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Jargon buster: The financial terms you’ve read explained

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10/04/2014
Confused by the terms Abenomics, taper tantrums and forward guidance? This guide will help you cut through the post-crisis financial jargon.
Jargon buster: The financial terms you’ve read explained

One of the challenges for private investors is getting to grips with the sheer amount of financial jargon spouted by economists, commentators and product providers.

Since the financial crisis of 2008, it seems the number of complex new words and phrases has only magnified, leaving individual investors more confused than ever.

Financial material is now littered with neologisms such as ‘Abenomics’ and ‘taper tantrums’.

But what do they all mean?

Fund provider M&G has selected what it believes to be the most commonly used post-crisis jargon and come up with some simple explanations:

Abenomics: Used to describe the economic policies (known as the ‘three arrows’) advocated by the current prime minister of Japan, Shinzo Abe.

Abe was elected in 2012 and has quickly implemented the ‘three arrows’ of Abenomics: fiscal stimulus, monetary easing and structural reforms. These policies have had some success in lifting Japan out of the economic quicksand it had found itself stuck in for over 20 years.

The yen and the unemployment rate have fallen, while equity prices, inflation and economic growth are all up. Abenomics may provide a blueprint for European policymakers to follow in the not-too-distant future as central bankers attempt to deal with the deflationary forces of high unemployment, austerity and internal devaluation.

Of course this is not the first time a politician has been associated with a set of economic policies. Think ‘Thatcherism’ or ‘Reaganomics’. There has also been a huge trend of adding ‘nomics’ to just about any word – ‘freakonomics’, ‘soccernomics’, ‘frugalnomics’, ‘cybernomics’… the list goes on.

Forward guidance: Central banks’ attempts to manage market expectations of the future level of interest rates.

An example of central bank regime change, forward guidance has been used by the Bank of England (BoE), the US Federal Reserve, European Central Bank (ECB) and Bank of Japan (BoJ) with varying degrees of success. The problem is, no one can control the market, and in the case of the UK, the BoE has quickly dropped all talk of ‘knockouts’ (what were they again?) and has now been forced into backing down on linking interest rate moves with the unemployment rate.

We have never been great fans of forward guidance, believing that central banks risk either a) not changing their policy even if economic circumstances mean that they should (for example, if economic activity picks up strongly yet they have promised to keep rates on hold for years), or b) lose face, credibility and trust with the market by going back on their promise.

Forward guidance: handle with care.

Great rotation: Investors on mass ‘rotating’ from government bonds into equities.

It seems obvious to many investors that the nominal and real long-term returns from investing in government debt look pretty poor as we stand today. Hence, many strategists are advocating a long stocks and short government bond position for portfolios.

Of course, a ‘one size fits all’ approach to asset allocation is a highly simplistic view of the world and ignores a number of technical factors that exist in financial markets. For example, there is evidence that pension funds are likely to de-risk their portfolios as their members get older. Safe investments and income will become the primary concern for these mammoths of the investment world. The great rotation will more likely be a gentle spin.

Grexit, Cyexit, Irexit etc: A term used to speculate on [insert European country here] leaving the eurozone.

Take the first two letters of any eurozone nation, add ‘exit’ to the end of it and you have made yourself a new financial term describing the devastating effects of a member leaving the single currency.

Greece, Ireland and Cyprus have severely tested the euro in recent years yet remain in the union. The strongest argument that has been put forward is that the costs of leaving the European Monetary Union will be too painful relative to the gains. Capital outflows, skyrocketing inflation, bankruptcy on a national scale, mass unemployment and social unrest do not make the option particularly enticing. And just imagine what would happen if Italy, Spain or Germany decided to get out.

Taper tantrum: The negative reaction of markets to the winding down of the US Federal Reserve’s quantitative easing programme.

If bond yields rise or equities sell off, strategists have become accustomed to blaming these price moves on the market’s reaction to the US reducing the amount of US Treasuries and mortgages that it purchases through its quantitative easing programme. The theory being that the Fed is less inclined to hold down long-term interest rates and this will have a dampening effect on the US economy as financial conditions tighten.

Other potential effects include a rising US dollar as the Fed eventually moves to normalise interest rates and emerging market turmoil as investors repatriate money back to the US.

For more explanations see the full guide HERE.

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