Global Capital Markets: Not There Yet

For me the current Euro crisis and the spike in gold prices reflects the investors’ inability to grasp the slow yet sweeping, rebalancing of global trade and growth. Cash surplus western investors are catching up slowly to the fact that their domestic fishing grounds are no longer viable and that their catch is falling. But, in my opinion, what they lack is knowledge and foresight to explore and enter the developing markets, where resources are abundant (and where fish are fishes). Thomas Friedman pointed out in his book ‘The World is Flat’ that the world is witnessing a globalization revolution, bringing down barriers of knowledge, information and intellect. I completely agree with his observations, but I feel finance is still not flat, although it has always been on that track.

One should now get used to increased speculation and volatility in domestic markets, as they are domestic no more; international is their new citizenship.

We are still to break down all barriers of information sharing and thus leading to an admirable state which economists call “perfect competition”. Many books have been written on the fact that globalization essentially is based on free market philosophy and has its roots in perfect competition. And so when people look at global finance, I feel they miss out on the basic assumptions of perfect completion or free markets or globalization. First, that information on prices, transactions and products are well known to all market participants.

Even George Soros, the man who made global hedge funds a symbol of global finance, questions this in his revolutionary theory of reflexivity. He also further goes on to write about how decisions of market participants have personal biases and thus enter the Keynesian animal spirits. Today there is no level playing field in global finance. From profligate and covert governments like Greece to unethical market leaders like Goldman Sachs, where is free information? With so much uncertainty the average, or better put majority, of investors will be nervous and jump on to gold.

The second assumption is that there are no transaction costs. But, in reality, today transaction costs are very high, eating into the investor’s margin. Ranging from consultancy fees, to trading fees, incoherent tax laws and legal charges; costs are higher for attracting foreign investors. Thus I reiterate that there is no level playing field.

The point I am trying to make here is that foreign investors have little (if not more) confidence and expertise while investing in developing markets. For instance, some stock analysts in India say that their foreign counterparts rely on broad macro economic data to analyze stock markets and so that explains their unpredictability when sudden macro events happen. Even I am witness to how FIIs in the last decade, even though have pumped up markets have made Indian markets even more volatile and inclined with global markets.

I feel we have a long way to go to see the full effects of a truly ‘free and flat’ global finance. One should now get used to increased speculation and volatility in domestic markets, as they are domestic no more; international is their new citizenship. Till the time we see some global regulations and standards in capital markets, like we have seen in the banking sector, investors should be worried.