Year: 2017

Saudi Arabia’s Vision 2030 plan spurs international investment

Posted on by Max Tomlin

As the 19th biggest economy on the planet and the largest in the Arab world – accounting for around half the $1.6trn represented by the GCC, according to Tadawul data – Saudi Arabia is already a global behemoth. Tumbling oil prices and subsequent OPEC cuts in oil production this year, however, have dealt their share of blows to the Saudi economy, with the IMF slashing its 2017 forecasts from two percent to 0.4 percent in January.

In response, in May last year the Saudi Government laid out plans to modernise, diversify and globalise its economy under its Vision 2030 plan, implementing a series of wide-ranging reforms designed to open the kingdom to foreign investors, reduce its reliance on oil exports and bring it in line with the world’s most powerful emerging economies.

“My first objective is for our country to be a pioneering and successful global model of excellence on all fronts, and I will work with you to achieve that”, declared King Salman Bin Abdulaziz Al-Saud at the project’s outset. By loosening restrictions on outside investors and introducing new regulations, Saudi Arabia’s overarching goal under the programme is to rank itself among the top 15 economies in the world by 2030.

The Vision 2030 plan was designed to open the kingdom to foreign investors, reduce its reliance on oil exports and bring it in line with the world’s most powerful emerging economies

The effects of Vision 2030 on various Saudi sectors are far-reaching, but among those set to benefit is the asset management sector. One company capitalising on such opportunities is NCB Capital, the investment banking and asset management arm of National Commercial Bank (NCB), Saudi Arabia’s first bank.As the largest asset manager in Saudi Arabia and the biggest Sharia-compliant asset manager in the world, NCB Capital is in a strong position in Saudi Arabia.

World Finance spoke to Khaled Waleed Al Braikan, Head of Asset Management at NCB Capital, to find out his views on Vision 2030 and whether it will create opportunities for the asset management industry and NCB Capital itself.

Vision for the future
Though the Vision 2030 reforms are wide-ranging and carry significant positive implications for the Saudi economy in the longer run, they have also sped up the process of opening the Saudi market to international investors. Al Braikan believes the potential inclusion of Saudi Arabia in the MSCI Emerging Markets Index (a decision still to be made at the time of print) is among the most significant outcomes of the ongoing stock market reforms: “The MSCI and FTSE Russell indices are benchmark indices for equity investment managers globally. As Saudi becomes part of these indices, we expect to see many more regional and international investors coming to the Saudi market.” If the MSCI inclusion goes ahead, it is expected to bring significant international portfolio inflows to the Saudi stock market.

Beyond that, there are various regulatory reforms already underway to help achieve the targets and encourage the interest of overseas investors. Since June 2015, for example, international equity investors with assets under management of more than $5bn have been able to access the Saudi exchange by applying to become Qualified Foreign Investors (QFIs). Back in 2016, market authorities lowered this assets under management cap to $3bn in order to facilitate more QFIs’ entry to the kingdom.

April this year, meanwhile, saw the switch from a T+0 to a T+2 settlement cycle for listed securities – a model used by the majority of leading emerging markets to make stock market transactions more secure, and to attract more investment from overseas. Whereas execution and settlement previously took place on the same day, investors now have two days to verify deals and arrange funds.

“The right steps are being taken in terms of regulation to accommodate the needs of international investors”, said Al Braikan. “The authorities are in dialogue with the international investors; they’re listening to them and are acting quickly to address any potential concerns.”

Al Braikan refers to the recent authorisation of short selling as a further incentive to foreign investors, who now have the option to sell borrowed stocks and hedges. There is also the Independent Custody Model, which means international investors can now allocate a global custodian bank to hold their assets, rather than having to use a local broker.

It is not all about larger corporations, though. Just as important has been the increased focus on the SME sector. According to Al Braikan: “The government is looking to especially support this area in order to help drive the growth of non-oil revenue. One of the initiatives has been the creation of the Nomu-Parallel market, designed to allow SMEs to access and raise additional equity capital.”

Saudi Arabia’s overarching goal is to rank itself among
the top 15 economies in the world by 2030

Developed as an alternative to the traditional stock exchange, Nomu is a lighter market with more flexible listing requirements than the Tadawul, which has been designed to enable smaller companies to get listed, in turn stimulating the wider local economy. The Nomu market is restricted to qualified investors, whereas companies require a minimum market cap of SAR 10m ($2.7m).

So far, the new market seems to be proving a success. “There appears to be a great deal of initial interest from the companies seeking to list on the Nomu-Parallel market, which is expected to grow significantly over the coming years”, continued Al Braikan. “Some of these companies, though relatively small, could eventually become future champions in the sectors in which they operate.”

Far-reaching impact
The reforms under Vision 2030 and Saudi Arabia’s National Transformation Programme 2020 (NTP 2020) have far-reaching effects across many sectors at Tadawul. Al Braikan highlighted a number of sectors that stand to benefit as a result of these reforms. The Saudi telecoms sector, for example, will see growth in three key areas: higher fibre optic coverage across the kingdom; improved availability of frequency spectrums to Saudi telecoms companies; and extensions in wireless broadband availability to remote areas.

Al Braikan also highlighted that, under Vision 2030 and NTP 2020, the Saudi Government intends to fully privatise the electricity generation capacity while restructuring the existing power utility. The government will also bring power tariff reforms through the removal of further subsidies. Speaking about the Saudi minerals sector, Al Braikan referred to these reforms as the future growth engine of the industrial sector, as Vision 2030 incorporates major investment plans to develop the mineral sector.

On Saudi healthcare, Al Braikan revealed that Vision 2030 promises major reforms, including the privatisation of government hospitals, further optimisation of current healthcare spending, incentives for the private sector to step up its investments, and addressing lifestyle diseases through lowering smoking levels and curbing obesity.

Al Braikan is also extremely positive about the future of religious tourism. Vision 2030 aims to increase the number of Hajj and Umrah pilgrims through sustained investments in the physical infrastructure of the two holy cities. Accordingly, this should benefit the listed enablers of this sector. Al Braikan was also of the view that developments such as the evolution of real estate investment trusts (REITs), the imposition of white land taxes and higher government spending commitments to build houses for the masses will create opportunities for the listed real estate sector. Al Braikan also named the insurance sector as a key beneficiary of Vision 2030.

According to Al Braikan: “Saudi Arabia has strong investment capabilities and tremendous growth potential. This is on the back of the kingdom’s strategic location, immense natural and mineral resources and favourable dynamics. Saudi Arabia is ideally located in the midst of Asia, Europe and Africa. This enables the kingdom to offer transit and gateway facilities. Ultimately, Saudi Arabia can emerge as a major regional trade hub. Furthermore, Saudi Arabia can build upon its industrial base that takes advantage of its vast natural resources. Given the mining potential in the kingdom, sectors and industries can further be developed in areas such as phosphates, metals, energy and petrochemicals.

By matching sources of
capital with investment opportunities, NCB Capital will continue to support local companies as they develop

The general dynamics of Saudi Arabia are also heavily in favour of investment development, and steps in this regard include the development and expansion of religious tourism and the expansion of physical infrastructure such as airports and other supporting transport systems. The demographic dynamics of the kingdom are also extremely favourable – this enables the development and furthering of local talent and technological penetration in new and unique areas.”

Al Braikan highlighted the marked reduction in the government budget deficit to SAR 26bn ($6.9bn) in Q1 2017 from SAR 91bn ($24.3bn) in Q1 2016. This allowed the government to reinstate allowances for public sector employees. NCB Capital believes restoring these allowances will increase average household income and may also increase the discretionary spending capability of a household in general. Al Braikan also pointed out that recent international sukuk issuance will further improve liquidity in the local market.

Long-lasting results
Al Braikan believes the reforms will have a long-lasting impact on the overall health of the Saudi economy. He said: “Over the longer term, the market should benefit and grow in terms of both depth and breadth, as more companies are listed, including privatisations, and additional sectors are added. The more the listed companies reflect the overall economy, the more relevant it will be for investors seeking liquid access to the long-term Saudi economic story.”

NCB Capital’s own part in all of this is clear. By matching sources of capital with investment opportunities, the company will continue to support local companies as they develop, helping them raise essential capital. “NCB’s existing business strategy focuses on capitalising on the opportunities brought about by the kingdom’s ongoing transformation into a more diverse economy”, said Al Braikan. “We are closely watching the market dynamics of REITs, for example, and may come up with appropriate products in the medium term to capitalise on this opportunity.”

He concluded: “During 2017 and 2018, our focus is likely to stay on growing our businesses within asset management, brokerage and advisory services. The changes coming as part of Vision 2030 will accelerate growth in many sectors, and therefore create opportunities for companies and investors alike.”

Opening up Angola’s informal sector

Posted on by Ashton Wenborn

The informal economies of developing nations are often the unsung heroes of job and wealth creation, creating millions of jobs in Africa. In some countries, they create more jobs than the formal sector: for example, in Angola up to 60 percent of jobs are part of the informal sector.

The region’s immature financial services sector makes it particularly difficult for informal businesses and entrepreneurs to build a credit history and borrow from banks. Those that can suffer from high interest rates.

The reality is that these businesses contribute billions to the national economy through salaries paid and goods bought. In Africa, the sector represents at least 41 percent of continental GDP. This figure reflects the even greater potential that the informal sector would have if it were to become formalised.

Migrating to the formal system
Part of the solution lies in facilitating policies to help legalise informal businesses and grant access to the benefits that formal businesses enjoy. The Angolan Government has already started on this journey. Policy changes include the PROAPEN programme, which aims to develop and establish small-scale businesses by granting credit facilities to micro-entrepreneurs. Measures such as these can go a long way in developing the informal sector.

Fiscal strategies are an important tool that should be embraced. Extending new lines of affordable credit for small businesses, addressing constraints related to registering property and easing red tape for construction permits all make it easier for small businesses to get started.

Encouraging informal businesses to sign up to a social security scheme also acts as an incentive for them to migrate to the formal system. In Angola, the government has created a new way for small growing businesses to gain access to funding through an innovative state-backed fund.

Extending new lines of affordable credit for small businesses, addressing constraints related to registering property and easing red tape for construction permits all make it easier for small businesses to get started

Fundo Activo de Capital de Risco Angolano (FACRA) helps commercially viable, promising businesses to meet with a range of foreign investors who are themselves looking for opportunities to invest in the country. FACRA also goes above and beyond the role of a traditional venture capital by supporting skills development. For investors, it offers an orientation on regulatory questions about the national entrepreneurial culture.

The fund is an ideal partner to foreign companies and investors, acting as a gateway to the best opportunities and a potential lifeline to informal businesses keen to make the transition to the formal sector.

Creating investment opportunities
One significant benefit of encouraging businesses to make the transition is that the number of investment opportunities in the country rises, making the market increasingly attractive to investors. Furthermore, the millions of people employed in the sector will gain greater protection under the law and have their income formalised. This will allow them to access previously unavailable financial services, helping to reduce the number of unbanked citizens.

Governments should also be cognisant of the fact that individuals running businesses in the informal sector are often stigmatised – national governments must therefore tread a careful path in encouraging informal business owners to come forward.

With millions of people working in the sector, there are thousands of highly talented entrepreneurs and innovators – this is especially important because national governments and ordinary people have much to gain by unleashing the potential of local entrepreneurs and big thinkers. It is time for them to be embraced by policymakers and the investor community so that everybody can benefit.

Stefnir Asset Management: transparency key to Iceland’s recovering investment market

Posted on by Max Tomlin

Over the past two decades, the asset management landscape has undergone a considerable transformation, not least spurred on by the financial crisis in 2008. Many people will remember the headlines describing the abrupt changes in Iceland’s financial environment, as well as the subsequent turmoil. As investors globally lost confidence and pulled away from risky, high-margin investments, veering instead towards lower risk alternatives, fund management companies had to adapt – and fast.

Nowhere was that more true than in Iceland, where the equities market was essentially wiped out overnight and trust in financial markets was at an all-time low. Growing assets under management (AUM) was therefore considered an insurmountable challenge in Iceland and beyond. Consequently, rebuilding trust and diversifying portfolios became essential, with transparency being the key.

Leading the charge through all of this was Stefnir, then a relatively small asset manager compared to its Scandinavian peers. After the dust had settled in 2009, however, we set about achieving big things. Stefnir is now Iceland’s largest fund management company, covering mutual, investment and institutional investment funds for both retail and professional clients. The firm has also been named Best Investment Management Company (Fixed Income), Iceland in the World Finance Investment Management Awards 2017.

By understanding the needs of both our retail and institutional investors at that time and shifting our focus to fixed income funds, Stefnir was able to achieve healthy AUM growth and revenues despite the tough market. We recognised the importance of innovation, creating new funds tailored to our clients and seizing opportunities brought about by new market conditions, while nurturing existing fixed income investments.

This was all supported by an entrepreneurial, progressive company culture, which helped Stefnir to stand out from the rest. Combined with a focus on transparency, a forward-thinking approach and an in-depth knowledge of the market, Stefnir was able to set an example for other major players in the industry, helping to revive Iceland’s stock exchange and assisting in the recovery of its asset management sector as a whole.

Fixed income focus
While fixed income has been at the core of Stefnir’s portfolio since its founding in 1996 – with its oldest funds now more than three decades old – it was only after the financial meltdown in 2008 that the company began heavily realigning its focus. The firm was already operating five asset allocation funds, each with a different emphasis on fixed income, but with the shift away from high-risk investments (for both retail and private banking customers), Stefnir decided to specifically market funds that had a larger proportion of fixed income products.

Stefnir is a strong advocate of good corporate governance, increasing awareness of responsibility at all levels of the financial system

This was the right time for a market that had suddenly become highly risk averse. The increase in the mass inflow of balanced funds, primarily consisting of fixed income products, then led to the growth of other actively managed fixed income funds.

Capital controls had prevented Iceland’s key institutional investors from investing outside Iceland, thereby cutting the country off from the rest of the world and creating a need for more diverse investment options. While the banking system wasn’t operating to its full potential, real estate corporations were emerging from restructuring programmes and seeking alternative means of financing on more favourable terms. Institutional investors were meanwhile looking for long-term, interest-bearing securities, preferably listed on a stock exchange.

As such, Stefnir actively considered investment options in large real estate with long-term leases under stable ownership, with interest terms that were favourable to both parties. In just three years, Stefnir launched seven funds based on asset-backed financing, subsequently listing the securities on the Icelandic Stock Exchange. They were among the first new listings since the financial crisis, and gave hope to investors that the Icelandic financial market was being revived.

Stefnir has always been known for its market knowledge when it comes to asset-backed financing; it is a trusted partner in listing and creating alternative investment options. The increase in AUM based on asset-backed securities tied to real estate was especially significant between 2010 and 2013, however. It went from representing just one percent of total AUM at the end of 2010 to two percent in 2011 and seven percent in 2013.

New products
Despite the success brought about by this shift, Stefnir recognised that more needed to be done. Interest rates in Iceland are considered high compared with those of developed markets, and in a closed-off economy, retail investors and legal entities tend to look for the most feasible options for short-term investment. At the same time, however, they want to maximise the opportunities presented by those high interest rates. Stefnir had operated several money market funds in different currencies before the financial meltdown, but they were dissolved shortly after the collapse.

Yet in 2011, as the economy began to recover, we decided to venture down that path once more. Stefnir established a new liquidity fund (see Fig 1), marking an innovative, bold move that wasn’t without risk. The established fund was not an overnight success. It was clear a lack of confidence in funds – and, indeed, in the wider financial system in Iceland – still existed, especially among retail customers.

Despite the slow yet steady increase in AUM, Stefnir decided to specifically target larger corporations with short-cycle liquid funds and legal entities with steady income flows. The liquidity fund then started to grow consistently and at a phenomenal rate, hitting two and three figure sums year on year. It increased an impressive 101 percent from 2013 to 2014, and 68 percent from 2015 to 2016 (at which point it represented a significant 10 percent of the total AUM).

Several economic factors have been behind this growth: the financial system has become healthier and economic factors are more favourable, mainly due to the influx of foreign currency through tourism. Real wages have also increased significantly over the past few years, creating opportunities for investment in financial products.

The fund is now a household name and the move has – in one way or another – been mirrored by various other companies in the industry, including key competitors.

Setting the trend
Nevertheless, it’s not just in this way that Stefnir has set the benchmark. We recognised a lack of public trust in the financial system and fund management businesses as a whole in Iceland, which is still evident now. To help combat it, we took action to increase transparency and make information related to our funds more accessible. All funds now publish their asset breakdown monthly, and historical data is available on the Stefnir website. Ultimately, investing in or redeeming funds has become straightforward and can be done via an investor’s online bank account.

Stefnir has also been a strong advocate of transparency and good corporate governance, publicly participating in debate and sponsoring conferences on the subject to increase awareness of responsibility at all levels of the financial system. Iceland is now recognised as one of the most transparent players in the global fixed income market, in large part because almost half of aggregate bond and bill trading takes place on the country’s stock exchange. By being an initiator in listing securities of asset-backed financing on the exchange, Stefnir helped to propel that trend.

The company is now embarking on a new path in asset-backed finance, this time financing diverse portfolios of secured and unsecured seasoned loans. So far, we have noticed a clear appetite for higher yields, which is why our institutional investors and fixed income specialists have provided a platform for accessible investment options for clients. They will also serve as alternative investment options for balanced funds and private banking customers.

As all of this suggests, product development has played (and will continue to play) an integral part in Stefnir’s success. One of the key tenets behind that lies in the company’s entrepreneurial spirit, which involves listening to the needs of the market and analysing trends before the clients themselves have even identified them.

That entrepreneurial spirit doesn’t necessarily mean excessive risk-taking; what it does mean is working to create opportunities for all parties involved. It’s about helping clients benefit from developments and opportunities brought about by changes in the investment climate, and indeed the wider economy.

With yields close to an all-time low, appetite for actively managed government bond funds has been decreasing worldwide. This means continuing to innovate and introduce new products to investors – whether retail or institutional – is now more important than ever. Stefnir has shown itself to be a driving force in identifying changing needs, bringing out new products and generating long-term value for its customers, all with transparency at the forefront of its operations. If its proven track record is anything to go by, it will continue to do so for the foreseeable future.

Swisscanto Invest: how to protect your investments against the unexpected

Posted on by Max Tomlin

In today’s uncertain environment, many of the income-orientated investors who typically look to the high yield market wish to limit the volatility associated with high yield bonds. With a solid global growth outlook, oil prices on the rise and President Trump’s continuing attempt to push deregulation and tax cuts, it makes increasing sense to maintain exposure to high yield assets.

However, investors will not be able to avoid risk altogether. Risk aversion stemming from growth concerns in China, inflation overshooting, or the failure of any of Trump’s intended policies could create volatility. Investors, therefore, are facing a dilemma: they need a high level of income but can’t afford to take high levels of risk. Many investors would agree market timing is extremely difficult to gauge, and, as a result, exiting the asset class at the wrong time presents a great risk.

Over the last 35 years, there have only been five occasions when negative returns on high yield bonds weren’t followed by a year of strong recovery. For example, even during the financial crisis in 2008, when high yield bonds posted a poor return of minus 27 percent, the market recovered by 58 percent the next year. Then, in the following five years, high yields delivered an average return of 9.4 percent per annum.

Even after significant gains, returns have historically remained healthy in subsequent years. Therefore, high yield is an asset class where market timing is not particularly imminent, and exiting the asset class completely is a risky move. While sizeable corrections aren’t unusual – occurring five times over the last 35 years – the market tends to bounce back quickly.

Reduce duration
While an untimely exit from the high yield asset class can prove extremely costly, the adoption of a short-term investment strategy can often provide a safer alternative, allowing investors to maintain exposure while limiting risk. Historically, short-term, high yield strategies have dampened volatility, holding up better than broad high yield allocations in down markets while equally capturing most of the market’s returns when times are good. The risk-return matrix shows short-term, high yield strategies often achieve similar returns to global high yield strategies, while being less volatile. Compared to equities, the risk is significantly lower.

This was emphasised when we analysed the volatility high yield investors had to bear during the financial crisis. Our research showed a short-term strategy achieved up to five percent lower volatility during the financial crisis than a global high yield strategy. While the research also revealed global high yield strategies outperformed short-term strategies during periods of falling yields, compared over a longer period, short-term strategies did not miss out on excess returns (see Fig 1).

Capital markets being open directly after the financial crisis helped the outperformance, allowing a high share of issuers to refinance maturing bonds. Further, based on a study from Moody’s Investor Services, short-term, high yield strategies benefitted from the fact the default probability of a bond decreases the closer it comes to maturity. The analysis showed that, between 1970 and 2016, the default probability in the first three years after assigning a rating to a new issue was 13 percent. In the following three years, it went down to 10 percent and in years seven to nine the default probability reduced to approximately seven percent.

Entering Europe
Another solution is to invest in European high yield markets. Adding exposure in markets at different stages in the cycle improves the diversification effect and reduces the overall risk. With standard global high yield benchmarks heavily tilted towards the US market – a share of approximately 80 percent – Swisscanto Invest believes a customised benchmark consisting of 50 percent European and 50 percent US high yield exposure reflects the fundamental strength of the US and Europe far better. The investor benefits from a wide range of alpha sources, such as different yield curves, industry segments and economic developments, and the diversification leads to higher risk-adjusted returns.

One of the main challenges investors face is identifying a strategy capable of increasing return potential while minimalising risk within the context of a portfolio. We have analysed various strategies to find the most efficient ways of generating return without having to take excessive risk. Strategies included overweighting BBBs, subordinated financials, longer duration bonds and single Bs, while underweighting the iBoxx in the same amount.

We scored each strategy for the lowest risk at any given level of excess return, using various risk measures such as drawdown, annualised break-even to volatility and negative return percentage. The analysis found adding a short-term, global high yield to an investment grade portfolio scored best in regards to risk-adjusted returns. Extending maturity, a strategy many investors continue to adopt in today’s markets, scored among the worst.

Swisscanto Invest’s solution
Swisscanto Invest launched the Swisscanto (LU) Bond Fund Short Term Global High Yield in 2011. The fund is actively managed against a customised benchmark consisting of 50 percent US high yield non-financial and 50 percent European high yield non-financial indexes – this includes securities with a maximum three-year maturity. The fund has a history of attractive risk-adjusted returns and compares favourably against the broader global high yield market, delivering significantly lower volatility. Comparing performance within its peer group, the fund ranks in the first quartile.

Duration is tightly managed and stands at approximately 1.7 years, with the average credit rating at B+ at the end of March. We find single B-rated bonds strike the best balance between the quest for income and the insurance of low embedded default risk. Normally a base case scenario for upward pressure on US Treasury yields and a steady improvement in the US economy would underpin an above average risk profile. However, we see the risks around CCCs as asymmetric and are very selective. Therefore, we only invest in companies with a high visibility of cash flow and a liquidity that supports a refinancing in the near future. As an active manager, we strive to avoid defaults based on rigorous bottom-up analysis and strict sell disciplines.

An untimely exit from the high yield asset class can prove extremely costly

The customised benchmark consisting of 50 percent European and 50 percent US issuers allows us to opportunistically allocate meaningful overweight positions to the market segment with the best return potential.

For instance, anticipating the energy crisis in 2015, we had strongly underweighted the US energy issuers and allocated exposure towards European issuers. Currently, we see value in European high yield: European companies – unlike US companies – are in an earlier stage of the credit cycle, which should keep a lid on defaults.

Additionally, European bonds benefit from a highly supportive policy backdrop. In the US, various industries will be affected by Trump’s policies. This is particularly prevalent in the healthcare sector, which has highly levered hospital issuers. Thus, the fund has an underweight in the US healthcare sector. Meanwhile, we are very selective in the retail space, as the sector faces some structural challenges.

Given its absolute size, the energy sector remains important moving forward. Although the spread of premium energy providers has tightened massively, we expect this trend to slow in the future. Against an improved fundamental backdrop for commodity credits, we are expecting the high yield default rate to decline in 2017, and the credit cycle to remain intact.

With US Treasury yields universally expected to trend higher in response to firmer global economic conditions and inflation, we believe a short-term, global high yield offers the best downside protection while not compromising on incoming yield.

How politics impacts forex

Posted on by Max Tomlin

The US dollar has spent much of 2017 consolidating from its December highs, when it peaked at a 10-month high of JPY 118.66. From languishing at near three-year lows of JPY 100, the dollar rallied following the November presidential election, bolstered by confidence in Trump’s campaign pledges to increase infrastructure spending and impose large tax cuts.

Aside from sending the dollar soaring, the so-called ‘Trumpflation’ effect has also boosted commodity prices and equities, particularly among construction stocks, with many experts persuaded that Trump’s promised fiscal stimulus will lead to higher growth. In a seeming vote of confidence in the new president, the Dow Jones Industrial Average and the S&P 500 both rose to record highs during the first quarter of this year.

Moreover, government bond yields have increased as investors move funds away from fixed income assets and into pro-growth assets. The yield on 10-year US Treasury notes has also surged to a two-year high, as the market anticipates further interest rate rises from the US Federal Reserve.

Despite this Trumpflation rally, however, the dollar is facing a new wave of challenges. With escalating geopolitical tensions and Republican Party infighting, the US currency may well struggle to recover its post-election value.

A burst bubble
The dollar rally first lost its fizz when the Trump administration showed signs of deviating from its campaign promises on infrastructure and tax policies. With disunity among Republican Party members and delays in confirming Trump’s full cabinet, many of the president’s campaign pledges took a back seat during his first few months in office. Perhaps most significantly, Trump’s first attempt at a revised healthcare bill failed to get the necessary backing in the House of Representatives, resulting in it being sensationally pulled. While later rectified, the defeat was not only a sign the new administration would have a hard time winning the support it needed from its own party, but it also fuelled doubts over whether tax cuts would ultimately prove feasible without any reductions in health spending.

With escalating geopolitical tensions and Republican Party infighting, the US currency may well struggle to recover its post-election value

US Treasury Secretary Steven Mnuchin confirmed in an interview that the previously stated deadline of August for passing the tax reforms was looking unrealistic, and he expected the tax overhaul to happen towards the end of the year. Despite this revised outlook, however, Mnuchin promised the proposed tax cuts will be the largest instance of tax reform in the history of the US.

After losing some 60 percent of its post-election gains, the US dollar now looks vulnerable to further depreciation, particularly amid low levels of consumer spending. Retail sales declined month-on-month in both February and March, contrary to certain optimistic consumer surveys. Inflation data has also given industry experts some cause for concern: the core Consumer Price Index fell for the first time since 2010 between February and March, while the Fed’s preferred gauge – the PCE price index – has been frozen between 1.6 and 1.8 percent since the latter half of 2016.

Meanwhile, geopolitical tensions have also taken their toll on the dollar. In particular, North Korea’s nuclear ambitions and an increasingly strained relationship with Russia have dampened bullish sentiment for the US currency. While the dollar may be underperforming, gold has emerged as one of the best performing assets of 2017, bolstered by increased risk-aversion stemming from Trump’s confrontational stance on foreign policy. Gold prices hit a five-month high of $1,295 an ounce in April, with political uncertainty in Europe also contributing to the precious metal’s gains.

Overseas influence
Away from US shores, Trumpflation is also having a profound effect on various other currencies. Commodity-linked currencies, such as the Australian dollar, have benefited from a rally in the price of resources such as iron ore. As the country is the largest iron ore producer in the world, Australia’s currency performance is strongly tied to the commodity’s prospects. Along with the Canadian and New Zealand dollars, the Australian dollar outperformed all other major currencies in the first two months of the year. In fact, the Australian dollar advanced by an impressive 7.5 percent between January and March, as iron ore prices surged by more than 20 percent.

However, since March, the Australian dollar has given up some of its gains following a sharp slump in iron ore prices, which was driven by concerns over a potential supply glut. In April, the price of iron ore hit a six-month low, delivering a strong blow to the Australian dollar. The now faltering Trumpflation trade has also been weighing on commodity prices and currencies, as investors grow increasingly doubtful about the
president’s fiscal plans.

On the opposite side of the world, the euro and the pound have both been dogged by uncertainty about the region’s economic and political stability following the UK’s decision to leave the EU last June. The Brexit bombshell gave fresh momentum to anti-establishment movements across Europe, which have been on the rise since the introduction of tough austerity measures following the 2008 global financial crisis. With millions of voters feeling alienated from mainstream politics, radical populist movements have made significant gains in the region.

The euro had its first big test in March, when Geert Wilders’ far-right PVV Party threatened to disturb the political status quo during the Dutch general election. A last minute boost for Mark Rutte’s centre-right VDD Party brought great relief to many European leaders and kept the euro at a stable value. However, just one month later, this stability was threatened once again by the contentious French election.

JPY 118.66

The value of the dollar in December, a result of Trump’s election

$1.28

The value of the pound following Theresa May’s announcement of a snap election in the UK

$1,295

The price of gold per ounce in April, its highest in five months

Notwithstanding a somewhat poor start to the year, the sterling is now enjoying a strong 2017. The British currency has been bolstered by added certainty over the country’s Brexit path, after Prime Minister Theresa May finally put pen to paper to invoke Article 50 on March 29. While the UK’s Brexit negotiations will certainly prove complex and lengthy, May’s conciliatory tone has so far helped to soothe market concerns over potential disputes between the UK and the EU. What’s more, the pound enjoyed a further boost following May’s surprise call for a snap election.

With the ruling Conservative Party enjoying a 20-point lead in the polls a month prior to the election, investors at the time were hoping an increased Conservative majority in the House of Commons would allow Prime Minister May to pursue a definitive path for Brexit, free from opposition meddling in her preparations to leave the EU. While this no longer appears to be the case, sterling’s lift following the snap election announcement took the currency back above $1.28 for the first time since October 2016.

An uncertain future
While the euro and the pound have had a mostly positive start to 2017, their future performance will very much depend on how the current eurozone risks play out. Upcoming elections will determine the fate of the euro over the coming months, while the Brexit negotiation process will continue to shape the value of the pound.

As for the dollar, its outlook will most likely be determined by the size and nature of Trump’s planned tax cuts and infrastructure spending, in addition to the wider influence of deregulation and the revision of trade agreements. However, with the impact of such measures unlikely to be felt until 2018, a bigger determinant of whether the dollar rally can be reignited is wage growth.

The absence of wage pressure since the financial crisis has been holding US consumer prices down, even as the unemployment rate continues to fall. The jobless rate in the US fell to a 10-year low of 4.5 percent in March, but average hourly earnings eased to an annual rate of 2.7 percent. At present, low productivity growth is the main factor keeping wage growth at muted levels.

The Federal Reserve has adopted a policy of very gradual rate increases, despite the US economy now being in its eighth year of expansion following the end of the Great Recession. With many sectors of the economy now beginning to report worker shortages, the Fed may well accelerate its pace of rate increases, acting before any fiscal stimulus kicks in. With further rate rises on the horizon, the dollar could well rally, bringing the JPY 120 level back within reach again.

As we look to 2017 and beyond, a decline in Trumpflation could have a profound impact on currencies the world over. With geopolitical shifts continuing to reshape the global economy, the foreign exchange market faces a turbulent future.

How to prepare for the future of forex

Posted on by Max Tomlin

The forex industry has advanced rapidly in recent years, as the online trading of currencies and commodities continues to grow in popularity. As such, the market’s structure has changed due to broadening participation in the industry, which is highlighted by the increasing number of forex brokers in the space. Execution within the market has likewise changed, as traditionally the forex market was dominated by trading between dealers.

The oversight of regulated forex brokers and the role of compliance has also evolved in parallel with this growth. In the past few months alone, there have been various regulatory changes, particularly from European bodies, which have implemented tougher guidelines, stricter enforcement and heftier fines across the board. Ultimately, forex brokers are now obliged to guarantee the safety of client funds, follow strict anti-money laundering procedures and ensure the best execution of client orders. This greater level of oversight and accountability has led to far better transparency within the market.

The sector has also become far more competitive, while acquisition costs continue to rise. Consequently, brokers are now looking for new ways in which to manage these changes and succeed in an industry that is set to evolve even further during the coming years. These factors have caused the structure of brokers’ operations and the entire landscape of the industry to shift dramatically.

Going forward, we expect further changes to take place with more stringent oversight from the leading global jurisdictions. Nevertheless, it continues to be a lucrative marketplace. Even as stricter regulations come into play, we can look forward to seeing a flow of new products emerge in line with technological advancements in the area.

Technological evolution
The increased ease of entry into the market is largely attributable to the rising number of execution platforms and services. In part, this has been supported by technological advancements, which have reduced trading costs, increased the speed with which transactions take place, and improved transparency. Consequently, electronic trading activity in the foreign exchange market has played a crucial role, now representing around 70 percent of daily turnover, compared with just 30 percent a decade ago.

Technology will inevitably continue to play an increasingly important role in the industry. The extent to which brokers embrace the latest developments will be crucial as they strive to expand their client base and increase their market share. Some of the more recent advancements include trading algorithms and software written specifically for the MetaTrader platform, which can advise traders on which trades to make. They can also be programmed to automatically execute trades on a live account, making the whole process more efficient.

Operating in fractions of milliseconds has become an important component towards achieving faster execution, but it could deter new participants from entering the market in the future

In line with this evolution, the industry has also seen a shift towards mobile trading, with mobile apps becoming increasingly popular, while developments in online payments are facilitating the trading process further still. Not only have technological advancements helped to increase the speed at which transactions take place, they have also reduced trading costs and improved transparency. New technology has also enabled the regular introduction of new products into the market, placing brokers in an advantageous position as they are able to frequently increase their client offerings and therefore stay ahead of the competition.

In terms of regulatory changes, these are a positive development for the industry. Increased regulation means more credibility for regulated brokerages that are proactive in following such procedures. They also benefit the client, as there is increased transparency and protection within a regulated forex market. Ultimately, embracing the latest technological developments enables brokers to offer their customers the latest state of the art trading platforms and advanced tools, providing them with a fast, efficient and continually improving trading experience.

Market trials
The challenges faced by the industry relate to some of the advantages previously mentioned: namely technology, increased regulation, transparency and competition. Although new technology has helped ease entry into the market, the capital investment needed for the long term has also increased. Indeed, operating in fractions of milliseconds has become an important component in achieving faster execution. This, however, could also deter new participants from entering the market in the future, particularly those that may not have the extensive resources required to keep up.

Moreover, though the positive influence that technological changes have had on market functioning is evident, it is not yet certain how these changes may affect the broader price discovery process or liquidity of the markets overall.

As far as brokerage firms are concerned, the marketplace has become a crowded area. With so many new companies entering, new business opportunities are becoming harder to find. This is particularly apparent as greater restrictions are being placed on brokers in terms of their services and promotional efforts. Forex brokers are also facing steeper acquisition costs, and are therefore forced to find new and innovative ways of
increasing their revenue.

To combat these challenges, many brokers are seeking expansion into new markets, such as China and the Middle East, both of which offer great potential for growth. Others offer alternative services to draw in new clients. Both strategies pose new risks and efforts, hence the challenges present in the market today are very real.

Teaming up
Partnerships are a fundamental part of any broker’s business, as they help to increase exposure – an important component of any marketing strategy. In the forex arena, partnerships are usually created by way of affiliates, introducing brokers (IBs) and white label programmes.

The relationship between a broker and these affiliates, IBs and white labels is symbiotic, in that both sides get to benefit from the partnership. The key benefit for HYCM is that we get more traffic referred to our website, along with more potential customers, which we might not otherwise have had access to. We greatly value our partner relationships and we are constantly striving to improve the products and tools available to them.
Partnerships are increasingly valuable in the internet age, where maximising online exposure is key to achieving increased sales and longer-term growth. They are also important in an industry where relationship building is central to operations, with successful partnerships often contributing to a considerable part of the revenue stream.

70%

of daily turnover in the forex market stems form electronic trading

30%

The same share 10 years ago

Partnerships therefore help to overcome some of the hurdles we might encounter when onboarding new clients, such as driving traffic to a website, breaking into new markets and reaching new customer bases in different countries. For example, HYCM offers comprehensive partnership programmes for affiliates and IBs that are unique to the industry. In addition, HYCM offers white label solutions, which are a perfect complement to the financial institutions licensed to hold client funds and regulated in their country of residence. As HYCM is a multiregulated broker with 40 years of experience in the industry, its partners benefit from working with a trusted broker with a solid industry reputation and an unparalleled range of compensation packages.

Our partners benefit from a variety of rebate programmes, which are backed by a highly skilled team that is on hand to discuss all available options. We also offer multilevel marketing rebate tiers, free market reviews for clients, customisable marketing and advertising tools, and local office and events support, which are all geared to help our partners grow their business and maximise their earning potential.

Once again, technological developments are of the essence. Our newly launched, fully integrated IB terminal stands at the forefront of the industry, allowing transparent, real-time tracking of client performance and trading activity, with the ability to monitor earnings and manage commissions – all within a secured environment.

The IB terminal also has a host of added benefits, including multiple URLs for registering clients on different packages, on-demand commission withdrawals, and the bonus of two free commission withdrawals per month, providing our partners with a sophisticated, user-friendly experience to support and enhance their businesses.

Steaming ahead
With its 40-year operational history, HYCM has earned a reputation for offering a trustworthy and transparent online trading service to investors. The company excels by providing traders with a state of the art MT4 platform and mobile app, offering an extensive asset portfolio and providing exceptional customer care and satisfaction.

The industry’s latest technological developments are central to both our trading operations and client offerings, allowing us to deliver an overall service that is second to none. We pride ourselves on adopting a professional approach in every aspect of our operations, ensuring we always adhere to strict procedures and regulations so our clients can trade in a secure environment with complete confidence.

HYCM also distinguishes itself with its strong company background. The company is part of the Henyep Group, an international conglomerate that was established in 1977 and today operates in the financial services, property, education and voluntary sectors. The Henyep Group is multi-regulated by the UK’s Financial Conduct Authority and the Cyprus Securities and Exchange Commission, and has a global presence with offices in the UK, Hong Kong, Cyprus and Dubai.

In spite of so many changes in the market, HYCM continues to experience major growth and is looking to further build on its success. Current plans include extending our global footprint into regions that offer new growth opportunities, such as China, the Middle East, South America, Africa and Europe. China in particular has experienced substantial economic growth as people look for new investment opportunities in the region. This in turn has fuelled some of our growth in recent years.

The Middle East is another important market for us, in which we are constantly looking to expand our presence through local partnerships.
In the short term, we plan to incorporate a new trading platform into our company infrastructure, expanding the range of platforms offered to our clients together with the introduction of variable spreads and the addition of some more exciting tradable assets to our portfolio. For HYCM, a future with innovative technology and increased regulation looks better than ever.

Danish Government raises retirement age as benefits system continues to prosper

Posted on by Max Tomlin

Despite its long, dark winters and overcast skies, Denmark is home to some of the happiest people on Earth. The Scandinavian nation has topped the World Happiness Report three times since the survey’s launch in 2012, with Danes consistently recording high levels of overall life satisfaction and personal wellbeing. The nation’s commitment to freedom and gender equality and an emphasis on a successful work-life balance inspires a culture of happiness among its citizens, while its extensive and generous welfare system creates a sense of security for all Danes.

It is perhaps unsurprising, then, that Denmark has been named the best country in the world in which to retire. In addition to offering a high quality of life and universal healthcare, the nation also boasts a highly robust and sustainable pensions system, ensuring comprehensive support for pensioners throughout their retirement years. Denmark may have one of the highest income tax rates in the world, but its citizens are happy to pay into a system that promises them a universal pension, quality healthcare and social security in return.

Thanks to this extensive social safety net, Danish pensioners are covered by rent allowances, fuel subsidies and an impressive state-funded pension, meaning retirees can enjoy a good quality of life long into their old age. With even low-income retirees able to enjoy a good level of financial security, the Danish model has emerged as the gold standard of global pensions systems.

Promising pensions
The Danish pensions system has now been ranked the best in the world for five consecutive years. The Melbourne Mercer Global Pension Index compares the pension systems of 27 countries, ranking them by parameters including sustainability, integrity and adequacy. Throughout the report’s eight-year history, Denmark has consistently appeared at or near the very top, indicating a sturdy and well-developed pensions scheme.

The nation is one of just two counties awarded an ‘A’ grade for its pension scheme. According to the report, such a ranking signifies “a first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”.

In order to ensure that pensioners receive an adequate income during retirement, the Danish system comprises several key components: in addition to the basic state-funded pension, the nation also offers a means-tested supplementary pensions benefit, as well as mandatory private schemes managed by large pension funds. What’s more, Denmark has one of the best-funded pensions schemes in the world, setting aside approximately 168 percent of its GDP to pay for its citizens’ future retirement.

From 2025 onwards, Denmark’s retirement age
will be indexed to life expectancy, and can therefore be expected to rise further over the course of the century

“Denmark has a long tradition of company pensions”, said Per Klitgård, CEO of Danica Pension, one of Denmark’s largest pensions providers. “In comparison with many other countries, Danish companies and institutions have taken a unique level of social responsibility in supporting their employees through pensions savings and insurance services.”

But for all the strengths of the current system, there are some areas in which pensions could still be further fortified. If Denmark wishes to retain its stellar pensions reputation, then changes will have to be made in order to address the pressing issues of demographic shifts, low youth pension coverage and rising unemployment among young Danes.

Challenges ahead
With rising divorce rates and increased job mobility, the pressures of modern life are rapidly reshaping the Danish pensions market. The nation now has the fourth-highest divorce rate in Europe, and these familial splits have a profound impact on an individual’s personal finances. Similarly, other significant life events, such as the birth of a child or a new job role, can alter a person’s savings. Klitgård told World Finance: “Individuals are increasingly experiencing big changes in their lives due to changing jobs, getting married and numerous other life events. This means that pension plans have to be adapted far more often than before.”

While these evolving circumstances are certainly a challenge for pensions providers, the Danish pensions system is facing an even greater threat to its sustainability. Like most developed nations around the world, Denmark has a rapidly ageing population. Thanks to medical advances and a focus on living more healthily, Danes are living for longer than ever before, while the nation’s birth rate has dropped to a 30-year low. With fewer working age citizens able to meet the demands of the elderly, the nation’s pensions system is coming under considerable pressure, with many experts suggesting that a pensions reform may ultimately be necessary in order to overcome this looming issue.

“A longer life – including a longer working life – will have a big impact on the way we allocate both financial and personal resources”, said Klitgård. “Already now, the population is having to adapt their pensions scheme so that it can cover between five and 10 years more than the previous generation’s did.”

As the share of retirees increases, the nation is already taking steps to ensure its pensions system remains sustainable. In 2016, the Danish Government unveiled a series of proposals for reform in a range of areas, including pensions. In an effort to increase labour force participation among older Danes, the government will be raising the retirement age: from 2025 onwards, the nation’s retirement age will be indexed to life expectancy, and can therefore be expected to rise further over the course of the century.

Digital drive
As the Danish pensions system looks to a more sustainable future, the nation’s pension providers are also upgrading their services. With the rise in the Danish retirement age and other promised revisions to the pensions scheme, quality advice on the subject is more important then ever. At Danica Pension, the focus is on improving the customer experience and helping retirees achieve their financial goals with ease.

168%

of Denmark’s GDP is put aside to pay for citizens’ future retirement

5

years in a row, the Melbourne Mercer Global Pension Index has ranked the Danish pensions system the best in the world

Each year, 20 percent of all Danes experience a major life change: whether it be a change in wages or the birth of a child, one in three Danica Pension customers will encounter at least one significant life event per year. These changes in personal circumstances have a significant knock-on effect for a person’s pension, meaning individuals ought to check their pension plan every time they experience a life change.

However, with the pressures of work and family life getting in the way, many customers simply don’t make time to update their pension scheme following a major life event. This is where Danica Pension’s One Step Ahead strategy comes in. In a new drive to engage with customers, Danica Pension will reach out to customers when they experience a change in their lives that might affect their pension plan. In this way, Danica is staying ahead of its customers, contacting them with relevant advice before they need to ask for help.

“Our One Step Ahead programme delivers a promise to customers that we will contact them first in most cases”, Klitgård explained. “With this programme, we want to ensure an optimal pension scheme for our customers, instilling them with a strong sense of financial wellbeing.”

In addition to this programme, Danica Pension is also in the middle of an impressive digital drive. The pension provider has set up an online pension checker, which customers can use to quickly and easily review their pension plan. Thanks to this online service, Danica customers are able to access an overview of their pension from the comfort of their own home, and can remotely find recommendations that best suit their financial needs. What’s more, the company has developed a strong multichannel presence, meaning customers can access financial advice in a range of different ways, and are not simply limited to face-to-face, in-store interactions.

According to Klitgård: “Already today, we give customers individual and clear recommendations based on dynamic data usage, which has produced measurable results. We strive to continuously improve our understanding of customers’ expectations, needs and motivations.”

While the Danish pensions sector certainly has some significant challenges ahead of it, the nation’s pension providers are creating a better future for retirees. Offering a wealth of personalised financial advice and proactive customer service, Danica Pension consistently delivers quality pension schemes to its growing customer base of 600,000 Danes. As it looks to further enhance its services and improve the financial security of its customers, Danica Pension is set to go from strength to strength.

Cryptocurrencies: a new financial world order

Posted on by Max Tomlin

For as long as we transact and exchange services, money will power the world. That said, the nature of money has evolved over time, and it’s currently experiencing its biggest ever transformation – right before our eyes.

But to appreciate how malleable currency is, we need to wrap our heads around the greatest illusion of the modern world: cash. We invest hours of each day earning it, but in reality, it has no intrinsic value.

The concept of cash is an ancient one, and it is ingrained in every society around the world. In the seventh century BC, the Lydians replaced goats with coins to make bartering more convenient. They imbued a physical object with nominal value, and that concept evolved over the centuries into the paper bills and coins we carry around in our wallets today. It’s certainly easier to manage than a goat!

In 1971, the story of money hit a turning point, and how we measure its value changed forever. When President Richard Nixon took the US off the gold standard, he hammered the final nail into the coffin of the Bretton Woods system and turned the US dollar (and, by extension, every other currency in the world) into a fiat currency. The dollar’s value was no longer measured against gold – instead, it was measured by regulations, laws and governments. In effect, it was the first time that money became divorced from the physical and became its own belief system, puppeteered by the invisible hands of the government.

Today, confidence in central banking systems like the US Federal Reserve is waning rapidly, especially in the world of Trump and Brexit. We are also living at a time when the technological ceiling gets shattered on a daily basis, and consumer needs are driven as much by convenience and novelty as they are by wants and needs. These factors have combined to redefine the meaning of archaic terms such as ‘coins’, ‘wallets’ and ‘money’, which are rapidly aligning themselves with the virtual space: a digitised, programmable, complex series of ones and zeros that are stored and encrypted in online databases.

Technology has redefined the meaning of archaic terms such as ‘coins’ and ‘money’, which are rapidly aligning themselves with the virtual space

As intimidating as this may sound to the layman, the great advantage of this digitised form of currency is its decentralised nature. Neha Narula, Research Director of the Digital Currency Initiative at MIT, said in her TED talk on the subject: “With programmable money, we decouple the need for large, trusted institutions from the architecture of the network, and this pushes innovation in money out to the edges.” In essence, she concluded, “programmable money democratises money”.

The rise of cryptocurrencies
Everyone’s heard of them, yet few know how to explain what cryptocurrencies are or how they really work. The bitcoin was engineered in 2008 by Satoshi Nakamoto (who may or may not be just one person), and is the world’s most familiar cryptocurrency – i.e. digitised money in the form of a string of encrypted computer data that is used to make online payments.

Bitcoin is the most prominent peer-to-peer alternative to the standard notion of physical cash and bank accounts, and other than a 2011 security breach at Mt Gox (a bitcoin exchange in Tokyo), which saw the loss of nearly $500m worth of bitcoin, the currency is widely regarded as secure and stable. Today, a single bitcoin is valued at more than $1,000, and more and more merchants are accepting it as a form of payment.

But bitcoin isn’t the only cryptocurrency around – new ones are popping up on a seemingly daily basis. Litecoin, Ethereum and DOJ coin are among the other cryptocurrencies gaining popularity, while the digital currency revolution is even stepping beyond the realm of cryptography.

Stan Stalnaker, founder of global collaboration network Hub Culture, created Ven, a digital currency with no borders and no fees – hidden or otherwise. In 2015, a grant from the Bill and Melinda Gates Foundation brought Ven to the growing mobile fiat currency system of many third world countries. As a currency that’s backed by carbon and other commodities, it’s a green alternative to physical cash. Stalnaker has boasted that Ven is the most stable currency in the world, making it of particular interest to currency traders, who welcome safe-haven investments during politically unstable times.

While some regulated forex brokers accept bitcoin, the decentralised nature of cryptocurrency and its total reliance on hack-prone computing devices have dissuaded most brokers from using it. At FXTM, we are paying close attention to the ongoing evolution of bitcoin, and though there is not currently a significant demand for it from our clients, it is something we will continue to monitor and consider as a viable option for the future.

Frictionless alternatives
Beyond peer-to-peer currencies, there are other alternatives that remove the friction of handling physical money. Payment networks like PayPal and Apple Pay are becoming increasingly common as they embrace the growing digital fiat system. Even in third-world countries, we are seeing a growing trend toward mobile payments: M-Pesa in Africa, for example, uses mobile phones as the primary device for transferring payments and even sends money through text messages. As of 2011, M-Pesa had transferred 11 percent of Kenya’s GDP.

Carrier billing is another form of payment that connects your phone to an online account, allowing you to book a hotel room with your phone number instead of a credit card, paying for it via your phone bill. In Sweden, the Swish app, which lets people transfer money using their smartphones, has become so popular that many hail Sweden as a trailblazer for cashless societies.

The nature of money changed when it was uncoupled from tangible commodities and measured instead by government policies

Besides mobile-friendly systems, there are also corporate value currencies, which many companies have integrated into their development. Value is derived from what consumers get out of the products and services the company offers, rather than legal tender. Looking at it from a big picture perspective, it’s all part of the gamification principle – offering incentives as a way to encourage engagement – which has made a big impact both in the video gaming industry and virtual world currencies.

Games like World of Warcraft see players spend hours on end performing missions to accumulate enough virtual ‘gold’ to enhance their characters; they can eventually sell their avatars for hard currency. In 2009, this kind of ‘gold farming’ made an estimated $3bn in real-life dollars, proving that modern virtual world currencies are not to be sneezed at. If that wasn’t impressive enough, Linden Lab’s Second Life, one of the largest online gaming platforms, made an estimated $144m by the first half of 2009, surpassing no fewer than 19 countries’ GDP figures.

What it comes down to
Ever since the US left the gold standard in the 1970s, public confidence in the fiat system has dwindled, fuelled in no small part by a general mistrust of banking corporations and government-controlled mechanisms. The nature of money changed when it was uncoupled from tangible commodities and measured instead by government policies. Now it is changing once more, as money moves away from the physical world into frictionless, digitised forms.

Consumers too are rapidly doing away with paper money, transacting mostly through credit cards, mobile phones and online payments instead. That said, these systems are still chained to bank accounts – for now. Current technological trends are veering away from traditional banking systems towards a purely democratic system of decentralised currency. With security underlined by meticulously coded data and a functionality that doesn’t depend on faceless third parties, digitised currencies like bitcoin stand poised to usher in a new financial world order.

Aside from the predicaments that come from regulating these currencies, the complex nature of cryptocurrency is still its biggest hurdle, and the primary reason it hasn’t breached the mainstream just yet. Time will tell whether this technology will be able to overcome its current disadvantages, but one fact remains: the nature of money is evolving away from the physical, centralised standard we’ve all come to take for granted. We set the value that money represents, so we have the power to take that value away and place it in something else, like a chip or a code.

Ultimately, the future of money doesn’t belong to the material world of plastic and paper, but in the complex matrix of cryptographic codes, data chains and mathematical puzzles. It will not be controlled by governing bodies, but by individuals. And the future is closer than we think.

Road to recovery: Argentina’s return to international capital markets

Posted on by Max Tomlin

It has been just over a year since Argentina was able to return to global capital markets following 15 years of exclusion. The resolution was quicker than expected and well received by markets; significantly, the state’s private and public sectors embraced the new opportunities offered by global investors from the moment the announcement was made.

Today, the fruits of such a meaningful structural change are gradually starting to emerge. However, there is still so much more to come, particularly as regaining access to financing translates into a variety of investment projects across an array of sectors that are currently in great demand.

The true cost of 15 years of financial exclusion was deeply marked on all aspects of the Argentinian economy. The central government, which had been engaged in a long-standing dispute with a group of holdouts from its 2001 sovereign debt default, was simply unable to issue debt in global markets, given the numerous attachment risks involved. This kept the level of country risk high, making funding for the private and public sectors very limited and expensive. Even multilateral lending was limited against this backdrop, as Argentina was classed as a risky debtor.

Capital expenditure
During Argentina’s 15-year absence from global debt markets, limited resources were available to fund gross fixed capital formation. Confidence was low and investment was inhibited. Consequently, inflation grew, as fiscal needs had to be increasingly met by the central bank through monetary printing. This caused Argentina’s exchange rate depreciation to accelerate, which the government attempted to curb with market intervention on numerous occasions – but to little avail.

Argentina’s sharp drain in international reserves led the government to impose restrictions on imports and capital outflows in a bid to contain the devaluation of the country’s exchange rate. This meant GDP did not grow in the five years prior to regaining access to capital markets. Indeed, by 2016, real per capita GDP had fallen by six percent since 2011, the year in which capital controls were fully fledged.

70%

of Argentine infrastructure plans are intended to develop transportation links

$550bn

The size of the Argentine economy

$116bn

Value of assets declared in the 2016 tax amnesty

Fortunately, the picture today is very different. The central government is an active participant in debt markets in the US and Europe, as well as locally. It has also set fiscal targets to reduce its funding needs in the coming three years.

Significantly, the government has engaged in an aggressive public works programme, which roughly duplicates known capital expenditures. More than 70 percent of the infrastructure plans are intended to develop and improve transportation and roadways, especially around the largest manufacturing centres, which will significantly improve productivity and therefore competitiveness.

Multilateral agencies have increased the funding available to Argentina, while local governments have followed suit by showing active participation in markets, seeking funding in most cases for capital expenditures. In fact, the largest provinces are currently seeking to triplicate the money spent on public works. It is important to note that, in this changing landscape, companies have not fallen behind, having issued more than $10bn of debt already.

In all cases, financial markets have signalled confidence in the country and have generally supported debt issuances from all participants and currencies with great enthusiasm.

Investing in Argentina
Today, Argentina’s inflation rate is on the road towards deceleration. The exchange is a free float, and the country is much more open to international trade than it has been in many years. Furthermore, at the end of 2016, Argentines participated enormously in a tax amnesty that resulted in the declaration of $116bn in assets – a historic success and a potential game changer for the $550bn economy.

Argentina has become a huge opportunity for global investors seeking to do business. Though macroeconomic and political conditions have deeply improved, opportunities in the real sector are still in their early stages. The public sector is casting the first stone to kick-start production, and began to recover in the last quarter of 2016 (albeit slowly), suggesting that a much more active role from the private sector can be expected in the years to come. Undeniably, 2016 was just the beginning of a new era for the Argentinian economy.

Further info: puentenet.com

Brazilian capital markets recover after government’s economic U-turn

Posted on by World Finance

Brazil’s economy has been recently rocked by scandal after scandal. The Bovespa index had its worst day since 2008 in May 2017, when newly appointed president Michel Temer was named in yet another bribery investigation. But the story of Brazil is one of two halves, explains Huw Jenkins from Latin American investment bank BTG Pactual. The first is its recent political instability, but the second is its recovery from recession. President Temer’s new economic team and positive legislation are pushing the country back to a place where investors have confidence – and infrastructure, real estate and retail are all now seeing strong growth in activity. Watch the second half of our interview with Huw, where he dives deeper into the equity issuances and M&A activity that’s come back to Brazil in 2016-17.

World Finance: Brazil is open for business, but investors are cautious; what should they be keeping their eyes on?

Huw Jenkins: It’s been a time of very significant political instability in Brazil. And that’s clearly rocked investor confidence. So we’ve seen the impeachment of President Dilma Rousseff, and we’ve seen the allegations brought against President Michel Temer.

But I think the story of Brazil is a story of, sort of two halves. One is this political instability, and the other is recovering from a very significant recession. Which was really triggered in many ways by the policies of the previous government, which resulted in an inflated public sector, very high levels of borrowing, and therefore a very low level of confidence from foreign investors.

In a way, there’s been a sort of, strange Brazilian miracle, where we’ve had Mr Temer – who was on the same ticket as Dilma Rousseff, as the vice president – introduce a 180 degree change in government policies. So we’ve seen some very significant legislation, a fiscal responsibility law, a labour law which is significantly improved the ability for flexible labour contracts in Brazil. And generally a move towards creating a much more flexible, modern, open market economy.

So I think investors are now generally looking more at the macroeconomic fundamentals, and a little bit less at the political instability.

World Finance: How is that actually coming through in investments and in business growth?

Huw Jenkins: You know it’s interesting. I can say we certainly haven’t yet seen it in business growth. So I think one of the big challenges for this government is, can they actually deliver both economic growth and job growth before the elections in 2018? And that’ll be very important I think for setting the tone for 2018 and beyond.

But if you look at the investment side of the coin, you can see that foreign direct investment has remained very strong in Brazil. So even though they were running a current account deficit over the last three years, that’s been more than compensated by very high levels of FDI. And we continue to see that in our M&A franchise.

And then on the capital markets side, after a very quiet period in 2014 and 2015, from the second half of 2016, we’ve seen a very significant pickup in equity capital market activity.

And that was really as a result of the impeachment of Dilma Rousseff, and the introduction of the new government. So there was generally a scene of significant improvement in the macroeconomic scene.

And then secondly, inflation started to tail off. And that of course started to create the conditions for reducing interest rates. Which as we know is constructed for equity markets. So then we started to see issuance re-emerge.

World Finance: Where are we seeing that activity come back?

Huw Jenkins: So we’ve seen it in real estate, we’ve seen it in retail, in car rental, in infrastructure. Less so in finance, but I would say broadly, across the board, there’s a hunger for capital in Brazil, where balance sheets have been starved of new capital, new investment.

There are now strong investment opportunities, and a willingness to come to the markets and issue, even on what looked like reasonably low prices relative to historical price levels.

But the real shift has been the interest by international investors in Brazil. And I think with the recovery of the commodity cycle in the second half of 2016, these improvements on the macroeconomic side that I’ve described. Together with, generally, an improving emerging markets environment from about that time. International investors have started to look at Brazil again. And of course, it’s that marginal investor which dictates the price and determines the success of these transactions.

World Finance: So what should the government be looking at to make sure that this sustained interest from international investors can continue for the next few years?

Huw Jenkins: You know, I think it’s going to be a function of continuing to see the political noise decrease. There’s a very important event with the election of the next president in the fall of 2018. Continuing to see the macroeconomic numbers play out. And at some point, starting to see the conclusion of these corruption investigations.

And it feels as though the scope of these investigations are now much better understood, and we’re moving towards a resolution. So perhaps people are less anticipatory of significant shocks from these investigations.

World Finance: Huw, thank you very much.

Huw Jenkins: Thank you.

Infrastructure leads as investment activity returns to Brazil

Posted on by World Finance

Brazil’s economy is in the middle of a strange miracle, as economic stability emerges out of the recent politically tumultuous years. Latin American investment bank BTG Pactual recently acted as joint bookrunner for infrastructure company CCR, in the largest offering in Brazil since April 2015; vice chairman of the board Huw Jenkins explains what this represents about the country’s economic recovery. He also talks through other infrastructure deals with toll road operator EcoRodovias and water company Odebrecht Ambiental; as well as retailer Lojas Americanas and retail player BR Malls.

World Finance: I’m with Huw Jenkins from Latin American investment bank BTG Pactual, and we’ve been talking about how equity activity is finally back on the books for Brazil.

You recently acted as joint bookrunner for the largest offering in Brazil since April 2015 – tell me more.

Huw Jenkins: CCR is an infrastructure company focused in particular on transportation and roads. It’s been an extremely successful deployer of capital within that space in Brazil.

And I think as I mentioned earlier, with the development of a new economic paradigm – we’ve moved out of a recession, started to see some recovery, and a kind of new Brazil. If we get the wind at our back with a good election in 2018, some economic recovery, some recovery in jobs, then we could see a very attractive environment for Brazil.

And especially for an infrastructure company like CCR, which tripled its value over the last 10 years, and is in a position to capture the benefits of a declining interest rate environment, improved government regulation for concessions and infrastructure. And an improved environment internationally, in terms of the way in which investors look at Brazil.

I think that everyone’s always seen Brazil as a country that was short of capital investment. That there was insufficient roads, ports, airports, telecommunications, power generation. And therefore the opportunity to attract foreign capital, because of the relatively high returns in those sectors in Brazil, has always been strong.

World Finance: You were also involved in two large retail transactions; investors are confident this is an area of growth?

Huw Jenkins: I think you might be thinking of BR Malls and Lojas Americanas. Lojas Americanas is definitely a retailer, and clearly benefits from the view that consumer demand is recovering in Brazil, and we will see an improvement in that sector. And indeed, just in the last week we’ve seen one of the largest transactions executed in Brazil – the IPO of Carrefour Brazil. Which reinforces investor appetite for the consumer sector.

The other transaction that we were involved in – BR Malls – is more of a real estate play. Where again, people are looking to capture the benefits of a declining interest rate environment, and what that will do to real estate valuations and the valuations for BR Malls.

World Finance: You’ve also enjoyed strong momentum in your M&A activity in the last couple of years; what have been the most interesting transactions you’ve been part of?

Huw Jenkins: BTG Pactual as a domestic player tends to focus on advising domestic companies that are looking for international buyers. So we advised Odebrecht Ambiental, the major water company in Brazil, which wound up being acquired by Brookfield of Canada, an infrastructure investor.

We acted for EcoRodovias, which is another toll road operator in Brazil, which we sold to Gavio, the Italian operator. And that’s another example of the interest in the infrastructure sector.

We’ve also been involved in transactions in other sectors: real estate and healthcare. But probably still I would say the strongest interest is in infrastructure.

World Finance: What would you see as the future for investment in Brazil?

Huw Jenkins: Having gone through a period – perhaps 10 years ago – where people were over-optimistic, people then became extremely pessimistic. And somebody once told me a story about Brazil, and said something along the lines of, ‘It’s never as good as they tell you, and it’s never as bad as they tell you.’

And I think Brazil is now entering a phase where, it’s going to surprise to the upside. Even though there’s been this political uncertainty. As I mentioned before there’s been this kind of strange miracle, where we’ve wound up passing some very constructive legislation, despite the weakness of the political groups in Brazil. And I think that lays the foundations for the fundamentals of very strong resources base, very large and growing population, relatively underlevered economy where there’s relatively low levels of domestic credit penetration. All of that I think can produce very attractive returns for investors over the next five, 10 years.

World Finance: Huw, thank you very much.

Huw Jenkins: Thank you.

Prima AFP: Peruvian workers find saving grace in private pension market

Posted on by Max Tomlin

Despite their country boasting an efficient and comprehensive benefits system, many Peruvians continue to work outside the bounds of a state pension. Almost 70 percent of the Peruvian workforce still operates entirely on an informal basis; ineligible to receive the benefits afforded to those in more conventional workplaces.

While efforts to formalise the workforce are underway, Peru’s evolving private pension market has offered financial relief to millions of informal workers across the country. As many continue – and will continue – to operate outside the realms of the formal marketplace, Prima AFP is leveraging new platforms to provide coverage to a whole host of new and existing customers, all the while educating the masses on the often confusing practices found in the country’s private pension system.

World Finance spoke to Renzo Ricci, CEO of Prima AFP, to find out more about the challenges facing the Peruvian market, and the steps Prima AFP is taking to ensure a brighter future for Peruvian workers.

What’s in store for Prima AFP in 2017?
This year has presented a new and exciting challenge for Prima AFP. Having won the latest tender from the Peruvian pension system, we will be responsible for affiliating all workers entering the formal marketplace from the beginning of June 2017 until the end of May 2019.

What can new customers expect from Prima AFP?
Here at Prima AFP, we are always trying to exceed the expectations of our customers, providing true value and accommodating each customer’s bespoke needs. Each new and existing customer can expect to benefit from excellent profitability in the long term, receiving support from Grupo Credito, an institution with over 127 years of experience, and gaining value from our personalised advice. On top of this, our customers will benefit from the lowest commission rate in the market as of June this year.

The positive customer experience we provide is reflected in the numbers: in 2016, our offering had a higher preference rate among customers than any other pension provider operating in the private pension market. This resulted in Prima AFP taking positive net flows of close to 18,000 people last year. Further, our customer experience meant we ended 2016 with a 54 percent share of the voluntary savings market, with this share growing seven percent in the last year alone.

What progress have you made regarding virtual platforms? And what measures have you implemented in response to the digitalisation of information channels?
This year we will be implementing a series of innovations around our digital channels. As more and more users engage with our products via their smartphones, we have increasingly made use of Facebook Live. By communicating with customers and prospective customers through this channel, we have been able to answer the questions of a wider audience, eradicating common doubts and resolving a variety of issues.

The main issue with the Peruvian pension system is that it only caters to those working in formal employment, leaving millions of Peruvians with very little
or no pension at all

It is important to note that we have the largest number of Facebook followers of any pension provider in Peru, boasting 750,000 to date. In order to make the most of our online presence, we have made a commitment to provide our followers with valuable and interesting content on a regular basis. This content primarily centres on three key areas: education, inspiration and utility.

As well as exploring new channels, we have sought to renew and upgrade our existing digital platforms, paying particular attention to our advisory telephone platform. We are working to ensure we can interact with our customers as efficiently as possible, and through a variety of mediums.

All customers interact in their own way, so operating across multiple channels is extremely important. It is because of this that we will continue to provide new technologies and services to as many customers as possible. Digital platforms are continuously evolving and, as with any business, we must evolve in tandem if we are to address the needs of the market effectively.

What is the biggest problem facing the Peruvian pension system?
The main issue with the Peruvian pension system is that it only caters to those working in formal employment. As a country, Peru has a predominantly informal workforce, with 70 percent of the population working outside the formal economy. As a result, you have millions of Peruvians with very little or no pension in place.

While the government is trying to formalise employment, there is no indication as to when this can be achieved and to what scale. Therefore, it is important to provide a flexible alternative to those currently without any coverage. In this vein, we believe it is important to continue to increase pensions, invest in flexible policies and diversify our offering, ultimately providing our customers with better returns in exchange for less risk.

In order to do this we need to create a savings culture, one that consciously addresses the need to prepare for the risk of longevity. It is essential to understand that, in the majority of cases, the fund grows not only as a result of the profitability of Prima AFP, but as a reflection of the affiliates contributions, both in frequency and size. This means investor confidence is key, and is the reason we are keen to work with the government to improve the current system.

What has been done in recent years to deal with the problems of the private pension system?
Our research studies have shown that one of the key problems within the private pension system is the language. Both clients and the wider population often perceive the language used by pension providers to be extremely complex, and become deterred as a result.

This is why we have developed the Let’s Talk Easy initiative. Let’s Talk Easy aims to educate our clients about our services using a simple and straightforward narrative. As a market leader, we have a responsibility to educate not only our affiliates, but also the population as a whole. Whether we are communicating via radio, social media or any other platform, we hope to broaden our audience’s understanding of the private pension system and the products that accompany it.

70%

of the Peruvian workforce is still in informal employment

54%

Prima AFP’s share of the voluntary savings market

In order to ensure Let’s Talk Easy is a success, we are conducting a number of qualitative studies to assess our communications in both content and form. We want all of Prima AFP’s communications to reflect our straight-talking strategy, thereby providing customers of all ages and backgrounds with interesting and relevant content in a clear and coherent manner.

President Pedro Pablo Kuczynski’s administration has promised reform – what will he do to contribute to the development of the system?
We have very high expectations for the reform being promised by President Kuczynski’s administration. Here at Prima AFP, we believe a comprehensive reform of the pension system is vital to the success of our industry, but any reform must also consider the state system.

We have already suggested some initiatives to the reform committee – known as the Reform Technical Commission – to ensure affiliates remain the beneficiaries of any changes to the system. It is fundamental that all of these improvements are geared towards ensuring a dignified retirement for the greatest number of employees across Peru. It is of national interest that people who end their working lives do not have to depend solely on their family or the state.

How much importance do you place on social responsibility?
To put it simply: a lot. Prima AFP has always put corporate social responsibility at the core of its operations and that is definitely no different in 2017. Last year, we decided to redefine our social responsibility strategy and, after an exchange of ideas between the main leaders of the organisation and those who had been involved in various sustainability activities in the past, we settled on three main pillars we consider to be of the utmost importance.

Our primary goal, as always, is to ensure that every worker has something to fall back on when they decide to leave the world of work. Continuing to live with dignity in the third stage of life should be the norm and not the exception.

Second, we aim to cultivate Peruvian culture and bring people together through a number of communal activities. We try to bring Prima AFP’s culture to the world, and connect people from a variety of backgrounds.

Our final pillar focuses on responsible investment. Last year, we developed the Programme of Responsible Investment, which took a fresh look at our strategy and outlined the key criteria we hoped to address with each and every investment. Our decision-making processes ensure each investment is not only beneficial in terms of profitability, credit and risk, but also ethical, social, environmental and adhering to corporate governance.

There is quantifiable evidence outlining the positive correlation between a company’s responsible investment and its profitability. To ignore any one of these pillars in our modern society is to risk the longevity of a business. While social responsibility can be costly in the short term, the long-term benefits are undeniable, and provide a platform for both the business and the society around it.

First Bank: Feeding Nigeria’s 200 million people will be huge business

Posted on by World Finance

Nigeria imports nearly a shipload of rice every week. But it is one of the most agriculturally fertile countries in Africa. The challenge, says First Bank of Nigeria MD and CEO Dr Adesola Adeduntan, is that the land is used by subsistence farmers, and is yet to be fully commercialised. He explains the work First Bank is doing in this sector, including helping farmers to form cooperatives in order to finance the right agricultural inputs and equipment. The potential of a food-secure Nigeria is huge. This is the second half of our interview with Dr Adeduntan; in the first half he discusses Nigeria’s general business outlook and First Bank’s financial inclusion targets.

World Finance: I’m with Dr Adesola Adeduntan, managing director and CEO of First Bank of Nigeria, and we’re discussing the country’s agricultural sector.

How is agriculture changing in Nigeria, and what’s driving it?

Dr Adesola Adeduntan: Agriculture has always been a key component of our GDP. What hasn’t happened is to transition agriculture from subsistence farming to commercial farming.

We import, I think, a shipload of rice almost every week. And for every shipload of rice imported to Nigeria, it’s costing us about 15,000 jobs.

Importation of foodstuff into Nigeria is one of the biggest consumers of our hard-earned foreign currency. A country should, give or take, be able to feed itself. Especially a country that is as endowed as Nigeria.

So that is actually the revolution that is ongoing now: so that we begin to have agricultural enterprises that have the required skill to be able to compete globally.

As a country it’s an area we must get right.

World Finance: What’s been the economic impact of Nigeria importing a significant portion of its food up until now? And what would be the benefits of that improved food security?

Dr Adesola Adeduntan: Nigeria today is a country of almost 200 million people, so the business of feeding our people alone is a big business.

If we can grow our own food – over and above the security that that provides – the savings in terms of foreign currency could be very significant.

Indeed, it will help us to generate foreign currency, because there’s a renewed focus on crops that we can export – and we use that to generate export proceeds.

It also helps us to address the issue of youth unemployment. If you commercialise agriculture, and we can get more and more youth into that sector of the economy, then we address the issue of unemployment.

So the benefit of getting agriculture right cannot be underestimated.

World Finance: Tell me more about the work you’re doing in agriculture: what kind of support are you offering specifically in this sector?

Dr Adesola Adeduntan: Over and above making loans available, we have what we call the Outgrower Scheme, where farmers are basically arranged or organised into small groups, and we provide financing to them. And there’s an off-taker who takes their produce off them. So that way the risk of default is minimised.

So we provide financing targeted at helping them to source the right seed, the right fertiliser, the right equipment.

We’re also supporting the large-scale producers – especially those who are in the value-adding section of the agric chain.

We partnered with the Federal Ministry of Finance to organise an Agric Expo, that brought together key players in the agriculture value chain, where we discussed how would the country sustain the current development that we are beginning to see in agriculture. Agriculture should be the biggest economy in Nigeria: with a population of about 200 million people, huge arable land; with the right policy, with the right type of financing, agriculture and the business of just feeding 200 million people will be a massive, massive business.

So we are focusing our energy, and we are developing the right products, we are developing the right services, to ensure that we support the agricultural value chain.

World Finance: Dr Adeduntan, thank you very much.

Dr Adesola Adeduntan: Thank you.

First Bank of Nigeria targets 30m customers in financial inclusion drive

Posted on by World Finance

Nigeria’s economy has been severely punished by the ongoing slump in oil prices: crude sales make up more than 90 percent of the country’s export earnings. In a global economy of continuing uncertainty and dramatic change, what does the future hold for Nigeria? Dr Adesola Adeduntan, MD and CEO of First Bank of Nigeria, explains how the business is helping the country grow. Watch the second half of our conversation with Dr Adeduntan, about the huge growth potential for Nigeria’s agricultural industries.

World Finance: What’s First Bank’s global business outlook for 2017?

Dr Adesola Adeduntan: At First Bank, overall we are cautiously optimistic. We keep on focusing on development in the economy of the US, given the impact that it has on the global economy.

The Chinese economy is another economy of interest to us in Africa, given the fact that China is a major importer of commodities, and most of the economies in Africa are commodity dependent.

As you rightly highlighted, Nigeria is an oil-dependent country. What has happened in the course of 2016 is that the price of crude oil has relatively stabilised around $50 to a barrel. The level of production has also gone up. And we’re already beginning to see the impact of these two fundamental changes in the quantum of foreign currency that is available to fund growth in the economy.

So, when you look at where we are today as a country, and we look at where we were in 2016, generally we are more positive about the trajectory in which the economy is growing. And for us as First Bank, the largest financial institution in the country, we are fully embedded in the economy of Nigeria.

For First Bank it is not just about profitability; it’s also about supporting growth, the general growth, in the economy.

World Finance: You describe First Bank as being really embedded in the Nigerian economy; as the Nigerian economy continues to grow, how are you going to ensure that First Bank’s growth matches or exceeds that?

Dr Adesola Adeduntan: As we move into the execution phase of our current business strategy, it’s about financial inclusion, it’s about leveraging technology to pull more people into the banking segment.

So, we do have this very ambitious plan to grow the number of customer accounts from where it is today – about 14.5 million customer accounts – we plan to grow that to about 30 million customer accounts in the course of three to four years.

We have the largest branch network – in excess of 750 branches. We also have the largest number of ATMs. We have the largest customer base. We have the largest number of subscribers. So, we are fully embedded into the economy.

We have identified the growth areas that are priority to the government, and we are giving very targeted support into those areas. So, SMEs for example is an area we have always focused on. We are the biggest lenders to SMEs in the country, and that continues to be an area of focus.

World Finance: With the largest branch network in Nigeria, how are you keeping costs efficient?

Dr Adesola Adeduntan: We set ourselves a very ambitious cost-to-income ratio target, and within one year of implementing our strategy, we’re actually number two in terms of cost-to-income ratio.

Over the next 24 months, we will centralise transaction processing in a single location. We will standardise processing in that single location. It’s expected to enhance the quality and the strength of our culture and environment.

Our cost to serve is expected to come down. And when our cost to serve comes down, that means more value will trickle down to the bottom line for our shareholders.

World Finance: And how are you maintaining a sustainable capital adequacy ratio?

Dr Adesola Adeduntan: We continuously evaluate our capital position. We evaluate our business plan, and our business development, and we ensure that both go hand in hand.

So with that process – which is being handled at the very senior level of our institution – our capital is continuously monitored and managed.

World Finance: So the future for First Bank: optimised and optimistic.

Dr Adesola Adeduntan: The future is very, very bright. With all the changes that we’re making, we see significant enhancement of our values over the next three years. And for our investors and our key stakeholders, it can only be positive for them.

World Finance: Dr Adeduntan, thank you very much.

Dr Adesola Adeduntan: Thank you.

Iceland’s booming tourism sector provides the perfect platform for international investors

Posted on by Max Tomlin

The 2008 financial crisis had a devastating and profound impact on Iceland’s economy. But, through a series of instrumental changes, the economy has become well balanced, and now boasts a current account surplus. In fact, for the first time in its history, Iceland has more assets abroad than liabilities.

As such, the foundations of the Icelandic economy are stronger than ever. The collapse of Iceland’s national currency, the krona, in 2008 has made Iceland’s export sector more competitive. This, among a number of other factors, provided the platform for the substantial growth currently being experienced by the tourism sector: in 2017, 2.2 million tourists are expected to visit Iceland, compared to just 500,000 in 2007.

This boom in visitors has led tourism to become the fourth pillar of the economy, joining the fishing industry, energy market and international sector (Icelandic companies operating in foreign markets) as a key driver of Icelandic growth.

World Finance spoke to Sigurður Hannesson, Managing Director of Asset Management at Kvika Banki, about Iceland’s phenomenal economic recovery and the bank’s strategy in light of the country’s impressive variety of investment opportunities.

How did Iceland deal with the crash differently to the other countries affected?
Unlike the states of many other countries, the Icelandic authorities didn’t have the resources to bail out the banks during the 2008 crisis, so had to find an alternative solution. In this respect, there were three key decisions that set Iceland apart.

First, the sovereign was ringfenced and the state refused to take on private debt. The legislation was then altered to prioritise deposits over any state funding for the banks. This was an important move as it kept the payment system operational.

After eight years of strict capital controls, businesses
and residents are finally allowed to invest abroad

Third, capital controls were imposed in order to protect the overhang of capital that would have otherwise left the country. Without the introduction of capital controls in 2008, there would have been an even greater drop in the local currency and Iceland would have slipped into an even deeper crisis. Most of these capital controls have now been lifted, and will, hopefully, be abolished completely in the next couple of years.

What has spurred Iceland’s impressive economic recovery?
While the growth of tourism has been a significant driver of Iceland’s economic recovery, recent policy measures have also contributed enormously. This includes the government-initiated programme of household debt reduction, which was designed to stimulate a previously frozen housing market and reduce household debt. As a result, household debt is now just 77 percent of GDP, down significantly from its peak of 124 percent in 2009.

Further, investments have also started to pick up, and demand in the housing market rose in 2013 after a five-year freeze. Supply is still lagging behind the rise in demand, but a greater balance is expected by 2020.

With capital controls helping to provide economic stability, how was the government able to abolish them?
There were two legacy issues that had to be resolved in order for the government to lift the capital controls imposed on residents and businesses. First, the failed banks had to acknowledge the economic situation and fulfil the stability conditions imposed by Icelandic authorities. Fortunately, all failed estates accepted these new conditions, paving the way for the controls to be lifted.

The other legacy issue was the so-called offshore krona: the leftovers of the carry trade that took place between 2004 and 2007 when Icelandic policy rates reached a peak of 18 percent. The outflow stemming from this offshore krona had to be organised in order to prevent further shocks.

Once these legacy issues had been dealt with, the government was able to issue allowances for foreign investments. In 2015, pension funds were allowed to invest abroad for the first time since 2008. By 2016, limitations had been decreased significantly, and they now function without limits.

Today, foreign assets account for approximately 20 percent of the pension fund’s portfolio, and this is expected to grow in the future. After eight years of strict capital controls, residents are finally allowed to invest abroad.

What impact has the abolition of capital controls had on Iceland’s economy?
Since the government abolished capital controls, Iceland has been on a steady growth path. In March, S&P raised Iceland’s credit rating to A/A-1 – up from BBB- in 2015 – and the CDS spread on government bonds dropped from 160bp at the beginning of 2015 to 90bp at the close of 2016. Further, the central bank’s policy rates have dropped and the domestic equity market has increased by 39 percent in the past two years. Investment has also picked up after a few underwhelming years.

Despite experiencing an enormous economic growth of 7.2 percent in 2016, inflation is below the central bank’s target of 2.5 percent. In fact, inflation has been low for the longest consecutive period in decades.

500,000

Number of tourists recorded in 2007

2.2m

Tourists expected to visit in 2017

124%

Household debt as a percentage of Iceland’s GDP in 2009

77%

Household debt as a percentage of Iceland’s GDP in 2017

In terms of the national currency, the Icelandic krona has strengthened significantly since foreign investment picked up. The attention was originally on low risk assets like government bonds, but recently this focus has shifted to listed and private equity.

What are the greatest opportunities now offered by the Icelandic economy?
With healthy growth and a well-balanced economy, there are numerous opportunities related to equities and real estate in Iceland. As Iceland has been isolated for eight years, there are so many opportunities for local companies to grow abroad. This can explain the large increase in mergers and acquisitions of late, with Kvika playing an advisory role in many large deals involving foreign investors in 2016.

And what are the risks?
With so much growth in tourism and an uptick in investments, the labour market is becoming a concern. Wages have risen significantly in the past few years, so a new policy is being implemented to strengthen the framework around wage bargaining. If this policy works, it will reduce the risks significantly.

Further, while housing prices have not returned to their former levels in real terms, demand is currently far greater than supply. However, with thousands of homes being built in the next three years, the housing market is expected to reach a balance in 2020.

What impact has this transition had on Kvika?
Kvika had an exceptional year in 2016, generating approximately 35 percent ROE. More or less all areas of the business did well, and the outlook for this year is quite positive. At present, there’s great interest in investing in Iceland, and a good proportion of this foreign investment goes through Kvika. We expect this to continue this year.

With an ever-growing client base, Kvika has experienced steady growth over the last few years. Capital controls had capped a lot of our economic potential, but we are no longer held by such limitations, and expect this growth to continue.

Residents and Icelandic businesses are now able to invest in international markets, and we were well prepared for this change. Together with our partners abroad, we provide comprehensive services in all major asset classes and major markets around the world.

Specifically, how has this influenced your investment strategy?
Kvika has a long history in foreign financial markets. Since 2004, Kvika and its predecessors have offered services to foreign markets via our extensive network of large international financial institutions. For example, Kvika offers a variety of asset classes and managed accounts services around the world. This includes asset allocation in line with a client’s risk profile and fund selection. The service also offers a full range of all asset classes and strategies in foreign markets.

As soon as the capital controls were lifted, Kvika started diversifying its portfolios, investing in international markets in order to reduce risk. With a clear strategy in place, we believe the risk-adjusted returns will continue to be enhanced, while currency risk and geographical risk will be significantly reduced, resulting in stronger risk-adjusted performance.

Initially, we focused on global investment strategies, but we have been widening our scope in recent months. In that respect, Kvika has extended its product offerings in foreign markets by cooperating with more international asset managers. Thus, Kvika can access the whole universe of investment opportunities and researchers in international markets.

We have further reorganised our international product offerings in response to the continuous changes and challenges in the marketplace, as well as to meet our clients’ requirements. Nowadays, more emphasis has been placed on equities, corporate bonds and alternative investments, such as private equity and real estate.

What does Kvika have planned for the future?
As the only investment bank in Iceland – and the only bank the government does not hold a stake in – we want to grow and expand our platform to provide our clients with a superior service, as well as exceptional investment opportunities.

Although Kvika doesn’t have a physical presence outside Iceland, the bank does do business abroad and caters to international clients. There are definitely exciting times ahead in Iceland: the country has numerous investment opportunities capable of attracting investors and local companies can now broaden their base to reach new markets abroad. For these, and others, Kvika is ready to act.