FinanceLab Magazine - #01 - April 2010

First Edition

FIN NCEL B MAGAZINE

Danish Bioethanol Industry of the month

Microfinancing

An imperative for the global economy

INTERVIEW:

Thomas Schuhbeck from HypoVereinsBank

The Global Economic Snapshot Macroeconomic overview

Beginners Guide Finance ABC

Financial havoc

Can the regulators solve the problem?

WHY?

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Dear readers of FinanceLab Magazine

W

elcome to the newest initiative of FinanceLab - FinanceLab Magazine.

This magazine will mostly be characterized by investment and financial aspects. But we also intend to take a broader perspective; so interesting articles about business strategy, leadership and political issues can also be found in the Magazine. This ensures that FinanceLab continuously can develop new ideas and see new investment opportunities, because in order to transcend mediocrity it is of uttermost importance to see where the world is arriving and not were it is departing from.

This Magazine, moreover, hopes to act as a forum for exchanging views and ideas among all student of CBS, of course within the boundaries of the editorial profile oulined above. It will thus be possible for all student to submit articles, which they themselves find interesting. This can be done via contacting the editorial office on email: magazine@financelab.dk

Thomas Christensen, Editor.

i | Financelab MAGAZINE

WHO MADE THIS? Editor

Thomas Christensen

Technical Director

Andreas Thelander Bertelsen

Journalist Team David Weinberg Daniel Schmidt Martin Frederiksen

Contributors Jacob Michaelsen Aurelija Augulyte

CONTENT The Global Economic Snapshot

1

Beginners Guide

5

The Danish Bioethanol industry is Passing Milestone

7

Financial havoc

9

Investing in Bonds

11

Microfinancing

13

FINANCELAB CALENDER

14

Financelab MAGAZINE | ii

By Aurelija Augulyte, Head of Investment Panel

The Global Economic Snapshot Macroeconomic overview

T

he global economic developments have been relatively positive recently. While we are not “out of the woods” yet, the bottom of the global economic cycle is behind: industrial production is expanding worldwide and world trade is picking up. In his comment to Reuters, just two weeks before The International Monetary Fund (IMF) releases their updated economic forecasts, IMF’s Dominique Strauss-Kahn sounded upbeat: “Globally we are certainly a little more optimistic now than we were in January”. Confirming the better expectations, the MSCI World Stock Market Index has recently hit the highest levels since September 2008.

with Germany holding the veto right. Secondly, the borrowing would be done at “market” rates. Finally, the support is promised only as a measure of last resort.

To me, saying that Greece will be supported only if it is not able to secure funds in the international financial markets, sounds weird: the problem is not that Greece has NO access to financial markets per se, but that this access comes at a high and increasing COST (Figure 1).

Figure 1. The credit risk premium for Greek 10-­‐year bonds edging higher

The economic recovery process, how-ever, will be gradual and challenging in a different way on a regional basis.

Euro area The bail-out plan with weak legs Source: Nordea Analytics

Last month on the euro front can be summa rized as the “discussion mode” in an attempt It seems strange that some German leaders, to find a bailout solution for Greece. Finally, including Angela Merkel, the German chancellor, after a two-day summit the European leaders sound aloof in their comments toward Greece. arrived at a compromise: an agreement which Even though Greece problems seem of no big stipulated that if Greece needs a bailout the concern, they clearly are for the whole euro area, rescue package will be shared with the IMF (in a including Germany itself. Being so dependent combination of contingent bilateral loans from on exports as Germany is (with 12% of total euro zone countries and IMF funds). exports to Greece, Spain, Italy and Portugal), the austerity measures with prolonged recession What seemed as a reasonable solution to politi- in Greece and other Southern countries might cians was met with scepticism in the financial have serious repercussions for Germany and the markets: the credit spread for Greek debt rest of the euro zone’s economy. Let alone the edged up. Hardly surprising. According to the negative effects due to financial ties that link agreement, any bail-out will come only if the 16 the Western bank system with the euro zone’s euro zone members unanimously agree to it, weaker economies.

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The bottom line: the debt problems of Greece and other PIIGS countries are going to be a drag for the euro zone’s recovery, as well as a challenge to the euro zone as a monetary union.

And such solutions as the European Council’s “compromise” recently is not really a solution, but an “open mouth operation”, aimed at trying to calm the markets. Whatever the future – bailout or no bail-out, default or no default… – it is clear today that there is no elegant way out of the “Greek tragedy”.

US First in, First out?

going to last: B. Obama’s promise to reduce the deficit to 3% of GDP by 2015 clearly does not sound very stimulative to the economy.

Moreover, the deleveraging process is still going on; credit standards are tight, with banks being cautious to lend. The confidence of small businesses, which created 6 jobs out of 10 during the past 15 years in US, is still weak. The discouraged workers might enter the labor force again at some point, thus contributing to the number of unemployed.

Figure 2. US unemployment slightly below the euro area’s rate recently…

The beginning of 2010 has largely been positive for the US in terms of macroeconomic data.

The FED have softened their tone, replacing the January’s comment that “the deterioration in the labor market is abating” with the labor market is “stabilizing” statement, as well as noting that business spending had risen “significantly”. In a similar vein, The National Bureau of Economic Source: Nordea Analytics Research (NBER) after the latest labor market report on April 2nd said that it is now “pretty That said, provided the neutral to positive clear” the recession is over. economic developments persist in the US, it is likely to outpace the euro area in this economic So far, the recovery in the US has been “jobless” cycle partly due to the US economy being in a sense that the growth came primarily more coherent and flexible, less burdened from businesses restocking and exports. From with institutional obstacles like labor market the recent consumer and labor market data, regulations. however, there are some mild signs of “life”: retail sales, car purchases have recovered This would imply that FED will be the first to slightly, consumer spending rose 3.4% (yoy) raise base rates at some point at the end of in February, increasing for the fifth consecutive this year or beginning of next year. The latter month. The unemployment rate has been is already is being discounted in the market, as stable at 9.7% for the past 3 months, with the US long term interest rates edge higher and 162,000 jobs being added in March, as the the US dollar strengthens against EUR with each third consecutive monthly gain and the highest positive piece of US macro news. increase since March 2007. The stock market growth has contributed to increasing residents’ Asia wealth, thus boosting the confidence levels.

Despite the optimistic signs already seen, patience is needed. The recent consumer data is partly a result of the huge stimulus, which was provided by government, which borrowed nearly 10% of GDP last year just to counteract the decrease in private consumption. This is not

All eyes on China

While the Western developed countries still struggle with high unemployment and sluggish growth, China has been climbing up in terms of most statistical data: inflation reached 16-month highs (2.7% yoy in Feb.), industrial

Financelab MAGAZINE | 2

output keeps expanding and industrial loans beating expectations, real estate prices increasing (10.7% yoy in Feb). The GDP growth is expected to reach nearly 10% this year.

One of the main discussions in the media recently has been whether China’s economy has turned into a bubble. The key concern here is the fact that most of the “growth” has been fuelled by credit and directed mainly to the sectors of less value added to the economy, primarily the real estate.

Figure 3. Chinese yuan’s status quo since mid 2008 is being challenged

Source: Nordea Analytics

Another discussion, even more pronounced recently, is the destiny of the Chinese yuan (Figure 3). The status quo of the Chinese currency has made its major trade partners concerned. The US has even taken a step to introduce legislature that would allow the US to officially name China a “currency manipulator”, thus enabling it to take protectionist measures against it, like introducing tariffs on Chinese goods.

It all reminds me the US and Japanese conflict back in 80s, when the growing trade gap between US and Japan became a concern for US politicians. After a similar bout of attacks on weak Japanese currency, it was let to go stronger against the US dollar. The Japanese loosened the monetary policy in an attempt to compensate for the stronger yen. A real estate and stock market bubble followed. What happened eventually was a long lost decade for the Japanese economy, the outcomes of which are present up to this day.

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It’s weird that the US politicians believe that a stronger Chinese yuan would solve the US trade deficit problem and return the US manufacturing sector jobs. If the Chinese currency would appreciate rapidly, this would be a blow to China’s exports, thus the overall economy which is to a large extent driven by exports. Eventually this would have negative effects for the US economy as well, since as a second round effect the China’s domestic demand would weaken, thus potentially decreasing the China’s imports from the US. If the two major global economies start a trade war, it is not only them that would be affected: the global trade growth will slow and the global economic recovery will stall.

I would keep a close eye to any statistical data that might trigger yet another wave of “yuan manipulation” or “Chinese bubble” discussions.

Judging from how recently markets reacted, any signs of high inflation or robust growth in China will cause speculations about restrictive measures from China or the US for that matter, which might lead to a sell-off in the global equity and commodity markets

.

April Key Events

Macroeconomy Calender T EN EV N GIO RE S TE DA

T EN EV N GIO RE S TE DA

US

5

US

ISM Non-Manufacturing PMI

6

US

FOMC Meeting Minutes

19 EU

Retail Sales

20 EU

7 8

US EU EU EU EU

US

9

EU

Pending Home Sales

German Factory Orders German Industrial Production ECB Press Conference

Unemployment Claims French Industrial Production m/m

11 China CPI

China GDP

China Fixed Asset Investment

US EU EU

EU

EU

22 US US US

23 EU

China NBS Press Conference

EU

China Industrial Production

US

China PPI 12 US

Federal Budget Balance

US

26 EU

Trade Balance

27 EU

14 China Trade Balance

US

13 US US

Import Prices

US

EU

Industrial Production

28 US

US

Retail Sales

29 EU

US

15 US US US

US

16 EU

US

CPI

Unemployment Claims

Empire State Manufacturing Index

US EU

US

30 EU

TIC Long-Term Purchases

EU

CPI

US

Industrial Production

US

Building Permits

US

Housing Starts

Prelim UoM Consumer Sentiment Flash Manufacturing PMI Flash Services PMI

German Ifo Business Climate German PPI

ZEW Economic Sentiment Current Account PPI

Unemployment Claims Existing Home Sales

French Consumer Spending Industrial New Orders

Durable Goods Orders New Home Sales

GfK German Consumer Climate German Preliminary CPI

S&P/CS Composite-20 HPI CB Consumer Confidence FOMC Statement

Federal Funds Rate

German Unemployment M3 Money Supply

Unemployment Claims CPI Flash Estimate

Unemployment Rate Advance GDP Chicago PMI

Revised UoM Consumer Sentiment

Financelab MAGAZINE | 4

by David C. Weinberg, FinanceLab Journalist Team

BeginnersLESSON Guide ONE W

hen we read through papers and magazines, we continuously encounter these terms. In particular in recent discussions the term stagflation occurs in connection with China. This article provides a precise and comprehensive explanation in order to better understand the consequences and dangers associated with each of these occurrences.

Inflation

The increase of prices from one period to another is called inflation. It occurs when demand for a certain product or raw material increases. We could observe this phenomenon in particular before the crisis took off. Raw materials for instance were traded at record highs. Most businesses expanded their capacities and were convinced that the boom would continue.

Thus, demand was huge and the result was inflation. Higher inflation affects interest rates because higher interest rates compensate for inflating goods. Considering the bond market, inflation will lead to the selling of bonds since bond holders fear the erosion of their bonds.

The value of bonds goes down and therefore increases the yield. Higher interest rates also affect investment decisions. It is more costly to borrow money, which will prevent businesses in initiating new projects or building plants since this will require more funds.

Deflation

The opposite of inflation is called deflation.

Prices which are going down from one period to another are deflating. The current crisis provides the best example. In particular Japan is fighting against deflation. The effects mentioned in the section before are in this case reversed. They

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lower the interest rate and therefore will enable business to borrow money cheaply. However, deflation is regarded as more dangerous than inflation since consumers will postpone investments. This reluctance to spend will lead to further price erosion. Companies will lose money and reduce their prices in order to cover at least some fixed costs. Continuing this vicious circle it will finally lead to lay-offs and a decrease in gross domestic product (GDP).

Disflation

Disflation describes the effect of increasing prices but below the inflation rate of the period before. For instance, if prices increase from period one to two by 5% and in period two to three by 3 %, we call that Disflation.

Stagflation

This term is composed of the two phrases “Stagnation” and “Inflation”. It refers to an economy which is not able to increase the rate of utilization by deficit spending (Spending money on infrastructure, building etc.) or credit accommodation (easier and cheaper access to money for companies). On the other hand, the government is not able to reduce the inflation by a decrease of the rate of utilization.

Both aims are exclusive and present a critical dilemma.

The occurrence of stagflation is usually observed with supply shocks. That means that the prices of raw materials are increasing due to bad weather or aggressive union policy.

The increased production costs are passed on by mark-up pricing. However, the companies

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supplying the end costumers make less profit and will hence reduce production and lay off employees. Now, the downside trend sets in and GDP will be reduced due to lower household income.

A possible solution for this dilemma is to rearrange the use raw materials by using substitutions. An alternative is to increase productivity, which results in a rise in performance with less input.

Conclusion

As we can see, the understanding of these terms is crucial in order to understand the economy as a whole and to comprehend the politics of central banks. The stated phenomena provide a first insight in what to consider when talking about increases in prices or salaries. Especially, the current situation requires a detailed understanding of these terms in order to gain a feeling of the discussions taking place in the media

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Financelab MAGAZINE | 6

Industry of the month

by Daniel Schmidt, Journalist Team

The Danish Bioethanol industry is Passing Milestone

T

he bioethanol industry has invested billions in second generation biofuel.

This has resulted in a range of new products which are redesigning the competitive milieu in the industry. The Danish contribution to the industry now seems ready to take off.

The Danish effect on the international bioethanol industry consists of a lot of firms developing technologies and production methods. The biggest players are Novozymes and Danisco which are producing enzymes for the production of biouel. Novozymes is the world market leader in enzymes, and it controls about half of the crucial American market. The newest product published last week is Cellic Ctec2.

Gencencor, owned by the Danish company Danisco, is the biggest competitor of Novozymes.

Gencensor also launched a new enzyme product last week called Accellerase Duet, which will have the same price as Cellic Ctec2. Novozymes is known for producing enzymes at lower prices than Gencencor, and therefore, the competition seems intensified.

However, the loser does not have to worry, since the demand for enzymes to second generation bioethanol will be large enough for both companies: It is estimated that the American market for these enzymes in year 2022 will be at 40 billion DKK. In addition, there will be other markets such as China and Brazil with growing demand as well. Share prices of both companies gained significantly in value after the launch of their new products. Danisco has increased the most, probably due to the equal price level of

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the new products which provides a possibility for Danisco to gain market share.

Another Danish ethanol companies Inbicon, which is owned by Dong Energy, also recently drew attention by announcing an agreement with the Japanese company Mitsui Engineering & Shipbuilding regarding export of technology to Japan. Inbicon develops technologies that transform the biological biproducts to ethanol by means of the enzymes developed by Danisco and Novozymes. The agreement is the first of its kind, but according to Inbicon, there will be more agreements with European and North American companies in the future.

Biogasol, another Danish company and competitor to Inbicon, has just raised capital through a new partnership with the capital fund Fjord Capital Partners, which enables the company to gain governmental support of 100 million DKK. In total, the Danish bioethanol industry has really passed some milestones during the last month, but there is no doubt that it will take a long time before the industry will show it full strength.

The future market for bioethanol The USA is the most important market for bioethanol, especially after the inauguration of President Obama, who has proposed new laws for the volume of the bioethanol production in the future: it has been determined that bioethanol has to make up at least 30 % of the fuel consumption in USA in year 2030 corresponding to 25 % in EU. All together, a huge market is waiting for the bioethanol

industry. Besides the promise of a big market, the American government is also supporting bioethanol companies. This has an impact on for instance Novozymes, who saves 150 million DKK. Due to the market forecasts, several of the big oil companies such as BP and Shell have recently invested billions of dollars in production of bioethanol. The oil companies can mix the bioethanol with regular petrol, since it will work in ordinary car engines as long as the bioethanol constitutes a maximum of 10 %. In this way, the market for production technologies and enzymes is already growing. Recent numbers tell that in November 2009 the bioethanol

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“Did you know?”

Bioethanol is in short a biological product, which can be used as fuel instead of or in connection with petrol. It is more environmentally friendly, and it will probably be a cheaper alternative as the depletion of known oil reserves continue.

“

The difference between first and second generation of bioethanol is that the first generation used agricultural products in the production, while the second generation uses waste products such as straw and corn stems. By using second generation bioethanol, production will no longer cause food prices to rise and cause famine in the poor parts of the world, which actually was the case with the first generation.

Likewise, the waste products are naturally cheaper than the primary products.

“

Enzymes are used in the production of the bioethanol to decompose the plant cell to sugar, which hereafter can ferment to ethanol. It is the enzymes that determine the ease, speed, and price of the process, and therefore it is a very important contribution to the industry.

“

It have become possible for Danish Novozymes to reduce the price of their enzymes by 80 % during the last two years, and therefore, the newest enzyme products make it possible to produce the second generation of bioethanol for about 50 dollar cent per litre, which is competitive with the price of regular petrol

production in USA increased by 18 % compared to November 2008.

China also aims to produce and consume more bioethanol in the future. Thus, CEO of Novozymes Steen Risgaard, expects that China can overtake USA as a consumer of second generation bioethanol within a relatively short timeframe. In addition, Brazil will be an interesting country due to its large production of sugar canes, which for many years have been used in first generation bioethanol.

Novozymes B

Danisco

555.00

366.30

Price P/E

25.22

P/E est.

22.72

161.76

24.61

The development within the industry especially depends on two parameters: The general economic growth and the price of oil. Growth determines the willingness to invest in projects with high risk, and the oil price determines the relative price of bioethanol, and consequently the future yield of the investment.

Uncertainty Despite of the good prospects for the industry and the new products, bioethanol is still connected with a lot of uncertainty. First of all, it will take a long time before bioethanol will be produced commercially, since both the production facilities and the infrastructure have to be further developed. This is very expensive, and very difficult to finance, especially during the financial crisis. In addition the oil price and raw material prices will play a major role since they can make bioethanol unprofitable very fast. This happened during large parts of 2009, because the oil price was low, thereby causing a lot of excess capacity in the bioethanol industry. The political environment, especially in USA, will also have a big impact on the success of the industry.

But despite the uncertainties, it is not a question about whether the bioethanol industry will have success or not, but rather a question about how fast it will be successfull

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Financelab MAGAZINE | 8

By Thomas Christensen, Editor

Financial havoc

Can the regulators solve the problem?

A

sweeping overhaul of the banking sector is lurking in the horizon. During the annual World Economic Forum jamboree in Davos the financial conglomerates have been on the forefront of the agenda. Regulators and politicians propagate for stricter capital demands and some, among them former Fed Chairman Paul Volcker, argue for a renewal of the Glass Steagall Act. But what consequences will a tightening of the regulatory environment pose for a world economy still on government support?

What is on the drawing board?

Various proposals have been articulated since the financial meltdown, but the present debate in central banks and in the corridors of political power can be boiled down to three problems and three solutions. The first problem arises as a consequence of too loose capital requirements in the banking sector. This means that even small losses in the short term can result in capital shortages, and the subsequent cries for governments to step in. The solution to this problem is straightforward: Raise capital requirements. The second issue is related to the regulatory aspect, and includes the mapping of systemic risk, and the discussion about banning certain activities such as proprietary trading and abolish some types of complex derivatives. Third, there is the inherent problem of some banks being “too big to fail�. In order to solve this complex conundrum critics as Paul Volcker are strongly propagating a forced demerger of large banking multinationals

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so that commercial banks are separated from investment entities.

Can higher capital requirements solve the problem?

One apparent consequence of more rigorous demands in respect to equity holdings is that large corporate banks with a diversified portfolio will be forced to deleverage. As a corollary the credit crunch will worsen, as cash stripped enterprises are denied loans, while the banking sector hoards cash, in order to keep the regulators at bay. This can potentially put the nascent economic recovery in danger.

But such a short term malaise may be necessary to ensure long-term financial security. To assess such a claim it is necessary to look at the trajectories shaping the outburst of the financial

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There is no such thing as a free lunch

Milton Friedman

Chernobyl of 2008. A prime driver of the recent eruption was loose monetary policies in most countries, which fuelled cheap money into an economy running in full speed. Another cause was that the incentives facing banking groups were not aligned with those of the general economy. An implicit state-guarantee insures

that banks have anything to win when buying risky securities while losses ultimately will fall on the tax-payer. Thus, stricter capital requirements may be necessary to at least ameliorate the moral hazard intrinsic to the present system, and force banks (and their investors) to take a haircut when risky investments go bad. Milton Friedman once said: “There is no such thing as a free lunch”, but perhaps we have granted large banks one, and higher capital requirements may be a necessary step to redeem it.

Regulatory solutions

A more severe long term ailment may arise if regulators and politicians start to interfere in other aspects than capital requirements. Even though higher capital requirement will somewhat curtail managerial sovereignty it may be justified on behalf of the implicit government guarantee, which is necessary to avoid bank runs as we saw them unfold in USA in 1907 and during the Great Depression. A more dreadful scenario for financial liberalism lures, if regulators are given “carte blanche” to hamper banks’ independence to take strategic decisions through regulatory devices and the abolishment of certain activities in the name of systemic risk. Such proposals and initiatives may sound prudent, in a time where the financial system is in the line of fire for being the primary trigger of the financial meltdown, but on the other hand this will also severely limit the ability of banks to provide liquidity to the market, which will impede growth in the longer term. A political ban on certain activities may also lure business away from the regulated part of the financial system and towards more shadowy institutions, which are not subject to regulatory supervision. Furthermore, regulatory meddling has never empirically been proved to be a prerequisite for financial stability. Some studies have, to the contrary, shown that tight regulatory control of the financial sector enhances the risk of a banking crisis.

Too big to fail and too big to bail

In respect to the question of a re-instalment of the Glass Steagall Act some troublesome issues come up. Even though the separation of large banking units will decrease the systemic risk of one failing it will also enhance the risk of

someone failing, and limit banks ability to take on risk. A separation of commercial banks and investment banks will, even worse, not solve the underlying incentive distortions. Under such a system investment banks will not formally be under the bank deposit-guarantee, but there will still be an implicit security, granted by nation states, as governments can not allow large scale investment bank to fail due to ‘systemic risk’. It does not matter whether Goldman Sachs accept deposits or not, if Goldman Sachs collapses the financial world will be toppled by a massive tide of losses and fear, and every sitting US administration will be loath to unleash such a wave of financial destruction. Another argument is that the present fusion of investment banks and commercial banks reduces the associated risk, as each department can somewhat counterbalance losses by earnings in the other segment. A final, and perhaps the most noteworthy for investors, argument is that global financial ‘megabanks’ have acted as facilitators of globalisation. Globalisation is an accumulation of various processes such as technological innovations, government policies and the liberalisation of capital. So a reduction in the size of banks and their ability to take on risks may slow down the globalisation process and hence the associated profits. I am not arguing for a complete halt of globalisation, but a decreased in the velocity of integration, due to the enhanced difficulty of obtaining funds and securitization, which may reduce new potential Greenfield investors’ appetite on foreign expansions.

As corollary of the above argumentation investors should pay close attention to how the future of the banking system is being shaped these days. My personal recommendation is to increase capital-ratios as this is a simple way to align banks’ incentives with that of the general economy and avoid speculation in overly risky assets. But an intrusion into banks managerial sphere and a forced break up of financial conglomerates will have severe implications on the prospect for growth, as a vibrant financial system is fundamental for a thriving economy

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Financelab MAGAZINE | 10

by Martin Frederiksen, Journalist Team

Investing in Bonds International Interview with

Thomas Schuhbeck from Hypo Vereinsbank

O

nce a famous man in the US said: ’I have a dream’. His dream was race equality, but he is not the only one having a dream. Everyone has at least one dream, and one of the most common is to get rich (or richer) without working too diligently. A lot of students make huge investments trying to reach this dream, but the money is primarily invested in equities. Why invest in equities and not bonds?

FinanceLab Magazine talked to Thomas Schuhbeck, director of Bond Brokerage Germany in HypoVereinsbank, and he gives among other things his view on this specific conundrum.

No one can deny that equities for most people are more interesting than bonds, and according to Schuhbeck, it is primarily due to the fact that equities first of all are a simpler product than bonds, but also that they are more known in general public.

- First of all equities are better known among the people due to the heavy focus on them by media and on TV, Schuhbeck says before he elaborates on the way equities are traded compared to bonds.

- I think it is because of the higher transparency with equities, since they mainly are traded via exchanges. Bonds are best traded OTC (over the counter), and if you invest in bonds you must be aware of more product and market details.

The details to be aware of are plenty, but one of the most important is the rating system. The financial services company Standard & Poor’s rates borrowers on a scale from AAA to D, and this credit rating is of major importance when buying bonds. High rating often means low yield and vice versa. Investors then buy the bonds,

11 | Financelab MAGAZINE

which he considers as too low rated, as the bond seller most often is forced to pay a higher yield.

Both governments and companies issue bonds, and now and then it is tempting to invest in companies compared to governments, because companies typical has a higher yield.

- Every issuer must be considered individually, governments as well as corporations. No standardization is possible and never has been possible! Before buying a bond the investor must be aware of the issuer risk, Schuhbeck explains. He emphasizes how important the rating of a government or a company is.

- If you want to compare governments vs. corporations you should at least cluster the rating classes, e.g. one can say that usually AAA-rated government bonds yield are less than AAA-rated corporate bonds, but is might not be true for lower rating areas.

Junk-Bonds are tempting

One of the fastest ways to earn a bunch of money, when investing in bonds is to invest in the so-called junk bonds. A junk bond is a high yield bond, which is rated below investment grade (below BBB-) at the time of purchase. The low rating means that they usually pay higher yields than better-rated bonds, but they do also have higher risk of default.

- Junk bonds might be favorable due to the higher yield, but usually there is no “free lunch”. Because there is a higher risk with junk bonds (e.g. see the history of bonds issued by The Republic of Argentina), Schuhbeck says. He would not recommend only investing in junk bonds, even though you feel that you are an expert.

- A good diversified portfolio could help to reduce

risk and bring a better performance and should be more favorable than single investments, especially in this market segment. Schuhbeck continues, before he emphasis that the unwritten rule of not investing more than you can afford to lose is more important than ever when speculating in junk bonds.

Denmark already has the euro

As a way of finishing the interview with Thomas Schuhbeck, we asked to the Denmark and the euro-question, and if Denmark should implement the euro.

- From a currency perspective I think there should be no major impact since EUR/DKK due to ERM2 is floating in a minimal range only within the last 10 years (trading range approx. 0,05; in comparison to USD/DKK approx. 4,00). One could actually say that the EUR has already been installed in Denmark.

Schuhbeck sees the major difference from the krone to the euro as a question about the relative competence of the Danish Central Bank and the European Central Bank.

- One could disagree with the shift of competence from ‘Danmarks Nationalbank’ to ECB. In my opinion the performance of ECB has been excellent in the last years, at least since Trichet took over as president of ECB (since 1st November 2003, red.), Schuhbeck says before he puts emphasis on the fact that the euro would give Denmark better access to the capital markets.

ELEMENTS TO BE AWARE OF when

INVESTING IN BONDS

• Economic situation and outlook (macro/micro) • Market situations (fixed income markets, FXmarkets, equity markets....)

• Chart signals • Yield • Issuer (e.g. Government/Supranational/Financial/ Corporate) • Rating • Maturity/Coupon/Currency • Collateral Type (e.g. guarantees, covered, ABS, MBS, subordinated, TIER1-2-.......)

• Product type (e.g. fixed coupon, floating rate note, structured product....)

Market liquidity (e.g issue size, trading volume....)

• Tax situation (e.g. specific local rules...)

• Sales restrictions (e.g. national or regional law...)

• Market Segment (Domestic/Global...)

Jean-Claude Trichet has held the position as president of the European Central Bank since 1st November 2003.

Even though, Schuhbeck not directly will recommend the euro or vice versa, it becomes clear that he considers the euro as a great currency for Germany, especially with Trichet as president of the ECB, and if he was forced to, he probably would recommend it to Denmark, although he understands the arguments for keeping the krone.

- In general, people are very loyal to their currency when they have shared a many good experiences, like Danish people with the krone, Germans with the D-Mark, but the EUR is quite good as well, Schuhbeck finally admits

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Financelab MAGAZINE | 12

By Jacob Michaelsen, FinanceLab Investment Panel

Microfinancing

An imperative for the global economy

A

result of the economic crisis is the decreased access to credit. Companies and private individuals now have to put up more collateral in order to obtain funds. Yet, in tens of thousands of small micro-finance institutions all over the world we see the business of micro-credit/-finance thriving. Besides the fact that most of these banks do not even require any form of collateral what-so-ever, it is really interesting that in general more than 98 % of all loans are repaid. Furthermore, the effective rates charged (normally 15-40 %) are far higher than what are charged in normal commercial banks where the payback ration is a mere 40-60 %. So why then, given these astounding facts, do we not see more banks and institutions shifting focus to this apparent higher profitable and safer investment? Here are a couple of reasons why micro-credit pays off.

Low-cost possibilities

As we have seen over the last 10-30 years in the case of China, Taiwain, Korea and so forth investments in emerging markets have created optimization possibilities through outsourcing and low-cost labour. This is today seen as an integral part of the global economic vehicle. However, in order for these countries to provide these kinds of services the national economic system must first be build up to support this. Imagine for instance a Taiwan where the people could not obtain credit to set up production facilities. Outsourcing production would then no longer be a possibility.

However, thanks to the availability of credit, it is possible to build factories for producing goods and roads for transporting them on in countries such as Taiwan. Micro-finance thus allows for such credit to flow to huge masses resulting in new venues for low-cost-production.

Import-Export

Another side to the micro-finance issue is the increase in trade between countries. By providing credit to people otherwise unable to obtain it important strategic markets will be created.

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Through these loans families will not only be able to make goods, but microfinance will also increase demand for products such as Coca-Cola, McDonalds, and so on. Such companies will most likely increase presence in these areas resulting in the creation of more jobs, and hopefully, in turn, start a positive spiral that can affect more than just the local community.

Of relation to the outsourcing possibilities mentioned above are also exports. With an ever more interacting world product demand will further enhance. Through the rise of the new emerging markets a basis for competition of exports will present itself further adding fuel to a global economy. Before such a rise is possible companies in such countries need capital just like the developed world. Providing the necessary funds for microcredit banks and institutions will over time create new venues for obtaining credit themselves. Although this sounds farfetched, think of China as the biggest importer of US debt as an example.

On the basis of the savings from their clients, Chinese banks lend billions of USDs to the American people every year (although this might be changing gradually as China seeks to shift economic focus). By providing the sufficient capital needed countries, currently considered third-world, will be able to rise and one day lend back some of their money to more developed nations where collateral can be found.

From these examples we see that micro-finance is not only an economic plus, but more of an imperative. The question therefore remains why more banks haven’t smelled the money yet. Although it sometimes seems difficult to convince boards and CEOs to throw good money after bad; it also seems that convincing them to throw good money after better is even harder. Micro-finance is a viable source of profit and is here to stay

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FINANCELAB Calender

All events can be found including more information on our Facebook group and on our homepage.

11/04-2010 – 13/04-2010: FinanceLab Trading Diploma

A documented step into your financial career!

FinanceLab is via a partnership with GCMS (Global Capital Market Solutions) offering the first trading diploma course in Denmark. You will receive diploma-certification in Trading Tactics, Forex Trading, Equity Derivatives, Technical Analysis and much more. Teachers with 9 years of HR- and trader-experience will be guiding you through the tradingplatform (Saxotrader) and different trading tactics.

25/04-2010, 08:30 – 17:00: “In defense of Capitalism”-conference

During the financial crisis, institutions and groups in society, has deemed unrestrained capitalism a primary cause of the financial crisis. Thus, many have attempted to redefine capitalism or to “fix” it with regulatory means. ‘In Defense of Capitalism’ is a conference aimed to explore why markets free from the influence of central planning/manipulation, is the most favorable of all perspectives.

Location: SP201, Danske Bank.

27/04-2010: 20:00: Investment Panel Meeting

Only members of FinanceLab Investment Panel can vote, but feel free to join and discuss what the Investment Panel shall invest in.

Location: FUHU Lounge, 3. floor, Porcelænshaven.

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