Warren Buffett’s appetite for deals doesn’t appear to be waning with age after news emerged that his investment vehicle, Berkshire Hathaway, is set to acquire aerospace manufacturer Precision Castparts for roughly $30bn. It would be the largest ever deal conducted by the 84-year-old Buffett.
The deal represents a change in focus for Buffett’s firm, which is set to continue looking at acquisitions in the coming months
The deal represents a change in focus for Buffett’s firm, which is set to continue looking at acquisitions in the coming months – as opposed to stock investing or insurance, according to The Wall Street Journal. Having previously grown the business through insurance, Berkshire Hathaway has been steadily moving towards M&A deals in recent years. These have included a wide range of firms from different industries, including clothing company Fruit of the Loom, brick manufacturing Acme Building Brands, utility company MidAmerican Energy Holdings, and press agency Business Wire.
Last year, Berkshire Hathaway announced a $4.7bn deal to buy battery-maker Duracell from Procter & Gamble, while it also holds investments in some of the world’s leading companies, including Coca-Cola, American Express, IBM, Wal-Mart, Wells Fargo, Goldman Sachs and Moody’s Corporation. Berkshire Hathaway’s previous record deal was the 2009 acquisition of Burlington Northern Railroad, which cost $26bn.
Precision Castparts represents a considerable outlay for Berkshire Hathaway – although with annual profits of $1.5bn and revenues of $10bn, it will certainly add to the group’s growth prospects. It’s thought that Buffett has pushed ahead with the deal because he sees aerospace firms growing their business thanks to the continued increase in orders from airline companies.
In a note to investors earlier this year, Buffett set out his plans to buy up more companies. Discussing the $4.1bn purchase of US car dealership group Van Tuyl in March, Buffett talked of how he was continuing to look towards M&A. “With the acquisition of Van Tuyl, Berkshire now owes nine-and-a-half companies that would be listed on the Fortune 500 were they independent (Heinz is the half). That leaves 490-and-a-half fish in the sea. Our lines are out.”
After nine years of sustained low federal fund rates, there is a near universal expectation that the Federal Reserve will finally raise rates in September. Recently released US jobs data for July 2015 further adds the expectation for a raise.
The Fed has repeatedly said it will only raise interest rates once it is confident that job growth is on track to meet full employment
The figures announced by the US Department of Labour were not hugely impressive, with business adding 210,000 jobs in July, a decline from the 230,000 added in June 2015,while unemployment held steady at 5.3 percent. These numbers, however, are deemed sufficient for Federal Reserve officials to stick to the current expected plan to raise rates next month.
As The New York Times reported, “While not as robust as the gains recorded in May and June, Friday’s Labour Department report came in within 10,000 jobs of what forecasters had predicted, a notable feat of consistency in an economy that employs nearly 150 million people.” Likewise, according to the Financial Times, “traders expressed confidence that “rates would go up next month, with federal funds futures implying a 58 per cent probability of an increase after the US central bank next meets, compared with roughly 50 per cent earlier, according to Bloomberg data.”
The Fed has repeatedly said it will only raise interest rates once it is confident that job growth is on track to meet full employment. US jobs data for July may only be at a level deemed sufficient for July, when looked at in the long term, figures have been positive. As the US Secretary of Labour, Thomas E. Perez points out in a news release, the uninspiring July figures come as “part of 65 consecutive months of private-sector job growth, to the tune of 13.0 million jobs overall.” The recovery, he continues, “is broad-based, with employment gains happening throughout the economy. Job growth is more widespread across industries than at any point since 1998.”
Unprecedented economic challenges have forced central banks across the globe to rethink previously held assumptions about what’s possible in terms of policy and, in economies tied down by stagnant growth and rising unemployment, policymakers are courting negative interest rates as a fix. Used in only a handful of instances and seen largely as a last ditch attempt to fend off spiralling deflation and joblessness, negative rates have cropped up across Europe recently and threaten to do so elsewhere if circumstances permit.
Though the policy tool has proven increasingly popular of late, as shown in Switzerland, Sweden and Denmark, it has not yet shown itself to be a success. Since the measure was first introduced in the late 19th century, interest in the subject has been almost wholly academic, and its practical application marks a real turning point for previously held assumptions about monetary policy. What’s arguably more significant is the importance of negative rates in highlighting the severity of the situation currently facing Europe, and in revealing the ineffectiveness of conventional policy tools in the matter.
“Low nominal interest rates are here to stay in economies afflicted by low growth prospects”, says Pierre Cailleteau, Head of Institutional Clients and Sovereign Entities at asset management firm Amundi. “They could move into negative territory as we have seen in different places in Europe, though such a situation reflects more of a temporary supply and demand imbalance than disastrous economic prospects. This situation is challenging financial intermediaries and institutions that have guaranteed elevated returns to their clients (pension funds, insurance companies, etc.). Naturally asset managers also have to cope with such a challenging situation.”
Amundi by numbers
€950bn
Assets under management
100m
Retail client base
30+
Countries it is active in
Negative territory
Whereas the ‘zero-bound’ thesis stipulates that interest rates cannot slip into negative territory, the adoption of negative rates is doing much to discredit the theory. In April, one quarter of the European sovereign bond market was trading with a negative nominal yield, and the same can be said for a growing, albeit small, segment of corporate bonds.
Whether critics care to admit it or not, negative rates have fast become a fixture of the modern day financial landscape, and will likely continue to crop up for as long as the situation endures.
“A prolonged phase of economic stagnation has obviously many negative implications”, says Cailleteau, who acknowledges that engagement with the policy is a consequence of dismal economic showings. “To mention three that are especially worrying: a sizeable part of the population is unemployed (see Fig. 1); commitments in terms of fixed rates of return on capital are starting to weaken the solvency of financial intermediaries; debt dynamics are made more complicated even as the generation of revenues to repay or simply sustain debt is weakened.”
In the eurozone, a prolonged debt crisis has inflicted major pains on member nations, as the currency area struggles to mount a credible recovery bid, more than five years on from when the crisis first struck. Worse still is that a sustained period of lacklustre growth has made businesses and households wary when it comes to spending. Confidence in this area will return only once the recovery gains traction. Committing first to austerity and record low interest rates, member nations have lately begun to consider negative rates, much to the dismay of the asset management business.
Far from excluded to citizens in affected countries, the prevailing low and negative interest rate environment has asked that asset managers, much like Amundi, keep close tabs on market movements, if only to minimise damages and guard against further price shocks. Naturally, close-to-zero and negative interest rates mean that managers must indulge in additional risk-taking, though doing so means they have a responsibility to educate clients about the situation at hand and how it might affect them.
Risk and return
“At Amundi, we believe that the first place to start is for our clients to clarify how much return they are prepared to chase against how much risk. And this, in a context where more risk must be taken to get the same return”, says Cailleteau. “Once this is made clear, several options are available: expanding the range of credit-sensitive assets, taking duration risk and being prepared to make concessions in terms of capital availability (illiquid space). But one favourite option is to take broader international exposures, which of course requires that we handle FX risk appropriately.”
As Europe’s leading name in the asset management business, measured in terms of assets – of which it has more than €950bn ($1.05trn) under management – Amundi also qualifies as one of the top 10 largest firms worldwide. Recognised for product performance and transparency, a long-term advisory approach, organisational efficiency and a commitment to sustainable development, the firm has made a name for itself as a successful and responsible enterprise.
Having built up a retail client base of 100 million and an institutional client base of over 2,000, Amundi designs “innovative, high-performing products for institutional clients, which are tailored specifically to their requirements and risk profile”. With a presence in over 30 countries, Amundi has done much to keep pace with a global financial market transformed from that of a few years ago.
The low and negative interest rate environment, for example, has done a lot to upend the operating environment for banks, and taking a tumble into negative territory any further could fundamentally alter the operating environment for financial services as a whole. For investors, meanwhile, the choices are quite simple: on boarding more risk, saving more or reducing expectations. The challenge lies more so with asset managers, who must work alongside clients to ensure that they understand this to be the case.
“Getting higher returns in next-to-zero interest rates involves some degree of additional risk-taking. So there is no magic here. These assets are more risky taken separately than conventional bond or cash management strategies. We argue that broadening one’s portfolio to such assets in a transparent and well-structured way adds value – and can even add value for a limited quantum of additional risk”, says Cailleteau.
Multiple strategies
If only to acclimatise to this much-changed economic environment, asset managers must make available a variety of funds, tailored to the prevailing low and negative interest rate environment of today and geared to suit various risk appetites. “Amundi is the leader in the euro fixed-income and credit space, but prides itself for offering a range of product/strategies to its clients, from liquid to illiquid, active to passive, European to global”, says Cailleteau. “So what matters to us is to bring the type of funds/strategies that fit our clients’ needs.”
Speaking also on what trends he has detected recently, Cailleteau says that global aggregate bond strategies have been very much in favour, just like multi-asset strategies that fit their clients’ risk adjusted return objectives. “We offer our eagerness to understand the challenges they face, our ability to offer tailor-made strategies and the benefit of entrusting their funds in a company that is robust financially and cares about client service.”
In answer to the question of what sets Amundi apart from rival global asset managers like them, Cailleteau says: “We are a European leader with a global reach; our breadth of expertise makes us no captive of any strategy, fund or asset class. We sell our clients what fits their needs; and we genuinely care about socially responsible investment and act accordingly – yet in a constructive and not prescriptive way.”
What’s clear when it comes to Amundi’s strategy is that clients are factored into every step of the decision-making process, and the firm has developed a reputation for promoting responsible finance that is respectful of human values. “Our approach is to engage our clients on their investment challenges and see how we can mobilise intellectual capital, fund management expertise and operational excellence to build solutions.” By incorporating environmental, social and corporate governance into all of its investment criteria and keeping the client front and centre of all its dealings, Amundi has come to be seen as a responsible corporate citizen, evolving as a company to meet changing client needs in an economically volatile environment.
“We spend a lot of time speaking to our clients and thinking about the challenges they face”, says Cailleteau. “Then we offer ideas, insights and solutions. Some of our clients reward us through partnership type of transaction.”
In a period in which European central banks are struggling to keep the recovery moving, by working closely with clients to reassure them about the risks they face in a negative interest rate environment, Amundi has cemented its status as one of the world’s leading asset managers.
Saudi Arabia is starting to feel the effect of its campaign to drive down the world price of oil, with falling revenue leading it to enter the bond market to plug its growing deficit. Starting in the summer of 2014, despite falling oil prices, the Kingdom led other OPEC members to maintain production levels, leading the cost of a barrel of oil to plummet from roughly $100 in July 2014 to $50 in January 2015.
Despite this cushion, the country is expected to see a fiscal shortfall of $100bn this year
Relying heavily upon oil revenues, this year’s steep price decline has forced Saudi Arabia to look to the domestic bond market to raise $27bn of funds. Earlier in July, the Kingdom also raised $4bn from bonds, which was the first sovereign issuance eight years.
According to the Financial Times, the Kingdom needs the cost of a barrel of oil to remain at $105 to maintain its spending levels. It is now one year since the price of oil fell below this figure, and has remained well below since. As a result the Saudis have relied upon $65bn of reserves built up in boom years.
Despite this cushion, the country is expected to see a fiscal shortfall of $100bn this year. The decline in oil prices has not abated the opulence of the monarchy’s state spending, with generous bonuses being bestowed upon state workers in 2015, capital spending being sustained at pre-price drop levels, and the country pursuing an increasingly expensive war against Houthi rebels in Yemen.
Falling oil prices have had repercussions across the region, with other oil dependent Gulf States facing a shortfall in revenue. As The Economist notes, “[w]ith falling global oil prices, the Arab Gulf states will miss out on an estimated $380 billion in export earnings this year, the International Monetary Fund estimates. Only Kuwait and Qatar will scrape by without a budget deficit, and all the region’s petrol states are being forced to look at cost-cutting.”
In recent years, Mexico has seen a boom in its car manufacturing and export industry. In the 1980s, factories often straddled the US-Mexico border; assembling cars from parts produced north of the border and re-exporting the finished product back to America. Yet since the 1990s and 2000s, Mexico has seen an increasing number of investments by automobile manufacturers for the production of increasingly sophisticated car parts and assembly plants, setting it on track to become a major centre of high-value manufacturing.
Toyota Motor Corp announced in April 2015 that it would construct a manufacturing plant in Mexico –costing $1bn – to build Corolla compact cars. Soon after Ford said it would be building and expanding (at the cost of $2.5bn) its engine and transmission factories in the northern and central states of Chihuahua and Guanajuato, and create another 3,800 jobs.
This is part of a wider trend of increased investment in the automobile industry, and manufacturing in general, in Mexico. According to Professor Mark Aspinwall, an expert in Mexican politics at the University of Edinburgh, “Mexico has received enormous quantities of inward FDI, especially in manufacturing in the past 20 years.” Much of this has been in the automobile industry and many of the world’s leading car manufacturers are looking to Mexico.
Sean McAlinden, Vice President for Research and Chief Economist at the Centre for Auto, tells World Finance that “Audi, BMW, Mercedes, Infiniti, and now maybe Land Rover have all announced or are about to announce new assembly lines in Mexico where Cadillac’s and Lincoln’s are already built.” Of late, McAlinden continues, “$25bn in new automaker investment has been announced for Mexico in the last four years – the new Mazda and Honda plants are already up and running.”
Occupying a relatively thin strip of the Americas, Mexico is a prime location for shipping exports
According to Christopher Wilson, Senior Associate at the Wilson Centre’s Mexico Institute, “this is just the latest in a long line of investments in Mexico’s auto industry. Over the years, Mexico has built out its supplier base for the auto industry and it has become one of the most competitive auto-makers on the planet.”
Free trade in a good neighbourhood
Mexico is a desirable place for car manufacturers to invest for a variety of reasons, perhaps the most glaring being the proximity of the most prosperous nation on earth; the US. According to the Mexican Automobile Industry Association, 70 percent of vehicles produced in Mexico are exported to the US. Also further north is the prosperous consumer market of Canada.
Occupying a relatively thin strip of the Americas, Mexico is a prime location for shipping exports. Through the use of its western ports, the country is able to export its products to the booming markets of East Asia, as well as prosperous pacific nations such as Australia and New Zealand, while its eastern ports are able to transport goods to more conventional markets in Europe.
Geography alone, however, is not enough and since the 1990s Mexico has made a concerted effort to liberalise its once closed economy through entering into free trade agreements with other nations. The first major effort to liberalise trade was the 1994 joining of the North American Free Trade Agreement, which has eliminated most import and export tariffs between Canada, the US and Mexico, creating a free market stretching from the Arctic Circle down to the Jungles of Chiapas.
Throughout the 2000s Mexico continued to pursue free trade agreements, and now has a total of 44 with countries around the world, including major economic players such as the EU, Japan and China. “I can export duty free to North America, South America, Europe and Japan”, Thomas Karig, Vice President of Corporate Affairs for Volkswagen of Mexico, tells Forbes. “There’s not another country in the world where you can do that.”
This has given it a comparative edge over the US, both its primary buyer and car-manufacturing competitor in the Western Hemisphere. Mexico’s many free trade agreements allow it to export cars at a much cheaper cost. “For example”, McAlinden says, “a $60,000 Audi Q5 shipped from the US to the EU would face a $6,000 tariff but from Mexico it’s $0 due to its FTA with Europe.”
Exportability is the basis of Mexico’s car industry, as, for now at least, many Mexicans will never be able to afford the cars made in these factories. Whereas America’s once booming car industry was based on its own internal market, south of the border the car industry is geared towards world exports. In the early 20th century Henry Ford paid workers higher wages in hopes of creating an adequate market for his cars. In a globalised world, car manufacturers in Mexico need not make such considerations, and wages remain low.
Despite huge investments from car manufacturers, Mexican workers have not seen much of a wage rise; “auto wages have gone nowhere and perhaps have even declined”, says McAlinden. These low wages also make Mexico an attractive place for investment. “When it comes to small cars like the Ford Fiesta, Mexico has at least a $600-700 labour cost advantage over the US”, says McAlinden. Chronic low wages have been a constant plague of the Mexican economy (see Fig. 1), with years of low wage growth. Dan La Botz, a professor who lectures on global labour studies at City University in New York, says “Today Mexican workers wages are a fifth lower than those in China, among the lowest in the world. As a result of pervasive low wages throughout the country in all sectors, 50 percent of all workers are poor.”
Professor Aspinwall sees the jobs offered by these investments as offering well paid jobs in the formal economy in a sea of informal low waged jobs: “It could improve the wages profile in the areas where the investment occurs, but not more widely. Wages aren’t that low in the formal sector – the informal sector is where they’re low.”
Luis Rubio, global fellow at the Wilson Centre’s Mexico Institute, agrees, arguing “The wages these plants pay are significantly higher than the average pay of workers in traditional industries and that’s why they are so much sought after. The issue is not whether they are higher or lower than in Germany or Detroit but how do they compare with their peers. In other words, what are the alternatives for these workers?”
Manufacturing globally
If wages are low in these factories, one major reason would be the lack of other decent jobs in Mexico’s formal economy. In 2014, over half of Mexico’s non-agricultural workforce was employed by the informal sector, according to The Wall Street Journal. The expansion of the car industry is bringing with it other jobs in the formal sector, hopefully creating more jobs with good pay and raising the wages for those that already exists, as competition between workers for them dampens.
Off the back of attracting and maintaining increasingly technological sophisticated car part factories and high-end car assembly plants, the Mexican Government hopes to turn itself into a global centre for high-value manufacturing. According to The LA Times, the government boasts that “100,000 Mexicans graduate each year prepared for careers in engineering and technology.” Likewise, “the Mexican Government has hired MIT and Oxford to advise them on building an auto R&D sector”, McAlinden says.
Ford’s decision to build a transmission factory is a step in the right direction. Transmission factories are technologically more advanced, requiring more skill than many other car part manufacturing processes. The “transmission capacity announcement was impressive because it was thought not too long ago that such advanced components as transmissions could not be manufactured in Mexico”, says McAlinden. “This requires advanced machining and automation. The transmissions will be the latest high number designs (nine and 10 speeds).”
The government’s attempt to position Mexico as a world centre for high-value manufacturing seems to be paying off, with increasing numbers of white collar jobs in automobile research coming to the country, according to John Baron, Chief Executive of the Centre for Automotive Research in an industry report, says The Dallas News newspaper. Further, Professor Aspinwall notes, “Mexico has also seen investment in the aerospace.”
All of these high tech investments create what Wilson calls a “virtuous circle of cluster development”, as more investment attracts further investment. “Once five to six million vehicles are built in Mexico per year by 2018”, McAlinden elaborates, “many other industries will find it lucrative to locate near such an agglomeration including tooling, contract engineering, and some product development – just like China.”
While wages remain low in Mexico and law and order concerns persist in certain states, the car manufacturing industry looks set to remain the backbone of the country’s manufacturing base. Manufacturing in 2014 rose by 3.5 percent and car production rose by a full 10 percent.
Snowballing investment looks set to create a new Motor City south of the Rio Grande; whether or not it will be able to provide the high-paying jobs Detroit’s car plants did in its heyday is yet to be seen.
The mutual fund industry in Chile has grown tremendously in the last few years, particularly given the global context of recent times. As was the case with countless others, the industry was hit hard by the financial crisis in 2008, which caused its assets under management (AUM) to shrink by 27 percent. Yet by the following year, Bci Asset Management experienced an impressive turnaround – not only did it recover the losses it incurred from the crisis, but it actually grew by over 40 percent from its 2007 base.
Since 2010, Chile’s mutual fund industry has continued this pattern of growth (see Fig. 1). “In fact over the three years, the growth rate has accelerated, reaching over 11 percent annually in USD”, Roberto De La Carrera, Chief Investment Officer at Bci, tells World Finance. In consideration of the favourable financial environment in Chile, there are strong indications that the increasingly sophisticated industry will continue to grow at this healthy pace. Today, the country’s mutual funds amount to just under $50bn in assets (see Fig. 2), which represents approximately 20 percent of Chile’s GDP. Given that in the US, the mutual fund industry is roughly equal to the country’s GDP, De La Carrera says, “It’s safe to conclude that there is plenty of more room for growth in Chile’s future.”
A number of promising opportunities currently exist within Chile’s local mutual fund industry, the two most notable being structured funds and balanced funds
Reaching maturity
In 2001, the first capital market reform was introduced with a positive impact to Chile’s development as a financial services centre. The mutual fund industry benefitted significantly with much greater flexibility, while asset management entities were also created at the time in order to effectively manage various types of funds. A third set of capital market reforms then came into force in 2010, aimed at increasing the security levels of financial transactions, as well as improving competition and the amount of information available for consumers.
In October 2011, the Chilean Ministry of Finance introduced a bill that drastically restructured the regulations applicable to investment funds and asset managers – providing a clear distinction between the two and their corresponding managers. The industry in Chile has thus gone from strength to strength, overcoming previous obstacles, such as fragmentation and an overtly complex set of regulations.
“In my opinion the industry has matured over the last few years”, says De La Carrera. “If one looks at the composition of the equity mutual funds from just a few years ago, they were heavily overweight in Chile, with nearly 50 percent of the total equity position within the local market. If you stop to think that Chile currently represents around one third of one percent of the world’s market capitalisation, this home bias was pretty extreme.”
Currently, the local market is still showing home bias in its equity exposure, but much less so than was previously the case and it is now down to less than 25 percent of the total equity position. To compare, the principal equity position in the US, which represents about 40 percent of the total, is largely in line with the market capitalisation weight for that market. “Certainly if the local market gets hot again in the future, one could expect an increase in the local exposure, but clearly there is a trend towards diversification.”
On the fixed income side, a recent fundamental change can be seen in the tremendous growth of medium- and long-duration mutual funds. In 2014, these long duration funds totalled more AUM than the local money market funds for the first time in the industry’s history. This current shift towards diversification can be attributed largely to poor returns in Latin America’s equity markets, resulting from the commodities boom coming to an end, which has naturally spurred investors to look outside local markets in order to find attractive returns. “This, compiled together with the recovery of the US economy and the apparent recovery in the European economy, has led Chilean investors to these markets”, says De La Carrera.
Further major regulatory changes in the mutual fund industry were implemented last year, thereby reflecting the ongoing efforts for developing the industry and its growing level of maturity. Under the new guidelines, there has been a significant increase in the level of autonomy with regards to investing, which aims to lead to the creation of new products that are more diverse than what is currently on offer. Another adjustment that has been introduced, which acts as a significant investment incentive, is a reduction in some of the taxes paid by foreign parties while operating in Chile. “All in all, these changes are positive for the industry and we should see the fruit of these developments in the near future”, says De la Carrera.
New opportunities
A number of promising opportunities currently exist within Chile’s local mutual fund industry, the two most notable being structured funds and balanced funds. The combination of low volatility in developed markets and relatively high local interest rates thus create an optimum environment for the offering of local structured funds, which offer downside protection, along with gains from upside movements in the market. The other significant opportunity involves a migration towards balanced funds, thereby catering to investors that are seeking safety, together with income and modest capital appreciation.
“In Chile, the industry is still heavily weighted in fixed-income funds, but with the eminent rise of interest rates in the US, I fear that investors in international fixed income may incur losses”, says De La Carrera. Therefore, the ideal approach in order to mitigate these losses is to move such fixed-income positions into balanced funds. Of course, this leads to an increase in the risk profile, but currently the risk of investing in international fixed income seems more than sufficient to offset it.
Among the array of prospects for the sector, the biggest challenge that has existed since mutual funds first started out in Chile in the 1980s is a lack of industry knowledge. This places a strong need on educating investors: “Clearly there has been a tremendous amount of progress in this area over the years, but there is still much to be done”, says De La Carrera. Additionally, correctly identifying an accurate risk profile for all investors is another challenge in the industry, and one that Bci Asset Management is making sizeable efforts to overcome.
Leader of the pack
The biggest factor that differentiates Bci Asset Management from rivals is its investment process. The firm has developed a robust system that involves seven stages: thorough research, the creation of an investment thesis, asset selection, due diligence, evaluation by a highly skilled investment committee, implementation and a continuous phase of monitoring. Key to this process are the talented experts that skilfully perform at each step, together with having the entire process well-documented – thus ensuring that no individual is irreplaceable and that there is a smooth transition with new hires.
“A second factor that differentiates us from our competitors is the ‘highest rating’ score that we have received from Fitch Ratings as a Mutual Fund Administrator”, says De La Carrera. In giving this rating, Fitch recognises Bci’s commitment to excellence, not only in the investment process but also in accounting, technology, back-office operations, as well as all other processes involved with asset management. Further exemplifying the firm’s prominence and leading market role is the fact that it is the only mutual fund administrator with this rating in the country.
While maintaining this prominent position in Chile, Bci Asset Management is also striving to expand outside of the state and into the international arena. The organisation is offering investors two Luxembourg-based UCITS funds that are managed by the firm – both have a primarily European customer base. There are solid plans also in place to further expand the number of funds offered from Luxembourg. “The idea is to take the advantage of our investment expertise in Latin America to other markets, and create an attractive option for our clients outside of the region.” With a strategy in place to expand its offerings and network, Bci Asset Management appears to be on a clear path to becoming a frontrunner not only in Chile, but for the entire South American region, supporting the country’s ambitions to become Latin America’s financial services centre.
“The goal for the future has been the same for quite some time now: to grow our market share in a sustainable manner, while maintaining profitability for our stakeholders”, says De La Carrera. “I see this growth coming from both local demand as well as from an increase in international demand, which will be accompanied by growing the number of international funds that we offer.”
Russia’s GDP is expected to fall by as much as 3.4 percent this year, according to the IMF. The poor economic performance is the result of a reduction in domestic demand and made worse by stagnating wages, increased capital costs, and weaker consumer confidence.
The economy should resume growth next year
However, the real problem for the country comes from pressure applied by the international community, with extended EU-US sanctions against Moscow serving to deleverage the ruble and limiting market access.
The economy should resume growth next year, as inflation continues to gradually decline. But full economic recovery is unlikely, with sanctions restricting medium-term growth in the country to just 1.5 percent a year.
In an attempt to stabilise the economy and bolster its struggling financial system, Russian authorities have moved to a floating exchange rate and increased overall FX liquidity. The government also introduced a large fiscal stimulus and a limited wage indexation in order to mitigate the disinflationary process.
Chinese authorities have announced new rules aimed at curbing short selling. Securities regulators from the Shanghai and Shenzhen stock exchanges announced that traders who sell borrowed shares must wait until the next day to pay back their stock.
The new rules will prevent traders from selling stock and then repurchasing it the next day once price has declined. This is a practice which tends to “amplify abnormal fluctuation in stock prices and affect market stability,” said the Shenzhen bourse on its official microblog.
The new rules will prevent traders from selling stock and then repurchasing it the next day once price
has declined
“This is apparently aimed at increasing the cost of shorting and easing selling pressure on the market,” partner of Shanghai-based hedge fund manager BoomTrend Investment Management Co, Samuel Chien, said.
As Bloomberg notes, “China already bans investors who buy shares from selling them until the next day and now such intraday trading restrictions have been expanded to short sellers.” High frequency trading, which makes use of computer algorithms to determine and execute trades, will also be affected.
The new regulations come in the aftermath of China’s recent stock market meltdown in which prices dropped off by almost a third, resulting in $3trn being wiped from the market, leading authorities to step in and halt trading.
As the Chinese state press notes, “Securities watchdogs have unveiled a string of policies to shore up the market, as the benchmark Shanghai index lost 30 percent from its June 12 peak, which included suspending initial public offerings, banning major shareholders from selling, investigating into “malicious short-selling” and granting government agency liquidity to help finance stock purchases.” The new rules, known as T+1, will come into effect immediately.
After five weeks, the Athens Stock Exchange (ASE) was opened on August 3 for early trading. In an indication of the recent battering to the Greek economy, shares nose-dived by 22.8 percent. The country’s biggest banks, National Bank, Alpha Bank, Piraeus Bank, and Eurobank Ergasius nose-dived by the daily limit of 30 percent. The prices of utilities and state-owned companies also plummeted, while export driven companies experienced less of a shock.
With its own currency, greater autonomy and less pressure from xenophobic neighbours, Greece may actually have a chance of climbing out of the spiralling crises it currently battles
To stem capital flight, the capital markets committee has banned short-term selling.
Given that financial institutions comprise 20 percent of the ASE, experts fear that the banks will bring down the rest of the stock market. State intervention in the banks is not expected at present, although they will require recapitalisation.
The news follows shortly after data revealed that Greek manufacturing contracted considerably in July as a result of the three-week bank closure, which had caused havoc with orders and supply chain. The Markit PMI for manufacturing dropped from 46.9 to 30.2 – the lowest rate since records began in 1999 and well below the 50 mark which indicates growth.
While a drastic decline was expected on the day that the ASE reopened, it is possible that even slow recovery is not yet in sight as capital controls continue to impair the liquidity of the stock market. Currently, local investors can only purchase shares with cash from overseas or money they have at hand. Capital remaining in security firms or earned from selling security can also be used, while foreign investors on the other hand can trade freely.
The situation in Greece goes from bad to worse as pressure mounts to agree new bailout conditions and discord exacerbates within the incumbent regime. In 2014, Greece ended a six-year long pattern of recession, only to return to this testing path in 2015. As patience runs thin from the country’s principle financier, the IMF, relations with eurozone member states are even more strained, particularly with Germany. Greece has become the foe within Europe, blamed for incompetence and viewed as a burden. As it continues to lose friends and favour, it seems that the time has come to bid farewell to the troublesome euro. With its own currency, greater autonomy and less pressure from xenophobic neighbours, Greece may actually have a chance of climbing out of the spiralling crises it currently battles. Taking heed from the lessons learned by Iceland, having its own currency may be the only way to recover, without causing more social distress and unrest to the weary Greek people.
The first phase of the reports on Kazakhstan and Morocco examined the countries’ legal and regulatory framework for transparency and exchange of information.
Morocco was successful and able to move to the next round of the assessment process – the aim of which is to ascertain the quality of its exchange of information practices during Q2 of 2015.
Kazakhstan on the other hand failed the initial assessment and, therefore, was prevented from moving to the second stage of the review process. The country has significant holes in its legal framework.
The Global Forum also assessed the exchange of information practices (phase two) in the Czech Republic. It then assigned ratings for compliance, along with an overall rating. The Czech Republic achieved an overall rating of “largely compliant”.
So far, the Global Forum has finished 186 peer reviews and allocated 78 countries with compliance ratings. Of that number, 20 were rated “compliant”, 44 were deemed “largely compliant, 10 achieved a rating of “partially compliant”, and only four have been rated as “non-compliant”.
China’s central bank has outlined new rules governing online payments. The regulation places a cap on third-party payments to Rmb500 a day and Rmb200,000 per year. Any payment in excess of these figures will have to be routed through a traditional bank account.
Online payment business and ecommerce sites, as would be expected, are not pleased with the new rules
What this means is that if a Chinese consumer were to use Alipay, an online payment system owned by e-commerce giant Alibaba, to purchase an item online, any costs over Rmb500 would have to be transferred from their bank account rather than use cash stored on online platforms.
Online payment business and ecommerce sites, as would be expected, are not pleased with the new rules. In a commentary, Yi Huanhuan, secretary-general of IFC1000, an online finance trade group, expressed his annoyance with the regulation: “It’s not even enough to buy one iPhone. If I want to donate Rmb210,000 to the Winter Olympics, I guess I’d have to spread it over two years.”
The People’s Bank of China has responded to criticism, pointing out that over 70 percent of online payments in 2014 were under Rmb1000, suggesting that the majority of online customers will not be impacted by the changes. “Transfer limits are proposed based on a holistic consideration of payment efficiency and convenience, as well as factors such as anti-money laundering and client fund security,” the central bank said, according to the FT.
These new rules are part of a wider attempt by the Chinese state to regulate China’s large and growing online finance market, with a number of new regulations for online finance activities such as peer-to-peer lending being announced in July.
In April, Chinese Premier Xi Jinping received a jovial welcome upon his arrival in Islamabad; it was the first visit by a Chinese leader to Pakistan in nine years. The celebratory reception can be attributed to China’s upcoming investment in the China-Pakistan Economic Corridor (CPEC) – a $46bn project stretching 3,000km and consisting of a network of roads, railways and maritime ports. In a bid to lift Pakistan out of energy poverty, the venture also entails oil and gas pipelines, as well as alternative power sources.
The CPEC will be connected from the Xinjiang region in western China to the Gwadar port in southern Pakistan, running through the latter’s poorly developed Baluchistan province and Lahore. Expectations are high in regards to the economic advancement of various impoverished areas in Pakistan, while China stands to gain considerably, starting with the creation of a vital passageway for exports through the region. “For the first time, China is going to become a strategic economic partner of Pakistan”, Pakistan’s Planning Minister Ahsan Iqbal says. “Gwadar is the shortest link to Europe, Africa and Middle East, [making it] a very attractive proposition for China and for its competitiveness.”
Pakistan’s annual GDP growth rate, percent
1.6%
2010
2.7%
2011
3.5%
2012
4.4%
2013
Energetic promise
Along with oil and gas pipelines, it is estimated that the project will bring around 3,000 megawatts of coal, wind and solar power to Pakistan. Improving Pakistan’s energy infrastructure is crucial for the incumbent government, given the level of social unrest and political discord that frequent and lengthy power outages cause. In some areas, blackouts can last up to 18 hours a day, which often result in the disruption of commercial activities and violent protests – factors contributing to the 2013 electoral defeat of Shri Pranab Mukherjee.
According to the Asian Development Bank, power cuts reduce Pakistan’s GDP growth by an estimated two percent each year, thereby consistently stunting the country’s economic development and preventing the seven percent growth rate needed to generate sufficient employment levels and tackle poverty.
Notwithstanding the favourable prospect of Chinese funding, energy issues in Pakistan cannot be resolved merely through an injection of foreign investment. “The benefit of China’s energy investments will be short-lived if the demand side problems are not fixed”, says Dr Ijaz Nabi, Country Director for the International Growth Centre in Pakistan. “We have to find the political will to make those who consume electricity pay for it.”
Unbilled electricity consumption has long afflicted the sector, with many citizens routing power to their homes illegally and paying bribes in order to continue this harmful cycle. At the end of 2012, the debt of Pakistan’s energy industry totalled $9.1bn, which is equivalent to around four percent of GDP, states a report written by the country’s Planning Commission and funded by USAID. This revenue shortfall has a domino affect throughout the electrical grid, making the system simply unworkable. Therefore, unless these issues are also addressed, greater energy supply may very well lead to even more problems for the afflicted sector.
Pakistani Government officials are optimistic that the economic corridor will spur a string of investment in the surrounding areas, which will be encouraged even more so by improved energy reliability – an issue that has long deterred foreign parties. Plans for mineral processing plants and industrial zones are also underway, potentially generating a further upsurge in economic activity.
Job creation is therefore also expected to follow, which is a key facet for Pakistan’s development, particularly given its rapidly expanding population: “It is critical that we make the best use of the increase in energy, which means providing most of it to the manufacturing industry, especially exporters, to improve our trade balance and create the greatest number of productive jobs”, says Nabi. It is essential therefore that the government places the labour market at the forefront of its economic strategy, supporting and funding training and education opportunities for newly-created roles.
China’s strategy
It is unlikely that direct trade to Pakistan will be enhanced through the economic corridor – of course, there may be an increase in demand for Chinese steel and construction materials, nevertheless, “the aggregate volumes are not really large enough to move the needle for China’s overall trade picture” (see Fig. 1), says Andrew Polk, Chief Asia Economist for The Conference Board. But this is not a driving factor in Beijing’s involvement in the project – the route to resource-rich Central Asia however is, for it can provide a significant boost to commerce and fiscal growth for China’s poorer western provinces.
It will also reduce the distance from Western China to the world market; “A look at the map shows how cost-effective this route is compared to China’s great ports on the Pacific coast”, says Nabi. China’s access for commercial vessels to the strategically advantageous Gwadar Port will also play a noteworthy role in supporting future trade.
The corridor also has symbolic connotations, and as such lays the ground for closer financial and political collaboration with relatively isolated states, such as Afghanistan and the ‘Stans.’ This is a significant asset for China’s long-term economic expansion, particularly given its slowing growth and the potential of the region. Moreover, supporting the economic development of neighbouring countries will boost China’s financial standing, as those surrounding states will naturally increase their purchases of Chinese goods and participate in more regional partnerships.
The CPEC provides an additional incentive for Chinese companies to extend further afield and expand their business models. Then there is the utilisation of its excess industrial capacity, which China stands to gain from considerably; “Putting idle machinery to use in another country helps to alleviate the domestic burden of idle productive capacity”, Polk explains, “which is currently one of the major constraints on China’s growth, so removing that excess capacity by building infrastructure in other countries may help to accelerate a stabilisation in China’s industrial sector”. Given such advantages for China, it would seem that the benefactor is gaining from the project as much as the recipient, and some may argue, even more so.
Pakistani commuters drive past a welcoming billboard featuring pictures of visiting Chinese President Xi Jinping (c) and his Pakistani counterpart Mamnoon Hussain (l) and Prime Minister Nawaz Sharif (r) in Islamabad
Security issues
Investing heavily in infrastructure and helping to develop Pakistan’s most underdeveloped areas can significantly improve the lives of poverty-stricken citizens, tackling the root causes of terrorism and reducing the spread of political radicalism. This incentive for China is heightened further by the presence of the insurgent group, the East Turkestan Islamic Movement, which operates in north-western China alongside Pakistani terrorist organisations. As Gwadar and Baluchistan are areas that are proximal to ungoverned tribal areas – where militants operate and young men are targeted – they are pivotal in the efforts for regional stabilisation.
Chinese funding for the economic corridor will be the most financial assistance Pakistan has ever received and far surpasses that which has been granted by the US. Although the project is still in its initial stages, there are already large disparities with the aid given by the US between 2009 and 2012 in order to deter terrorism. The $7.5bn package was simply insufficient to make a marked difference in impoverished areas, while the funds were spread too thinly to provide an impetus to the country’s development. It would seem that Beijing has learnt a lot from this lesson, providing “a much larger financial commitment – and it is focused on a specific area, it has a signature infrastructure focus and it is a decades-long commitment”, said Xi in an article written for the Pakistani media and distributed prior to his visit.
“China already has been much more successful in Pakistan than the US, whether China can maintain this successful record is still uncertain”, says Dr Yinhong Shi, Professor of International Relations at the Renmin University of China. “Especially since 9/11, the US has invested a lot of resources to try to make Pakistan more pro-American and also increase investment stability – but I think that the US failed. Of course, whether China’s project and economic corridor can really increase the stability within Pakistan still has to be tested in the future – and Pakistan is a very complicated country.”
There is yet another prong to the security aspect of the economic corridor; “China has a strong interest in Pakistan’s stability because it can be a reliable ally in China’s global rivalry with India”, comments Nabi. The project therefore enables China to extend its strategic influence in the region, a tactic which is further evidenced by the less-publicised clause of the deal which involves the purchase of eight Chinese submarines, allowing its ally to counter India’s dominance in the Indian Ocean, thereby tipping the regional balance of power in China’s favour.
Extending influence
China has a lot invested into making this project work and helping to accelerate the rate of Pakistan’s economic development. With lessons learnt from others, most notably the US, there appear to be grounds for optimism. Yet, various structural changes are also needed by the ruling government in Pakistan, coupled with a holistic commitment to sustainable development: “China’s large package is thus a God send for the political leadership. But we need to think beyond the election cycle and make sure that our long-term development objectives and strategic interests are addressed”, says Nabi.
Lowering youth unemployment is crucial, not only for the economic boost it entails, but also for tackling the deep-rooted social issues in Pakistan that currently plague the country and incite insurgent activities, which ultimately spill over to neighbouring countries and impact the entire region.
With the economic corridor providing greater connectivity and a flourish of economic activity in all areas that the route leads to and surrounds, the project has great geopolitical significance. The region seems to be at a pivotal stage in its history and advancement – given its continued development and integration, its strength should not be underestimated. The project also marks another step that China has taken in gaining further influence within the regional context, and consequently the global arena.
China is progressively forging closer ties with its neighbours through the implementation of strategic manoeuvres. The huge injection of investment and soon-to-be established transportation links is an example of such a stratagem – propping up its long-standing relationship with Pakistan considerably, while bringing it closer to Central Asia.
China’s network of power and allegiance therefore continues to strengthen in Asia and adjoining areas, gradually replacing the US in terms of presence and financial might. Together with the formation of the Asian Infrastructure Investment Bank, it seems that China is indeed steadily rising to become the world’s new superpower.
After the conclusion of its latest policy meeting over the past few days, the Federal Reserve has released a statement outlining its assessment of the US economy. While economic indicators are generally positive, the Fed – as expected – says that it will maintain the current low interest rate for the time being.
Since the last Federal Open Market Committee meeting in June 2015, the statement claims that “economic activity has been expanding moderately in recent months.” It notes that there has been an improvement in the housing sector and moderate growth in household spending. The labour market is noted as improving, with increased job gains and declining unemployment. Likewise, the Fed says that “a range of labour market indicators suggests that underutilization of labour resources has diminished since early this year.”
Inflation is expected to remain low in the near term
There does, however, remain a few concerns. Business fixed investment and net exports are noted as staying soft, while inflation is currently running below the Fed’s longer-run objective. This is blamed on a fall in energy prices and “decreasing prices of non-energy imports.” Inflation is expected to remain low in the near term, but anticipated “to rise gradually toward two percent over the medium term as the labour market improves further and the transitory effects of earlier declines in energy and import prices dissipate.”
Therefore, with its eyes on maximum employment and two percent inflation, the Fed concludes that the current “zero to a quarter percent target range for the federal funds rate remains appropriate.” The Fed feels it appropriate to raise rates only after further improvements in the labour market and when it is confident that inflation will “move back to its two percent objective over the medium term.” However, it is further noted that even after employment and inflation targets are met, wider economic conditions may still result in lower than usual federal fund rates.
Shell announced on July 30 that, as part of its on-going cost cutting exercise, it will shed 6,500 jobs in 2016 and reel in capital spending plans by 20 percent, or $7bn. The move falls in step with similar such actions taken across the industry, as the fossil fuels business looks to mitigate the impact of a crude price slump and make savings where possible.
The executive later stressed that the company’s planned combination with BG would shore up the company’s cashflow
“We have to be resilient in a world where oil prices remain low for some time, whilst keeping an eye on recovery,” said CEO Ben van Beurden in a statement. “We’re taking a prudent approach, pulling on powerful financial levers to manage through this downturn, always making sure we have the capacity to pay attractive dividends for shareholders.”
The executive later stressed that the company’s planned combination with BG would shore up the company’s cashflow and make Shell a global leader in LNG and deep water innovation, while also turning the combined entity into a “simpler and more profitable company”. In the statement, van Beurden confirmed that the BG transaction is on track and once completed would “deliver better returns to shareholders”.
Shell’s outlook shows that caution remains the go-to sentiment for much of the fossil fuels business, as low oil prices bring a host of planned projects to grinding halt and threaten to do so in the long-term. The spending cuts also bring the combined value of cancelled and delayed oil and gas projects to around $200bn, and many, including Shell, expect to make further reductions in the years ahead, should the price of oil fail to pick up.
The Latin-American economies of Peru, Colombia and Chile have all previously struggled with political and economic uncertainty, which prevented many industries from taking off. However, this has changed significantly in the last two decades.
From the early 1990s and beyond – and especially after the Asian financial crises – these three nations have focused their efforts in developing the elements of market oriented economies, fully accelerating the process of integrating their economies to the world, and creating important middle-income classes, which create demand for goods and services, and increased the dynamic of the real estate market.
These countries are now facing breaking points in their process of development, creating huge opportunities for companies across different segments of their economies. World Finance spoke to Andres Pacheco, Director of Real Estate, Credicorp Capital, to find out more.
What is it that makes Peru, Colombia and Chile’s growth prospects so advantageous compared to most emerging markets?
These three countries are the successful market-oriented stories of Latin America. With different levels, the three countries have fairly well-run democracies, a good level of openness to international investors and well-managed economies that have attracted significant flows of foreign investments in the last decade. These economies are also well position from the macroeconomic point of view for the changes coming in the international economic environment.
Most emerging countries have missed opportunities for growth because of the lack of an adequate regulatory framework
How has the housing deficit hampered growth in these countries?
Even in advanced countries – where the market has met most demands in real estate – the sector has been a huge contributor to GDP growth. Most emerging countries have missed opportunities for growth because of the lack of an adequate regulatory framework and defence of the rule of law. But over the last decade reforms have developed the capital and mortgages market; improved access to basic infrastructure among others; and are un-tapping the huge opportunities of large countries with unmet demand.
How has Credicorp Capital helped alleviate the problems facing the real estate sector?
Well, the real estate asset management market formed fairly recently in these countries. Our funds there are helping to channel capital from the national saving (pension funds) to the development of real estate projects, helping developers to increase their capacity to produce the needed area, and other companies to focus their capital in their core business, improving efficiencies in the economy.
That amount of capital devoted to the sector is still small compared to what other global institutional investors normally do, but if these countries are to meet the demands of the growing middle classes, they need to significantly increase the amount of capital that its invested in the real estate sector. We are helping to increase these amounts.
How successful have the Credicorp Capital real estate investment funds been in boosting the real estate market?
The amount of capital already invested is relatively small, especially when compared to the size of the market and its needs, but Credicorp funds have managed to help it in developing the capital markets for real estate funds, allowing the developers to undertake more projects and on a far larger scale; generating the assets that the countries demand.
What is the Inmoval fund, and how has it impacted on the real estate market overthe last few years?
Inmoval is Credicorp Capital’s commercial real estate fund, and it has invested more than $250m since it began five years ago, with an average annual return above 11 percent. This has resulted in investors continuously investing. Additionally, due to its track record, institutional investors agreed to invest in a second fund focused only in residential real estate, with equal results.
Credicorp Capital recently closed a $120m fund through Peru’s real estate arm. What did this entail?
The $120m fund was closed through Peru’s real estate arm with Peruvian institutional investors who bet on the sector and on the team created by Credicorp Capital to take advantage of such opportunities.
What does the future hold for the housing market in Peru, Colombia and Chile?
These countries still produce less housing units yearly than households are formed, and it has been like these for several decades. It is therefore likely that the number of units developed every year will increase steadily in the following years, as long as the finance and the markets are developed.
