Question

“In theory, the financial sector is supposed to support the long-term growth of the real economy. In practice, it has become so detached from the real world that it is more akin to a fantasy land, inhabited by a growing number of peculiar characters undertaking nonsensical tasks.”

Source: Stewart Investors Sustainable Funds Group, Alice in Financeland, (Feb 2017).

Please respond to the following questions by drawing upon relevant concepts/theories you have learnt in this unit.

a) Discuss why capital markets have become so disconnected from the real economy.

b) Discuss what are some of the barriers to change (and why is it so hard to change).

c)What do capital markets need to do differently in the future to better support economic, social and environmental outcomes for people and the planet.   

Answer 1

A. Capital markets have become so disconnected with the real economy because capital market are driven by the expectation of the investors from the economy in the future and capital market is not just representative of the present status of the economy so there is a wide discrepancy of movement of stock markets and capital markets with the real economy.

Recently it is to be seen that capital markets have also been infused with too much of liquidity and too much of quantitative easing by the central banks so they are not representing the real status of the economy and capital markets are also not including the overall economy in its truest sense and it is only reflecting a few very large companies on the index front so they are not reflective of the real situations of the economy

2. Some of the barriers to change is traditional thinking of the market participants along with there are various heuristics and cognitive behaviour which is representation of of biased approach of the investor and they are driven by greed and fear also so it is not representative of the truest reflection of the economy and these are the barriers to change

3. Capital market need to do apply a higher degree of efficiency in order to better support economic social and environmental outcome and it need to adapt to the highest possible degree of disclosure norms and it will also try to reflect highest Corporate Social responsibility in order to maximize the interest of stakeholders in the economy.