Wealth & Finance International | May 2015
The Results Are In
What the Election Means for Accountants
State Street Global Exchange have released the results of the State Street Investor Confidence Index® (ICI) for May 2015. Take a look inside to find out more!
We hear from Helen Brand OBE, Chief Executive at ACCA about what the election means for accountants. She talks us through business reflection and the effects that the election will have.
Cashing in on the Crashing Euro Expats, holidaymakers and currency traders have been “piling into the Euro”, confirms one of the world’s largest independent financial advisory organisations.
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Welcome to your May issue www.wealthandfinance-intl.com of Wealth & Finance.
This month, we catch up with Jeff Landle, Managing Principal and Chief Investment Officer at Little Harbor Advisors, LLC to learn more about his company and its recipe for success. In our Market Matters section, we explore currency risks as the return of volatility to the FX markets means that many corporates and investors are taking a close look at their risk management and hedging strategies. We hear from Helen Brand OBE, Chief Executive at ACCA, about what the election means for accountants in our Taxing Times section. We discover why expats, holidaymakers and currency traders have been piling into the Euro, in our Banking Zone. Plus, we hear from Mike Deverell, Investment Manager at Equilibrium Asset Management, on what an EU referendum could mean for UK investment and which asset classes could represent a safe bet for savers during this period of uncertainty. We take a look at how Ontario, Canada is making it easier for businesses that produce positive social or environmental impacts, along with a sustainable financial return, to grow and succeed. And, of course, there’s our regular round-up of the news affecting the major regions and markets from around the world. We hope you enjoy the issue!
Contents 4. News
Market Matters
13. The Global Bond Market Sell-off is Putting Retirement Incomes Increasingly at Risk 14. Do Currency Risks Make You Nervous? 16. Record Fines for Currency Market Fix 18. Why Water Investors Are Set to Enjoy Double Digit Earnings Growth in 2015 and 2016
Taxing Times
22. Third Countries Bullish for Passport to Europe’s 15.5 Trillion Asset Management Market 24. FSB Responds to the Queen’s Speech 26. What the Election Means for Accountants 28. Higher Earners Should Consider Urgently Reviewing Pension Tax Relief Perks 30. FairFuelUK Campaign discovers the
Banking Zone
32. The Fintech Evolution of the Real Estate Industry 34. Cashing in on the Crashing Euro 36. Africa Rising, Where Investors Can Really Take Advantage. 38. What an EU Referendum Could Mean for UK Investment
Financial Focus
40. Is Rumpole Ready for the 21st Century? 42. Pushing Positivity, Ontario, Canada is Making it Easier for Businesses. 44. A New Enterprise 45. The Results Are In, Tate Street Global Exchange have released their results. 46. 12 months, 10 deals, £1 Billion 50. How to Grow a Company Successfully 52. If this is Not a Bubble, Then it’s Hard to Image What One Looks Like. 3
Wealth & Finance International | May 2015
News
Little Harbor Advisors, LLC We hear from Jeff Landle, Managing Principal and Chief Investment Officer at Little Harbor Advisors, LLC, winner of the Best in Sophisticated Multi-Strategy Investments – USA award from Wealth and Finance International to find out more about his business and what makes it so successful. Can you tell us about Little Harbor Advisors, LLC, your clients and the services you offer. Are there any specific alternative investments that you specialise in?
Our plans focus on education, continued structural innovation, and new product introduction. What was your reaction to winning this award and to what do you most owe this success?
Little Harbor Advisors selects and works with independent managers having track records usually in excess of ten years to construct innovative investment vehicles we call “Composites.” These Composites can be constructed for the private institutional market or for the registered ‘40 Act fund market. Little Harbor officers have extensive investment management experience with an average of 26 years in the industry.
Little Harbor is pleased that qualified investors are beginning to appreciate the value of innovation, particularly in this case, innovation around multi-manager structures. This award points to both increasing awareness of our innovations and the insightful eye of the magazine’s editorial staff to recognize such. Appreciative is the best single word I can use.
How does working in alternative investments differ from the more conventional sectors? Are there any specific things you need to take into consideration and how much more difficult is it to keep your finger on the pulse?
How important do you believe awards like this to be, both to individual businesses like Little Harbor and to your wider industry? I think recognition is always appreciated whenever given, but performance over the long term, and a dedication to investor-return means the most for our business and the wider industry.
The alternative investments marketplace has evolved at a rapid pace and has taken some major turns since 2008. Little Harbor has sought to address this changing environment with innovative structures that reflect the market’s desire for greater transparency, lower fees, lower correlations to the equity and credit markets, and a real focus on risk management.
What areas have you focused on and what challenges have you overcome to win this award? Our structural innovations have come from acute focus on investor and market demand following the debacle that was 2008. Innovation comes with its own challenges, be they regulatory, market acceptance, or competitive in nature. I think Little Harbor has done pretty well in all three areas and will continue listening to investors for future guidance.
What specific challenges/opportunities do alternative investments present, both to your business and your clients? Little Harbor is an investment advisor, registered with the SEC, exclusively focused on alternative investments. Our challenges are very similar to all advisors in the alternative investments space: new regulation, higher client expectations, and new market opportunities. With respect to new market opportunities, the growing awareness and appreciation of alternative investments by the financial advisory community presents new challenges and opportunities as it evolves. Little Harbor seeks to address this market’s specific and unique needs through its Composite structure.
Tell us about Little Harbor Advisors, LLC’s overriding philosophy when it comes to your clients. What do you see as the most relevant and vital areas to focus on when it comes to providing the best possible service? Little Harbor seeks to provide institutional and qualified investors with measurable and understandable sources of return by working with synergistic managers that usually have between $100 million and $1.5 billion in assets under management, maintain their strategy focus, and possess track records of strong performance. We believe that large amounts of AUM can erode a manager’s performance and that transparency in a multi-strategy investment vehicle is crucial to understanding attribution. By combining the discrete strategies of disciplined mid-sized managers into a single diversified investment, investors may enjoy the benefits of strong performance and clear diversification, combined with enhanced transparency of underlying holdings, mature operations, sophisticated risk management, and efficient management and incentive fee structures.
What major successes can you point to over the past 12 months that have seen your business stand out among your peers? Through its “Composite” structure, Little Harbor allocates to managers in a concentrated portfolio of high-conviction strategies in an efficient single investment, with visibility into the holdings of the underlying strategies, transparent risk reporting, and management and incentive fees that reflect an alignment of interests between investors, managers and Little Harbor. Our biggest success in the past 12 months was launching our unique multi-strategy composite structure.
What should clients be looking for when seeking a company like yours and how do you go about meeting these requirements?
What plans does your business have in place to ensure it remains at the forefront of the alternative investment sector for the coming year?
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I think investors should look first at the people involved in any investment firm. This is, after all, a people business. We don’t make widgets in the investment management business. That said, we happen to think that the combination of a manager’s experience, couple with a moderate size of firm AUM offers distinct advantages, whether it is with respect to the size of a fund, the size of the management firms to which we allocate, or to the team that oversees investment and other activity. What sets Little Harbor Advisors, LLC apart from your competitors and peers and how do you use this differentiation to your advantage? Little Harbor’s Composite structure is designed to offer robust exposure to a core allocation of hedge fund strategies. The Composite structure is built around a diversification framework which systematically re-balances assets equally to managers with a synergistic cohort of hedge fund strategies. With the predictability of a fixed allocation, the Composite is designed to seek strong returns that support its investment thesis by consistently reflecting the return characteristics of each underlying hedge fund strategy. As a single investment, Composites do not have the management fee and incentive fee layering of traditional multi-manager fund-ofhedge funds. In addition, investors pay performance fees on the Composite’s aggregate performance (performance fee-netting), not on the performance of each of the contributing strategies. The efficiency of this incentive fee structure is based on a clear alignment of interests between the Composite managers and investors. Each Composite has visibility into the holdings of each underlying strategy, which supports risk oversight and transparency into the Composite’s risk and return attributes. In terms of alternative investments, what have been the most prevalent trends in your industry over the past 12 months and what have you done to ensure that you are always at the forefront of any new developments? The most prevalent trend in the last 12 months is the recognition in the financial advisory industry that alternative investment products have a place in an individual investor’s portfolio as a means of providing diversification. The use of alternatives by the financial advisor community is strong and getting stronger. What developments or changes do you see having the biggest impact on your business and industry over the coming year and where do you think the biggest opportunities – and challenges – will lie? The increased focus on cost in the alternative investment product space will likely continue as distribution grows. Little Harbor believes or Composite structure reflects the desire for efficient and effective investment options for investors that want exposure to hedge funds. Any further comments? Thank you and best of luck to everyone in the alternative investments business.
Jeff Landle, Managing Principal and Chief Investment Officer at Little Harbor Advisors, LLC,
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Wealth & Finance International | May 2015
News
Bayer Named One of UK’s Most Reputable Companies by Reputation Institute Bayer has been named among the most reputable companies in the UK, according to the annual UK RepTrak 150 list released by Reputation Institute. The UK RepTrak rankings measure the public’s perception of companies based on seven dimensions: innovation, leadership, governance, citizenship, workplace, financial performance, and products/services. •
•
“Bayer continually strives to deliver – and exceed – stakeholder expectations, as such I am delighted to see the Bayer 2015 UK RepTrak® 150 pulse score reflecting this ethic”. Reputation Institute survey highlights that, if you have an excellent reputation 82% of consumers would definitely recommend your products and conversely that with a poor reputation only 8% of consumers will recommend your products.
Bayer was placed 62nd on the 2015 list of UK’s 150 most reputable companies. All pharma companies notched an average reputational score, but Bayer topped the list at 73.8
Bayer: Science for a Better Life Bayer is a global enterprise with core competencies in the fields of health care, agriculture and high-tech materials. As an innovation company, it sets trends in research-intensive areas. Bayer’s products and services are designed to benefit people and improve their quality of life. At the same time, the Group aims to create value through innovation, growth and high earning power. Bayer is committed to the principles of sustainable development and to its social and ethical responsibilities as a corporate citizen. In fiscal 2012, the Group employed 110,000 people and had sales of €39.7 billion. Capital expenditures amounted to €1.9 billion, R&D expenses to 3.0 billion.
Report compiled by Reputation Institute, the world’s foremost research and advisory firm focused solely on corporate reputations.
Reputation Institute’s RepTrak model is the gold standard for reputation measurement, providing a one-of-a-kind measurement of how the public views the world’s best-known companies. The RepTrak database is normative, examining over 200 of the most visible UK and international companies. The 2015 UK RepTrak 150 examines perceptions of companies by the general public based on over 7,200 interviews. The survey captures the ‘pulse’ of the public in relation to a company with questions measuring Trust, Admiration & Respect, Good Feeling and Overall Esteem on a scale of 0 to 100. Bayer UK/Ireland CEO, Alexander Moscho, said: “Bayer is a world-class innovation company with a 150-year history. Our scientific successes are intended to help improve people’s lives. Our products are helping to address some of today’s biggest challenges, including global population growth, an ageing society and the need to make efficient – and, wherever possible, sustainable – use of natural resources.
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Wealth & Finance International | May 2015
News
Vanderbilt Completes Acquisition of Security Products from Siemens Vanderbilt Industries, a global leader providing state of the art security systems, has announced that it has completed the acquisition of Security Products from Siemens, as previously announced in October 2014. The purchase fits with Vanderbilt’s strategic expansion plans and the new operation will be headquartered in Wiesbaden, Germany, with Joseph Grillo as its Managing Director. ‘The acquisition of Security Products from Siemens builds upon Vanderbilt’s solid foundation and strong legacy built from nearly three decades in the security industry,’ commented Grillo. ‘I’m delighted that we have been able to finalise this purchase on schedule. It will significantly boost our market position in Europe by offering a wider and more comprehensive range of products and solutions to our channel partners.’ The Siemens product ranges, which include access control, intrusion alarm, and video surveillance products, were identified as a good fit for Vanderbilt’s current activities. Vanderbilt also recognises that the Siemens product brand names, such as Aliro, SPC and Vectis are widely recognised, have a loyal customer base, and therefore does not plan to change them in the foreseeable future. The acquisition will not only considerably expand the company’s presence in the security industry but will also enhance its competitive position in what is a highly fragmented market with great growth potential. With excellent coverage in the mature markets of North America and Europe, Vanderbilt is now looking to expand further into other areas including South America and Asia Pacific. The company’s enhanced resources and ability to provide more products than ever before are already drawing interest in these regions. ‘We’re the only independent business with proven capability operating at this level in the industry and have retained the ability to provide a level of service that is agile, flexible and meets our customers’ needs,’ concluded Grillo. ‘We understand the requirements of local markets, with an unmatched range of national approvals and multi-lingual capability. However, we also offer the benefits of a larger organisation, such as products that are easy to install and maintain, availability through established distribution channels and a commitment to reinvest at least 10 per cent of our annual revenue into new research and develop-
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ment programmes. We will bring a refreshing perspective to an industry that is changing rapidly and showing continued growth.’ Vanderbilt is a global provider of stateof-the-art security systems. Based in New Jersey, USA, the company is active in 95 countries and has its European headquarters in Wiesbaden, Germany. Having acquired Security Products from Siemens in June 2015, it is now the largest independent business of its kind in the security industry. Its portfolio comprises over 2,000 products and it currently supplies and supports in excess of 9,000 customers. Vanderbilt designs, manufactures and distributes systems which make environments in organisations of all sizes safe, secure and easy to maintain, complemented by an agile and flexible service that always meets its customers’ needs.
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Wealth & Finance International | May 2015
News
Small Business Demand for Alternative Finance Set to Soar According to a new study by Amicus Finance Plc (“Amicus”), a leading specialist lender, nearly two thirds (64%) of small business owners expect demand for alternative finance – including forms such as property finance, crowdsourcing, invoice finance and asset finance, to increase over the next two years while just 8% think it will decline. The findings, which underline the continued decline in support for mainstream lending, show that small firms predict demand for alternative finance will increase by an average of 26% over the next two years. In 2014 the total amount raised through alternative forms of lending was an estimated £1.74 billion2, double that of 2013. Over four in ten small businesses (42%) said they considered using alternative finance in the last five years. The most popular option, considered by a quarter (24%) of respondents, was crowdsourcing finance, including peer-to-peer lending and crowdfunding, followed by cashflow/invoice finance (18%), property finance such as bridging loans and commercial mortgages(8%) and asset finance (6%), which covers areas such as plant and machinery and business equipment. On a regional basis, over three-quarters (77%) of small business owners in London predict a rise in demand for alternative finance, the largest portion in the UK. Business owners in Scotland and Wales were equal second with 69%. SMEs in the West Midlands were the least enthusiastic about alternative finance with just over half (53%) anticipating an increase. John Jenkins, CEO of Amicus commented: “This research shows that the business finance landscape has changed for good and demand for alternative finance is set to go from strength to strength over the coming years. “Small businesses are increasingly turning to specialist lenders who have the skills to understand their specific needs. Having built a strong business base from our property lending expertise we are broadening our proposition into other areas of lending. Our relationship-based approach resonates well in specialist lending markets that are poorly served by mainstream lenders.” Do you believe that SME demand for alternative finance will increase over the next two years? UK region
Those that answered yes (%)
London
77%
Wales
69%
Scotland
69%
East Midlands
68%
North West
67%
South East
67%
Yorkshire and the Humber
63%
South West
61%
North East
59%
Northern Ireland
56%
Eastern
56%
West Midlands
53%
UK average
64%
Amicus offers short term, property-based lending solutions to private and corporate borrowers which include landlords, developers and owner-occupiers. Earlier this year Amicus announced the acquisition of City-based asset finance specialists Norton Folgate Capital Group Limited and is committing significant capital and resources to build the Norton Folgate business over the next five years.
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Market Matters
Retirement Incomes Increasingly at Risk Nigel Green, deVere Group’s founder and chief executive, is speaking out after a reported $450 billion has been wiped off global bond markets recently. Mr Green comments: “It is still unclear whether we’re about to enter the end of the incredible three decade bond market rally – but what we do know is that the currently tumbling bond market is pushing company pension deficits even further into the red. “As such, the bond market sell-off is threatening the retirement incomes and ambitions of a large number of workers. “So-called ‘gold plated’ final salary schemes, which already have record deficits, are being hammered further because these pension funds are typically largely or wholly invested in bonds as they are perceived to be less risky than shares. “Many people with a company pension wrongly assume their retirement incomes are safe. Perhaps they were when they joined. But this isn’t the case today due to the skyrocketing pension deficits which are now being exacerbated by a volatile bond market.” He continues: “I would urge people to have their company pensions checked sooner rather than later. This is because it is likely that their values could fall further as most trustees have already made almost every change possible, such as raising retirement age and amending the amount of pension increases, yet the schemes remain extremely vulnerable. “It is arguably more crucial than ever for pension members to understand exactly what represents a risk to their pensions and how these can be mitigated.”
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Wealth & Finance International | May 2015
Do Currency Risks Make You Nervous? Are you nervous about currency risk? Why not consider your options?
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Market Matters
Table 1
The return of volatility to the FX markets means that many corporates and investors are taking a close look at their risk management and hedging strategies. The sudden depreciations of EM currencies are back with a vengeance, making investors realise anew that high yields are usually commensurate with high risk. What is the best thing to do when you have, or want, an exposure in a high yield, high risk currency? One thing which is often neglected is a look at history. An interesting currency to take as an example is the Brazilian Real (BRL). In the five years preceding the 2008 currency crisis, the BRL appreciated steadily, despite high interest rates. A sharp depreciation in 2008 was followed by a partial retracement, but since 2011 a slow but steady depreciation has taken place. What has been the best hedge strategy throughout this time?
Source: Bloomberg and Commerzbank
We can consider a few simple hedging strategies from the point of view of a US investor, all at the popular 3m tenor. Below in Figure 1 we have plotted the quarterly returns to hedges with forward contracts, at-themoney-forward (ATMF) options, and cheaper out-of-the-money (OTM) options. The option cashflows bundle the premium cost and option payout into a single item, to better represent the overall value delivered by the option.
The worst case cashflow for the forward contract has been a loss of nearly 23% - in contrast with a 5.6% loss for the ATMF option. And yet the maximum cashflows, which all occurred in the 2008 crisis, are very similar; the options did a good job of protecting the underlying. The average loss for the forward hedge was 3%, contrasted with 1.1% or 0.4% for the options. There is very little room to argue about which was the best strategy!
Figure 1
This is an isolated example for BRL, but let’s take some other currency pairs and see how similar hedge strategies performed for them in Figure 2. Figure 2
Source: Bloomberg and Commerzbank
We have also plotted the BRL spot FX rate changes, as the sharp upward moves are the risks which were being hedged. What is absolutely clear is that the forward contract has consistently lost a lot of money! The depreciations implied by the high BRL yields very rarely occurred, and whenever they did not, the cost of hedging was high. The forward hedge lost money almost every quarter when the BRL was appreciating, and made money less than half the time of the post crisis depreciation regime.
Source: Bloomberg and Commerzbank
We see that while BRL was an extreme example, the tendency of forward contracts to lose much more than options is almost universal in the Emerging Market universe.
The options are another matter. The cost of hedging, especially with the cheaper OTM options, has been a fraction of that of the forward contracts – and yet, the protective positive flows in the strong depreciation events have been extremely similar to those of the forwards. Table 1 gives us a more precise idea of what has been going on.
What’s going on? Nothing more than the fact that the forward contracts continually lock in a depreciation which historically is only occasionally realised. Meanwhile the options are priced at a moderate volatility which means they lock in similar levels of protection at much lower cost. This has been a consistent pattern for all liquid option markets in the high yield currency world. So for those investors or corporations worried about high yield depreciations, there is a simple message; it’s often better to spend premium than carry. Or put another way – consider your options. Jessica James is co-author (with Jonathan Fullwood and Peter Billington)of FX Option Performance: An Analysis of the Value Delivered by FX Options since the start of the Market, Published by Wiley, May 2015, Hardback and e-book.
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Wealth & Finance International | May 2015
Market Matters
Record Fines for Currency Market Fix Five of the world’s largest banks are to pay fines totalling $5.7bn (£3.6bn) for charges including manipulating the foreign exchange market. JPMorgan, Barclays, Citigroup and RBS, have all agreed to plead guilty to US criminal charges.
In a scheme known as “building ammo”, a single trader would amass a large position in a currency and, just before or during the fix, would exit that position.
The fifth, UBS, will plead guilty to rigging benchmark interest rates. Other members of the cartel would be aware of the plan and would be able to profit.
Barclays was fined the most, $2.4bn, as it did not join other banks in November to settle investigations by UK, US and Swiss regulators.
“They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients,” said New York State superintendent of financial services Benjamin Lawsky.
Barclays is also sacking eight employees involved in the scheme. US Attorney General Loretta Lynch said that “almost every day” for five years from 2007, currency traders used a private electronic chat room to manipulate exchange rates.
The fines break a number of records. The criminal fines of more than $2.5bn are the largest set of anti-trust fines obtained by the Department of Justice.
Their actions harmed “countless consumers, investors and institutions around the world”, she said.
The £284m fine imposed on Barclays by Britain’s Financial Conduct Authority was a record by the regulator.
Separately, the Federal Reserve fined a sixth bank, Bank of America, $205m over foreign exchange-rigging. All the other banks were fined by both the Department of Justice and the Federal Reserve.
Meanwhile, the $925m fine imposed on Citigroup by the Department of Justice was the biggest penalty for breaking the Sherman Act, which covers competition law.
Cartel threat Regulators said that between 2008 and 2012, several traders formed a cartel and used chat rooms to manipulate prices in their favour.
The guilty pleas from the banks are seen as highly significant as banks have settled previous investigations without an admission of guilt.
One Barclays trader who was invited to join the cartel was told: “Mess up and sleep with one eye open at night.”
The Attorney General warned that further wrongdoing would be taken extremely seriously: “The Department of Justice will not hesitate to file criminal charges for financial institutions that reoffend.
Several strategies were used to manipulate prices and a common scheme was to influence prices around the daily fixing of currency levels.
“Banks that cannot or will not clean up their act need to understand - it will be enforced.” Analysis: Kamal Ahmed, BBC business editor If anyone in the City thought that the latest multi-billion pound fines for the banks meant that they were now out of the regulatory woods, they should think again.
A daily exchange rate fix is held to help businesses and investors value their multi-currency assets and liabilities. US Attorney General Loretta Lynch said traders had colluded for five years ‘Building ammo’
The New York State Department of Financial Services is still investigating Barclays, for example, over other aspects of the foreign exchange market including electronic trading.
Until February, this happened every day in the 30 seconds before and after 16:00 in London and the result is known as the 4pm fix, or just the fix.
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Barclays is also being investigated in the UK over its Qatari fund raising during the financial crisis and in America over the operation of its “dark pool” electronic trading business. Other allegations include manipulating the energy markets in California and the US precious metal market. For the Royal Bank of Scotland it is not a much rosier picture. The bank is facing a class action from major investors over whether it gave the correct information to the market during the financial crisis and is also facing an investigation into its mortgage business in the US. Civil legal actions on foreign exchange manipulation are also in the offing for both banks. It looks like the major global banks are going to face many more “we deeply regret this behaviour” days ahead.
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Wealth & Finance International | May 2015
Market Matters
Water Investors to Enjoy Double Digit Earnings Growth in 2015 and 2016 Kleinwort Benson Investors highlight drivers of outperformance as the growing demand for fresh water from a rapidly-expanding global population, coupled with unrelenting demand from industry and agriculture, has focused the world’s attention on the way in which we manage our scarce water resources. It was against this very backdrop, almost 15 years ago, that Dublin-based Kleinwort Benson Investors (‘KBI’) established its Water Strategy as a high conviction, global, long only equity portfolio. Communicating with investors as part of its most recent Strategy Review, the firm said that it expects the Strategy to deliver double digit percent earnings growth in 2015 and 2016.
Long-term drivers continue the march forward
of a pick-up in water and wastewater data, this view reaffirmed by much of the data the firm sees on a regular basis, which it expects to benefit holdings such as Tetra Tech, a US-based engineering and consulting company with a broad range of end markets
Population growth, urbanization, industrialization, increasing regulation and infrastructure rehabilitation have long underpinned the firm’s Water Strategy, which accesses the attractive investment themes of infrastructure spending, natural resource scarcity, demographic shifts and climate change; however, as the supply of water is constant – it is arguably declining as a result of pollution and aquifer depletion – and because demand for water grows at approximately twice the current rate of population growth, the supply/demand wedge continues to expand.
•
Demand for water will grow by 40% by 2030. Currently almost 800 million people have no access to clean drinking water, while a further 2.5bn do not have basic sanitation. To do nothing is not an option. As a result, the investment thesis supporting investment in companies providing solutions to global water problems is becoming ever stronger over time. These solutions include increasing supply/access to water, lowering water loss, improving water and wastewater quality, and building out new and maintaining installed infrastructure.
There are a number of attractive stock-specific investment stories within the portfolio, which KBI believes are not fully appreciated by the market, such as: •
Investing in rapidly growing industrial waste water and sludge treatment companies, which has become a top priority for the Chinese government e.g. Beijing Enterprises Water Group
•
Participating in the large ($30bn) retrofit opportunity of the global shipping fleet, as each ship installs a plant to treat ballast water e.g. Danaher, a large global diversified industrial company serving Environmental, Dental, Life Sciences and Industrial Technology end markets.
Near-term drivers to underpin double digit percent earnings growth KBI highlights the near-term drivers which underpin the firm’s optimistic view that its Water Strategy will continue to benefit from these long-term secular trends. •
Water scarcity has attracted heightened levels of media attention in recent months, acting as a catalyst for growing concerns about waste and increasing calls for more efficient water supply – the severe drought in California creating a heightened awareness globally. KBI expects this to benefit some of its technology holdings, those involved in drip irrigation, leak detection, pipe rehabilitation and water metering in particular, including Toro, a leading worldwide provider of innovative maintenance equipment and irrigation systems
Municipal water spending typically lags residential construction trends by 2.0-2.5 years. In Q1 KBI observed the early indications
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Wealth & Finance International | May 2015
Market Matters
Investment Outlook The market environment has changed significantly over the last quarter and KBI has continued to rebalance the Water portfolio to maintain the asymmetry it seeks to deliver, reducing positions in some of its best ideas, including Advanced Drainage, one of the two biggest contributors to positive performance over the past year. The Infrastructure segment of the strategy has been reduced, a process which continues, and now stands at 48%. This will enable the Strategy to benefit from outperformance of the segment, whilst ensuring greater balance in terms of the risk walls that the market may face in the months ahead – currency volatility, oil price uncertainty and diverse and uncertain levels of global growth included. At the same time, KBI has added slightly to positions in the Utility segment of the portfolio, further increasing its exposure to the Emerging Markets. Commenting on the investment outlook and the positioning of the Water Strategy, Kleinwort Benson Investors CIO, Noel O’Halloran, said, “We have added new positions and increased existing positions where our work suggests that there are opportunities for outperformance. We have positioned the portfolio to capture what we believe to be the best risk reward balance for the current environment. We believe there is more upside than downside potential for the portfolio as a whole and our work suggests we are capturing less of the downside risk without sacrificing the upside potential. The end markets we expected to perform well at the beginning of 2015 have all done well and we expect these markets to continue to outperform the broader market.” With a track record of strong and consistent outperformance versus the MSCI World index, which has seen the Water Strategy outperform in 11 of the past 14 years (calendar years to 31st Dec 214, gross of fees in EUR), KBI remains optimistic that it will be able to benefit from the long-term secular trends for a period of 15 years or more. The Kleinwort Benson Investors Water Strategy was established in 2000. A high conviction, global, long only equity portfolio, the Strategy invests in 40-50 publicly traded companies, providing value-added solutions to meet the vital, global need for water. One of the first of its kind, globally, the Strategy has delivered strong, consistent returns relative to the broader market since inception, outperforming the MSCI World in 11 of 14 years. Philosophy Water is a key resource which will need significant investment to ensure its adequate provision to a growing global population. Growing demand for fresh water from a rapidly-expanding global population, coupled with unrelenting demand from industry and agriculture, has focused the world’s attention on how we manage our scarce water resources. The Water
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Strategy gives investors the opportunity to invest in companies which are poised to generate significant revenue growth from providing solutions to the growing need to address water scarcity. The primary drivers of the Water investment theme are: • • • • •
Inadequate supply: < 1% of water is available for use; Increasing demand: growing 40% by 2030; Increasing regulation and government support; Increasing investment in infrastructure: $12 trillion required through 2030; Increasing investment in technology: to enhance infrastructure, increase efficiency and assure quality
Water is essential for feeding the world with nearly 70% of water supply going to agriculture. Industrial use accounts for a little less than 20% of the water supply and further highlights its importance for economic growth. These uses far outstrip domestic water use of a little over 10%, but should not obscure the vital need to provide domestic water as today nearly 800 million people do not have access to clean drinking water and 2.5 billion people lack access to basic sanitation. As a result, this vital resource has a supply demand imbalance which will drive significant investment in solutions over the next two decades in which technology and infrastructure in areas such as desalination, water re-use, filtration, and metering will play a major role. Further, environmental regulations continue to support spending on treatment technologies and testing equipment to encourage compliance with water quality standards. Whether it is the European Union’s Water Framework Directive, the Safe Drinking Water Act in the US, or China’s water standards, regulation – both economic and environmental – has been a backbone of support for investment in water. While other areas of clean technology saw regulatory support wane during the global credit crisis, the essential need for clean water provided the impetus for continued consistent regulatory support. An estimated $12 trillion is expected to be allocated to spending on water through 2030, making it the largest component of global infrastructure spending over the next 20 years. As a specialist active manager, KBI is well positioned to understand how this capital will be deployed and which companies will provide the dominant solutions to ensure the demand for this most vital resource is met.
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Taxing Times
Third Countries Bullish for Passport to Europe’s 15.5 Trillion Asset Management Market Nicola Le Brocq, Regulatory & Compliance Market Analyst at Confluence. http://www.confluence.com/
Back in December 2014, Paul Soltis provided us with a timely update on the transposition and implementation of the Alternative Investment Fund Managers Directive (AIFMD) and finished off by alluding to the round of talks scheduled for 2015 in relation to the distribution of non-EU AIFs within Europe under the existing cross-border marketing passport regime originally established under MiFID. This program is now well and truly underway and with the initial consultation period now closed by the European Securities and Markets Authority (ESMA), the responses to the “Call for Evidence – AIFMD passport and third country AIFMs” by various EU and non-EU (Third Country) stakeholders indicate this could be a lively debate.
world’s largest corporate law firms, highlighted the costly inconsistency of process, requirements and timelines throughout Europe when having to utilise the National Private Placement Regimes (NPPRs) for their clients. They strongly urge ESMA to allow passporting for non-EU AIFs and cite improved competition and better investor choice as a result. Conversely, The Association of Luxembourg Fund Industry (ALFI) has suggested in their response that the extension of the passport facility to non-EU managers at this time would be premature and ESMA should allocate more time for its Member States to fully implement AIFMD and “establish a smooth functioning of the passport” before doing so.
From a Third Country perspective, much work has been done in preparation for these talks so it’s difficult to imagine that nothing will come from this process. All key fund services jurisdictions with mature fund services markets have proactively engaged with the 27 member states and signed co-operative agreements, thus creating various regulatory and fiscal gateways for exchange of information. Similarly those non-EU jurisdictions who also promote themselves as domicile of choice for asset management companies have legislated for AIFMD in order to position themselves as having an equivalent standard of regulatory framework to facilitate any passporting decision. A positive decision by ESMA to allow passporting for non-EU managers may not be in the form of blanket permission across all Third Country jurisdictions but it’s reasonable to expect there will be some positive outcome.
It’s clear that the consultation to allow non-EU AIFMs access to European distribution is politically sensitive and that a form of protectionism is understandably likely to emerge, but what does the consultation and final decision mean for the future of global distribution? Well for a start, a positive result would mean a fundamental shift in the way non-EU managers view Europe in terms of the potential for raising capital. In particular, while US managers have a healthy and thriving domestic investor base to utilise, the opening of cross-border marketing opportunities using a single passport to unlock Europe’s EUR15.5 trillion* asset management business, is arguably very appealing. So if ESMA looks favourably on the lobbying and recognises the regulatory reform and commitment to AIFMD demonstrated by the Third Countries, it’s reasonable to expect an uptake in the desire to be an AIFM by asset managers established and operating within Third Country jurisdictions such as the US, Cayman Islands, Switzerland and the Channel Islands. ESMA is expected to deliver its advice and opinion to the Commission on or around 22nd July 2015.
In evaluating the responses from the Call for Evidence consultation, needless to say, any stakeholder body with a business interest in a Third Country is bullish on the establishment of a mechanism for EU cross-border distribution. International firm Eversheds, one of the
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Taxing Times
FSB Responds to the Queen’s Speech Following the recent Queen’s Speech, the Federation of Small Businesses (FSB) has welcomed a series of measures to back small businesses including those in the Enterprise Bill. John Allan, National Chairman, Federation of Small Businesses said: “The economy is on the right track to create jobs and growth in the UK. The Government must maintain its course, strengthening the enterprise landscape to support ambitious businesses to boost productivity and jobs. However, Ministers must stick to the path of fiscal discipline and continue to drive down the deficit. We want to continue to see a stronger economy while the cost of doing business must be lower and easier, ensuring growth in every nation and region of the UK, not just London and the South East.”
economic environment is the right one. Local decision makers are best placed to understand local economic needs and if managed carefully, greater decentralisation has the potential to deliver the economic rebalancing which is so clearly needed. We must also be careful not to bypass rural areas when power and resources are reallocated. “One issue which will be particularly important to get right is localising taxes. Although we agree with the principle of local areas retaining more of the rewards of success, we do not think it wise to allow local variation in business rates. There is a big risk this would fragment the tax system, leading to confusion and either increase costs for businesses or lead to a race to the bottom, which could harm the economic vitality of cities in the long term.”
Commenting on the Enterprise Bill, John Allan said: “We are pleased the Government is maintaining focus on small businesses. Our members have been very clear on the need to cut burdensome red tape and on addressing issues like the billions owed to small businesses in overdue payments. The Enterprise Bill is a real opportunity to make progress on these issues.
Commenting on the Full Employment and Welfare Benefits Bill, John Allan said: “As we approach full employment the task of finding staff with the skills a small business needs will become more of a challenge. The measures in the Employment Bill to support more apprentices will help. But the issue is not only about the number of apprentices. The aim must be to make our apprentice system the world’s best, matching in quality to that offered in Germany, and offering a rewarding vocational alternative to academic routes.
“When setting out to tackle the burden of red tape, it’s important not only to identify obstructive regulations, but also look at how regulation is enforced. Poor enforcement or excessive monitoring requirements can turn straightforward regulations into costly and disruptive burdens. “We look forward to seeing the details of the proposed Small Business Conciliation Service and how it will address issues like late payments. Small businesses often have the law on their side, but find accessing the legal system complex, time consuming and expensive. A properly constituted conciliation service should help with this and go some way to addressing major problems like the UK’s poor payment culture.” Commenting on the European Union Referendum Bill, John Allan said: “With the UK set to debate its relationship with Europe, it is vital we truly understand the business case for staying in or leaving the European Union. The Single Market is important for many businesses in the UK – however, some are concerned about the EU’s approach in a number of areas, especially regulation.
“The only way to significantly increase the number of apprentices is to improve take-up among the UK’s 5.2 million small businesses. This requires Government to make it crystal clear what the benefits are, and what support is available. They must be affordable, have standards based on current industry practice, and the quality of training must give confidence to employers that apprenticeships will produce the skills they need for the long term.” On the announcement of the Scotland Bill, Andy Willox, the FSB’s Scottish policy convenor, said: “The Smith Agreement, to which we and many others contributed, made it clear that the Scottish Parliament is set to become a more powerful actor in the Scottish economy. It will be critical to small businesses in Scotland that parliament get right the legislation that turns that agreement into law.
“The referendum will inevitably bring a period of uncertainty, which should be resolved as soon as possible. However, we must also ensure there is adequate time allotted to fully explore the options on the table. Small businesses must be able to fully understand and participate in the debate – discussing the economic case and what meaningful reforms are achievable before deciding how to cast their vote.”
“Further, we must see any administrative burden of further devolution borne by the tax authorities and not taxpayers and enterprise. We’ll need our parliamentarians to understand and thoroughly test how every clause will work in practice – not just on paper. Devolution should give different authorities the powers to boost their local economies however difference itself can’t become a barrier to trade.”
Commenting on the Cities and Local Government Devolution Bill, John Allan said: “The move to give cities greater power to shape their local
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Taxing Times
What the Election Means for Accountants We hear from Helen Brand OBE, Chief Executive at ACCA about what the election means for accountants
Business reaction: In ACCAâ&#x20AC;&#x2122;s first quarter Global Economic Conditions Survey, our members cited uncertainty over who would form the next government as the biggest risk to the UK recovery. Judging by the reaction from business on Friday morning, that feeling is shared by UK plc. Immediately after the result, sterling surged and the FTSE 250 reached an all-time high. It was estimated that UK business grew by ÂŁ50bn within hours of a Conservative majority becoming certain. Every penny counts: Accountancy is at the heart of every organisation, no matter how large or small, and no matter which sector. As a result, over the next five years, some professional accountants will face testing times under the plans outlined in the Conservative manifesto. Sustained recovery: Budgeting to provide public services is one thing, but delivering a sustained economic recovery could be an even more complex issue. The Conservatives claimed to have created almost 2m new jobs in the last Parliament, but doubters countered that a large number of those were from people choosing to go self-employed. The jury is out on whether this was a result of limited access to more traditional forms of employment or because the coalition had created an environment where starting a business was easier and more profitable. In either case, the commitment from the Conservatives to create another 2m jobs by 2020 is to be commended, even if it is perhaps a little ambitious. Tax reform: It is no secret to anyone in business, be they self-employed or running a large multinational, that we have one of the most complicated tax systems in the western world. Five years of government provides an opportunity to embark on a long-term, large scale project to redefine tax in our country so it better reflects the twenty-first century economy. Europe: While the benefits, and indeed pitfalls, of EU membership are open to debate, it is clear that much of twenty-first century accountancy, and modern business in general, operates across borders. Clearly, any vote on our future membership of the EU holds significant implications for both our profession and the UK economy in general.
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Taxing Times
Higher Earners Should Consider Urgently Reviewing Pension Tax Relief Perks Britain’s higher earners should urgently consider reviewing their tax relief on pensions, affirms the chief executive of one of the world’s largest independent financial advisory organisations. The message from Nigel Green, CEO and founder of deVere Group, comes ahead of Chancellor George Osborne’s post-election additional Budget, scheduled for 8 July. Mr Green comments: “This bonus Budget, the first of the new parliament, is likely to be used to deliver bad news, as it will allow the longest time for the electorate to forgive the government before the next general election. “In order to demonstrate that ‘we’re all in this together’, it is probable that the Chancellor will target higher income earners’ pension tax perks. “As such, those who earn £150,000 or more and are subject to the marginal rate of 45 per cent, might want to urgently review their tax relief on pensions. “The time to act is now as it is highly probable the pension contribution relief for those on higher incomes will be reduced. “For instance, it might be worth considering making a larger one-off contribution before the summer Budget, in order to benefit from the higher tax relief.” Mr Green continues: “This latest policy would appear to be another hammer blow for those who want to get on in life through hard work and by prudently saving for their future. “Aspiration and securing ones’ own financial future should be being actively championed by the government, not only because it means that people will be best-placed to have the retirement they wish, but it means that they are less likely to be a burden on the State and this will help ensure the country’s long-term, sustainable economic growth.” He adds: “The move would be another example of how politicians of all parties seemingly believe that pensions are an easy and convenient target to bolster government coffers as and when they need to. This might explain the growing trend of people moving their UK pensions out of Britain and into HMRC-recognised overseas pension schemes.”
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Taxing Times
FairFuelUK Campaign Since the General Election the FairFuelUK Campaign has received more than 14,000 emails and communiques continuing to question why current prices at the pumps do not reconcile with recent oil price and dollar exchange changes. These same campaign supporters are angry, frustrated and perplexed as to why any Government has never got on top of the need for an open and fairer pricing mechanism on such a vital resource to millions. Some detractors say that it is because the Government is too close to oil companies preferring to give them extra tax relief, because of the impact of falling oil prices on their businesses, instead of addressing the cost of motoring worries that impact on 40m UK vehicle license holders. In particular why, with today’s wholesale price of diesel being the same as petrol, are diesel retail prices at the pumps 3p to 5p more than petrol? Who is profiteering from this blatant exploitation of motorists and the haulage industry? The UK remains the only nation state in the EU that prices diesel more than petrol. In our recent General Election poll 97% of FairFuelUK supporters wanted a full and transparent fuel pump pricing inquiry to be instigated by the new Government through the CMA. Only 1 in 10 blame fuel retailers for recent price changes at the pumps with the major charge targeted at the Government’s own inertia and punitive taxation, oil companies and speculator greed. Virtually all FairFuelUK supporters are convinced that when oil prices go up, pump prices rise too quickly and by too much. And when Oil costs fall retail prices drop too slowly and not by enough. In light of this continued pricing opaqueness and uncertainty on all vehicle fuels on behalf of 1.1m supporters we call, with the backing of the RAC, FTA, RHA, Microlise and the APN, on the new Government and the nation’s new MPs to support a full transparent investigation by the CMA (previously the OFT) into the pricing process at the pumps. Interestingly in our poll of more than 60,000 supporters 98% of believe that current fuel duty levels are still too high, with 65% saying that they think fuel duty will eventually be increased by this Government to cover cut backs in their spending. Quentin Willson lead campaigner for FairFuelUK said: “The Election outcome means Conservatives should continue their good intentioned low fuel duty policy because FairFuelUK has proved to them it has worked for the economy. Let’s make sure they keep their taxation promises but go further by also honouring our supporters’ wishes to see fairer and more honest pricing at the pumps too!” Howard Cox, Founder of the FairFuelUK Campaign said: “Incandescent fury from FairFuelUK supporters has built over the last 5 years to such a crescendo that it’s vital the Government recognises that being fleeced at the pumps is no longer an option they can ignore. It’s time for a rigorous pricing process inquiry now!”
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Banking Zone
The Fintech Evolution of the Real Estate Industry We spoke to Thomas Schneider, Chief Investment Officer at BrickVest, about the fintech evolution of the real estate industry. Real Estate investments have long been left behind within the investment world which otherwise has been significantly transformed by technology. For investors, this has reduced the opportunities for to build tailored real estate investment portfolios. However, financial technology (fintech) has recently come into the spotlight of US and European Venture Capital investment. As fintech challengers have made successful inroads in sectors such as remittances, payments and loans, the once archaic retail banking system has been transformed. Global fintech venture investments tripled from $4.05 billion in 2013 (Accenture) to $12.2 billion in 2014 ($1.48 billion in Europe),. Although many of these start-ups focus on core banking products such as foreign exchange, card payments, the Bacs system, or consumer loans, there has not been much development of technology for investment services. This is a remarkable opportunity for the right ideas since “buy-side” platforms are few and far between. Take the likes of Nutmeg for example who have sprung from the ground within a couple of years, raising $37m to help cut out the middleman. By being a user-friendly, technology-based, transparent platform, Nutmeg has successfully been able to introduce investing in the markets to a new audience. In real estate investment, the best opportunities and the best services have traditionally been the reserve of a very closed network. This network with its large pool of financial backing and industry connections, restricted the access of the everyday investor to such investments. It is clear that by bringing together knowledge and understanding of real estate investment and online technology, real estate investment services have something to gain from the fintech treatment. The goal is not to risk losing the quality of a skill-intensive service in the process, especially when you are providing direct investment access. At BrickVest, our vision is to provide investors with the full spectrum of high quality fund management services, delivered through a straightforward online portal. Users are provided global deal sourcing, ongoing risk management and asset ratings through to thorough due diligence, monitoring and fund reporting services, typically reserved for major real estate investment players. We want investors to have a full range of direct real estate investment opportunities readily available and be able to easily build their portfolios online through a transparent, data-driven approach. The multitude of alternative investment platforms that have come to market in recent years has really captured the imagination of investors. Certainly real estate investment could see positive change from using sophisticated online platforms that go beyond a pure marketplace for investors and financial products. Real-estate ‘crowdfunding’ at large was a $1 billion industry in 2014 and is expected to grow to more than $2.5 billion this year, according to a report released recently from industry research firm Massolution. US-based firms like Fundrise or RealtyMogul offer a platform more similar to online brokerage services, directly linking real-estate developers and investors. While this model is well suited to the US and its regulatory twilight zone, it cannot reasonably be imitated in Europe. Building a pure marketplace for real estate assets adds little value – instead the emphasis will likely reside in providing a full range of investment management services to help users make informed decisions. This may well prove to be where the crowds ultimately flock.
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Banking Zone
Cashing in on the Crashing Euro Expats, holidaymakers and currency traders have been “piling into the Euro”, confirms one of the world’s largest independent financial advisory organisations.
The observations from James Stanton, Head of Foreign Exchange at deVere Group, come as the single currency dropped to its lowest level against the pound in two and a half months, as Greece told international creditors it could default on its repayments. Mr Stanton explains: “The euro has further weakened against the pound due to concerns over Greece’s possible default and the outpouring of capital in the Eurozone, amongst other factors. “It’s been a monumentally busy day for currency trades. Those going on holiday in the Eurozone, expats and/or those planning to imminently retire to Spain, France, Germany Italy or any other Eurozone destination, plus sterling currency traders, have been piling into the Euro on Monday to cash in on the single currency’s latest slide. This is a savvy, sensible strategy for those who want to take advantage of the crashing Euro.” He adds: “Hitting €1.41 against the pound, the Euro is currently looking like a good long-term buy. In addition to the problems in Greece, sterling traders are also taking into account last week’s surprisingly good UK retail figures, and the GDP figures that will be released on Thursday are likely to be better than previously expected. “It looks like we could reach highs of €1.42 against the pound in the near term, and that the pound will cement its position around the €1.41 mark, as there seems to be a lot of support for sterling at that level. The trend is also very similar to that of the March high.”
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Banking Zone
Africa Rising Where Investors Can Really Take Advantage We hear from Hurley Doddy, Co-CEO of Emerging Capital Partners, the pan-African private equity firm that has raised over US$2 billion for growth capital investing in Africa
Africa presents the sophisticated investor with a significant and broad range of opportunities. According to The Economist, six of the world’s ten fastest growing economies of the past decade are in sub-Saharan Africa (including Zambia). We see opportunities across a range of different industries driven by underlying demographic shifts (rise of the consumer class), Africa’s natural competitive advantages (agribusiness), as well as significant on-going supply-demand imbalances (low penetration rates and unaddressed markets). Africa’s growing middle-class story is exceptional: The demographic statistics suggest that Africa already has a larger middle-class (those earning more than US$20,000) than India. 43% of Nigeria’s population is under the age of 14. Africa has more cities with a population of 1 million or more than Europe. Urbanization is continuing at a fast pace – it is forecast that more than 50% of Africa’s population will live in urban areas by 2030, up from one third today. These trends along with continued GDP growth rates in excess of 4-5% across various regions, all support forecasts of growth in the consumer class and associated industries. Retail (supermarkets, restaurants, fast-moving-consumer-goods) and continued demand for financial services and telecoms and media penetration are key drivers. Our award-winning investment in Nairobi Java House (NJH), Kenya’s leading café and casual dining chain, evidences this trend. Telecoms and associated industries remain a key growth area. Growing disposable incomes has also driven strong demand for infrastructure outsourcing such as telecoms towers, media/data convergence and data centers. For example, we made an investment into IHS in December 2011, then principally operating in Nigeria. IHS is now the largest African telecommunications towers company, after acquiring both Orange and MTN’s towers portfolios in Cote D’Ivoire and Cameroon. Our investment in Wananchi, the first triple-play PayTV and broadband operator in East Africa is another example of this theme. In terms of agribusiness, domestic African and international food security is an emotive subject. Africa has the bulk of the world’s uncultivated arable land and many natural competitive advantages to develop a successful agribusiness industry. Despite this, Africa generates only 10% of global agricultural output and accounts for less than 5% of world
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agribusiness GDP. Most farming in Africa is small-scale, in-part because farmers do not have access to the farming inputs that their Asian or European counterparts do. This creates a broad range of opportunities from a private equity perspective, including in the infrastructure that supports the sector. ECP invested in Notore Chemical Industries, in Nigeria, one of the largest fertilizer companies in sub-Saharan Africa. Notore provides premium fertilizers and agricultural education through a network of professionals that support farmers and farming communities across Nigeria. Nigeria’s government has recently been bolstering its agricultural sector in an effort to reduce the levels of imports. Notore’s CEO, Onajite Okoloko, spoke with Goodluck Jonathan, Nigeria’s President, about Nigeria’s agricultural needs at the Davos meeting in 2014. Financial services continue to draw our attention. According to Bain, more than 300 million of the world’s unbanked population lives in Africa, with 80% of the adult population in Africa still without access to simple banking services. Penetration rates across a wide-range of basic banking and insurance products are very low on a GDP-adjusted basis. This points to significant growth potential. On the back of such broad growth across a diversified range of industries, we are also witnessing an increase in intra-African investments, which is deepening the pool of available capable for Africa-focused private equity funds. Recently lifted restrictions on South African pension funds have allowed up to 5% of the country’s Public Investment Corporation’s funds to be invested in the rest of Africa. Nigeria is actively encouraging its pension industry to do the same. Running parallel with the growing influence of pension funds, we are seeing new African sovereign wealth funds, for example the Nigerian Sovereign Investment Authority. These sovereign wealth funds are focused not only on supporting domestic infrastructure projects, but also on developing pan-African investment strategies, and are looking at private equity funds as a means to achieve diversification and above-market returns. International investors are encouraged by this vote of confidence from local players. There is growing investor interest in the burgeoning African economy and the potential for private equity. We believe the fundamentals of Africa will present continued growth opportunities across a broad range of countries and sectors for several more decades to come. This is a great-time to be investing in Africa.
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Banking Zone
What an EU Referendum Could Mean for UK Investment We hear from Mike Deverell, investment manager at Equilibrium Asset Management, on what an EU referendum could mean for UK investment and which asset classes could represent a safe bet for savers during this period of uncertainty “More than a quarter of FTSE 100 revenues come from the EU and those companies that trade with Europe could well see their share prices affected as we get close to a referendum. “According to reports, German carmakers will be one of the biggest losers should the UK leave the EU. About one fifth of cars produced in Germany in 2014 were sold to the UK. “For UK investments, one way to reduce this risk is to invest more in smaller companies which tend to derive more revenue from domestic markets. This area looks better value than the main market in our view. We also think that other UK assets like bonds or commercial property funds won’t be too badly affected by referendum uncertainty. “However, the obvious answer to avoid referendum uncertainty is to reduce exposure to the UK. Equities in Asia, especially Japan, have a lot going for them and would not be exposed to risks around the referendum. “One area to avoid would be European stocks. If the UK looks like it will leave the EU then those companies that trade with us could well suffer. Europe looks pretty expensive in our view anyway, with plenty of risks from things like the Greek situation.”
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Financial Focus
Is Rumpole Ready for the 21st Century? We hear from John Bechelet, partner at Bivonas Law. He states that the current imbroglio surrounding FIFA is easy to understand; a whistle-blower revealing the fact of the payment of big backhanders to secure lucrative contracts to stage football tournaments.
The US authorities are seeking to extradite FIFA officials and appear willing to pursue aggressively anyone involved in corruption that has any nexus with the United States. This aggression also extends to the regulatory sphere, and the extradition is currently being sought of an individual trader accused of market abuse in relation to US securities derivatives. This will put high-frequency trading utilising algorithms into the spotlight, but it may prove a more difficult concept for the lawyers to get to grips with than a FIFA bribe.
confessed that he totally failed to understand the expert evidence which was presented to him. This may be the future in the courts when high frequency trading is considered. If the judges, lawyers and regulators find these matters difficult, what will juries make of them? We will need Doctor Frankenstein to explain to all of us, if he can, how his creation works. In the meantime, regulators and lawyers alike remain behind the curve. Rumpole of the Bailey made his name in the infamous Penge Bungalows murders case with his grasp of the forensic significance of bloodstains. If he were here today, one wonders exactly what he would make of algorithms.
“Layering” or “spoofing” is one such abuse whereby large amounts of electronic orders are put into the market to give an impression of higher demand. The orders are immediately cancelled by the trader, leaving him to sell securities or derivatives at a higher price and make potentially huge profits. High frequency trading makes up approximately 75% of all trading in US equity markets and is conducted by algorithms, sophisticated computer programs buying and selling in milliseconds. Policing market abuse will be an increasing problem for regulators, lawyers and the courts. Recent high-profile cases have seen lawyers and regulators alike trying to get to grips with terminology relating to financial benchmarks and market abuse. No doubt they have now graduated from Wikipedia to Investopedia to seek to understand the jargon and fathom what is going on. Last year, the lawyers had to find out what LIBOR and FOREX stood for and how these markets were being manipulated. Algorithms and high frequency trading is the new challenge, and few lawyers or regulators actually have any understanding how these work or are developed. Do the prosecutors really understand high frequency algorithmic trading? How can a lawyer identify trading that constitutes market abuse? What is the difference between “layering” and “spoofing” (which are illegal activities) and “scalping”, which is a legitimate market strategy? Do we really believe one trader can be responsible for a “flash crash,” wiping billions of pounds off markets? The Frankenstein’s monster of high frequency trading has been unleashed, and now the regulators have to police it. Prosecutors must make their cases and defence lawyers must plead their clients’ innocence, but the immediate challenge is to understand what is going on in the first place. In the meantime, many have put on a bold face, muttering about the need for integrity in the markets and trying to project understanding and expertise in relation to the markets which they do not actually possess. The lawyers and regulators are left to pick up the pieces and to bring order to a world about which they have little understanding. One English judge in a complicated competition case recently
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John Bechelet, Partner at Bivonas Law
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Financial Focus
Pushing Positivity Ontario, Canada is making it easier for businesses that produce positive social or environmental impacts, along with a sustainable financial return to grow and succeed.
QUICK FACTS
The province, in partnership with the Network of Angel Organizations– Ontario (NAO-Ontario), is launching the Impact Angel Alliance. The Alliance will encourage more investors to help kick-start promising, high-growth social ventures in Ontario. This will be Canada’s first impact investing angel network.
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• The Alliance will work with NAO-Ontario to: • Raise awareness of social ventures among established angel investor groups. • Help diversify angel group membership to help bring in more women, visible minorities, and new immigrants. • Bring together angel groups and non-traditional funding partners to increase co-investment into social ventures in priority areas, such as community health and sustainable craft industries. • Research emerging trends, challenges and opportunities in impact investing to reduce risk, save time and attract better opportunities.
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Impact Angel Alliance is inspired by a similar initiative in the United States that has successfully worked with early-stage social ventures to help raise over $180 million to date. Angel investors are high net-worth individuals who provide financing to start-up companies. About 320,000 high net-worth individuals – with a collective wealth of almost $1 trillion – are estimated to live in Canada. The current total Canadian impact investing market is nearly $5 billion. In 10 years, that number is estimated to grow to $30 billion. Ontario is home to over 10,000 social enterprises that employ about 160,000 people. Ontario is home to SVX, the first social impact investing platform of its kind in North America.
Ontario, Canada “We want to encourage investors to target businesses that focus on achieving more than just profits – by placing their money into businesses that also positively contribute to social or environmental benefits in Ontario. Angel investors can help social enterprises grow and succeed, and through our partnership with the Network of Angel Organizations and the Impact Angel Alliance, we are making it easier for social ventures and angel investors to connect, contribute, and make our society a better place to live.” — Brad Duguid, Minister of Economic Development, Employment and Infrastructure
Ontario, Canada’s business environment is designed for global success. Ontario is an efficient North American hub for international investment and trade. It offers direct access to the US$17+ trillion North American market; a multicultural workforce; streamlined regulations; a low-risk investment climate, competitive business costs, a great quality of life and more. World leading companies have invested billions to start or expand their operations in Ontario, from many sectors including automotive, aerospace, life sciences and biotech, ICT, water and wastewater technologies, financial services, mining and more. These companies are leveraging Ontario’s competitive advantages by developing breakthrough technologies, products and services for global markets. Major players with an Ontario presence include Honda, Magna, Sodexo, Alcatel-Lucent, AXA, DuPont, MDS, sanofi pasteur, GlaxoSmithKline, Teva, IBM, and Dell. Ontario has a population of over 13 million (the largest in Canada), generates 37 per cent of Canada’s GDP, and boasts an export-oriented GDP that is larger than that of Belgium, Switzerland or any of the Scandinavian countries.
“Like any other start-ups, impact ventures need financing to grow. The number of angel investors making impact investments is growing, and we want to make it grow even more. With the support from the government and partnership with NAO-Ontario, we’re confident that we can achieve that goal and help to transition impacting investing to greater mainstream awareness and adoption.” — Sean Holt, Executive Director, Impact Angel Alliance “Initiatives like the Impact Angel Alliance will help Ontario-based companies like ChipCare to accelerate our growth, and allow more people around the world to access affordable, life-saving HIV treatment. We are grateful to our investors who are committed to building a profitable Canadian diagnostics company, while helping to make a real difference in patient care globally.” — James Fraser, CEO, ChipCare.
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Wealth & Finance International | May 2015
Financial Focus
A New Enterprise Tracy Ewen, managing director of IGF Invoice Finance, comments on the announcement of a new Enterprise Bill in the Queen’s Speech.
“The announcement in the Queen’s Speech has introduced a new Enterprise Bill - giving additional support to SMEs to settle payment disputes - ought to be welcomed by businesses across the UK. To have this Bill included in the speech should give hope to many struggling businesses that the government is serious about the need to protect SMEs and bring an end to the issue of late payments. The current payment terms that many suppliers in the UK are subjected to mean that goods delivered today wouldn’t need to be paid for until long after summer is over; a practice that isn’t sustainable, but it is a reality that, until now, SMEs have had very little power to change. The implementation of a Small Business Conciliation Service should protect SMEs against larger and more powerful entities, and should reduce the number of SMEs that fold due to intense cashflow problems. Whilst acknowledgment in the Queen’s speech has symbolic importance, businesses have been waiting for support from Government to tackle this issue for a long time, so will be watching the progression of this Bill with care and limited expectation. In the meantime, there are options available that cover the gap between work completed and money in the bank. It’s therefore important for firms to thoroughly review their options and make use of any free financial advice that their own financial partners and suppliers can offer before pressure from large customers impacts their growth or operations.”
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Financial Focus
The Results are In State Street Global Exchange have released the results of the State Street Investor Confidence Index® (ICI) for May 2015
The Global ICI increased to 120.8, up 7.0 points from April’s revised reading of 113.8. Confidence among North American investors increased with the North American ICI rising 8.0 points to 129.4, up from April’s revised reading of 121.4. Meanwhile, the Asia ICI rose by 7.4 points to 98.6. However, the European ICI fell 5.5 points to 103.8. The Investor Confidence Index was developed by Kenneth Froot and Paul O’Connell at State Street Associates, State Street Global Exchange’s research and advisory services business. It measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors. “A lower dollar, stabilizing energy prices, and reduced expectations of an imminent rate hike provided tail winds to North America sentiment,” commented Froot. “Investors must now wait and see whether a rebound in second quarter growth will lead to more hawkish statements from the Federal Reserve.” “In Europe, a rising euro, increased sovereign yields, and the continued Greek funding drama helped contribute to the decline in European confidence by 5.5 points,” added Jessica Donohue, executive vice president and chief innovative officer, State Street Global Exchange. “However, the front-loading of sovereign bond purchases by the ECB before the summer months may help reverse recent trends. Meanwhile, in Asia, policy maneuvers in China helped boost investor confidence by 7.4 points.” About the State Street Investor Confidence Index® The index is released globally at 10 a.m. Eastern time in Boston on the last Tuesday of each month. About State Street Corporation State Street Corporation (NYSE: STT) is one of the world’s leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $25.4 trillion in assets under custody and administration and $2.2 trillion in assets under management at March 31, 2013, State Street operates in more than 100 geographic markets worldwide, including the U.S., Canada, Europe, the Middle East and Asia.
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Wealth & Finance International | May 2015
Financial Focus
12 Months, 10 Deals, £1 Billion - Duff & Phelps A Year On Duff & Phelps, the global valuation and corporate finance advisor, has grown considerably in the UK in the last few years, so it was only natural that in 2014 the decision was made to build a mid-market UK M&A team of its own.
Having built an enviable record for cross-border advisory expertise from its home market of the US, establishing a full team was a natural progression for the firm. The corporate finance boutique is now made up of 16 professionals, including four managing directors, covering four core sectors: Industrials, Energy, Business Services and Consumer, Leisure & Retail.
Joel Hope-Bell, Head of the UK M&A team, has for nearly a decade been primarily focused on the Business and Support Services sector. He joined from DC Advisory, where he was a managing director and head of the Business and Support Services sector team. Earlier, his career was spent in bulge bracket investment banking - most recently as a managing director at Bank of America Merrill Lynch. He also spent five years at Morgan Stanley and five at UBS Investment Bank prior to that.
Each of the four managing directors has at least 15 years of corporate finance sector experience, as well as a designated specific sector, which combined ensures that it is a well-rounded, comprehensive team able to cover all client requirements.
Henry Wells moved with Joel from DC Advisory, where he served as a managing director and head of the Leisure and Retail team. Prior to that, Henry qualified and practiced as a solicitor in the corporate group at the Eversheds’ London office. Henry advises clients on a wide range of corporate finance transactions including private and public company disposals and acquisitions. His clients include corporate shareholders, private equity houses and management teams in the Leisure and Retail sectors and he is fast becoming a leading expert in the Travel M&A space.
Dafydd Evans has over 15 years of corporate finance experience across both M&A and Restructuring and has a particular expertise within Aerospace & Defence and Industrials. Dafydd has a strong track record in originating, leading and executing transactions for UK and European corporates, private equity and owner-managed businesses. He also joined from DC Advisory.
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Paul Teuten brings more than 25 years of experience in valuation opinions and corporate finance to the team. Paul has a strong corporate M&A background advising PLC’s and other larger groups on bolt on acquisitions and disposals principally in manufacturing industries; he has also developed a strong track record in industrial technology. Paul’s previous career was in senior roles RSM EquiCo Capital Markets, a California based mid-market investment bank, Ernst & Young, CCF in Paris and Charterhouse Bank.
www.wealthandfinance-intl.com
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Wealth & Finance International | May 2015
Financial Focus
Since June 2014 the team has successfully completed 10 deals: D&P Client
Deal Type
Transaction
Size (EV)
Link to D&P Website
Vitruvian Partners
Buy side
Acquisition of Jac Travel
c.£80m
Jac Travel web link
Fresh Direct
Sell side
Joint Venture with Brakes Group, a Bain portfolio company
Not Disclosed
Fresh Direct web link
Living Bridge Partners
Buy side
Acquisition of Sykes Cottages
Not disclosed, reported to be c.£50m
Sykes Cottages web link
Danube Foods Group
Sell side
Sale of Danube Foods Group to Mid Europa Partners
€625m
Danube Foods Group web link
United Flexible
Sell Side
Sale of United Flexible group of companies to Arlington Capital Partners, a Washington DC-based private equity firm
Not disclosed
United Flexible web link
Phoenix Equity Partners
Buy Side
Acquisition of Riviera Travel
Not disclosed, reported to be c.£120m
Riviera web link
The Carlyle Group
Buy side
Acquisition of the Barbon Insurance Group
Not disclosed
Barbon Insurance Group web link
Aim Aviation
Buy side
Altitude Aerospace Interiors
Not disclosed
ESG Solutions
Sell Side
ESG Solutions acquired by Spectris
Not disclosed
ESG acquired by Spectris
Inflexion
Buy side
Shimtech Industries acquired by Inflexion and Auctus Industries
$220m USD
Shimtech Industries acquired by Inflexion and Auctus Industries
All of the above has been achieved in a very quick time-scale, the organic growth allowing the new team to work seamlessly to produce a good result in its first year. Over the last year the team has particularly proven itself as an expert M&A advisor on highly complex, cross-border deals, developing innovative exit solutions for its clients, for example in the sale of Danube Foods Group, which is the largest transaction in the Balkan region for 2015 so far. Sensitive Approach To Shareholders Duff & Phelps’ approach is also sensitive to shareholder interest, as was demonstrated in the sale of Fresh Direct, a private family business, with a complex shareholder base, which did not want to “sell-out” to trade. The team worked tirelessly with the owners to review their options, to find the right long-term partner and then to coordinate, negotiate and structure both the sale of their business to a new company as well as the simultaneous acquisition of the fresh businesses from Brakes. The team is particularly successful in the mid-market travel space and has completed three deals in the year, with two more in the pipeline. It is the leading M&A advisor by value to April 2015, having advised on deals worth a total of €360m (source: Mergermarket, April 2015). Joel Hope-Bell, Head of the UK M&A business, said of the performance over the last year, “We have worked incredibly hard to make sure our first year together has been a successful one and I am proud of the achievements of the team. We have closed deals totalling £1bn over the last 12 months and that is down to the detailed sector expertise that each one of us can bring to the table, as well as our ability to provide solutions to specific client issues. Our ambitions for the practice extend far beyond this year and this is just the start of a journey that will see further growth of the team and increasing market share of mid-market M&A deals in the UK and Europe.”
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Wealth & Finance International | May 2015
Financial Focus
How to Grow
a Company Successfully Andrew Johnson, Financial Director at Powwownow, the conference calling service providers, shares his thoughts on how companies can ensure a smooth growth journey.
Our systems know all of our customers and their history with Powwownow, such as how often they makes conference calls, the numbers they most commonly dial, how long they have been using the service etc. This allows our back office and primarily our customer service staff to spend less time on sorting out issues and more time on more beneficial and rewarding activity. Without these systems in place, the company would lose time and effort manually going through customer records, slowing everything down and leading to potential aggravation from customers.
The term ‘back office’ refers to the technology, services and human resources required for a company to run smoothly. It plays a key role internally to a business by providing support to all that work within and will often carry out vital functions such as accounting, record maintenance and regulatory compliance. When trying to grow the size and profitability of a company, it is the core areas of the business; the sales and marketing teams, which you will ultimately be looking to grow, not the back office. This is because the core is responsible for generating revenue whilst the back office allows them to do so.
As Powwownow has continued to grow, we now operates in 95 different countries, enabling over 1.7 million people worldwide to use our services, we have continued to increase automation of reports and billing and now have systems in place that are able to this for which significantly on billings.
In order to grow a company successfully it is important to ensure the back office is not growing at the same rate as other areas of the business or else the company’s profit will be slashed through unnecessary expense. Instead, the back office can scale as the business and ultimately revenue grows.
Whilst we have systems in place to look after these functions of the business, our sales, marketing and business development departments have continued to grow through the employment of quality staff, since these jobs require human input and touch that a machine cannot do.
To keep spend on back office functions to a minimum, it is vital to identify what areas of the business can use the same resource at each stage of the growth cycle. For example, if you currently have 100 customers and two people servicing these clients; one responsible for finance and the other customer service, it would be wise to consider if these same two people could service 1,000 customers providing your internal system can be tweaked so that they have more flexibility.
We still have a small IT operations team which is highly effective in its function. Just because the business has doubled it doesn’t mean the operation team needs to double too. Our team is multi-disciplined which means they can look after numerous channels at once. This also highlights the importance of recruiting the right people. A flexible workforce that can do multi-diverse roles will also help to keep costs down and the bottom line up.
The answer to this is scalable technology. With such complex and specific systems on offer, a company needs to employ a flexible system to allow for a shift in the back office when required, ensuring that so that no extra resources are required. At Powwownow we have a bespoke billing system which was built in house and offers us maximum reporting without the need of additional time so that less input is needed.
In summary, profits will not grow with the business if the number of staff in all areas of the company grows at the same time. As you look to increase the size of your business, it is crucial you keep the back office as slim line as possible so that money can be saved here. The best way to do this is through the use of scalable technology and in order for systems to be as efficient as possible, initial investment in technology is key. A company will be forever hampered by leaders who fail to prioritise their support and management system by choosing to save the pennies instead of investing in their future success.
It is important however to keep things simple. You don’t want a company that is overcomplicated and run by too many systems because if something goes wrong with them this could cause catastrophic results on the business.
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Andrew Johnson, Financial Director at Powwownow
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Wealth & Finance International | May 2015
Financial Focus
If This Is Not a Bubble Then Itâ&#x20AC;&#x2122;s Hard to Imagine What One Looks Like. We hear from Paul Marson, CIO at Monogram Invest, on the threat of a bubble in the Chinese stock market, following a rise of 140% in the Shanghai Composite Index in the past 12 months (the best performer in the main 35 global stock markets) The average monthly stock market turnover has increased 10 fold in the last year (830 billion Yuan v 80 billion). The root cause of this is the expansion of bank balance sheets in China. Over the past four quarters, Chinese bank balance sheets have grown by the equivalent of 35% of GDP annually - remarkably this is less than the 55% expansion at the start of the crisis. However, if (and this is a big and qualified if) Chinese GDP is expanding by 7% annually, there is a 28% overhang of liquidity. This was formerly fuelling the real estate market - which is now deflating with real estate lending contracting - but has now found its way to the equity market, inflating stock prices. Liquidity will always chase an asset higher. It is an extremely inefficient system that requires financial institutions to grow their asset base at such an extraordinary rate to generate so little growth. It is important to note that if financial institutionsâ&#x20AC;&#x2122; balance sheets are expanding by 35% of GDP annually, just 50% of those assets become non-performing (a likely figure given past Chinese standards), and the recovery rates on those non-performing loans is 50%, then China writes off 8% of its GDP each year.
There are further issues, as Chinese financial institutions expanding their balance sheets at such a ferocious rate - combined with a broadly more accommodative monetary policy stance - means that copious amounts of industrial capacity, that would under regular conditions be disposed of, is allowed to linger. Additionally, this excess of capacity is being added to because, if the machine is not stoked, social pressures will become unmanageable.
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Wealth & Finance International | May 2015
Financial Focus
Chinese manufacturers are adding capacity at a rate 8% faster than demand is growing, meaning the pace of supply growth massively exceeds the rate of global demand growth. This results in huge numbers of cheap goods to be sold. As long as China is adding productive capacity faster than demand grows, there will be global disinflationary pressure; the West cannot grow demand at 8%, and China cannot tolerate 2-3% capacity growth as well as the GDP growth this corresponds to.
The 28% overhang of liquidity, which has found its way to the equity market, inflating stock prices, has further consequences, implying explosive investor turnover, trivial implied return and no equity premium: a very unattractive situation. Admittedly this situation is not as negative as in 2007 when implied equity returns were appalling, but the implied equity return minus the 10 year Government Bond yield is zero, which is an unappealing state of affairs. By way of explanation, if it is assumed that the Chinese market P/10yr E ratio reverts back to its trailing median level over the next ten years, and earnings per share growth are normalised (Chinese earnings grow quite solidly, but that growth is financed by hugely dilutive share issuance such that earnings per share growth is trivial), the following graph shows the implied ten year holding period return:
The current implied ten year holding period return is approximately 3% below these assumptions, and if the current nominal yield available on a Chinese Government Bond is subtracted from that, the result is something akin to a â&#x20AC;&#x153;risk premiumâ&#x20AC;?. The market capitalisation of all Chinese exchanges and GDP is represented in the below graph: It is notable that only late 2007 is a peak above the current situation. These conditions indicate a very unhealthy sign for the global economy; it can only end in tears. Bubbles always leave behind more problems than they resolved.
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