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Nikkei 30,000 brings back memories of 1980s mania



In 1989, an Osaka tempura restaurant owner, who claimed a divine destiny for her stockpicking, hosted share-tipping seances and channelled the advice of a magical toad statue, was Japan’s most successful and influential individual investor. 

The history of Nui Onoue, who was 59 at the time, whose asset portfolio expanded to billions of dollars and whose subsequent fraud conviction forced two banks into mergers, have for years been the great cautionary tale. This is not just because she and her shenanigans were so lurid, but because they blended all too naturally into the deranged backdrop of the bubble era. Japan remains dented by a living memory of what true, nostril-flared investment mania looks like when it grips a country.

Which is why the sight of the Nikkei 225 Average surging back above the 30,000 line for the first time since 1990 last week — as US benchmarks like the S&P 500 and Nasdaq were trading at all-time highs — felt like a venture into both a new and old era. Assumptions about Japanese retail investors that have formed over the past three post-bubble decades may suddenly no longer hold.

The Nikkei, whose construction accords outlandish weightings to a handful of companies, has now risen 78 per cent since its pandemic trough in March 2020. It is viewed by professional investors with some scorn. But its role in defining market narratives and psychology, says Peter Tasker, a veteran analyst of Japan’s bubble, remains immense. 

The break last week through 30,000 leaves the benchmark still almost 30 per cent below the December 29 1989 peak and trading on a decisively smaller price-to-earnings multiple. But the historic resonance of 1990 is powerful and these are heights that have not once, in 30 years, felt remotely recoverable.

Even eight weeks ago, 30,000 felt like a stretch, but talk of reaching the old 1989 peak has now elbowed its way into public discourse. On a practical front, the crossing of this line is expected to intensify the debate over whether the Bank of Japan should now end its decade-long support of the market through purchases of exchange traded funds. More viscerally, this big round number has acted like a Proustian madeleine. It provides sensory transportation back to a happy time before the miseries of the economic “lost decades” and sustained market sell-off began to weigh through the early 1990s and beyond.

Trading desks offer sensible reasons — a strong earnings season and relatively low liquidity during Chinese lunar new year — for the Nikkei’s recent surge. But all this history has produced a suspicion of froth that Japan has been conditioned to beware. For many, the question is whether Tokyo stocks, now roughly a third owned by non-Japanese investors, are in the grip of something irrational, foreign in origin and inherently fragile.

The eye-catching external phenomena of the past month — including the whipsaw trading in GameStop and other “meme stocks” in the US, the skyrocketing of bitcoin prices and even the gyrating share price of Tesla — represent an addictive dislocation from sanity. For some, it evokes the days of building portfolios around the whims of stockpicking toads.

But most people believe that Japan remains very far from its manic alter-ego of 1989, leaving the question of what, domestically, might have changed. Retail investors, suggests Nomura’s chief equity strategist Yunosuke Ikeda, have morphed into a new type of force — not just through numbers, but through trading behaviour.

In the past, Japanese retail investors were reliable contrarians of prevailing market direction: they sold as the market rose and bought as it dipped. In effect, they have been market stabilisers — dampening big moves in both directions. But since the Covid-19 pandemic, their ranks, according to Japan’s largest online brokerages, have expanded by more than 1m, their average age has fallen substantially and the frequency with which they trade has risen.

With that transformation, says Ikeda, has come a break with historical patterns of behaviour. He says on an aggregate basis, retail investors are less sensitive than they were in the past to price level or direction and now (at least on current evidence) appear content to continue buying through a rally. When a correction comes, he added, they may also now exacerbate the drop. 

That gives the passing of the 30,000 line on the Nikkei its greatest significance: retail investors have continued buying, where for the past 30 years they would dependably have taken the moment as a clear sign to sell. If the theory continues to operate, Japan strategists may need to reconsider the market: not as one that has lost its head, but one that might, at least, have lost its collective memory of Onoue.

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How traders might exploit quantum computing




If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

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Martin Gilbert returns to dealmaking fray with Saracen acquisition




Martin Gilbert, the acquisitive founder of Aberdeen Asset Management, has returned to the dealmaking fray and scooped up Edinburgh-based boutique Saracen Fund Managers through his new venture. 

AssetCo, the Aim-listed company of which Gilbert became chair in April, said on Friday it had agreed to buy Saracen for £2.75m. The deal marks the first step in its strategy to use its platform to make acquisitions in the asset and wealth management industries.

“We need to acquire a regulated entity,” said Gilbert, who established Aberdeen four decades ago and helped orchestrate the £11bn all-share merger between Standard Life Investments and Aberdeen Asset Management in 2017. “Saracen was typical of a good asset manager that had struggled to grow. That’s where we think we can help.” 

Saracen was founded in the late 1990s and has five full-time employees and three funds, which together manage about £120m in assets. In the financial year ended March 31, the group recorded turnover of £985,364 and a post-tax loss of £15,146.

David McCann, an analyst at Numis Securities, described Saracen as “a nice little business but obviously it’s very small”. He added: “It doesn’t move the needle for AssetCo, but it’s about what they do next. The expectation is that this is used as a building block for something much bigger.” 

Dealmaking is sweeping across the fragmented asset management industry. Gilbert, who stepped down from the board of Standard Life Aberdeen in December 2019 and is also chair of fintech Revolut, said AssetCo was “pretty ambitious, we’re looking at lots of opportunities”. 

“There are lots of opportunities for consolidation at all levels because of headwinds like the move to passive, fee compression, ESG and the move from public to private markets.

“We grew Aberdeen largely by organic growth and acquisitions,” he added. “That is our current strategy but at the boutique end of the market. I’ve told [Standard Life Aberdeen chief executive] Steve Bird ‘you’ve nothing to fear from us’.” 

AssetCo also owns a small stake in UK investment group River and Mercantile. Gilbert and Peter McKellar, who is also a director of AssetCo, will join the board of Saracen once the deal is completed.

Standard Life Aberdeen’s share price has tumbled about a third since the merger was struck.

The group last month cut its dividend by a third after full-year pre-tax profit fell almost 17 per cent and investors yanked money from its funds. It was also widely mocked online after announcing it would change its name to Abrdn.

Gilbert said: “The merger was obviously going to be difficult but the business is not alone in having to look at overheads because of the headwinds the industry is facing. It has the strongest balance sheet in the sector.” 

He added he was “supportive” of the rebrand: “That’s me being diplomatic.”

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Wall Street stocks bounce back after inflation scare




Wall Street stocks went into recovery mode on Thursday, after being pushed lower for three consecutive sessions by fears that central banks will withdraw crisis-era support following a surge in inflation.

The S&P 500 index was up 1 per cent at lunchtime in New York, after falling 2.1 per cent on Wednesday in its worst one-day performance since February. The technology-focused Nasdaq Composite rose 0.6 per cent, having neared correction territory on Wednesday when it closed almost 8 per cent below its record high in April.

US government debt rallied, with the yield on the benchmark 10-year Treasury sliding 0.03 percentage points to 1.67 per cent.

The S&P 500 hit an all-time high on Friday, fuelled by optimism about a global recovery supported by central banks keeping monetary policies loose. The blue-chip benchmark then lost 4 per cent over three sessions as worries about inflation rippled through markets.

Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast. This increased speculation about the Federal Reserve reducing its $120bn of monthly bond purchases has helped lower borrowing costs and prop up equity valuations.

Fed vice-chair Richard Clarida said this week, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target but the economy remained “a long way from our goals”.

Analysts warned that market volatility would continue as investors swung from believing the Fed to fretting that its policymakers would act too late to combat inflation and then tighten financial conditions rapidly.

Line chart of S&P 500 index showing Wall Street benchmark on track to snap three-session losing streak

“We are at such an inflection point that volatility in markets is likely to be quite persistent,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “Any chance of a change from the story of constantly low interest rates is going to be unsettling.”

The Vix, an index of expected volatility on the S&P 500 known as Wall Street’s “fear gauge”, is running at around its highest level since early March.

“Markets are volatile because they’re not sure which sort of inflation we have at present, or what, if anything, the Federal Reserve may do to bring inflation down,” said Nicholas Colas of research house DataTrek.

Mark Haefele, chief investment officer at UBS wealth management, said the market jitters also presented an opening for traders.

“Given our view that the spike in inflation will prove transitory, and that the equity rally has further to run, investors can use elevated volatility to build long-term exposure,” he said.

In Europe, the Stoxx 600 index ended the session 0.1 per cent lower, paring a loss of 1.7 per cent earlier in the session.

International oil benchmark Brent crude dropped 3.8 per cent to $66.68 a barrel as the Colonial pipeline in the US resumed operations after being shut down last Friday by a cyber attack.

The dollar index, which measures the greenback against major currencies, rose 0.1 per cent.

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