First, expect the financial world to become more local. Investors will favour local, home-country stocks over international investments as emotion overrides reason. Home is where the heart is and we should expect investors to feel safer in their own backyards for a while. They will feel most confident holding domestic stocks where their governments will protect both them and their institutions. And these institutions and those who trade for them are also likely to prefer local counterparties where they are available.
Second, financial industries have become political. The public is looking to governments to act and politicians have shown they will not let the electorate down. We should remember that governments are local, not international. While information and intelligence are shared internationally, decisions are made at the country level.
Third, complexity is out and simplicity is back in. Investors, firms and regulators will have a newfound desire to understand fully what they are buying and will favour those investments they can adequately control, understand and monitor. For many financial instruments, underlying exposures and leverage have moved beyond the understanding of those who bought them and also those who had the responsibility of governing the institutions who traded and marketed them. Firms will now become more focused on what they can do well and what they can adequately control and monitor.
Fourth, models are out and people are back in. Investors will shift away from models û quantitative or otherwise û and swing back to human beings, where their level of understanding is greater. Many such models rely on past relationships between securities, markets and asset classes. Theory and practice can be strange bedfellows as many investors are now finding out. Market participants have learned now how leverage has overridden historical correlations so that everything now seems one-directional.
Fifth, innovation is out and experience is back in. Funds will flow to those with experience in the traditional practices of traditional markets and investors will be wary of anything new. This was already a trend emerging this year but last weekÆs events have cast it in stone û at least for the foreseeable future. Smart will be replaced by sensible, while trust and experience will be at a premium.
Sixth, transparency trumps opacity. Investors will demand transparency from the firms managing their money and in the products that they market.
Seventh, oversight will be as valuable as insight. Compliance will become even more critical in firms and those companies that have relegated this function will need to redress the balance. Oversight will become as important as insight in the new world of investing.
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