Year: 2015

Currency devaluations become less effective

Posted on by Ashton Wenborn

As any introduction to macroeconomics class will tell you, a decrease in the value of a country’s currency leads to goods and services becoming more competitive on the world market – increasing demand and spurring economic growth. However, according to a new study by the World Bank, this vital tool in the arsenal of finance ministers and central bankers across the world is becoming less reliable.

The analysis of 46 countries found that since the 1990s, the effectiveness of currency depreciations in increasing exports and spurring on economic growth has halved. As the paper points out, “over the period 1996–2012…the elasticity of manufacturing export volumes to the real effective exchange rate has decreased over time.”

This may come as bad news for China, which recently went through a series of currency devaluations, some speculate, to reboot their faltering economy

Countries that have become embedded in the global economy’s “global value chains” are most likely to see a decline in the effectiveness of currency depreciations. “As countries are more integrated in global production processes” the study continues, “currency depreciation only improves the competitiveness of a fraction of the value of final goods exports.” Goods are increasingly produced as part of a global supply chain, meaning devaluation in one country has a minimal impact on a product’s final price. The savings made are often likely to be absorbed by the multinational company in control of the supply chain, without necessarily raising the demand in the country with a devaluated currency.

This may come as bad news for China, which recently went through a series of currency devaluations, some speculate, to reboot their faltering economy. Latest figure show, for instance, that Chinese manufacturing has suffered its largest contraction since 2009. As the study notes, integration into the world economy’s supply chain – and China deeply is- particularly makes economies more immune to currency devaluations.

Eurosceptics pushing for Greece’s withdrawal from the eurozone are also likely to take note of this study. The convention has been to argue that inclusion in the monetary union, alongside economic powerhouses like Germany, has made Greek exports uncompetitive. Likewise, being locked in the union has prevented Greece from being able to revive its economy through currency depreciation. However, as the study underlines, Greece dropping the euro in favour of a devalued currency, such as a new drachma, may not be as effectiveness a tool for boosting growth as it once was.

Valeant agrees to Sprout Pharmaceuticals acquisition

Posted on by Ashton Wenborn

Canada-based Valeant Pharmaceuticals announced on August 20 that it had entered into a definitive agreement to buy Sprout Pharmaceuticals for $1bn, with the opportunity for Sprout to enjoy a share of future profits. Sprout’s newly released flibanserin has caused stir in the hours since its approval, and the treatment for generalised Hypoactive Sexual Desire Disorder (HSDD) has been nicknamed the “female Viagra”.

Whether the drug will be accepted en-masse
is uncertain

News of the deal emerged just over 24 hours after the FDA approved the Sprout pill, to be marketed under the brand name Addyi. “Delivering a first-ever treatment for a commonly reported form of female sexual dysfunction gives us the perfect opportunity to establish a new portfolio of important medications that uniquely impact women,” wrote Valeant’s Chairman and Chief Executive J. Michael Pearson in a statement. “We applaud the efforts of the Sprout team to address this important area of unmet need and look forward to working with them to bring the benefits of Addyi to additional markets around the world.”

The pink pill is scheduled for release in the US in the fourth quarter of this year, and is aimed at women who experience emotional stress due to low sexual desire. Whether the drug will be accepted en-masse is uncertain, though Addyi will likely benefit from the scale of Valeant’s marketing operations. Studies have shown that the effect of the pill is marginal, and the side effects – namely low blood pressure – have turned some consumers off the drug already.

Under the terms of the deal, Valeant will offload $500m upon the transaction’s closing, expected September, and hand the remaining $500m to Sprout in the opening quarter of 2016. “This partnership with Valeant allows us the capacity to now ensure broader, more affordable access to all the women who have been waiting for this treatment,” said Sprouts chief executive Cindy Whitehead. “Beyond building this in the United States, Valeant also offers us a global footprint that could eventually bring Addyi to women across the globe.”

Kazakh currency plummets 23 percent

Posted on by Ashton Wenborn

In a bid to stabilise its economy, on August 20 the Kazakh government abandoned control of its exchange rate in favour of a free float system that will be determined by supply and demand. Although the shift has caused a drastic 23 percent decline – the largest ever drop for the tenge – it is expected that the currency will stabilise somewhat in the coming weeks.

Kazakhstan, together with Vietnam, was the latest emerging market to ditch efforts to control
its currency

Kazakhstan, together with Vietnam, was the latest emerging market to ditch efforts to control its currency and relinquish a fixed exchange-rate regime in anticipation of the increase in US interest rates.

The decision in Astana was supported further by the present fiscal landscape, in which the crude-driven economy is struggling to contend with low oil prices and the escalating difficulties facing its two biggest trade partners – China and Russia.

The Central Asian state hopes that the devaluation of the tenge will boost exports, create jobs and encourage investment. Furthermore, according to an announcement by Prime Minister Karim Massimov that was reported by Bloomberg, the shift is also expected to facilitate the pursuit of an inflation target of three to four percent in the medium term.

Despite the bold move, given the country’s intractable links with Russia and China, particularly those with the former, Kazakhstan’s own economic future is increasingly precarious. Although positive steps are being taken to prevent further decline in the arduous wait for rebounding oil prices, including a 10 percent slash to the government budget in February, it simply may not be enough when the Fed’s increase ultimately ensues. While corruption maintains its stronghold and the limited access to capital drastically continues to reduce fiscal activities, the development of the economy is severely restricted, particularly amid the current tumultuous climate of the region.

Tianjin insurance costs rocket to $1.5bn

Posted on by Ashton Wenborn

The two explosions that that rocked the Chinese port city of Tianjin last week are expected to cost insurance firms $1.5bn, stemming from direct damage as well as the halting of manufacturing operations. The disaster resulted in over 100 confirmed deaths so far, with many still missing and hundreds hospitalised.

While both international and domestic insurers are set to take heavy losses, domestic firms are expected to take the brunt of it

According to the BBC, based on “official Chinese media reports, bank Credit Suisse estimates the losses could amount to $1-1.5bn,” while the ratings agency Fitch warned that actual costs could be higher. “Claims from the blasts are likely to undermine the financial performance of some regional players and those property and casualty insurers with high risk accumulation in the affected areas,” the BBC reports Fitch as saying.

While both international and domestic insurers are set to take heavy losses, domestic firms are expected to take the brunt of it. Car insurers are also to be particularly financially hurt, with damage being reported for 80 percent of the 10,000 newly built cars that were located in a nearby logistics port. Many car manufacturers have had to halt operations, with the ensuing loses liable to be paid by insurers. Toyota, which has three production lines in the area, has ceased its operations, which can produce over half a million cars a year. With the prospect of lingering harmful chemicals in the atmosphere and environment, how long these shut downs will continue is uncertain. Further, as Chinese response teams and volunteers sift through a clear up the debris, the death toll is expected to rise, further adding to compensation costs for life and injury insurance.

The cause of the explosions, which took place in a warehouse storing hazardous and flammable chemicals such as calcium carbide, sodium cyanide, potassium nitrate, ammonium nitrate and sodium nitrate, are yet to be determined. According to the FT, “The Central Commission for Discipline Inspection, China’s anti-corruption agency, said on Tuesday that Yang Dongliang, head of the country’s workplace safety regulator, had been detained on suspicion of “severe disciplinary violations”.”

Syria turns to Turkish currency for stability

Posted on by Ashton Wenborn

Despite Syria’s civil war raging for nearly five years now, many areas seized by opposition forces have often continued to use the national currency: the Syrian pound. In the divided city of Aleppo, however, some traders are attempting to change this – promoting the adoption of the Turkish lira in the districts of the city held by various rebel factions.

The adoption of the lira is also hoped to bring economic stability

According to the FT, those “advocating a currency switch say it is economically practical because Turkey has become the north’s main trading partner.”Aleppo, once the business capital of Syria, has since 2012 been at the heart Syria’s war, with districts being divvied up by the Syrian government and different rebel factions. Based in the north of the country near the Turkish border, “local markets are dominated by Turkish products or goods sent via Turkey,” writes the FT. Despite initially falling as the war started, Turkish exports in 2014 were worth $1.8bn, not far off the pre-war 2010 amount of $1.84bn.

The adoption of the lira is also hoped to bring economic stability. Since the start of the civil war in 2011, the Syrian pound has been unstable. At the conflicts outset, the currency was worth 47 to the US dollar, but now stands at 189 to the dollar. “Using Turkish currency will benefit local residents because it’s less volatile,” said Aleppo tradesman Rashid Tahvali, reports the Turkish-based Anadolu Agency.

Not all are in favour of the change, however. “The people are split for and against and the debate is causing us problems,” Fouad Hallaq, an activist from Aleppo city told the FT. Some fear that the lira will lead to the domination of rebel held northern areas by Turkey, with more nationalist-minded rebels seeing it as a plan hatched by the AKP and rebel factions funded by the Turkish state. Those opposed call the plan an “Ottoman occupation of the north”, according to Ahmed al-Ahmed, an Aleppo activist, speaking to the FT.

Choosing an investment strategy: Learn from advisors’ experience

Posted on by World Finance

Dramatic valuation increases in the equity markets mean investors are taking on more risk, says Scott Clemons, Chief Investment Strategist for Brown Brothers Harriman. He explains a recent trend in asset allocation from fixed income to equities, and how investors can become more active in their approach.

World Finance: Choosing a passive investment strategy might seem the safest long-term bet, but it brings inherent risk. Excessive diversification has also proven to be an inadequate tool for managing risk. 

So where is the middle ground? Scott Clemons shares his insight.

So first, are investors more or less at risk since the global financial crisis?

Scott Clemons: Kumutha I think they are, in the simple sense that valuation is the best measure of risk. Valuations of equity markets either here in the US, where I am, or in Europe or abroad, have risen dramatically, since the worst days of the global financial crisis. So the risks that remain in the market remain without the margin of safety that lower valuations might bring. So yes, I think this is a riskier investment environment.

World Finance: Very interesting, now with the global ageing population increasing, frankly, in its demographic, are you seeing more turning to passive investments, such as index funds? 

Scott Clemons: The real shift that we’ve seen in asset allocation isn’t so much between active and passive, because of demographics, but it’s from fixed income and into equities. And that is a reflection largely of a lack of yield available in global fixed income.

Traditional asset allocation would have an investor raise his or her allocation to the safety of fixed income as they age, but that safety comes without any yield. So investors have really had no choice, but to remain in equities versus fixed income. And, that is the shift we have seen demographically, as well as, reflecting the global nature of interest rates in this market.

World Finance: So what is the inherent risk that lies within these indices?

Scott Clemons: Well, Kumutha there is no such a thing as an investment without risk, and I worry that sometimes investors confuse the label ‘passive’ with the connotation of ‘risk free’ and it is not. For example, there is an investment strategy baked into the fundamental approach of any index fund.

Most index funds are based on market capitalisation. So the larger a company is, the number of shares outstanding; times the price of those shares; the more of it an index fund has to buy – It is the essence of a price momentum strategy.

When markets are going up, price momentum is great.  It is a strategy that works. But when markets turn down a price momentum approach, such as that imbibed with an index fund, it can be quite painful, as we learnt in 2008, 2009, during the global financial crisis, and really in any bear market in equities. We see price momentum on the down side: that is all an index fund provides.

World Finance: So if the solution is to be a more active investor who insists on transparency in the investment process. How does one go about achieving that ideal?

Scott Clemons: I am afraid it takes some work. The beauty of passive investing is a thoughtless, if you will, approach to owning equities or owning any asset class. And, by active approach: don’t confuse active approach with a frequency of trading, or high trading type approach. It simply means understanding what the underlying investment strategy is, in whatever fund you are using, and comparing it to the alternatives.

So if, on one hand, an index approach is largely a price momentum strategy, investors should compare that to other strategies such as a value based strategy, or a fundamental based strategy and then decide which of the options on offer are best aligned to supporting their goals.

World Finance: Now when it comes to passing wealth to future generations, should one’s investment portfolio goals equally shift?

Scott Clemons: Absolutely, and if you look at the shear scale of wealth that’s likely to be transitioned over the next generation, largely because of the demographic trends that you’ve identified. Investors are already confronted with the opportunity and the challenge of investing, not only for their own lifetime, but also for the lifetime of their children, their grandchildren; as well planning for philanthropic goals.

So I think the old traditional approach of making sure you have enough money to prepare for retirement, and for healthcare in your later years; as wealth levels rise, begin to encompass the broader goals of the next generation as well. Investors are well advised to think about that, as they create their asset allocation.

World Finance: Finally, how can advisors to wealthy families help with that transition?

Scott Clemons: Well, if you think about the wealth transition that families go through. Most families only ever experience that maybe twice at most: One when the current generation inherits their wealth from their parents, and then again, when they pass it onto their children. So they have two data points of experience to draw on.

Advisors on the other hand; accountants, financial advisors, investment advisors, have a whole wealth – a breadth – of information and experience of how those transitions take place. Simply by asking the question of your advisory team, you can uncover paths to failure, paths to success. You can learn vicariously from the experience of others. It’s something that both investors, as well as their advisors, should spend more time and attention on.

South Africa’s young workers to boost economy

Posted on by Ashton Wenborn

In its latest economic report, the World Bank looks at how South Africa can use a sizeable demographic shift – the growth of its work-age population – to its advantage. It outlines how economic prosperity can be attained through a cycle of job intensive growth, enhanced productivity, greater saving, and by making substantial improvements to education. All of which will help the country’s youth to drive economic growth by as much as 5.4 percent.

South Africa’s working-age population (those between 15 and 64 years of age) has grown significantly in recent years

“We hope that analysis and evidence offered in this report will promote informed dialogue and policy debate about the country’s development priorities pertaining to job creation and economic inclusion in a context of major demographic changes”, said Guang Zhe Chen, World Bank Country Director for South Africa in a statement.

South Africa’s working-age population (those between 15 and 64 years of age) has grown significantly in recent years: increasing from 11 million in 1994 to 54.9 million in 2015, with that number set to grow by a further nine million over the next 50 years.

This surge in working-age population poses a unique opportunity for the country and not just for improving the South Africa’s economic growth, but for the improvement of living standards for all. However, this window of opportunity it hampered by high unemployment and poor job creation rates, with more than 30 percent of its workforce currently out of work.

“We see that education is the greatest priority for South Africa if it is to harness its demographic opportunity to propel growth,” contends World Bank Program Leader, Catriona Purfield. “Getting basic schooling right is the first step to ensuring that school leavers and graduates have the foundational skills necessary to function in the modern workplace.”

Chinese devaluation plagues emerging markets

Posted on by Ashton Wenborn

Although China’s recent weakening of the RMB has been – as far as currency depreciations go – relatively modest, the effect is being felt far and wide. As testament to just how important and central China now is the world economy, last week’s revaluation has had a deleterious result for many emerging market economies.

On Monday August 17, the Turkish lira, Mexican peso and South African rand all hit new lows against
the dollar

On Monday August 17, the Turkish lira, Mexican peso and South African rand all hit new lows against the dollar, while the South East Asian leaders Malaysia and Indonesia saw their currencies decline to the lowest price levels since the 1998 Asian Financial Crisis. With many emerging market economies being reliant upon Chinese economic growth and exports, investors are, according to the Financial Times, “in a sell-first, ask-questions-later mood at the moment.”

Likewise, Bloomberg has identified a set of emerging market currencies, termed the “troubled ten,” said to be particularly vulnerable from China’s currency devaluation. This grouping is composed of the Taiwan dollar, Singaporean dollar, Russian rouble, Thai baht, South Korean won, Peruvian sol, South African rand, Chilean peso, Columbian peso and the Brazilian real.

“It’s all about vulnerability,” Hans Redeker, the London-based global head of foreign-exchange strategy at Morgan Stanley, told Bloomberg. “Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China.”

The fear is that these currencies will further weaken as interest rates in developed economies – principally the US – rise. The resulting currency strengthening that a rate rise will bring will further push down the value of the above mentioned emerging market currencies.

Shell Arctic drilling gets the go ahead

Posted on by Ashton Wenborn

Shell’s latest Arctic drilling endeavour has been given the go-ahead by the Obama administration, which now means that the Anglo-Dutch multinational can drill beneath the ocean floor off the coast of Alaska. Previously, the company was restricted to drilling the topmost sections of its two wells there, although the long awaited final permit means that the oil giant can extract Arctic oil and gas more freely at the so called Burger Prospect, Burger J.

Backers of the plan maintain that Arctic drilling will grow increasingly important as the century wears on

The permit was awarded after the company repaired a damaged icebreaker, and on the condition that Shell works with the utmost commitment to stringent health and safety measures. Bureau of Safety and Environmental Enforcement (BSEE) safety inspectors have been deployed on each of Shell’s drilling units, and they’re working “24 hours a day, seven days a week to provide continuous oversight and monitoring of all approved activities,” according to the BSEE in a statement.

“Activities conducted offshore Alaska are being held to the highest safety, environmental protection, and emergency response standards,” said Brian Salerno, Director of the BSEE. “Now that the required well control system is in place and can be deployed, Shell will be allowed to explore into oil-bearing zones for Burger J. We will continue to monitor their work around the clock to ensure the utmost safety and environmental stewardship.”

Backers of the plan maintain that Arctic drilling will grow increasingly important as the century wears on, and that the $7bn spent on the venture so far is justified on the basis that costs will fall dramatically in the decades to come.

Japan returns to “dangerous and expensive” nuclear

Posted on by Ashton Wenborn

Almost five years on from the Fukushima triple meltdown, Japan has restarted one of two reactors at its Sendai plant and, in doing so, marked a long-awaited return to nuclear power. Located in the country’s Kagoshima Prefecture, the plant is the first to resume operations after the last of the country’s 44 reactors was shut down two years ago.

Anti-nuclear campaigners gathered outside the facility to protest against the decision

The Fukushima catastrophe, which was triggered by an earthquake off the coast and made worse by the resulting tsunami, claimed the lives of 16,000 people and triggered the evacuation of 160,000. Shaken both by the event and a failure to contain the damage in the time since, much of the population is opposed to a nuclear restart.

Anti-nuclear campaigners gathered outside the facility to protest against the decision. Among them was the former Prime Minister Naoto Kan who told the crowds: “We don’t need nuclear plants,” adding later that Fukushima had “exposed the myth of safe and cheap nuclear power, which turned out to be dangerous and expensive.” His successor Shinzo Abe, meanwhile, has already committed to nuclear power as part of the country’s energy strategy, with the resource set to make up a 20 percent share of Japan’s total generating capacity by 2030, down from 30 percent prior to the 2011 crisis.

Over $100m has been spent in keeping to the country’s beefed up safety regulations and the Sendai plant became the first of 25 applicant plants to be granted permission for a restart last September after passing what Abe called “the world’s toughest safety screening.”

Forecast to start generating power before the end of the first week, the plant should reach full capacity within the month and will be joined in October by a second reactor.

China devalues currency for a third day in a row

Posted on by Ashton Wenborn

China’s central bank has devalued its strictly regulated currency for a third day in a row – this time by 1.1 percent. On Tuesday August 11, the RMB was devalued by 1.9 percent, pricing it at 6.2298 to the dollar, in what was said to be a one one-off move to reflect a change in how the daily fix of the currency is determined. However, this was followed by a further 1.6 percent devaluation on Wednesday August 12. The latest depreciation brings the value of the RMB to 6.4010 to the dollar.

This sharp depreciation has stoked fears that the world economy will face a fall in demand from Chinese business and consumers

With Beijing claiming that the depreciations are part of a new attempt to allow market actors more of a role in determining the price of its currency, it would seem that this is part of China’s attempt to reform its currency in order to win inclusion in the IMF’s reserve currency basket – alongside the dollar, euro, yen and pound.

To these ends, the moves may be successful, with the IMF calling it “a welcome step as it should allow market forces to have a greater role in determining the exchange rate,” reported the FT. The Fund, however, went on to note that that the “exact impact will depend on how the new mechanism is implemented in practice”.

This sharp depreciation has stoked fears that the world economy will face a fall in demand from Chinese business and consumers. According to the Financial Times, this second devaluation is “likely to fuel expectations of more sustained weakness in the Chinese currency.”

China, however, looks set to benefit from this depreciation, with lower prices raising demand for Chinese goods from abroad. The world’s second largest economy has faced a recent slowdown, with exports down eight percent in July 2015 compared to July 2014.

As the BBC economics editor Robert Peston notes, the fall in value will “increase the competitiveness of China’s exports at a time when the country’s economy is growing at its slowest rate for six years – and when many economists fear that the slowdown will become much more painful and acute.

However, “for all the spur to growth it may give,” he continues, “the devaluation will reawaken concerns that Beijing is still a million miles from having re-engineered the Chinese economy to deliver more balanced growth based on stronger domestic consumer demand.”

The depreciation is the most significant change in Chinese currency valuation since the 1990s, with Tuesday’s devaluation being the largest one-day change since the Chinese government moved from its tightly pegged currency system to a “managed” floating system a decade ago.

China’s central bank attempted to prevent fears of further slides in the value of the RMB by claiming, once again, reports the BBC, “repeating Wednesday’s assertion that there was no basis for further depreciation given strong economic fundamentals.”

South Africa’s retirement fund reforms

Posted on by World Finance

Retirement fund industry reform has been a hard-pressed objective in South Africa. Mothobi Seseli, CEO of Argon Asset Management, discusses the objectives behind South Africa’s reforms, Argon Asset Management’s role in the process, and his hopes for the financial system in 10 years.

World Finance: Retirement fund industry reform has been a hard-pressed objective in South Africa. Here to share insight on the path to innovation: Mothobi Seseli.

First, let’s talk about the objectives behind this reform.

Mothobi Seseli: With any reform process, what you’re actually trying to achieve is to get the system to work better. The objectives behind the reform process within the South African retirement fund industry are numerous. I’ll mention just a few.

You want to broaden coverage and participation in the system. You want to lessen the burden on the state. You also want to make sure that as you try to build up retirement capital that you’re doing so as cost-effectively as possible.

There are of course a whole range of other objectives, but those primarily would be the key ones.

World Finance: So, tell me where would you place Argon Asset Management in this process?

Mothobi Seseli: Argon Asset Management is an asset management or investment management company. We provide investment management services to the retirement fund industry.

We have a role to play as a stakeholder in that industry, so we talk to our clients about the reform process. Because it is about change, and change is always difficult.

And if you think, in a South Africa sense, the rebuilding of our society is important. So as we democratise, as we try to get more inclusivity, you are going to see change across all of the industries that feed into the retirement fund industry.

So, we’re doing our bit with technical relevance on the money management side. And I think that we’re doing a good job of it.

We built a globally recognised, multi-award winning investment management organisation. And that is our contribution to the game, on two levels: the discourse with clients about the change, and the benefits of a wider and bigger system that is more inclusive; as well as what we do on the money management side.

World Finance: So Mothobi: you know, when you are advising clients, do you suggest that diversifying risk is indeed the way ahead for them?

Mothobi Seseli: Risk is very important. As an investment principle you need to be diversifying risk. But you can’t diversify all the risk away. If we’re going to meet member return expectations, some risk is required.

So yes: go on to take risk, but be mindful, and be clear about what type of risk you are assuming. And of course allied to that is your return expectations.

World Finance: So what role does the South African government play in this effort?

Mothobi Seseli: As you’ll appreciate from an earlier question, one of the key objectives behind the retirement reform process is to lessen dependence on the state. So the state is a key stakeholder in this. So the state has a role to play in driving policy, driving the engagement that is necessary to achieve what they want to see. So the South African government is giving that kind of direction and leadership.

World Finance: So how does South African retirement fund reform play into the larger story of the pension industry, both regionally, locally, and then internationally?

Mothobi Seseli: I think that when you have a system that works really well, I imagine that the features of a well functioning system will be high integrity, high engagement, with attendance to the things that I spoke about. We have greater participation, greater coverage, you’re preserving as you should, and it’s cost-efficient.

What you’ll have is possibly, much more confidence in the system. Much more trust in the system.

When it works that way, you hopefully will be able to encourage more people to come into the system. So you also hopefully will benefit on the savings rate increase likelihood. When that increases, obviously your risk and capacity also improves. So it’s got meaningful economic growth implications. And that’s not only in the South African sense: it’s regional and global.

World Finance: So where would you like the industry to be, about 10 years from now?

Mothobi Seseli: I think that what I’d like to see is an industry that is delivering the majority of its desired goals and outcomes to the majority of the members, the consumers that it’s designed to serve. That kind of system is a lot more sustainable for me.

It’ll be a lot more inclusive a system. As I said, high integrity and high engagement, I think, are critical. That would be my desired picture.

World Finance: Mothobi, thank you so much for joining me today.

Mothobi Seseli: Thank you.

PwC: post-crash regulations challenge bank liquidity

Posted on by Ashton Wenborn

A new study released by PwC, commissioned by the Global Financial Markets Association and the Institute of International Finance (two lobby groups for international finance), claims that post-crash regulations need to be revisited by lawmakers, due to the negative affects they have had on financial markets.

The study also suggests that there has been a measurable decline in the trading capacity
of banks

The report claims that “market evidence points to a measurable reduction in financial market liquidity,” pointing out that the volume of European corporate bond trades has declined by 45 percent between 2010 and 2015. Likewise, large trades are said to be increasingly hard to execute without affecting price. The study also suggests that there has been a measurable decline in the trading capacity of banks: “banks’ holdings of trading assets have decreased by more than 40 percent between 2008 and 2015, and dealer inventories of corporate bonds in the US have declined by almost 60 percent over the same period.”

This reduced liquidity, PwC notes, is a result of many factors – however, it singles out “banks de-risking in the wake of the crisis (selectively de-leveraging and unwinding large non-performing and capital-intensive credit books), following the introduction of new regulatory risk frameworks,” as one particular factor.

The regime of tougher regulations following the 2008 crash is claimed to be “presenting challenges for banks’ traditional role as market makers.” The new regulation are, the report claims, affecting “the ability of bank dealers to facilitate liquidity and the redistribution of risk in times of volatility, potentially introducing new and unforeseen risks to our markets and economy.”

PwC concludes that “there are grounds for a review of the calibration of the reforms to date and the ongoing regulatory agenda, in order to properly understand and consider the effects of regulatory initiatives on market liquidity by asset class, and to consider whether upcoming regulatory initiatives could likely exacerbate the trends in liquidity.”

HSBC: the not-so-local bank

Posted on by Ashton Wenborn

HSBC has marketed itself to its customers as the “world’s local bank”, priding itself on providing financial services and products that are uniquely tailored to the needs of individuals no matter what country or culture they are part of. It is a strategy that has served the bank well for many years, mainly because it has made many inroads and opened up operations all over the world, particularly in emerging market countries.

For some time now, HSBC has been one of Europe’s biggest banks in terms of market capitalisation, and it has built up a massive presence in over 80 countries around the world. But since the financial crisis, it has seen its profits fall dramatically, with the bank dubbing 2014 a “challenging year” after it reported a 17 percent drop in profits to $18.7bn (see Fig. 1).

36%

Of the UK public trust banks

On top of last year’s poor performance, the bank has also been forced to pay out billions in penalties for its involvement in a massive money laundering and tax evasion scandal. The string of scandals participated in by HSBC and others, has helped weaken public trust in banks, with the latest Trust Barometer survey, from Edelman, showing that only 36 percent of the UK public trust them.

All of this has prompted the bank to consider a new business model, one that will see the organisation restricting its once rampant expansion into new markets, in favour of a plan that will involve it downsizing and simplifying its operations.

The move suggests many things, mainly that the strict regulatory environment and the cost of compliance is weighing the company down. But it also indicates the heavy toll that recent scandals have had, and the shift in culture, not just for HSBC, but also for the entire UK banking sector.

Leaving London
Not only is HSBC taking drastic action with its new business plan, but it has also expressed a willingness to move its headquarters out of London – where it was originally founded back in 1991.

At HSBC’s Annual General Meeting, Group Chairman Douglas Flint explained how it was essential that the bank position itself in the best way possible, in order to support the markets and customer bases, which are going to be critical to its future success.

“In this regard, we also have to take fully into account the repositioning of our industry being driven by the regulatory and structural reforms which have been put in place post crisis”, said Flint. “As I said at our informal meeting in Hong Kong on Monday, we are beginning to see the final shape of regulation and of structural reform, including the requirement to ring fence in the UK.

“As part of the broader strategic review taking place, the Board has therefore now asked management to commence work to look at where the best place is for HSBC to be headquartered in this new environment”, he added.

“The question is a complex one and it is too soon to say how long this will take or what the conclusion will be; but the work is underway.”

This bombshell has led to many commentators wondering which country, and which city, the bank will decide to call home, now that it is leaving London behind. But most industry insiders, including Chirantan Barua, a senior analyst at Bernstein Research, have placed their money firmly on the bank returning to its namesake, Hong Kong. “It’s a no brainer, it has to be Hong Kong”, Barua told BBC News. “The Hong Kong regulator leads the world in macro prudential (economy-wide) regulation… what the Bank of England has rolled out in UK mortgages is a leaf out of the HK rule book.” But there are plenty of other reasons, besides a shared name, for the bank to call Hong Kong home.

For starters, moving its HQ to Hong Kong would be a popular move among the bank’s shareholders, mainly because it would pay a lot less tax. The UK government’s decision to impose a bank tax (bank levy), has been a very unpopular one since it was introduced back in 2010 and, according to the international specialist banking and asset management group, Investec, HSBC could see its tax bill in the UK slashed by as much as two-thirds should it make the journey to Asia.

If that were to happen, and HSBC decide that they are more than happy to turn their back on the capital, London will certainly miss its charm. Not only will the treasury lose out on all those billions in tax revenue, but the square mile will lose one of the biggest players.

Hong Kong will also decrease the bank’s regulatory burden, which is sucking huge amounts of money out of HSBC, as a result of the heavy price that complying with all that regulation generates. Hong Kong has also not wasted any time in making HSBC aware of its more business friendly policies, with the Hong Kong Monetary Authority (HKMA) releasing a statement explaining that the move would be a “positive development”.

“HSBC is the largest bank in Hong Kong and has deep historical links with Hong Kong”, it said in a statement.

But probably the best reason for packing its bags and saying farewell to London has to be the simple fact that people in Hong Kong still have something nice to say about the bank. Over there it has the ability to make a fresh start as just another bank, and can finally get away from all the media attention that has plagued it in recent years, as a result of the part it has played in numerous high-profile scandals.

Probably the best contrast about the difference in how HSBC is viewed by the two cities, has to be how the British media and public berated the bank for the part it played in the Swiss banking debacle, while in Asia, Hongkongers stood in line waiting for the chance to get their hands on a HKD150 banknote that celebrated the organisation’s anniversary.

HSBC pre-tax profits

Culture shift
In the UK, the banking sector has been under immense pressure. And, according to a report on the culture of British retail banking, commissioned by the New City Agenda, there have been calls for the banking sector to become more competitive, provide better products and solutions for customers, and a drive to more ethical decision making and improved employee satisfaction.

While the report contends that there has been a marked improvement by the banks to meet these demands, there is still a lot more to be done. But there is some solace to be taken from the fact that HSBC and other British banks are working hard to take the necessary steps.

“Every major bank we talked to not only acknowledged the toxicity of previous working cultures, but had programmes in place to ensure their business treated customers fairly”, writes Lord Sharkey. “Encouragingly, we also found among challenger banks a real willingness to avoid the kind of mistakes made by their more established competitors; a desire which was often reflected in their policies, controls, and structures.

“Secondly, it is equally clear that this journey towards a healthier culture is nowhere near complete. A toxic culture decades in the making will take a generation to clean up. Some frontline staff told us they still feel under significant pressure to sell. Complaints continue to rise and trust remains extremely low. Most of the people we talked to believed that real change, and as a consequence the better treatment of customers, will take some time to achieve.”

Reputation recovery
Since the outbreak of the financial crisis, HSBC and other British banks have been embroiled in a number of high profile scandals that have only helped its image in the UK sink to new depths. Arguably the most damaging for HSBC was the role the high street banking giant played in the Swiss tax avoidance scandal, which prompted the bank to take out adverts in British Sunday newspapers in an attempt to apologise for its part in the incident.

“Their reputations are in tatters”, Pat Southwell, Director of Strategy and Head of Crisis Communications at Berkeley PR told PR Week. “Bankers are widely disliked and distrusted. Rightly or wrongly, they represent an ethically dubious elite who are seen to act above the law at worst, or can negotiate the law at best.”

To make matters worse for the bank, the FSA has announced a number of probes designed to examine the state of the banking industry, in an attempt to foster a more competitive culture, so to allow smaller institutions’ access to a fairer playing field.

That is why, for many outsiders looking in, the decision by HSBC to downsize operations and set up shop elsewhere has become evermore understandable. According to a report by the Financial Times, the bank is looking to withdraw its retail banking operations from a number of emerging markets, such as Brazil and Turkey. It even reported that the bank was flirting with the idea of downsizing its involvement in the US and Mexico, along with massive cuts to its investment division, which has been part of its core business for years.

Use tax to combat oil losses, IMF advises UAE

Posted on by Ashton Wenborn

The IMF told economists from the UAE that a 15 percent excise tax on cars, combined with a broadening of its 10 percent corporate income tax (CIT) to more businesses, could offset the impact of falling oil prices and the subsequent loss of export revenues by bringing in an estimated $42bn.

Zeine Zeidane, an advisor of the IMF Middle East and Central Asia department and Mission Chief for UAE, said in a statement: “We don’t expect any increase in taxes, so we don’t have any tax measures in the macro fiscal framework that we have right now. But that said, our policy advice is to continue to diversify revenue sources for the UAE.”

For many years, the UAE has managed to remain a largely tax-free country

And while the IMF acknowledged that a comprehensive impact study is required before a broadening of CIT go ahead, the organisation recommended that the UAE look at Dubai and take notes.

“If you look to the case of Dubai you already have CIT applicable to foreign banks and not to domestic banks, so that’s something we recommend to have a unified system without any discrimination between investors,” continues Zeidane. “We are recommending to move towards the CIT that is applicable to everybody, foreigners and domestic banks, but also to other corporates.”

For many years, the UAE has managed to remain a largely tax-free country, relying on oil exports to cover its outgoings, but with lower revenues from the commodity expected, the government has been forced to look at alternative revenue streams.

Overall, the UAE economy looks strong and robust enough to withstand external shocks, possessing extensive fiscal and external buffers, according to the IMF. However, the organisation has urged it to diversify its economy by supporting the development of its wider business environment.

“Lower oil prices are eroding long-standing fiscal and external surpluses, but the UAE has continued to benefit from its perceived safe haven status and large fiscal and external buffers that have helped limit negative spill overs from lower oil prices, sluggish global growth, and volatility in emerging market economies,” concluded a recent IMF report.

“The economic outlook is expected to moderate amid lower oil prices. Non-oil growth is projected to slow to 3.4 percent in 2015, before increasing to 4.6 percent by 2020, supported by the implementation of megaprojects and private investment in the run-up to Expo 2020.”