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Commentary on financial markets – April 2017

Highlights:

  • Czech Republic: end of CNB foreign exchange interventions
  • France: centrist Emmanuel Macron wins first round of presidential election

Commentary:

At the beginning of April, the CNB abandoned its commitment to hold the exchange rate at a minimum of CZK 27/EUR after three and a half years. The koruna reacted to the end of foreign exchange interventions by strengthening, but so far it has been very weak. This is due to the fact that the CNB announced its intention to leave the intervention regime in advance, so its decision was not surprising. Moreover, the CNB is prepared to intervene again to the detriment of the koruna if it appreciates too much. With such an attitude of the central bank, there is no room for a strong appreciation of the domestic currency and only a gradual strengthening of the koruna can be expected, as the CNB allows. In any case, there will be no sign of a repeat of the Swiss scenario, where the central bank there ended foreign exchange interventions without prior warning in January 2015, and the Swiss franc began to appreciate sharply (it strengthened by +20% on the pair with the euro).
European financial markets reacted very positively to the result of the first round of the French presidential elections, in which Emmanuel Macron (gaining 23.8% of the vote) and Marine Le Pen (21.5% of the vote) were successful. According to the pre-election polls, the pro-European Macron had the best chance of beating the nationalist Le Pen in the second round, which is why his victory and progression to the second round were so well evaluated by the European stock markets. A high turnout will be key to his success in the second round, while a weaker turnout would favour Le Pen. Initial estimates for the second round strongly favour Macron, who should beat Marine Le Pen by a vote share of 62% to 38%.

European equities are riding on positive sentiment this year, driven by economic growth accompanied by a fall in unemployment. Moreover, the results of the elections in the Netherlands and the first rounds of the presidential elections in France give hope that the EU project will continue, although it is clear that it needs to be significantly reformed.

The investor school:

In the Investor’s School, we will this time look at investment fraud, which is present in every market. It attacks human greed and financial illiteracy and leaves behind the havoc of many people being defrauded. Fraudsters also operate in the domestic financial market and are difficult to spot early on because they often “work” for a long time and actually pay returns. Let’s first take a look at the history of investment fraud, and then name a few typical signs that should alert us to the fact that it might actually be a scam.

In the early 20th century, a man named Charles Ponzi devised a clever way to use human greed and gullibility to his advantage. He offered American investors a certain investment that would have a 50% return credited after 90 days. The profit was to be certain because the investors’ funds were to be valued by arbitrage trading of international postal coupons, which were worth different amounts overseas and in America itself.
In reality, the clients’ funds were not invested anywhere and the proceeds were paid out of the deposits of other trusting investors who entrusted their money to Ponzi. Since the whole system generated no real returns while paying profits to clients, it was unsustainable in the long run. And the moment the payout of profits exceeded the size of the new investments, the whole system collapsed. Charles Ponzi, who until then had enjoyed luxury and fame, was condemned, and gullible and greedy clients lost money. Since then, the fraudulent system, where no real investment is made and profits are paid out on the deposits of new investors, has been called a Ponzi scheme or, in popular parlance, a plane or pyramid game.

Even today, people are still greedy and many are financially illiterate, so planes are constantly springing up and robbing gullible people of their hard-earned money. A case in point is the American financier Bernard Madoff, who managed to embezzle a staggering USD 65 billion on the same principle. In the Czech Republic, we can mention companies such as Sorrenu Invest or Futurum Aurum.

It is impossible to detect the plane in advance, but there are signs that should warn us in advance. There is always a promise of above-standard returns, the risk is zero or not mentioned at all, and the investment is wrapped in a story that all small savers can understand and identify with. Often in our country, aircraft have been associated with symbols of security, such as various investments in Switzerland, or investments destined for the Arab world, because we all know that the sheikhs there are terribly rich. Modern stories then often exploit the wave of success of new technologies, such as the dubious stock trading robots that supposedly can make incredible money. The problem is that the plane works at first. The money can be paid out of the deposits of new investors. And this is extremely dangerous, proven valid and the client starts to trust the “product” implicitly and starts to lure even their loved ones.
So be vigilant and beware of dubious investments when presenting investment opportunities. These often exhibit 5 basic symptoms, unfortunately the last one doesn’t come to fruition until it’s too late…

5 signs of an investment plane
1) High yield
Promising a return of over 10% p.a. should be alarming.

2) Absence of risk
If the return is not accompanied by adequate risk or the risk is being concealed, the investor should be doubly cautious.

3) Strong story
Very often the aircraft is built on a story that even a layman can easily identify with (security symbols, modern technology, etc.).

4) Retail
A great investment opportunity in which even small amounts can be invested and yet high returns are paid and anyone can invest this way. If it’s so profitable and yet safe, why doesn’t the bank lend the funds? The founder could benefit from the difference between the yield and the interest paid. That’s another warning!

5) Proof ex-post
Unfortunately, proving a plane cannot be done in advance. Because everything works. Only when the returns paid out exceed the capital inflows from new investors will the plane crash.

Have a great day
Peter Gray

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