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e Business OBSERVER
| June 30, 2016
CASE STUDY
Platform for growth GATIS EGLITIS, Exante’s cofounder, is breathing a sigh of relief that 2015 is over, preferring to look ahead and boost the company’s momentum to where it should be. Last year, you were embroiled in a €100 million trading scandal uncovered by the US Securities and Exchange Commission (SEC) but you were cleared of all charges last February. How did the story end? The US Court confirmed that Exante was no longer on the defendants’ list. It was dismissed from the case and the SEC admitted that they had made a mistake. We were ended up without any charges or any penalties. Very few companies survive an SEC investigation… It took a lot of resources to protect our rights. Although many of our customers supported us throughout this time, we lost a lot of business. But since then many customers came back to us and to many of them, we are heroes as we survived and are actually stronger than they imagined. This is one of the worst times for anything to do with investments – in fact, many investors are opting to keep more cash than they have in years, because the yields are so bad… Keeping cash is also a position. It means that there has been a decision to stay in cash: there are bulls and bears and there are those who wait. If you look back last week, before Brexit, it was the highest level of cash ever held by hedge funds. I talked this week to a few of our hedge fund customers and asked them whether they had survived Brexit. All of them said they were actually sitting on cash and willing to buy things – which was not that easy as everyone was doing the same thing. Due to large cash holdings the impact of the referendum was cushioned. There was very high volatility and the markets crashed but they bounced back very quickly. Those who had cash helped the Bank of England and other central banks to boost the markets.
GATIS EGLITIS WITH PART OF HIS TEAM AT EXANTE. PHOTO: MATTHEW MIRABELLI
“e money being printed is no longer being used to purchase only sovereign debt but also corporate debt. at is insane” Cash actually has a negative interest in the eurozone as you now have to pay as much as one per cent to keep it in a bank (for example in Switzerland and Denmark). The financial system is designed to encourage you to invest, to take a risk rather than hold on to cash. I predict that 10 years from now, there will be no cash on the streets and all cash will have to be held in banks with negative yields. The trading platform that we built in-house is well prepared for these times – it gives an opportunity to buy more than 80,000 financial instruments through one account which is a
good alternative to keeping cash in a current account with negative yield. Why lose money by keeping cash in a bank while there are so many opportunities to make it by allocating to other financial securities – bonds, stocks, metals, ETFs, options, futures and funds? We live in the best time to be a broker in the past 100 years. Money is so cheap. There is excess liquidity. We have seen the ECB printing money every month. If you think about it, with €80 billion every month you could build hundreds of skyscrapers. It would pay for 800 skyscrapers every month! You cannot spend that much even if you tried. When you take into consideration that the global GDP is $70 trillion, of which $15 trillion is the US’s, then it puts this huge number into context. The money being printed is no longer being used to purchase only sovereign debt but also corporate debt. That is insane. If you think about it: companies are benefiting from a regulator! The premium of their risk reward, which should be included in the price of those debt instruments, is just evaporating because of this massive securities purchase.
With Brexit, we saw what happens when uncertainty kicks in. For example, Italian and Spanish bonds all lost tremendous value once people started to ask whether Italy and Spain would also decide to leave, now that there was a precedent – which would mean there would no longer be the ECB to back up their debt. Prior to Brexit, banks had been buying sovereign debt, dragging sovereign interest rates to very low levels, so 10-year bonds in Spain peaked at the same level as in the US, even though the former has high unemployment and other fiscal problems and the latter is a superpower in economic terms. So why would the yield of that debt be the same? It was clearly mispriced over the last year or so. Our customers made a lot of money by making a bet that there would be a correction – and it happened. US and German debt papers rallied while European weaker economy bonds were dumped massively. Market participants were simply relocating assets from risk to safety. Nowadays markets have never been so unified and there is no longer any discussion about single stock picking, or single asset