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RESTORING INTEGRITY TO THE INVESTMENT INDUSTRY

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Nitin Mehta

By Nitin Mehta, CFA

Automotive. Pharmaceuticals. Telecommunications. Energy. Media.

Nitin Mehta

Nitin Mehta

What do these industries and sectors have in common? They all outrank the financial services industry when it comes to public trust. Accordingly, the response of the investment industry to the financial crisis needs to be about greater professionalism. The financial reforms that are in full swing around the world will be incomplete if they do not also fundamentally improve the behavioural norms of those working in finance and investments, and the need to improve the values and conduct of practitioners must remain a priority.

Earlier this month CFA Institute, the global association of investment professionals, and Edelman (creators of the annual pan-industry Edelman Trust Barometer) published joint research in to levels of trust in the investment industry. The survey sought views of over 2,000 investors in the U.S., U.K., Hong Kong, Canada and Australia, and found that just 53% across all those markets trust investment firms to do what is right. Retail investors were less trusting than their institutional counterparts, and the U.S. and U.K. were found to be the least trusting markets.

The reasons for this crisis in confidence are manifold, and finding a solution is equally complex. Interestingly our study revealed that investors are more likely to trust individual investment managers they have worked with than investment firms or regulators, yet the majority (52%) felt that the regulators hold the most responsibility for effecting change in the industry. I would argue that if ethical, efficient individual managers hold the trust of investors, it is up to investment firms to ensure that all their investment decision makers uphold these standards, which would in turn benefit the reputation of their institutions and the industry as a whole.

In many developed economies green shoots of recovery are tentatively emerging, making this a critical time to address concerns about gaps in knowledge and understanding of the industry as a new generation of professionals begin to come in to finance. The career opportunities are vast, not just in investment banking roles but in a range of other professions in the sector such as law, IT, marketing and PR, HR and compliance.

As the industry returns to growth, there will likely be more career opportunities and competition for strong candidates looking to set themselves apart as the leaders of tomorrow. It is a complex professional environment to enter, navigating the myriad of global systems, processes, regulations and terminology.

So how can the industry set a better example for this new generation? And how can managers change behaviours to reflect a new era in banking?

Mark Carney, the new Governor of the Bank of England recently commented that banks must “reconnect with society.” To fulfill this societal mission, investment professionals must act on behalf of investors to protect and grow their savings to secure their financial future. In order to achieve this, leaders must instill a culture of ethical conduct, rigorous regulatory compliance, and create systems to report misconduct in confidence.

At CFA Institute our mission is to guide the investment industry to higher ethical and professional standards for the ultimate benefit of society. The tools we have created to equip financial institutions and professionals include the CFA Program, now in its 50th year, and our new Clartias® Investment Certificate which provides a fundamental introduction to the industry for those outside of investment decision making roles.

In creating the latter, we worked with industry leaders, regulators, journalists, academics, and our own members from around the globe. We heard from leading talent development professionals about the challenges that they face in ensuring that their company’s employees can speak a common financial language. We spoke with policymakers about their concern with the industry for failing to take critical steps necessary to repair its reputation. We heard from industry leaders about their frustration with the lack of awareness that policymakers and others have about the efforts they have already made. Most importantly, we heard again and again that there was an unmet need in the industry for a global benchmark of knowledge for the ninety percent of professionals in the investment industry who are not themselves investment decision makers.

The benefits for firms that invest in the knowledge and education of their staff and commit to ethical practices range far beyond the macro-societal good: staff retention; organic growth through sharing within and across the business; development of more sophisticated products; attracting top talent; stronger client relationships; and so on.

It is critical that the industry approaches this issue from all angles. We have seen a focus on investment decision makers themselves, but their communications teams, finance departments, IT consultants and legal counsel and how all these functions operating within the wider industry can improve understanding, performance and ethical practice.

The conversation must move on from a culture of blame to a constructive dialogue about what positive solutions organisations can bring forward to restore a healthy financial system. Our call to action to the industry is ‘the future of finance starts with you’ and much needs to be done urgently. Regulators should drive the broader professionalisation of the financial sector; a greater emphasis on professionalism must properly complement and balance the regulatory and industry overhaul reshaping finance. At the same time, employers should require their most valued employees to actively seek professional status as a condition of employment; long-term competitive advantages and investor confidence could be built in this way.

It will take more, much more, to restore the public’s trust in the financial services industry, but investing in education is a visible and tangible step for any company that wants to demonstrate an institutional commitment to ethics – and a belief in the fundamental good that the industry can do for society as a whole.

Nitin Mehta is Managing Director for Europe, Middle East, and Africa (EMEA) at CFA Institute.
www.cfainstitute.org

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GameStop rally fizzles; shares still on pace for 130% weekly gain

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GameStop rally fizzles; shares still on pace for 130% weekly gain 1

By Aaron Saldanha and David Randall

(Reuters) – An early surge in the shares of GameStop Corp fizzled and left the video game retailer’s stock down more than 15% on Friday, throwing water on a renewed rally this week that has left analysts puzzled.

GameStop shares hovered around $94 after hitting $105 in late-morning trading. Despite Friday’s losses, the company’s stock is up about 135% for the week in the face of a broader market selloff that has sent the benchmark S&P 500 down about 2% over the same time.

Analysts have struggled to find an clear explanation for the rally, leaving some skeptical that it will continue.

“You might be able to make some quick trading money and it could be a lot of money, but in the end, it’s the greater fool theory,” said Eric Diton, president and managing director at The Wealth Alliance in New York. The theory refers to buying stocks that are over-valued in anticipation that someone else will come along to buy them at a higher price.

One catalyst that sparked GameStop’s rally in January – a high concentration of investors that had bet against the stock being forced to unwind their positions – does not appear to be as much of a factor this time.

Short interest accounted for 28.4% of the float on Thursday, compared with a peak of 142% in early January, according to S3 Partners.

Options market activity in the stock, which has returned to the top of the list in a social media-driven retail trading frenzy, suggested investors were betting on higher prices or higher volatility, or both.

Refinitiv data on options showed retail investors have been buying deep out-of-the-money call options, which are options with contract prices to buy far higher than the current stock price.

Many of those option contracts are set to expire on Friday, and would mean handsome gains for those betting on a further rise in GameStop’s stock price.

Call options, which would be profitable for holders if GameStop shares reach $200 and $800 this week, have been particularly heavily traded, the data showed.

“The actors are looking to take advantage of everything they can to maximize their impact and the timing is important,” said David Trainer, chief executive officer of investment research firm New Constructs. “The options expiration will contribute to their strategy on how to push the stock as much as they can and maximize their profits.”

Bots on major social media websites have been hyping GameStop and other “meme stocks,” although the extent to which they influenced market prices is unclear, according to analysis by Massachusetts-based cyber security company PiiQ Media.

GameStop’s stock is still far from the $483 intraday trading high it hit in January, when individual investors using Robinhood and other trading apps drove a rally, forcing many hedge funds that had bet against the video game retailer to cover short positions.

Other Reddit favorites were also lower, with cinema operator AMC Entertainment down around 5.5%, headphone maker Koss off about 25% and marijuana company Sundial Growers down less than 1% in Friday trading.

(Reporting by Aaron Saldanha in Bengaluru; Additional reporting by Devik Jain and Sruthi Shankar; Writing by David Randall; Editing by Shinjini Ganguli, Anil D’Silva and Dan Grebler)

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Stocks try to recover from bond whiplash, dollar gains

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Stocks try to recover from bond whiplash, dollar gains 2

By Herbert Lash

NEW YORK (Reuters) – Global equity markets swooned on Friday, even as the Nasdaq and S&P 500 tried to recover and the bond rout eased a bit, but fears of rising inflation still weighed on sentiment as data showed a strong rebound in U.S. consumer spending.

Shares of Amazon.com Inc, Microsoft Corp and Alphabet Inc edged up after bearing the brunt of this week’s downdraft, while financial and energy shares fell.

The S&P 500 gained 0.80% and the Nasdaq Composite added 1.87%. But the Dow Jones Industrial Average fell 0.3%.

U.S. consumer spending rose by the most in seven months in January as low-income households got more pandemic relief money and new COVID-19 infections dropped, setting the U.S. economy up for faster growth ahead.

The benchmark 10-year Treasury note on Thursday touched 1.614%, the highest in a year, rocking world markets. The note’s yield is up more than 50 basis points year to date and is now close to the dividend return of S&P 500 stocks.

The 10-year note fell 1.7 basis points to 1.4977%.

The amount of money swirling through markets and U.S. stocks at close to all-time highs has caused investor angst, said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.

“Many people are taking some profits and not necessarily reinvesting that money quite yet,” Kinahan said, but the tug of war isn’t over year.

“The U.S. equity market is still the best game in terms of safety versus opportunity. But there is a shift going on.”

The scale of the recent Treasury sell-off prompted Australia’s central bank to launch a surprise bond buying operation to try to staunch the bleeding.

MSCI’s benchmark for global equity markets slid 0.83% to 661.49.

In Europe, the broad FTSEurofirst 300 index closed down 1.64% at 1,559.48. Technology stocks lost the most as they continued to retreat from 20-year highs.

The dollar rose against most major currencies as U.S. government bond yields held near one-year highs and riskier currencies such as the Aussie dollar weakened.

The dollar index rose 0.578%, with the euro down 0.78% to $1.2081. The Japanese yen weakened 0.42% versus the greenback at 106.66 per dollar.

Gold fell more than 2% to an eight-month low, the stronger dollar and rising Treasury yields hammered bullion and put it on track for its worst month since November 2016.

Benchmark German government bond yields fell for the first time in three sessions but were still headed for their biggest monthly jump in three years after rising inflation expectations triggered a sell-off.

The 10-year German bund note fell less than 1 basis points to -0.263%.

European Central Bank executive board member Isabel Schnabel reiterated on Friday that changes in nominal interest rates had to be monitored closely.

Copper recoiled after touching successive multi-year peaks in six consecutive sessions, falling more than 3% as risk-off sentiment hit wider financial markets after a spike in bond yields.

Three-month copper on the London Metal Exchange (LME) slumped to $9,112 a tonne.

MSCI’s Emerging Markets equity index suffered its biggest daily drop since the markets swooned in March. MSCI’s emerging markets index fell 3.06%.

The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.

Currencies favoured for leveraged carry trades all suffered, including the Brazil real and Turkish lira, which slid for a fifth straight day, erasing all the year’s gains.

Asia earlier saw the heaviest selling, with MSCI’s broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since the market rout in late March.

Oil fell. Brent crude futures fell $0.78 to $66.1 a barrel. U.S. crude futures slid $1.24 to $62.29 a barrel.

(Reporting by Herbert Lash, additional reporting by Tom Arnold in London, Wayne Cole and Swati Pandey in Sydney; editing by Larry King and Nick Zieminski)

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European shares drop as high yields spark profit taking in tech, resources

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European shares drop as high yields spark profit taking in tech, resources 3

By Shashank Nayar and Ambar Warrick

(Reuters) – European stocks closed lower on Friday, ending three weeks of gains as investors booked profits in technology and commodity-linked shares due to concerns over rising inflation and interest rates on the back of a jump in bond yields.

The benchmark European stock index fell 1.6%, and shed 2.4% for the week – its first weekly loss this month – with technology stocks losing the most as they continued to retreat from 20-year highs.

On the day, resource stocks were the softest-performing European sectors, tumbling 4.2% from a near 10-year high in their worst session in five months.

“Equity markets across the U.S. and Europe are quite expensive now and with bond yields constantly rising, the fixed income market is proving to be more attractive than the riskier equity market,” said Roland Kaloyan, a strategist at SocGen.

“Investors are actually looking at the pace at which yields drop and the current speed is quite concerning for equity markets.”

U.S. and euro zone bond yields retreated slightly on Friday, but stayed close to highs hit this week as investors positioned for higher inflation this year. Yields were also set for large monthly gains. [GVD/EUR] [US/]

Sectors such as utilities, healthcare and other staples – usually seen as proxies for government debt due to their similar yields – lagged their European peers for the month as investors sought better returns from actual debt.

Still, the benchmark STOXX 600 gained in February, helped by a rotation into energy, banking and mining stocks on expectations of a pickup in business activity following vaccine rollouts.

Travel and leisure was the strongest sector in February as investors bet on an economic reopening boom. Banks also outperformed their peers thanks to higher bond yields.

Better-than-expected fourth-quarter earnings have also reinforced optimism about a quicker corporate rebound this year. Of the 194 companies in the STOXX 600 that have reported quarterly earnings so far, 68% have beaten analysts’ estimates, according to Refinitiv.

“As recovery hopes gain ground with the economy re-opening and vaccines coming up, coupled with earnings being relatively positive, the near-to-mid-term outlook for equities seems positive with yield movements still a part of the equation,” said Keith Temperton, an equity sales trader at Forte Securities.

Among individual movers, Belgian telecom operator Proximus was the worst performer on the STOXX 600 for the day, after it flagged a lower core profit in 2021.

(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by Sriraj Kalluvila and Hugh Lawson)

 

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