Saturday 27 December 2008

Traders Likely to Shun Equity Markets Until 2010

“When the retail guys begin to go away, suddenly all you have is very knowledgeable players playing with each other, and it gets a little dicey,” said Brad Hintz, analyst at Sanford Bernstein, who expects trading volumes to decline until 2010.

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Guanyu said...

Traders Likely to Shun Equity Markets Until 2010

Exchanges braced for short, sharp shock, analysts say

Reuters and Nick Westra
21 December 2008

After a few panicked months of record selling, the world’s stock traders are walking away from equity markets and are not expected to return in force until 2010.

Fewer participants signal a drought for companies that rely on trading volumes, such as online brokerages and exchange operators, both of which have benefited from a spike in volume brought on by the volatile sell-off.

Hong Kong Exchanges and Clearing, operator of the local stock market, could be among the worst hit in the city, since it makes much of its revenue from handling equity transactions.

Because the market sell-off has been so sharp, however, observers expect the decline in trading volume to be severe but short - unlike early this decade, when US equity trading volumes took three years to follow the broader market down.

“What you’re seeing is an extraordinary phenomenon where liquidity just blew out to unprecedented levels,” said Laurie Berke, senior consultant at research and advisory firm TABB Group and author of its soon-to-be-published US Institutional Equity Trading study.

“The liquidation has been far greater, equity assets under management have shrunk far more rapidly, so I think the impact on volume is taking place much faster, and it’s [all happening] in 2009,” she said. “You don’t [have to] wait until 2010 for that to happen.”

It took nearly three years for the dotcom crisis to decimate stocks the way the credit crisis has in less than a year.

While the S&P 500 index skidded from 2000 to 2002, average daily volumes continued to rise. It was not until 2003, when the S&P rebounded 26 per cent, that volumes finally declined, by 3 per cent.

“We could have a lower-volume period throughout much of 2009, until the market begins to see the light at the end of the tunnel,” Ms. Berke said.

But in Hong Kong, turnover has already started to edge upwards on the back of a recent rally. After three straight monthly declines in trading levels, turnover has picked up some ground in December and cracked the HK$60 billion daily trading mark twice over a span of three days.

“Risk appetite has increased a little bit,” said Teresa Chow, a fund manager at RBC Investment Management. “And the market also expects some kind of year-end rally and, all in all, that draws both local and foreign investors back to the market.”

The short-term bottom-fishers and traders looking to time the market are mostly responsible for the uptick in turnover levels, according to market observers, while most long-term, institutional funds remain on the sidelines.

“But right now the market sentiment is turning better,” said Linus Yip, a strategist at First Shanghai Securities. “And the market has had a breakthrough, so maybe it could trigger a portion of long-term funds” re-entering the market.

Analysts covering HKEx, however, are still bracing for sharp profit losses in the company because trading turnover is not expected to rebound significantly until the market has clearly turned the corner.

Tommy Ho, an associate director at UOB Kay Hian, projected average daily turnover in the local market would amount to just HK$33.2 billion next year, compared with an estimated HK$77 billion this year. He maintains a sell call on HKEx with a target price of HK$44.90.

A 39 per cent decline in the S&P 500 since January has meant liquidation for everyone. Hedge funds have deleveraged and contracted, banks have consolidated and eliminated jobs, and individual investors have dumped equities for cash and safer securities.

Like the technology-inspired downturn of 2000-02, the current mortgage-inspired downturn is expected first to drive individual investors, known as retailers, away from active trading. That could further handcuff institutions, which often rely on retailers to take the other side of their trades.

“When the retail guys begin to go away, suddenly all you have is very knowledgeable players playing with each other, and it gets a little dicey,” said Brad Hintz, analyst at Sanford Bernstein, who expects trading volumes to decline until 2010.

In Hong Kong, individual investors make up only about 10 per cent of volumes on the stock exchange at the moment, in contrast to 30 per cent previously, according to brokers.

“Our view, especially on the exchanges, is that they’ve been extremely over-penalised,” said Roger Freeman, an analyst at Barclays Capital who covers both exchanges and online brokers.

“The market is far more institutionally driven than it used to be, and within the institutional space there are a lot of algo-driven strategies that don’t require leverage.”

Indeed, trading has been transformed in the past few years, which could hasten both the drop and the recovery in volume. Computerised trading programs, called algorithms, now generate up to 40 per cent of all activity, according to a study by US-based research firm Aite Group.

Even the retailers - who can now cheaply access markets and the information necessary to trade there - are increasingly using sophisticated products such as options.

“Higher volatility and higher trading volumes are the new reality. This is not a two-month thing,” said Keith McCullough, CEO of advisory firm Research Edge.

“Wall Street has never been shaken to its core like this ... so I think that when we come back next time there is a massive tidal wave of self-direct investing coming that’s going to increase volume.”