World Finance: There has been talk that the renminbi could one day overtake the greenback as the international reserve currency; what do you think the likelihood of this happening is? Mark Boleat:That’s a long way off if it’s ever going to happen. I think what business wants to see is alternatives.
The greenback is there, not because anybody’s passed a law; it’s there because of market reasons. It’s what people find easy to use; it’s got a lot of backing and support from America, obviously, a lot of the big financial institutions are in America. It’s not the only globally traded currency, of course: sterling, the euro, the yen, many other currencies.
We would expect the renminbi to be used increasingly, reflecting the size of the Chinese economy and growing trade with China. It’s not going to replace the dollar, but it’s going to be a very useful addition to the range of currencies that can be used.
Contrary to the general reduction in the price of commodities last year, cocoa was exceptional with an overall price increase of 7.4 percent. Several factors have been attributed to rising prices of cocoa despite the global economic slowdown. Growing worldwide demand resulting from changing tastes in Asia and escalating adult consumption of chocolate in Western markets have outstripped current supply capabilities. Widespread fears within the confectionery market of further shortfalls have also augmented the price of the commodity.
Experts suggest that the demand for confectionery goods will continue expanding
With an annual increase of eight percent in the demand for cocoa in India and chocolate sales in China having doubled in the last decade, the Asian market is driving pressure on existing supply chains. According to Euromonitor, the chocolate confectionery market in the Asia-Pacific region alone is set to increase from $13.3bn in 2013 to $16.3bn in 2018. Consumption is also growing in Western Europe, the world’s largest market for chocolate, propelled by an increase in the availability and range of the products on sale. Greater expenditure by confectionery brands on advertising has also caused Western palettes to crave chocolate more than ever before.
Approximately 68 percent of the world’s cocoa supply is concentrated within West Africa, with the Ivory Coast and Ghana being the globe’s leading producers. The dangers of limiting the supply of such a popular commodity to one geographic location were highlighted last year as suppliers struggled to meet rising demand. Accentuating this risk was the outbreak of Ebola in neighbouring countries Liberia, Sierra Leone and Guinea, which caused fears of possible contamination. Despite no cases of Ebola reported in the Ivory Coast and Ghana, news of the fast-spreading virus raised the alarm for confectionery manufacturers across the globe. Panic buying prompted price hikes that reached $3270.27 per tonne in August. Fears of the virus affecting cocoa crops are beginning to subside, as suggested by the easing of pricing since September 2014.
Adding to the demand pressures on the region are the current limitations of cocoa harvesting in West Africa. The majority of cocoa farms in the Ivory Coast and Ghana are small, family-run operations, making expansion and the introduction of modern farming techniques challenging. “Cocoa traders and processors have invested considerable capital in their local supply chains in Cote d’Ivoire and Ghana, including sustainability programs and grinding factories”, says Victoria Crandall, Soft Commodities Analyst at Ecobank. “Traders are thus supplying farmers with inputs (fertilisers and pesticides), providing training on tree husbandry and helping to build strong farmers cooperatives”.
This gap between demand and consumer needs presents a golden opportunity for the South American market and particularly Peru, Ecuador and Colombia. With vast land resources and the necessary weather conditions required for cocoa harvesting, the region is ideal. In recognition of these attractive prospects, international investors are beginning to pour capital into new plantations located within the Amazonian basin. Governmental initiatives to encourage cocoa farming in place of coca production also indicate an increase in supply from the region.
Experts suggest that the demand for confectionery goods will continue expanding, particularly given new trends in emerging markets; the rise of the middle class in countries such as Turkey, India, China, Brazil and Russia makes the growing appetite for chocolate increasingly insatiable. Despite the pressures of mounting demand, particularly from the Asia-Pacific region, continuing price augmentation may not be on the horizon after all. Along with increasing supply, the slump in oil prices will also have a bearish effect; indicating that the recent pattern of sliding commodity prices will include cocoa as well. With West African producers endeavouring to increase their yield and buyers looking to new sources in South America, fears of a global shortfall may soon begin to alleviate.
Less than a month after it was announced that RBS would be withdrawing from the Japanese market, the UK-based lender is in talks this week over retreating from the continent altogether. As part of a major restructuring strategy launched in 2014, the bank has made public its plans to exit various international markets in recent months, including central and eastern Europe and the Middle East. The lender is also taking bids for its non-UK operations of its private banking arm, Coutts, and is in the process of divesting Citizens, its US retail banking operation, which listed on the stock exchange last year.
[RBS] is now facing pressure to simplify its business and focus on its domestic operations
Ross McEwan, Chief Executive, is aiming to reduce the bank’s overseas operations to less than a quarter of its assets, and it has been speculated that it will ultimately withdraw from over half of the 38 countries it currently trades in. Since his appointment in October 2013, McEwan’s cost-cutting initiatives have gradually returned the bank to profitability following an £8.2bn loss in 2013, and he aims to eventually return it to private ownership. 80 percent of RBS is owned by the British government after it was bailed out post-financial crisis, and it is now facing pressure to simplify its business and focus on its domestic operations.
While the move has been anticipated for some time now and if confirmed will not come as a surprise to many, a retreat would put an end to a 185-year presence in Asia, where it employs around 2,000 people across China, Hong Kong, India, Indonesia, Malaysia, Thailand and Taiwan. According to Bloomberg, it is likely to retain some corporate banking operations in Singapore, where its Asian headquarters are based. In recent years many global banks, including UBS and Barclays, have scaled back dealings on the continent after struggling to compete with local players on costs.
At a time of extremely low global real yields, investors should consider diversified portfolios of low volatility and high yielding equities to supplement their income. The New Zealand and Australian equity markets provide attractive investment opportunities. Investors have historically generated income in their portfolios using fixed income and cash investments, and diversified their portfolios by investing in equities and real assets such as property and commodities, to provide capital protection and to deliver growth.
This ‘balanced’ approach has placed bonds at the low end of the risk spectrum and equities at the high end. Traditionally, investors have considered bonds and cash as their income generating asset classes, and equities as providing a source of long-term real capital protection. Over the very long term, equities have actually done a good job of protecting wealth after inflation.
However, several significant forces are changing the way investors think about portfolios. Global interest rates are near record lows and it is getting harder to generate real, after tax and fee returns from cash and bond portfolios (see Fig. 1). We don’t see this changing much over the next few years. While there is a path to increase interest rates in several of the developed markets, we believe that generally interest rates are likely to stay lower than in the past. As a result, global bonds and cash yields are not currently satisfying investor appetite for income.
We believe that investing in a diversified portfolio of Australian and New Zealand equities targeting income and growth characteristics can provide a solution for global investors in the search for yield.
New Zealand and Australian real 10-year bond, cash yields and equity yields are among the highest in developed markets (see Fig. 2). This offers global investors with not only income opportunities, but the potential for capital growth.
Resistant to crises
New Zealand is one of only a few developed countries to have weathered the global financial crisis in good shape and maintain a strong sovereign credit rating throughout. The country had already learnt the lesson of its own financial crisis in the mid 1980s, which had prompted widespread reforms to create a world leading framework for monetary policy and fiscal responsibility. As a result, New Zealand entered the global financial crisis with a strong banking system, low inflation, and low levels of government debt.
The New Zealand economy has also benefited from three additional drivers of growth. Firstly, following the devastating February 2011 earthquake in Christchurch, the country’s second largest city, there has been a surge in residential and commercial construction, funded by insurance cover from global reinsurers. This is set to continue for many years to come.
Secondly, New Zealand has benefited from a number of new free trade relationships. There is a structural change occurring in consumption habits in Asia, and New Zealand has the agricultural land, technology, sunshine and water to feed the continent’s growing middle classes there.
Finally, New Zealand is experiencing record net migration, equivalent to around one percent of the population, as foreigners are drawn to the economic prospects in New Zealand, and fewer locals are departing to foreign shores as they see better opportunities at home.
Combined with this macroeconomic backdrop, New Zealand has a vibrant capital market, which has seen new equity listings across a number of sectors. Government stability, strong growth of the local savings industry and the proximity to growing Asian markets are factors that have helped contribute to the country’s growth in the equity market in the past year.
Moreover, New Zealand’s equity market continues to provide a cash yield to global investors of around 4.5 percent, while local investment grade bonds also yield around 4.5 percent. These yields look good in the context of local inflation, which is below two percent.
Robust activity
The Australian market has also weathered the global financial crisis in relatively good shape. However, we acknowledge that the tapering off in the resource sector boom is providing some headwinds for parts of the market, as is some regulatory reform. Domestic economic activity is relatively robust and the central bank is in no rush to raise interest rates with positive but modest growth, and inflation remaining tepid. Outside of the resource sector we still see many investment opportunities for income and growth with market valuations relatively attractive.
New Zealand and Australia have typically been much higher dividend yield-paying markets than their global counterparts. Part of this reflects the market composition of more defensive and mature companies such as utilities and Telco’s, but also investor’s appetite for income. The average cash dividend for New Zealand and Australia in equities over the last 10 years has been pretty similar at 5.4 percent per annum and 5.5 percent per annum respectively. This would place both countries at the top of developed markets for dividend yields over this period.
We do not see this changing materially over the medium term and, in fact, the Australian and New Zealand markets currently have the highest market dividend yield forecasts. In addition, New Zealand and Australia have stable political environments, relatively strong government fiscal positions and strong external credit ratings (see Fig. 3).
Companies in Australia and New Zealand are also generally in a good financial position post-global financial crisis. Many companies have surplus cash or under geared balance sheets and are either returning cash to shareholders via dividends or undertaking other capital management initiatives.
As such, capital efficiency and earning higher returns on invested capital is becoming an area of increasing focus for shareholders. Many listed companies are standing up and listening, especially in an environment where it is difficult to secure growing revenue and earning is difficult.
One of the other features of the New Zealand market has been the period of strong returns delivered with lower risk than other markets. This has attraction for global investors who not only have income needs, but also want a lower volatility investment.
While equity market volatility has been suppressed recently with central banks delivering monetary impulse through lower rates and quantitative easing, we would expect a return to more normal levels of equity volatility. However, the New Zealand market and to some extent the Australian Industrial market still provide investors with lower risk investment opportunities.
Lower volatility
When investors look at investment opportunities in Australia and New Zealand from an income perspective, chasing the highest yielding companies in the market is not the best approach to take, not only from a return perspective, but also from the volatility of returns that arises from it.
To take advantage of the income, low volatility, and market stability that the New Zealand and Australian markets provide, Harbour Asset Management launched an Australasian Equity Income Fund to cater for investors looking for income and capital growth, but also with an emphasis on lower volatility. The fund provides investors with a diversified portfolio of 40 to 60 stocks across both New Zealand and Australia.
Through a filtering and quantitative process the investment process seeks to identify those companies that have sustainable dividends, some earnings growth and have exhibited characteristics of low volatility of historical returns and earnings.
Harbour Asset Management has emerged as the premier New Zealand investment manager, being named World Finance’s Best Investment Manager, New Zealand, in both 2014 and 2013 when this accolade was first awarded. Supporting this, Harbour Asset Management was also named Morningstar Fund Manager of the Year, for New Zealand in 2014 after winning both the domestic equities and fixed interest awards. Harbour Asset Management is regarded for its well conceived and timely communication with investors providing astute insights into both portfolio positioning and market developments.
Harbour intends to launch a European domiciled UCIT Fund in 2015 that will enable European investors to invest in the Harbour Asset Management Australasian Equity Income strategy.
The Chinese yuan or renminbi – meaning People’s Currency – is the seventh most traded currency. And after years of being undervalued, it’s now emerging as the major new player on the foreign exchange market. World Finance speaks to Mark Boleat, Policy Chairman at the City of London Corporation, to discuss the future of this currency.
World Finance: Well Mark, the yuan has always had a lot of potential, but it’s been very inaccessible. How does it stand today? Mark Boleat: It’s becoming more accessible as the Chinese economy grows. As China’s trade with the rest of the world grows, more businesses need to be able to trade in the Chinese currency. A business now trading with China – or wanting Chinese currency – can get whatever it needs.
It’s been a pretty dramatic change over the last few years. It reflects what’s happening in China, and we’re going to see more to come.
It’s impossible to keep a currency that’s traded undervalued
World Finance: So the seventh most used currency; surely this is just a reflection of China’s massive population, rather than being a globalised currency? Mark Boleat: It’s a reflection of the size of the Chinese economy. It’s not just the number of people, it’s the output of the economy. And we know that China’s economy is now very large; on some measures it’s even larger than America’s, and it’s growing very rapidly.
World Finance: Well historically it’s been undervalued as much as 37.5 percent against its purchasing power; so how flexible is it today? Mark Boleat: It’s impossible to keep a currency that’s traded undervalued. Because by definition if people think it’s undervalued they’ll buy it, and therefore it will cease to be undervalued.
Now for a time, when the Chinese authorities were seeking to control the currency, yes: they could influence the rate, and it was widely perceived to be undervalued.
One should be slightly cautious about looking at the purchasing power parity rate, because on that basis a load of currencies are undervalued, and others are overvalued. But in relation to the market, the Chinese currency is no longer undervalued. It is at the market level, and indeed at times it is depreciated a little; at other times it’s appreciated.
So that reduces the attraction of holding it as an investment; but it increases the attractiveness of holding it and using it as a liquid currency at the market value.
World Finance: So what opportunities are there to invest in it today? Mark Boleat: Most of what we’re seeing in Britain is not investing. It’s the use of renminbi for trading. Those businesses that actually need to trade can get the renminbi they want if they need to buy or sell.
In terms of investing, that’s not going as quickly; one wouldn’t expect it to. We’ve had a number of bond issues from banks, and most recently from the British government. Those issues have been very quickly picked up, so there is an investment demand.
We’re going to see not just the British government, but other governments, wanting to hold renminbi in their portfolio of foreign exchange reserves. Businesses will want to hold some renminbi. We are going to see investment, but that’s going to take a bit of time until people are more confident about investing in China, and if they want to do so with Chinese currency.
World Finance: Do you think there’s added risk considering the Chinese government’s heavy-handed approach to fiscal and monetary policy? Mark Boleat: There’s risk investing in any currency, whether it’s the euro, dollar, sterling. Some of the concerns about China are really about the unpredictability still of the regulatory environment. A large number of businesses quoted on the Chinese stock exchanges are semi-government owned. So it isn’t quite the market that we have in Britain: there isn’t the same volume of authoritative research; there aren’t the same number of investors; there isn’t the same liquidity.
So at the moment, China’s investment market is still pretty thin for the size of the economy; that is going to change pretty dramatically.
We recently had the Hong Kong-Shanghai Stock Connect, which makes it easier for institutions to invest in China. We’ve got a direct quota for investments from Britain. So we’re seeing a lot of measures to open up the Chinese market, and I suspect over the next few years you’re going to see more investment offers in Britain of securities denominated in renminbi, and securities traded predominantly in China.
Most of what we’re seeing in Britain is not investing
World Finance: Well London is at the heart of the offshore market for renminbi, so why London? And what are the opportunities for London and China? Mark Boleat:London is the biggest international financial centre in the world. In terms of foreign exchange it’s by far the largest market in the world. So it’s natural that when you’ve got a currency that’s being used increasingly, London is going to be where it’s traded.
More than that, the Chinese authorities wanted to see London develop as an offshore renminbi market. So did the British authorities. So a lot of public support, government support, for what’s happening. We have a swap line between the Bank of England and the People’s Bank of China, which helps to underpin the market. It gives the security, it gives a guarantee of liquidity. We’ve done everything we can to make London the centre for renminbi trading.
World Finance: Now Hong Kong’s long been known as the platform into mainland China, so what kind of impact do you think this will have on Hong Kong, if the renminbi becomes more accessible? Mark Boleat:Most of what happens in London already goes through Hong Kong. So we shouldn’t see this as being a limited market for offshore renminbi facilities, and that we’re competing against Singapore and Hong Kong and Dubai and lots of other centres.
We see a rapidly growing global market, and the more there is of trading of renminbi – for example, in Europe – the more there’ll be business coming through London.
There are lots of implications for Hong Kong as the Chinese financial markets open up. As Shanghai develops into a major financial centre in its own right. But the one thing you can be certain about Hong Kong is that the people there are very entrepreneurial. They understand market developments as fast as anyone else. And they’ll be seeking to secure their place in the growing market.
Payday lending has come under serious criticism as of late, not least for their dealings with small companies, and regulators have recently tried to stamp out unethical and uncompetitive performance. World Finance speaks to Simon Featherstone, CEO of Bibby Financial Services Global, to discuss the future of the receivables finance and invoice finance industry.
World Finance: Well Simon, in short, what is the difference between a high street bank and Bibby’s financial services? Simon Featherstone: We are a lender that takes its own decisions, and frankly has a lot more credit appetite than a traditional high street bank.
World Finance: You come from a banking background. You were formerly the MD of Lloyds TSB Commercial Finance. How is the banking industry changing, and how do you foresee it developing? Simon Featherstone: What we are going to see is a lot more innovation in simple terms. We’re already seeing, both in London not far from here and in other parts of the world, a huge investment in what’s known as FinTech, the financial technology combination of lending products.
So we’re seeing a huge amount of innovation and frankly that will be led, in my opinion, by people who are not part of banks. I think banks themselves will really struggle with the combination of regulatory pressure, their own internal politics and policies, and pressure on costs to create the kind of innovation that will give the solutions that the customers need for the future. I think old fashioned banking is dead, to be blunt.
I think banks themselves will really struggle
World Finance: So you see receivables finance playing a greater role in the future? Simon Featherstone:I think receivables undoubtedly will play a greater part. The whole industry though does need to change. It needs to simplify its product offering. What you’ll find in the receivable industry, both in the UK and in other parts of the world, its client satisfaction scores across the board are very very high.
What it doesn’t do is a good job of explaining its proposition and simplifying its terms and how it operates.
World Finance: Well in perhaps very simplistic terms, your industry could be described as a sort of payday lender for small companies, which has of course come under a lot of criticism. I think Bibby in 2012 even admitted to unethical practices with brokers. So how regulated is the industry? Simon Featherstone: Well I’m not sure I agree with that. What most people, and again that’s something that the industry has done a bad job of, is explaining the balance between the funding it provides and the service it provides with it as well. The two costs for those things can often get blended and be mistaken as a pure lending cost.
The industry itself has taken in the UK significant steps forward to regulate itself.
World Finance: Well of course, at the start of this year there was a new regulation put in place that borrowers would only ever have to pay back double what they initially borrowed. What kind of impact will this have on the receivable industry? Simon Featherstone: The codes that were put in place for payday loans were aimed specifically at consumers. We’re lending to businesses. You find that the services of the receivables industry are split between the lending aspect of what we do and the service aspect of what we do, whether it be bad debt protection, and of course the cost of that can depend on the quality of the customers that our client is selling to, together with the number of invoices we have to chase and allocate the cash on, and all the other services that get wrapped up into receivable lending as well.
World Finance: Well what sort of percentages or interest rates do you charge? Simon Featherstone: Typically you’ll find a borrower will be borrowing between 3 and 4 percent over base. Very similar rates that you find with any other form of lending in that type of space. The service charge that we’ll pay will depend on the volume of invoices and number of debtors, whether they take bad debt protection and so forth.
I don’t think regulators and central banks look enough at the psychology of individuals when they’re thinking
World Finance: The financial crisis must have really boosted your industry, with a reduction in the availability of business funding and tightening of credit terms. How much does ethics play in your business? Simon Featherstone: Ethics plays a huge part of it. We’re part of a 206 year old family business involved in everything from the oil and gas offshore industry to haulage and distribution, to retail Costcutter franchises in the UK.
So Bibby is a very broad-spread conglomerate that’s been around a long time, and clearly when you’ve been around that long-term and lived through wars, recessions and so forth, you’ve got to have operated with a huge amount of integrity and standing to be able to have survived all of that. So for me, integrity has so need of rules.
World Finance: Now you have said that we might be headed for another financial crisis if we’re not careful, why do you say this? Simon Featherstone: We see invoices from our small business customers and our medium size business customers first, before anybody else does. In previous recession, I’ve seen the recession in my statistics before anybody else does. And I think we may be starting to see a period of deflation across the UK and Europe.
I also think the number of new lenders that are entering post all the quantitative easing and the printing of money that’s taken place in North America and the UK, is quite remarkable, on a scale I’ve never seen before.
World Finance: You’re an advocate of increasing interest rates, surely this is just so more business will go your way? Simon Featherstone: I don’t think regulators and central banks look enough at the psychology of individuals when they’re thinking. The longer we tell people interest rates will stay low, the longer they can put off the investment decisions knowing it’s not going to cost them any more. And if, as we’re seeing with prices not rising as well, all that does is push out investment decision into the long grass.
The Ukrainian parliament has made a considerable effort in showing to the IMF that it will put the money to
good use
Originally agreed last April, Ukraine has so far only seen around $5bn from the IMF, as the organisation waits to receive reassurances from the government in Kiev that it is serious about reforming its economy. After adopting its budget for this year in December, the Ukrainian parliament has made a considerable effort in showing to the IMF that it will put the money to good use.
Prime Minister Arseniy Yatsenyuk faces a difficult year ahead, with economic woes exacerbated with the conflict arising from Russia and the east of the country. While the country’s economy has trudged along over the last year thanks to its foreign exchange reserves, it is thought these are quickly running out.
Many observers think that even if today’s talks over the next wave of payments from the IMF – thought to be around $3bn – are successful, it will still not meet the obligations of Ukraine’s government. These amount to around $20bn, and it’s thought the country is still most likely to be heading towards a default before the end of 2015.
This week, the FT revealed the country’s bonds had fallen to a record low. In partnership with the IMF, the FT showed that Ukraine’s economy may have retracted by as much as eight percent last year. They study suggests that the Ukraine’s debt-to-GDP ratio would probably be around 90 percent for this year, which is more than double the level that the IMF typically sees problems arising.
Following months of speculation that the eurozone could soon take a trip into negative territory, Eurostat figures for December show consumer prices were down 0.2 percent from what they were at the same point last year. With an inflation target of close to two percent, the ECB has fallen far short of its ambitions, and many expect that the announcement will pile pressure on the bank to take immediate action and stave off the threat of a deflationary spiral.
The ECB has fallen far short of its ambitions
Still, the figure is only a flash estimate, and the EU’s statistical office will review the numbers in a month’s time when more data is available. “This negative rate for euro area annual inflation in December is driven by a fall in energy prices (-6.3 percent, compared with -2.6 percent in November), while prices remain stable for food, alcohol and tobacco (0 percent, compared with 0.5 percent in November) and non-energy industrial goods (0.0 percent, compared with -0.1 percent in November). The only annual increase is expected for services (1.2 percent, stable compared with November),” according to a Eurostat news release.
The price of oil came in at less than $50 for the first time since 2009 on December 7, and, according to Eurostat’s findings, slumping energy prices are by far the biggest factor dragging consumer prices into the red. Without factoring energy prices into the mix, eurozone inflation would’ve come to 0.6, significantly more than the flash estimate, though still short of the ECB’s two percent target.
The revelation that the eurozone has slipped into deflation will compound the already-mounting pressure on the ECB to introduce a QE-like programme of its own, and many expect the bank to do just that at its next meeting on January 22.
The bank has been flirting with the prospect of sovereign bond purchases for some time now, but has been tentative to do so in the face of strong opposition from Germany. The news that Germany’s annual inflation rate came to only 0.1 percent in December, coupled with eurozone deflation, could force the ECB’s hand in the weeks ahead.
Since the global financial crisis, investors’ appetite for risk has been subdued; and as a result, returns have taken a hit. But as economies are recovering, demand for asset management is once again growing. World Finance speaks to Lars Oberle Zurich-based Finanz Konzept to find out more.
World Finance: Well Lars, maybe you can start by telling me how is the business of asset management different from six years ago? Lars Oberle:Well, the market opportunities are completely different. In 2008 you bought undervalued securities in a way, even off top borrowers. Actually, looking at the same stage now, you have a completely different setting. The market is much more risky now.
At the moment we are holding a wide spread throughout all countries
World Finance: Well in some ways the financial crisis did have some positive side-effects, in terms of low interest rates, so how did you take advantage of this? Lars Oberle: To be honest, we took those low interest rates and realised undervalued potential as a part of a fund strategy.
We took full advantage of dynamic leverage, on daily basic up to 200 percent, outperforms actually around three to four percent.
World Finance: What’s your investment model? Lars Oberle:We invest in government, corporate and convertible bonds, and bring these three asset classes individually to the market opportunities.
Actually, we invested 90 percent in diversified corporate bond market worldwide. Our focus are bonds issued in Europe, a strong diversification in more than 180 positions, and dynamic leverage on a daily basis.
World Finance: So which countries and asset classes are you invested in, and why? Lars Oberle: At the moment we are holding a wide spread throughout all countries. We haven’t a focus on special countries; we’re more concentrated on companies and financials with a very good return on equity, in all industries worldwide.
World Finance: How do you tailor portfolios to individual clients, and what are the main funds you currently offer? Lars Oberle: We are looking at our clients’ needs; how particular or complex they may be. The basic questions like the investment period, currency, risk scale and yield interest.
Our core competencies are fixed income, securities, stocks, and physical diamonds. We managed physical diamonds in a separate investment fund for clients with a conservative investment focus.
Our core competencies are fixed income, securities, stocks, and physical diamonds
World Finance: How do you manage risk? Lars Oberle:Basically, we are distinguished between long- and short-term market risks. We use derivative hedge instruments for short-term market risks; for medium- and long-term market risk, we rebalance our portfolio to the market opportunities.
World Finance: Finally, looking to the year ahead, where do you see the future opportunities? Lars Oberle: We see our opportunities in the future in the market fluctuation for interesting purchases, and in the low interest rates to use leverage.
World Finance: Lars, thank you. Lars Oberle: Thank you.
The theme ‘The New Global Context’ couldn’t be more fitting for this year’s annual World Economic Forum. World Finance speaks to Mark Spelman, Managing Director at Accenture Strategy and member of the Global Agenda Council, to discuss if Europe is effectively embracing this ‘new normal’.
World Finance: Now, one of the biggest criticisms of the EU is that it applies policy in sort of a piecemeal fashion. Let’s focus specifically on fiscal consolidatory efforts, related to bringing down a country’s deficit, versus structural reform. We have not seen the application of these ideas happen in an effective manner, so do you think that Davos is really the place to see movement? Mark Spelman: I think it’s really important to remember that Europe’s not homogenous. So the dynamics of what happens in, for example, southern Europe, is different from what’s happening in northern Europe, which is different from Scandinavia.
So, what you’re trying to do is apply those principles of fiscal stability and structural reform, in different parts of Europe.
World Finance: Davos does one thing really well, and that’s bring everyone to the table, right? So: if we take the top tier countries in the EU, and the ones that are really struggling, the ones that really need the reform and to be bailed out, frankly, in the end: those countries are going to have some of the biggest, most decisive stars at Davos. So who should we be watching for? Mark Spelman:Well. We know that quite a lot of the European leaders are going to turn up in Davos. We expect to see Angela Merkel making a frontline speech. Francoise Hollande’s going to be there. David Cameron’s going to be there. So I think that you’ll see a lot of the frontline major leaders taking to the stage at Davos, and really talking about what their view is about the outlook going forward.
[T]he digital single market absolutely needs to move forward
And this balancing act between, on the one side, a German-centric view which says ‘You need to have financial stability in order to create the backbone for further reforms,’ and other countries saying, ‘Actually, we need more space and more latitude in order to be able to create the degrees of freedom to drive particular structural reforms.’
That is going to be manifest on the open stage in the public forums. But a lot of the private discussions will be, how is it really going to work in practice?
World Finance: Everything that you’ve mentioned is going to ring true. We’ve heard these conversations take place, well before even Juncker was able to enter into his position. But these are all theoretical conversations, right? So, if there are backroom conversations, they’re going to involve the business elite who can afford, frankly, membership and attendance at these events. But are the right key stakeholders taking part? Mark Spelman:Well, I think there’ll be a lot of important stakeholders there. And one of the key messages, for example, from the business community, will be something like the digital single market absolutely needs to move forward. Because if you look at the whole digital agenda, for example, it absolutely addresses some of Europe’s critical needs. It addresses the needs of growth, it addresses the needs of creating jobs. It’s around productivity, and it will improve European competitiveness.
So I think there will be areas like the digital single market, which is one of the priorities on the European Commission. And business will be saying ‘This really does need to move forward,’ in a very practical way.
And we’ve already seen that: particularly around the development of online shopping, but increasingly with industrial internet, which is going to be one of the big trends, I think, over the next two years. There’s going to be a lot of discussions about how Europe can really use its scale and its size to be able to, sort of, take advantage of this key trend.
World Finance: Everything that you’ve said is very positive and hopeful on the prospects of advancing these talks. But what if there is an embarrassing consensus around Jean Claude Juncker’s ability to really invoke the change that the economy is demanding? What do you do then? Mark Spelman: Well, I think one of the things that business and policymakers can do is that Jean Claude Juncker has put together a 10 point programme. And what he’s actually looking for is the degree of business support and empathy with some of those key initiatives.
And so, one of the things that you can actually do in those private, one-on-one discussions, is if you like, reinforce what are some of the priorities, and some of the examples, that the commission needs to hear about, about why things need to happen.
Because what the commission, and what governments are looking for from business, is validation that they’re on the right track. And what they want from business is examples of where things are working; but also where things are not working. So for example, if you look at the digital single market: understanding the difficulty of doing cross-border payments, and how you can improve that. Looking at ways of, for example, addressing issues around consumer protection, or harmonisation of VAT rates across different parts of Europe.
I think 2015 is going to be really critical in terms of getting momentum on the European agenda
These are practical issues which politicians like to hear about in terms of examples, so that when they go back to Brussels, and back to their home countries, they can then look at what can be done to address those key problems.
World Finance: Very hopeful on your side, I think, in terms of what can actually come out of this event. So moving forward, how many months do you think it’ll be before we see something really tangible? Mark Spelman: I think you have to look at Davos in the context of the annual cycle that goes on around Brussels and international governments. We’ve clearly got an important European Council meeting coming up. In April, the digital single market will be one of the key focal points. Juncker has made a specific point that he wants momentum in the first six months or so of his new commission. So I think 2015 is going to be really critical in terms of getting momentum on the European agenda.
And the key acid test is really, when you come back to growth and jobs.
So: can Europe actually move the growth rates, nudge them forward, and at the same time begin to address some of the underlying issues about a jobless recovery?
Those two me are the two underlying output tests that we’ll be watching for during the course of 2015. Davos gives you a great start to the year, because it brings some key stakeholders together. And hopefully that will create some momentum.
World Finance: Okay, well we’ll all be watching. Thank you so much for joining me today Mark. Mark Spelman:My pleasure.
The uncertainty shrouding the Greek economy continues with as much zeal as ever as the seemingly hapless state embarks upon a New Year. With the failure of the Greek parliament to elect a new president on December 19, snap elections have been scheduled for January 25. Incumbent Prime Minister, Antonis Samaras, plans to maintain the austerity measures stipulated by Greece’s bailouts conditions. Conversely, Alexis Tsipras, premier of the leading opposition party, Syriza, is gaining increasing popularity with promises for an immediate end to austerity.
Appealing to millions of Greeks who have suffered immeasurably from the recession, Tsipras pledges to introduce a host of drastic social benefits in order to alleviate the current “humanitarian crisis”. For those facing enduring periods of unpaid wages and a heavy reliance on food donations, they are now being offered the Golden Fleece after an arduous journey. If Tsipras fulfils the promises made during his campaign, this would cause Greece to default, swiftly exit the Eurozone and plunge the country further into economic chaos. Yiannis Milios, leading economic advisor for Syriza argues that “no disaster will happen if Syriza come to power, but a disaster is going forward with extreme austerity measures.”
The EU has warned that the social programme outlined by Tsipras is an unrealistic set of false promises
In a somewhat inconsistent pre-election campaign message, Milios says that “in no case” will Syriza leave the Eurozone. He is correct. Despite recent commentary, if Syriza wins the upcoming elections, the Eurozone cannot be abandoned. The new regime will be tied to complying with austerity measures and the agreements signed by their predecessors. An extension or freeze of repayments due in 2015 may occur if successfully negotiated by Tsipras. Doing so will keep the various factions of Syriza and the electorate itself appeased. If not achieved, the risk of destabilisation is high and is likely to result in re-elections. According to Professor Kokkoris, Chair in Law and Economics at Queen Mary University, “Tsipras has to try to win something more from the Troika if he wins the election, otherwise the situation will never stabilize.”
The EU has warned that the social programme outlined by Tsipras is an unrealistic set of false promises; the Greek economy is not able to fund such an unapproved increase in government expenditure. Tsipras may indeed introduce some of the promises made during his pre-election campaign, which will only be possible over a lengthy timescale. “Syriza will not be able to achieve everything they have promised as fast as they would like to; the numbers do not add up,” concludes Professor Kokkoris.
Adding to the uncertainty of the Greek economic landscape in 2015 is the plan outlined by ECB President Draghi for mass purchases of government bonds with new money. This decision is due on January 22, just three tense days before the snap elections. If quantitative easing is introduced, then this will help to ease pressure for the Greek economy. Much to the exasperation of Berlin, the possibility of this initiative could cause a false sense of security, leading to a lax in reforms and an unravelling of the progress made thus far.
The Greek economic crisis is beginning to alleviate, despite persisting hardships and an overlooked humanitarian crisis. Greece may not make all the repayments scheduled for this year, yet it is financially capable of making a strong headway in reaching these goals. Whichever party wins the election cannot withdraw from the Eurozone and its commitments, nor can it implement radical social reforms at this stage. Greece is on a set pathway, as laid out in writing with the Troika. Despite auspicious assurances made during Syriza’s pre-election campaign, the Greek population has to hold out a little longer. Only with long-term stabilisation can desperately needed and far-reaching social benefits be implemented, an unlikely feat for 2015.
2014 was a year in which regulatory pressures caused existential threats to much of the financial services industry, with new liquidity rules putting more of a demand on banks. Still, whether you see regulators as Lombard Street’s wingmen, Che Guevara’s in suits, we have a new banking landscape. World Finance speaks to Jean Lassignardie, Global Financial Services Chief Sales and Marketing Officer for Capgemini, about banking in 2015.
World Finance: Well Jean, how much more can we anticipate regulators getting involved, or can we assume that they’ve had enough leaning on the industry for now? Jean Lassignardie:As you rightly pointed out, after the financial crisis in 2008, there has been a significant regulatory impact on the financial institutions. Our prediction is that we enter into a new era of regulation, that all financial services institutions will have to cope with.
I think on all different aspects, like customer protection, increased stability, product operation, there will be a whole set of new impacts of this next era of regulation.
World Finance: Internally, how much do you think banks need to rethink their core processes? Jean Lassignardie:Simplification is obviously one of the other major trends and predictions that we have in 2015. Decreasing costs, I think banks have squeezed as much as they could thanks to 2018, they have reached a limit of standard squeezing costs. It needs now to be simplified, their operation.
Simplification is obviously one of the other major trends and predictions that we have in 2015
World Finance: How reliant is the banking sector on the more general recovery of the EU? Jean Lassignardie:The banking sector played a critical role to fund the economy, to really redefine the day in the life of the customers. They’re all in every sector there. I think we have very strong institutions in each and every country. They have just demonstrated that they have been able to wave the crisis. Overall, it had a critical role in the recovery of the EU.
World Finance: We’re hearing more and more criticism from financial service industry players that the ECB needs to stop with this rock-bottom interest rate nonsense. What do you make of that? Jean Lassignardie: The level of interest rate is putting an additional pressure on the banking P&L, pushing the bank and the financial services institutions to truly look for additional services, additional easy to interact with for the clients. So to a certain extent, it’s good for the clients, but of course pressure for the banks themselves.
World Finance: Capgemini is a great proponent of e-banking. How transformative can this be in 2015? Jean Lassignardie:E-banking is becoming absolutely vital. Banks reinventing themselves and the customer experience through e and mobile.
World Finance: So do you foresee retail banks therefore cutting more jobs? Jean Lassignardie: It’s more transforming those jobs. There is of course what is called the only channel, which is the combination of the historical, for example, network of branches, that are truly, completely transformed, together with all these digital and new electronic channels, and mobile channels.
Yes, it’s true, it’s a significant transformation, not to say a reinvention. So there is a whole set of new jobs and in each and every large institution you can see transformation and a lot of programmes to really help their people to truly get to the next level.
Regulation of course if increasing the pressure towards customer security
World Finance: Well like ant industry, banking relies on how it’s perceived. Surely with the increased regulatory tightening, severe cost cuts, and new processes, customer expectations are going to have to change fast. So do you expect this to be the case in 2015? Jean Lassignardie: Absolutely. As you mentioned, the words customer expectation, customer experience, this is now truly the name of what matters, what really the banks are focusing on, and what the customers are truly taking to account to decide, where do they want to bank, with who do they want to bank, who they would recommend. So that’s absolutely vital.
Regulation of course if increasing the pressure towards customer security, making sure that all the protection, the data protection, all these aspects are truly taken into account. Definitely in 2015, prediction I should say is quite easy, as we’ll see an increased focus on those aspects.
World Finance: Finally, the last few years have seen a period of banker bashing. Do you think 2015 will be any different? Jean Lassignardie: I understand why there has been some bashing. We all understand that there have been some questions here and there, but frankly the banking and the large banks do deserve to be much more understood and appreciated by everybody.
There have been a lot of efforts to truly stay in touch with their clients, make sure that they continue to be relevant, provide with services, security, everywhere you can find that. Sometimes we don’t recognise that, we don’t appreciate that when you need money and you have your credit card with you, somewhere in the world your bank is behind that.
So I hope that what you call banking bashing will be significantly lower in 2015. I know banks are making a lot of effort for that, and I hope they will be very successful.
A “sleeping giant” that could cost Australia’s economy $226bn in coastal infrastructure – this is how the Climate Council recently described the threat posed by rising sea levels. And with four out of every five Australians living on the coastline, it would appear that the millions of affected individuals can do little now but wait for their homes, schools and hospitals to succumb to the advancing waters.
“Rising sea levels increase the probability of flooding”, says Chris Zevenbergen, Professor of Flood Resilience of Urban Systems at UNESCO-IHE. “Rising sea levels is a continuous and natural process – and climate change is likely to accelerate this process.” Still, Australia’s losses pale in comparison to those in India, which, according to OECD estimates, will be the country worst hit by rising seas. By 2070, says the report, Calcutta’s 14 million people will be dealt $2trn in damages if emissions are allowed to go on unchecked, whereas Miami and Guangzhou are on track to lose $3.5trn and $3.4trn in that same year.
Escalating costs
Talk of the true extent of the damages has been gathering momentum now for some time, and so too has speculation on the financial ramifications rising sea levels could bring for the global economy. One such study, jointly compiled by World Bank economist Stephane Hallegatte and the OECD, forecasts that related losses of $6bn a year in 2005 could grow to $63bn by the midpoint of the 21st century, adding that many coastal cities run the risk of losing $1trn a year to flood damage. These are only estimates though, and exactly how much will be lost to the phenomenon is still an issue of fierce debate.
Top 10 cities most vulnerable to flooding:
Guangzhou, China
New Orleans, US
Guayaquil, Ecuador
Ho Chi Minh City, Vietnam
Abidjan, Ivory Coast
Zhanjing, China
Mumbai, Maharashtra
Khulna, Bangladesh
Palembang, Indonesia
Shenzen, China
Even without the exact figures to hand, it’s clear that coastal cities around the world must work quickly to mobilise against the ever-potent threat of rising seas. And only by investing in infrastructure and patching up any vulnerabilities will they keep their heads above water and answer the prevailing 21st century question of climate change.
For example the Dutch delta-city of Rotterdam has laid down a high marker for cities like it designing creative infrastructure responses to the issue. Should the city’s vision materialise as planned, Rotterdam’s climate proofing strategy will shield the country’s second largest metropolis against billions of dollars in damages, and save its citizens from challenges ranging through inconvenience to homelessness.
As a low-lying seaport, Rotterdam is highly susceptible to any changes in sea level, no matter how slight, and without a strategy in place to alleviate the damages, residents and businesses could suffer huge consequences. Appropriately, rather than see water as a threat, city planners have utilised it as a resource by turning key city spaces into water storage and, in some instances, even turned the problem into profit. Now home to a plethora of green spaces, water plazas and underground basins, Rotterdam’s newly constructed water storage facilities put the resource to good use rather than flushing it back out into the sea.
“Current and new innovative infrastructure is the basis of our adaptation strategy on flood safety, because our system and strategy is based on prevention”, says Nick van Barneveld, a senior advisor working with the Rotterdam Office for Sustainability and Climate Change. The steps taken so far are among the most impressive worldwide, and Rotterdam’s water management system has laid down a benchmark for others to aspire.
By investing in infrastructure and taking the long view, the city is better prepared for any challenges it may face in the future as a result of rising sea levels. Yet the measures are not the exclusive work of government, and citizens have also been doing their bit to intercept any damages – namely by water proofing basements and keeping their valuables away from vulnerable spots.
All aboard
The work done to address the problem spans a multitude of projects, and currently the city is over a year into the construction of a floating neighbourhood, in keeping with a citywide vision to showcase the latest in flood-proofing technology and water management innovations.
The story of the area itself is an interesting one, even without the development: Once among Rotterdam’s most undesirable postcodes, Katendrecht is today an up-and-coming destination, replete with creative talent and trendy commercial outlets. However, ahead of the area’s redevelopment, the water residence project represents a crucial part of a much larger plan to prepare the city for a future changed by climate change.
“In Rotterdam we take the next step. We do not move away from the water, but we go on and into it”, wrote the PvdA politician Hamit Karakus in the project’s bid proposal, which later reads: “The current economic situation forces all parties involved to fundamentally rethink their roles. Old business models will need to be replaced with new ones. The way we invest in new activities shall continuously adapt to the changing developments. Each of us, whether public or private, will need to ask ourselves new questions to find new answers and forge new types of collaboration.”
Boston, a city that is susceptible to flooding, could potentially become a canal city
The introduction here hints at one of the biggest questions in constructing flood defences; that is, who will foot the bill? The facts state that citizens, states and businesses alike will suffer as a result of rising sea levels, and so the responsibility should be shared between all parties if – as in Rotterdam’s case – the necessary infrastructural improvements are to be made. The solution then, is not to introduce ever-so-slight modifications to existing flood defences, but to implement a sustainable strategy that takes into account the long-term effects of environmental degradation.
Those following in the footsteps of Rotterdam, therefore, will be asked to stomach a huge infrastructure bill that, without public, government and business backing, could put the city in serious jeopardy. Today, the realisation that rising sea levels could bring huge financial losses marks a turning point, as coastal cities are left to weigh up the immediate costs of infrastructural development against the potential damages of rising seas in the future.
Boston sea party
For some cities, however, the scale of the damages is not at all unsurprising. Having experienced first hand the social and economic disadvantages a natural disaster can bring, Boston is today looking to the examples set forth by both Amsterdam and Venice, and flirting with the idea of one day becoming a canal city. Mayor Martin Walsh took to the stage on the second anniversary of Hurricane Sandy to warn that storms and rising sea levels pose a major threat to the city, and emphasised the importance of preparing for the dangers exacerbated by climate change. “I believe climate change is not a burden we take on, but an opportunity we embrace,” he said at the Architecture Boston Expo in October.
“Last year, the World Bank ranked Boston as the eighth most vulnerable city in the world in terms of overall cost of damage”, says Dennis Carlberg, Sustainability Director at Boston University. “Boston is a vibrant, thriving city, an economic engine for the region. There are billions of dollars of real estate and infrastructure at risk in the city, but the implications of flooding in the city are far reaching. The same holds true for costal cities around the world.” The realisation that Hurricane Sandy was a mere matter of hours away » from plunging low-lying areas of the city in up to six feet of water has been taken by local authorities as a warning sign (see Fig. 1). And the news that the city’s landmass is shrinking at a rate of approximately six inches per century, according to a City of Boston report entitled Climate ready Boston, means that rising sea levels are likely to encroach on the city sooner than most.
Now, city planners are beginning to envision a future whereby Boston’s streets are transformed into a network of canals, on the presumption that the Back Bay neighbourhood will be at least part submerged in water by the turn of the century. Alternatively, authorities could simply bolster their existing flood defences and shore up the areas most exposed to the city’s changing tides – though doing so would only prolong the inevitable damage.
“The biggest challenges are urban vitality, economic, policy, and the jurisdictional boundaries rising seas don’t respect. These are some of the challenges the Urban Land Institute is now exploring for a new report we plan to release in mid 2015”, of which Carlberg is co-chair for the institute’s Sustainability Council. “The cost of doing nothing will be far greater than investing in resilient and protective strategies – as long as we are able to reduce greenhouse gas emissions quickly.”
Rallied by studies into the spiralling costs of leaving flood defences unmanned and coastlines unchanged, public and private parties are placing a greater emphasis on protecting against rising sea levels in cities like Rotterdam, Boston and many more places like them. Without question, there is a growing consensus that water risk management merits a considerable chunk of public and private attention, though agreement on the exact form this should take varies from case-to-case.
In all cases, decisions are made on a benefit-cost analysis basis, though the problems come when incorrect assumptions are made about the exact nature of the problem cities are facing.
Making the wrong assumption
“Coastal defences reduce the risk of floods today, but they also attract population and assets in protected areas and thus put them at risk in case of the defence fails, or if an event overwhelms it”, says Stephane Hallegate, Senior Economist at the World Bank. “If they are not upgraded regularly and proactively as risk increases with climate change and subsidence, defences can magnify – not reduce – the vulnerability of some cities.” Essentially, the success of any solution is based on how accurately authorities can chart changing sea patterns, as well as any additional issues that extra defences might bring for those in the area.
In the case of Rotterdam, the city’s water management strategy is designed not simply to limit water damage, but to bring more investment, and therefore people, to the area. Here the benefits of the strategy are unclear, in that bringing more people to the fray could exasperate the issue further still. Already, the population stands at over 600,000, which has essentially ruled out the quick fix of closing problem sections of the city in times of storm, and the population growth born of the city’s water management strategy renders this already problematic solution nigh on impossible.
Maeslant Barrier storm surge flood defence, New Waterway, Hook of Holland, Rotterdam
“Flood defences are inert systems and have a long lifetime which easily could exceed 50 years. It will take another 10 years to design and implement them. Hence, we have to look at least 60 years ahead and take all these changing drivers – such as sea level rise and economic growth which are associated with many uncertainties – into account in the design”, says Zevenbergen. “There is a risk of overinvesting [changes occur more slowly than assumed) and under investing (changes have been underestimated]. This means that these systems should be flexible and adaptable, which allow adjustments over time as new insights call for them. The biggest challenge is to build in flexibility into these systems in a cost-effective and attractive way. A major challenge for designers and engineers.”
The real skill in warding off the threat, therefore, is in ensuring that the solution does not create the illusion that so-called sustainable cities are invulnerable to rising seas. Obviously the issue, if left unchecked, is far greater than any amount of infrastructural development can hope to manage, though this shouldn’t stop cities from taking strides to reduce the damage. Cities such as Venice, Hamburg, Seoul and New Orleans offer an example of what can be done to stave off the damage. Though, as it stands, the solutions are too few and far between.
The decision to invest in coastal infrastructure is one that pertains to risk management above any-thing else, and by choosing not to invest, affected populations will be left dangerously exposed to the damages. We’re yet to see anything close to a concerted global effort to protect coastal cities from flooding, though we will likely see more in the future, as the danger increases and the damages spiral out of control.
When Prime Minister Matteo Renzi made clear his ambition for Italy to host the 2024 Olympics, the proclamation was met with mockery and ridicule. The southern European country is in the midst of its longest recession since WWII: unemployment figures have climbed to their highest since records began in 1977, and many don’t see GDP growth exceeding even one percent until 2018 at the earliest. “Proposing Rome as a future Olympic city is like painting an old Fiat 500 red and hoping that people will believe it’s a Ferrari,” Luca Zaia, Governor of the Veneto region, told The Telegraph in December.
13.2 percent of the Italian workforce is currently unemployed, and while that in itself is dangerously high, of even greater concern is youth unemployment, which rose to 43.3 percent in October. That’s almost half of all young people in Italy unable to find work – over 708,000 – and it largely comes down to the government’s preoccupation with regulations that protect older workers, while severely limiting the opportunities for youngsters with less experience.
A connection can be made between high youth unemployment figures and the results of an OECD report released in September, which found that university graduates in Italy and Spain possess significantly lower levels of basic skills than other member nations. In fact, on average, Italian and Spanish graduates were less skilled than high school leavers in the highest performing countries, Japan and the Netherlands. While this does correspond with high youth unemployment figures – Spain makes even Italy look good, at 53.8 percent – a more common argument is that joblessness is rife because of a mismatch between supply and demand. The skills students are graduating with are disproportionate to the jobs available, for example, there are too many law graduates, and too few engineers.
Unemployment special: Australia’s future looks bleak as mining boom ends
Unemployment forecasts for 2015 vary, from EY’s 12.7 percent to analysts at Istat, Italy’s own national statistics agency, who see it falling to 12.4 percent. GDP growth predictions hover between zero and one percent, but S&P said it anticipated much slower progress than official forecasts, bringing its prediction down from an initial 1.1 percent to just 0.2 percent. The credit ratings agency also cut Italy’s debt score to BBB-; its lowest investment-grade rating and just one notch above ‘junk’ status, citing its inability to stabilise public debt among various other factors.
Renzi has been fighting labour unions and opposing politicians to implement reforms aimed at fixing the problem, most recently the Jobs Act, which still awaits approval from parliament. If consented to, six months is allocated to specify the measures being taken and pass them, meaning real change is unlikely until mid-June 2015 at the very earliest. And it’s not just the rivals and labour unions that need convincing: citizens aren’t happy either. Rallies have broken out in cities across the country, disrupting transportation services and causing chaos on the streets with several arrests made. The reforms, aimed at making the labour market more flexible, include loosening the restrictions on firing employees when business slows, and weakening unlawful dismissal rights. However, protestors claim that the government has made workers its scapegoat by limiting their rights without addressing the fundamental problem.
S&P anticipates unemployment to continue limiting both private sector spending and investment activity well into 2015. “Although we think the announced reform measures in a wide range of policy areas will ultimately help strengthen the economic fundamentals and resilience of the Italian economy, these benefits will likely not be felt in the near term,” reads its forecast. “In fact, the persistently weak economic conditions could raise fiscal risks before the growth-enhancing structural reforms take root.”
It looks like 2015 could see a faceoff of sorts between Renzi and neighbouring France’s President Hollande, who is up against the similar challenge of shaking up the labour market. If the currently rigid, hostile market is not opened up to the younger generations, when the current labour force reaches inevitable retirement and there’s no one to fill those shoes, it’ll be a far bigger mess Italy finds itself in.
When Eran Hammer first came up with what he called Nouncer, the idea was for a consumer-facing micro-blogging web service. Unfortunately, the service was still in development when Twitter arrived, forcing him to change his product. After a year of uphill struggling he decided to call it a day. “I realised I was already too much behind everyone else who joined the space, and decided it was better to give back some of the money I raised than burn through it trying to catch up. It was clearly a great idea, but execution is everything.”
Despite offering something unique to the market and spending a year developing his idea, Hammer’s start-up failed, and he’s not alone. According to research by Shikhar Ghosh, a senior lecturer at Harvard Business School, 75 percent of all start-ups fail. He defines failure as those who do not return investors’ capital, but if he were to include those that don’t break even, that figure reaches 95 percent. In essence, start-up founders have to have a thicker skin when it comes to failure, because they can’t escape it.
There is a certain stigma attached to the ‘f-word’, but not for the entrepreneurs of Silicon Valley. Never ones to follow the crowd, the world’s leaders in technology and innovation reject common perceptions of failure, instead seeing it as a necessary step towards success, and fundamentally, a valuable lesson learnt. Not only this, but failure is proof that someone is not afraid to take a risk – a personality trait both commendable and essential to survive in the tech industry. While failure in other areas of business, and everyday life for that matter, is worn like a scarlet letter, in the start-up capital of the world it’s a badge of honour.
75%
Start-up failure rate
$108k
Average tech salary working in Silicon Valley
It’s possible, however, that the industry’s somewhat lax attitude towards failure has allowed it to spiral out of control. Beneath the smiles on the surface, an image of the darker side of start-ups is beginning to emerge from the valley, as more and more entrepreneurs come clean on the challenges they face on a daily basis. The reality is that successes are sung from the rooftops, and failures are buried very quietly, says Ghosh. This instils the idea that if they suffer, founders must do so in silence.
A lesson learned
The mantra ‘fail fast, fail often’ is well ingrained in the culture of Silicon Valley. Plastered on office walls and often recited in meetings (or at least, that’s what some reports suggest), the concept of failure is welcomed with open arms among the world’s most innovative entrepreneurs and developers. The hugely popular conference FailCon sees start-up founders discuss the failures of themselves and others, and attempt to understand how to turn them into successes.
A 2014 report by CB Insights found that a whopping 42 percent of failed start-ups cited “no market need” as their reason for failure – essentially, they created a solution to a problem that does not exist (see Fig. 1). How effective an app or a product is at solving a problem is irrelevant if it’s not a problem that needs solving. Take Pay by Touch, for example, which sold biometric systems to retailers, allowing customers to pay for transactions by scanning their finger and entering a code. A nice idea, but only really a solution once its systems are installed everywhere. Although it had a long line of investors, the company never really got off the ground. Marred by allegations of fraud and board issues, Pay by Touch declared bankruptcy at the end of 2007.
“The best start-ups know that establishing a need in the market is the most important thing you can do when developing a product”, says Elizabeth Varley, CEO and co-founder of TechHub, a start-up incubator. “It can be very easy to get carried away with the excitement of what’s possible with technology and end up developing features that customers may not want. Ensuring you keep a constant feedback loop with customers helps avoid this.”
Every so often, a product or app comes along that makes everyone wonder how we’ve all survived without it. Uber, for example – a free iPhone app that connects customers with the driver of a luxury vehicle at the touch of a button – has been incredibly successful, raising a huge $1.2bn of venture capital in June. Granted, private transportation is a well-tapped market already, but Uber’s creators, natives of San Francisco where hailing a cab is a challenge at the best of times, identified a gap before creating their product. Convenience is higher on the agenda of consumers than it has ever been before, and the app also capitalised on the mobile payments phenomenon; the current hot topic on everyone’s lips.
Taking shortcuts
The nature of the mobile app market means that often just one app in each category can survive for a prolonged period of time. This is particularly true of social media and messaging applications, whose success effectively relies on the power of critical mass. The social aspect of a social network is obsolete if no one else is using it, so by default, companies such as Facebook and WhatsApp maintain a monopoly over the market, and just like Hammer’s Nouncer, the smaller start-ups don’t stand a chance.
Plus, overcrowded app stores, where apps are mysteriously ranked according to a variety of factors – many of which are kept from the general public – make it incredibly difficult for lower profile developers to have their voices heard. Generally, once an app gets to the top 10 it stays there, but for users to find your app it must be near the top, and to get to the top users must have already downloaded it. The chicken-and-egg element means that many developers turn to complex tactics to manipulate the rankings, or employ ‘growth hackers’ to do it for them.
The Uber app shown on an iPhone in Madrid. Uber identified a gap in the market to become successful
An example of this is overnight sensation Flappy Bird, a simple but frustrating game that generated $50,000 in revenues per day until its developer Dong Nguyen removed it from the store, unable to handle the fame it brought him. The secret to Flappy Bird’s success was very simple – in an early version of the game, a rate button was placed where the user would expect the play button to be. Therefore users were unwittingly pushing it up the rankings when starting a new game, and given its addictive nature, it wasn’t long until Flappy Bird was at the top of the app store.
Tactics such as this are referred to as ‘dark patterns’ by interface designers, and the very existence of entire websites dedicated to them shows just how competitive the market is. And these tricks and strategies are by no means limited to apps – a typical example is set by organ donor programmes around the world, where if people have to sign up, a relatively low number do, but if everyone is signed up by default and has to manually opt out, very few do. Regardless of all the covert tricks and tactics used, it’s inevitable that many businesses burn out in such an aggressive environment. And when they do, the impact on everyone involved can be detrimental.
Burning out
Seattle-based analysts PitchBook have claimed that burn rates among all US tech companies have drastically increased over the last four years, now reaching their highest level since the height of the dotcom crash of 2000. In this overcrowded and fiercely competitive market, companies are left with no choice but to raise unprecedented amounts of venture capital to spend on marketing exercises, in an attempt to gain some sort of edge over rivals. PitchBook found that the further along these companies are, the more they are burning – so while the average start-up in its series B phase of funding is burning at a rate of $660,000 per month, that figure reaches $1.82m for those at Series D.
Equally trapped, the venture capitalists investing in these businesses must continue to foot the bill despite many of the companies in their portfolios being unprofitable. To get around this, venture capitalists tend to invest in a multitude of start-ups, with the idea that even if just one takes off, the profits made will cover the costs lost on others. And yet, Silicon Valley’s culture of failure could be damaging to the industry itself, in that, if investors repeatedly lose out, they may refrain from such high-risk funding altogether. But Bill Reichert, of venture capital fund Garage Technology Ventures, disagrees, telling the BBC that what the industry loses in start-up failures is absorbed into other businesses – both in terms of talent and technology.
On the flip side is Fred Wilson, of Union Square Ventures, who wrote on his blog: “We have multiple portfolio companies burning multiple millions of dollars a month… it is more than I’d like and more than I’m personally comfortable with.” If fund managers like Wilson are growing increasingly tired of keeping failing companies afloat for little in return, and do begin to pull back, this could reduce the amount of products reaching the market, perpetuating the monopoly already in place.
Many founders say they can’t publicly admit just how dire the situation is to employees and investors, so continue working 100-hour weeks. In 2013 founder and CEO of e-commerce start-up Ecomom Jody Sherman committed suicide, after reportedly facing mounting difficulties raising funds for the company. Ecomom closed its doors just weeks after the tragic incident, with president Marcus Nucci claiming no less than $2-3m would be needed to rescue the company. Sherman lived a lavish lifestyle, once allegedly spending $75,000 on an Airstream travel trailer, which he planned to drive across the US, distributing food to children in need. Plus, as is often seen in tech companies, he was incredibly generous, paying unusually high salaries to ensure he retained the best talent.
As a consequence, anonymous support sites like startupsanonymous.com have begun cropping up, with confessional posts ranging from “we’re shutting down and I’m scared” and “everyone is telling me it’s hopeless. I’ve not exactly proven them wrong yet. All my projects have failed; hits me hard and makes me feel like a fool”, to more general questions and answers, such as “will most investors consider a prototype only?” and “are power naps effective in the start-up world?”
“The real price to pay for a start-up is the personal toll it takes on friends and family. Too many people lose their significant other, friends, or other important social interactions in the rush to ship a successful product”, says Hammer. “It is a lifestyle that is more and more limited to people in their 20s, who can afford to make less for doing more.”
Too good to last
The figures emerging are not for the faint-hearted. According to PitchBook, in the third quarter of 2014 alone, $13.8bn of venture capital was invested in start-ups – and that’s down 21 percent from the second quarter (see Fig. 2). Seed financings have also increased in both frequency and size, with 337 seed stage deals being made in the period, and just five of those were valued at a total of $10m.
These astronomical figures are leaving financial experts and the media alike dumbfounded, with some hinting that the industry could find itself in a bubble, not unlike that of 2000. When it happened before, start-ups were spending large amounts on servers and office spaces, and while this is not strictly the case now – technological advancements mean offices can be virtual when starting out – many are chasing the typical start-up model seen at the likes of internet giants Google and Facebook. In light of such success stories, too many small businesses still in their early stages are burning through capital, using the few thriving exceptions as a benchmark for success.
Start-ups just like Sherman’s Ecomom are overspending beyond their reach on lavish offices and unfathomable employee benefits and salaries, all of which shouldn’t be considered until relative success is achieved. Such is the competitive nature of the industry, with companies forced to market themselves to potential recruits as much as potential recruits to them. In January 2014, tech jobs site Dice put the average US tech professional’s salary at $87,811, but that figure reaches $108,603 when referring specifically to those in the Silicon Valley area. What’s more, real estate firm Cassidy Turley puts average office rent in San Francisco at $59.35 per square foot, its highest rate since 2000.
Blame does not lie squarely at the feet of start-ups. Overzealous venture capitalists, also suckers for a success story, have been pouring record amounts into these companies with high hopes for hefty returns. “It certainly is possible that a start-up bubble is looming”, says Adley Bowden, Senior Director of market development and analysis at PitchBook. “Almost everyone would agree in the industry now that things are definitely on the upside of the venture capitalist cycle as investment continues to climb, valuations are through the roof and the exit M&A scene continues to be very active.”
Making a lot of this possible is the US Jumpstart Our Business Startups Act, or colloquially, the Jobs Act, which was introduced in 2012, loosening restrictions on equity crowdfunding and allowing small businesses to expand their shareholder base before going public. This has transformed the landscape – crowdfunding sites were illegal under US law until the Jobs Act was introduced – and while easing the flow of capital to small businesses, it’s become a double-edged sword.
One of Facebook’s data centres. Investment has meant that the company can spend thousands on servers
Whereas the last tech bubble saw young start-ups forced onto the public market prematurely, the Jobs Act has created a reverse effect. Now these companies are able to raise billions in capital before filing for an IPO, which is driving valuations through the roof – to the extent that over 40 tech companies have now broken the $1bn mark, it emerged in November 2014. Not only this, but some experts warn against raising too much too early on, due to the risk of relaxing into the idea that the hard work is over. Focusing solely on boosting company value and attracting investors, many lose sight of the most important stakeholder: customers.
Crowdfunding has transformed the investment environment, broadening and therefore increasing the pool of funding available to start-ups. With the act still in its infancy, its long-term impact on business is difficult to forecast, but it could prove problematic in the future. Giving away too much equity in early stages could discourage larger investment funds from participating later on, when larger amounts are required.
The soft landing
Shutting up shop for good is obviously the last resort, but it’s not the only option. Many start-ups manage to maintain an air of decorum in the form of an acqui-hire – a relatively new phenomenon whereby a company is acquired for its talent rather than its products. The concept lends itself particularly well to the tech industry, where the skills developed on one project are highly applicable to another. A form of recycling, if you will, an acqui-hire is a softer landing for struggling start-ups, allowing investors their money back and staff the opportunity for future employment.
In terms of achieving success, however, it’s most useful to look to those who are already there. Berlin-based mobile photography network EyeEm was launched in 2010 and has accumulated 10 million users in that time. “For us, it’s very helpful to have certain formats where failures are addressed in certain ways, such as post-mortems or bug-fests”, says Fabian Heuser, Head of PR at EyeEm. “The main thing you should avoid is an atmosphere in which employees are afraid to admit mistakes.”
Despite vast criticism of the Jobs Act and its subsequent impact, the US economy recognises the importance of fresh young businesses, and that’s something all governments could learn from. Stomach-turning rates of failure and the subsequent emotional impact aside, a thriving start-up scene is at the heart of economic recovery, and if embracing those failures is what works for them, then so be it.
