An article published by the British newspaper “Financial Times” identified three reasons for this concern:
The first of these reasons has to do with profound changes in the macroeconomic environment, in terms of the shift from central bank quantitative easing stimulus programs to coordinated tightening. Second, growing uncertainty surrounding monetary policy increases interest rate volatility. At a time when central bankers’ desire to avoid 1970s-style inflation clashes with expectations of a sharp economic contraction that will necessitate a return to easing. Third, changes in the US Treasury market have raised liquidity concerns. This is after the size of the market exploded to more than five times over the past 15 years (according to JPMorgan data).
However, JPMorgan found that the number of primary traders has stalled and the depth of the US Treasury securities market has shrunk by almost 60% in 2022.
With this data, what are the implications for investors? The aforementioned article, written by Laurie Heinel, suggests that investors need to think more broadly about how they are exposed to acute liquidity risk. Many of the most damaging market events are liquidity-related, but they also present prime opportunities for those with ready cash to buy assets at bargain prices.
Liquidity crisis
Saudi economist, Suleiman Al-Assaf, says in exclusive statements to the “Sky News Arabia” site:
There are signs of an upcoming liquidity crisis. Due to the high interest rate and the resulting withdrawal of cash from the markets and its deposit in banks. The process of increasing interest makes borrowing more difficult; Due to the high cost of debt, all of these things affect liquidity. There is uncertainty and uncertainty in the global economy. The world is expected to go through a recession, and we hope it will not be widespread inflationary stagnation in many countries around the world.
He refers to the term “cash is king” in such times, and it is “a correct term, but many misunderstand it, because it means that you can benefit from the money you have not in it. hoarding without investment, but rather investing by seizing opportunities, given that the state of panic and fears that afflict the markets are causing some to get rid of certain valuable assets, and here it is possible to seize this opportunity and to invest money in these assets.
Accordingly, the economist points out that, according to the aforementioned principle, opportunities can be seized at this time, whether in US and other companies and markets.
Returning to the article in the “Financial Times”, the author indicated that “it is necessary to have a short-term mentality to face market pressures and seize opportunities to buy cheap assets”.
At the same time, she noted, investors today need to be smart and develop an insurance framework to test their assumptions about future liquidity and retain access to property and assets to take advantage of liquidity driven opportunities.
This comes at a time when innovation in markets and access to liquidity pools are helping investors adapt. Expanding access to markets through electronic trading has reduced the costs of accessing the liquidity.
Improving risk management tools offers another important solution. Investors should proactively identify areas of stress by monitoring key metrics such as actual trading volumes for vulnerabilities, costs, and cash flows while taking a close look at areas of the market that have experienced stress in the past. If a potential risk issue is identified, risk management teams need quick action to mitigate the issues.
coverage factors
For his part, a member of the advisory board of the British Institute for Securities and Investment in Dubai, Wadah Al-Taha, says in statements exclusive to “Sky News Arabia Economy”:
A liquidity crisis means a decrease in liquidity levels in the financial markets, whether as a result of liquefaction and withdrawal transactions or a change in the investment positions of portfolios and funds, which leads to a decrease in liquidity levels also due to concern about the lack of clarity of vision on the economic situation, particularly in the United States. The continuous repetition of rising interest leads to a reduction in the money available in the market; Because it reduces borrowing.
And he adds: “Usually – and this is the most important point for portfolio managers and in general even for investors – that liquidity in the market when it decreases, it becomes a source of concern because the possibility to choose the right time to exit completely or partially from a stock or several stocks is less.”
And he continues: “Therefore, some portfolios focus on market liquidity and equity liquidity, as they calculate the exit strategy, so that this strategy is not affected by low levels of liquidity, and therefore there is has a reserve and cover for this aspect.”
A member of the Advisory Board of the British Institute for Securities and Investment in Dubai points out that there are several strategies followed by fund and portfolio managers, reducing exposure to markets and stocks whose liquidity has decreased, focusing on the long term for stable investments defensive stocks with stable returns, which should not be liquidated. Name them after.
Al-Taha also indicates that hedging is done with assets that usually maintain value, either due to currency depreciation or due to instability or lack of clarity, so one resorts to the gold, for example (..), adding: “These strategies are precautionary strategies for fear of instability The ability to exit a particular security due to low levels of liquidity.
He concludes his interview with “Sky News Arabia Economy” by saying, “In general, in times of economic uncertainty, various precautionary measures are usually taken, and not only through the stock market, but also, in addition to this mentioned, the trend towards long-term stocks and stable stocks Defensive, which generally has limited levels of volatility, as well as gold.
Banking crisis and withdrawal of deposits
For his part, the Kuwaiti economist, Muhammad Al-Ramadan, indicates in exclusive statements to “Sky News Arabia Economy” that “after the beginning of the banking crisis in the United States with the weakening of Silicon Valley, in last March, large investors began withdrawing their deposits from US banks, and investing it in US Treasuries, especially since deposits are only covered up to $250,000, and so those who had deposits above that quickly withdrew their deposits.
He points out that “there is a selection by investors towards stocks that are expected to perform well, or by reducing investments in indices and increasing liquidity in order to avoid risk. There is also many investors who are turning to alternative investments in various assets, as well as digital currencies, in addition to gold of course, in light of high inflation rates and currency crash fears, as well as investors’ fears about the extent of exposure and risk in their portfolios, and so they change their directions in order to avoid the risks they deem to be large.
He explains that there are also aspects of investing in real estate, hedge funds and others, pointing out that “the current situation requires moving away from high-risk assets, relying on safer assets, or so-called defensive assets, or to turn to bonds and alternative investments in light of the uncertainty that makes Every investor reconsiders his portfolio and makes adjustments to it.
In this context, the author of the aforementioned article pointed out that “diversification by sources of liquidity is always imperative”, explaining that investors should also review their allocations to illiquid assets, because a large amount of money has flowed in. into private credit, private equity, and other asset classes. As uncertainty mounts over capital demands for these investments, investors need to hold liquid assets to meet any demand.
The impact of deflationary policies
Anwar Al-Qassem, an economist at the Financial Times newspaper, says in exclusive statements to Iqtisad Sky News Arabia:
The liquidity crisis is pushing markets into a state of recession and recession, from which no sector in most global economies can be spared. The current deflationary policies suck liquidity from the markets under the pretext of achieving fiscal and monetary balance and reducing inflation rates and the budget deficit. We hope that what is happening now is a temporary, short-term crisis, not a long one.
He adds: “To overcome this stage, it is necessary at a later stage, perhaps at the end of this year, to reduce the interest rate to encourage borrowing and consumer spending, and to increase and to create job opportunities to overcome unemployment and achieve better incomes to encourage consumption.
For investors, Al-Qasim points out, “Short-term trade credit and deferred payment purchases can be an easy way if there is a lack of liquidity to buy cash, and this means that many investors and companies can achieve high profit margins even if they do not have short-term assets or sufficient cash.
And he continues: “Similarly, a minimum level of cash must be available to meet obligations that must be paid immediately, otherwise the business and investors will fall prey to financial insolvency and bankruptcy.
At the end of his interview with “Sky News Arabia Economy”, he draws attention to the management of the purchase of precious metals such as gold as a semi-collateralized reserve, in addition to investing in assets fixed assets such as real estate and assets, and seek new investment areas, without taking the risk of increasing short-term investment, until the current international economic clouds dissipate.
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