Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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FREE FOR ALL?

In his recent book*, British historian Niall Ferguson cites four main reasons why Western economies are in decline. One reason is that free markets are no longer really free.

Ferguson writes “today … the balance of opinion favours complexity over simplicity; rules over discretion; codes of compliance over individual and corporate responsibility.” He suggests that “excessively complex regulation is the disease of which it pretends to be the cure.”

In the wake of the Global Financial Crisis and its aftermath, it’s likely that Ferguson’s comments will raise the eyebrows of market regulators and others tasked with ensuring that financial market misadventure is a past phenomenon. However, Ferguson’s remarks point to an interesting question – what defines a free market?

Freedom is a concept which tends to be shaped by the circumstances of the time. History has shown us on innumerable occasions that in times of crisis or conflict, personal freedoms may be curtailed so that the freedoms of all can be maintained.

Freedom in financial markets is no different. The Bubble Act of 1720 to curtail speculative excess was enacted by Britain’s Parliament following the infamous collapse of the South Sea Company. The Great Crash of 1929 which foretold the Great Depression of the 1930’s saw the introduction of the Securities Act (1933) and Securities Exchange Act (1934) in the US, both of which were criticised at the time as having the potential to hinder rather than help economic recovery. The Black Monday Crash of October 1987 launched a US Presidential Task-Force on Market Mechanisms, while the burst dot.com bubble in the early 2000’s introduced a further tier of market reforms. More recently, the GFC saw the International Monetary Fund create the Financial Stability Board across the G20 group of countries. In New Zealand, a recent sweep of financial market regulatory reform has now concluded with the enactment of the Financial Markets Conduct Bill.

Despite all of the above, most would consider that globally, financial markets continue to be relatively free, albeit with limitations on certain types of financial behaviour which has the potential to jeopardise the integrity of market mechanisms, or compromise the quality of securities issued.

Overall, it appears that the continuing evolution of regulation is not hindering the growth of financial markets. Earlier this week, our local sharemarket operator, NZX, held its annual Investors Day. Of note, the number of IPOs undertaken in 2013^ in New Zealand was the largest in the past decade, as was the value of securities traded ($40 billion). In the US, the past week has also been noted as the biggest for IPOs since the end of 2006, with 16 companies scheduled to make their trading debut. Confidence of issuers and investors would appear to be strong, despite a tighter regulatory environment applying to both.

In the mid-1960’s, the Rolling Stones song “I’m Free” proclaimed “I’m free to do what I want any old time”. It appealed to the zeitgeist of the era and was later used to promote credit cards for Chase Bank. Nearly 50 years later, society’s concept of freedom may not be quite as liberal as it was when it comes to financial markets, however current evidence suggests the evolutionary impact of regulation is achieving about the right balance.

* The Great Degeneration – How Institutions Decay & Economies Die

^ NZX Investor Day 2014 – “Entering The Next Phase Of Growth” - 9 April 2014

By Gordon Noble-Campbell
Director,  Private Client Services

This article was published in April 2014