come in waves

4. Financialization.
Refers to the growth in scale/profitability of the finance sector at the expense of the rest of the economy.
Largely, post-1980 expansion of finance in advanced economies.
and the shrinking regulation of its rules.
Debt to equity ratios have increased over the last 30 years.
Financial services account for increasing share of national income.
Simply stated: it is making money from money.

5. Do we want financialization?

6. The changing nature of work-the precariat!
Emerging economies are defined by younger people, informal markets and fluid employment structures.
By 2040, one in four workers globally will be African.
The Jua Kali (hot sun) in Kenya created 750,000 jobs, while the formal sector created,
In Indonesia, Go-Jek delivers everything through an app, via motorbike (is a $2.5 billion company).
Even in the US, the Business Talent Group provides “in-demand business talent on-demand,” for many
professional services.
Flexibility, job uncertainty, and therefore multiple jobs is becoming acceptable.
These side-hustles and layered work contributes to income inequality, will that continue?.
The precariat is the precarious proletariat.

7. Bull markets end with bangs…..

8. Globally, demagoguery and populism began to rise well before 2016.
In recent years, the Arab spring (2010), exodus from Syria (2012), Turkey (2014) and Russia (2014) welcoming pitiless despots, India welcomes Modi (and the Sensex takes off, 2014), Duterte in the Phillipines (2016).
Even further back in time, the Enlightment (18th century) was a revolt against the monarchy (yet another out-of-touch bunch),
19th century utilitarian theorists, Jeremy Bentham and John Stuart Mill espoused the idea that:
what counts is what can be counted, and what therefore cannot, doesn’t (count).
Dostoevsky’s Underground Man was the quintessential loser, railing forever against rationalist winners.
Backlash against out-of-touch establishments has happened many times in history. In this setting, Brexit is late, in turn hints at a Trump victory (and SGB loses some money betting on it!)
History may not repeat, but it often rhymes (Mark Twain….)
For a better look at this, see Pankaj Mishra, The long read (Guardian, November 2016).

9. Real Assets Vs Financial Assets
Real assets are tangible assets which are used to create value
Examples: Land, buildings, equipments, human capital, art, antiques etc
Their value fluctuates depending on demand and supply – Value increases if growing population increases the demand for the scarce resources
Financial assets are legal claims on future financial benefits created by underlying real assets
Examples: Shares, Bonds, Derivatives etc
A share in a stock derives its value from its claim on the uncertain financial benefits created by some real asset
Bond certificates are a piece of paper which are used by Government/corporates to raise money and they assure the holder of periodic payment / discount at the time of issue or both

10. Stock of Global Financial Assets
Source: Deutsche Bank Research- The Random Walk: Mapping the World’s Financial Market 2015 dated 11 February 2015

11. Equity Market Capitalisation by Region and Exchanges (USD billion)
Source: World Federation of Exchanges

13. Market Players… Mutual Funds (debt, equity, sector, cap, indexed….).
Pension Funds (Japan, Norway at a trillion each, Calpers, EPF).
Sovereign Wealth Funds (China Investment Corp - FX, Temasek).
Insurance companies.
Investment Banks.
Hedge Funds (quant, macro, arbitrage, distressed, activist).
Venture Capital.
Private Equity.

14. Global Pool of Funds- 2013 Estimates
Source: Deutsche Bank Research- The Random Walk: Mapping the World’s Financial Market 2015 dated 11 February 2015

15. Financial Analysts
Individuals typically knowledgeable about areas such as retail, pharmaceutical, airlines, defence
Mostly sell side, their efforts are geared towards making individual investors purchase stocks
Issues research reports and make recommendations
Analyses are a complex amalgam of financial reports, press releases, an assessment of the strength of the company’s relationships with supplier, with product markets
They tend to have some expertise (work experience, technical knowhow, access) in the industries of their specialization
Their rankings range for strong-buy, buy, hold, sell, strong-sell although other gradation is now common place
They generate orders for the sales force in the investment banking companies who employ them, guide institutional clients, listen to pitches from investor relations (hence sell-side)

16. Financial Analysts – How good are they?
Every major institutional firm has retail analysts, entertainment analysts, different sectors covered.
In the US, a magazine called Institutional Investor rates the quality of each sector analyst on the strength of their past recommendations, with the successful ones being rated “star” analysts’ who are essentially the go-to people for that sector.
For India, one of your seniors is working on a CCS project to rate them!
Still there are conflict of interest issues-- the sell-siders work for the same people who have other interests –investment banking, M& A. Talk of Chinese wall. Analysts will proclaim objectivity, distance from the stock being discussed, sometimes I would rather have a passionate advocate!
Versions of fair disclosure regulations require simultaneous disclosure of information to all investors.

17. Retail Investors
Trading in developed (and even emerging) markets has become institutional.
Implies large research/technology resources and a fiduciary responsibility.
In emerging markets, both regulators and exchange heads bemoan lack of retail participation.
Is there room for retail investors to play ?
Individuals care about absolute performance
Institutional money tends to be fully invested, but individuals can choose to sit out periods of market turmoil. This begs the question of whether attempting to ”time” markets is even a worthwhile exercise.
Mutual fund performance around the globe has been less than stellar, with most being unable to “beat the market” consistently over periods of time. Therefore, why not become the market?
Much of financial analyst research focuses on a subset of stocks. Even in the US, over 50% of publicly listed don’t have national analyst coverage. Are these hidden gems or the devil’s playground!