Year: 2019

Andrea Orcel: the shark of global finance

Posted on by Max Tomlin

From his lauded polyglotism to his well-known proclivity for silk Salvatore Ferragamo ties, there has always been a touch of the celebrity about Andrea Orcel. In the same way that Hollywood actors are asked about their punishing training regimes or ‘who they’re wearing’, the 55-year-old Italian investment banker inspires a similar sort of almost reverential reaction.

Orcel’s character and personality traits have always been closely entwined with his illustrious career

Likewise, Orcel’s character and personality traits have always been closely entwined with his illustrious career. Described alternately as charming and brutal, dashing and determined, Orcel’s dapper appearance belies a bullish and aggressive dealmaker who is constantly in search of greater profits.

This drive sent him soaring to lofty heights within the investment banking sector, where his renowned negotiation skills were rewarded with prestigious positions and hefty pay packets. In September, he got his hands on the top job at Santander. However, it was snatched from his grasp at the last minute due to his €50m ($56.7m) price tag. For the first time in his career, Andrea Orcel was just not worth the cash.

Road to the top
Born in Italy in 1963, Orcel’s interest in investment banking was reportedly sparked by a report on mergers and acquisitions that he read while on holiday in the US at the age of 18. He studied economics and commerce at the Sapienza University of Rome, from which he graduated summa cum laude, before going on to study for an MBA at the prestigious INSEAD business school. After graduating, he cut his teeth at Goldman Sachs and Boston Consulting Group, before joining Merrill Lynch in 1992. It was there that the semi-mythical reverence around his dealmaking capabilities began to rear its head.

$24bn

Value of the merger between Credito Italiano and Unicredito, which Orcel advised on in 1998

$11bn

Value of the merger between Banco Bilbao Vizcaya and Argentaria, which Orcel led in 1999

$34m

Orcel’s bonus from Merrill Lynch in 2008

$26m

Fee paid by UBS to lure Orcel away from Merrill Lynch in 2012

$56.7m

Orcel’s severance package, which Santander ultimately declined to pay

His first big break came in 1998, when he was an advisor on the merger between Credito Italiano and Unicredito. The €21.2bn ($24bn) deal created Italy’s largest bank, and Orcel made such a good impression that he was allegedly later asked to run the newly created institution. By then, though, he’d been bitten by the dealmaking bug. The following year, Orcel personally closed the €11bn ($12.5bn) merger of Banco Bilbao Vizcaya and Argentaria – a deal that not only created Spain’s second-largest bank, but also reserved Orcel a seat at the table for financial royalty.

His sharp mind, strategic approach and unrivalled passion for the game caught the eye of Emilio Botín, the then-chairman of the Santander Group, who asked Orcel to advise on the bank’s full acquisition of British subsidiary Abbey National in 2004. This sparked a friendship that would burn bright until Botín’s death in 2014; the duo grew particularly close when working on Santander’s acquisition of Sovereign Bank in 2009. At the time, it was reported that Botín would send hand-written notes to Orcel after each agreement was signed, presumably to thank him for his work.

In 2007, Orcel was tapped by the Royal Bank of Scotland to work on its ill-fated acquisition of ABN AMRO, which – at $55m – was the largest deal in history at the time. When it seemed as though the whole thing might be going up in smoke, Orcel snatched the deal from the flames by bringing in Fortis and Santander to execute a three-way consortium bid. He was lauded for his quick thinking, receiving a healthy $12m in advisory fees.

Orcel – who was unavailable for comment after being contacted by World Finance – has, ironically, sparked outrage on a number of occasions with regards to the enormity of his compensation. At the height of the 2008 financial crisis, he was paid a whopping $34m bonus, despite the fact that Merrill Lynch had racked up net losses of $27bn that year and had to be bailed out by taxpayers. The payout was so obscene that Orcel was investigated by the New York Attorney General, while Institutional Investor branded him “one of the most controversial figures of the financial crisis”. Just four years later, Orcel’s lucky day came once again when he was paid $26m by UBS to lure him away from Merrill Lynch amid its merger with Bank of America. At the time, he was labelled by friends as the “last of the Mohicans”, being the last in a breed of highly compensated senior bankers, the rest of whom were phased out amid the 2008 crash.

Dark side
It’s not solely Orcel’s extortionate pay packets that have troubled his contemporaries. His fiery temperament, hard-line management style and obsession with returns is well documented, particularly by colleagues at UBS. According to an investigation conducted by Financial News in October 2018, Orcel’s tenure at the Swiss investment bank has been marked by a series of heated clashes with other senior members of staff, where the hotheaded Italian allowed his temper to get the better of him.

Honouring Orcel’s salary demands may have knocked Santander back in the lengthy process to regain the public’s trust 

He’s been known to embark upon screaming tirades against other executives that have continued long after his targets have left the room – part of a “pattern of aggressive behaviour”, the report concluded. Other profiles by publications including the Financial Times have alleged that he begins calling and sending emails to junior employees at around 5am and often does not let up until after midnight. In 2013, when a Bank of America intern died after he was said to have worked for 72 hours straight, Orcel rebuked pressure to change the working hours of junior bankers. He told the Financial Times that when new recruits asked him whether he would enforce a minimum number of holidays, or ban them from working weekends, his “answer to this was no”.

Orcel’s temperament was particularly evident during Accelerate, UBS’ five-year transformation plan to streamline its business, over which he presided between 2012 and 2017. He was personally responsible for firing thousands of employees, which he allegedly did by simply disabling their access cards to the UBS building. In the midst of this aggressive restructuring, though, Orcel’s personal wealth pile grew ever larger: in May 2015, he was the highest-earning executive at UBS, taking home $8m in base salary alone.

These controversial personality traits inspired admiration from some and aversion from others. Many interviewees, who have spoken to publications such as Financial News and the Financial Times over the years on the condition of anonymity, have agreed that management is not Orcel’s forte. He himself has said that he detests having to worry about costs, capital ratios and staff conciliation, or being a “beancounter”, as he called it. One UBS employee described him as “uniquely talented” but “singularly unsuited” for the CEO role at Santander.

Public relations
His love affair with dealmaking – and seeming obsession with the thrill of the chase – meant that his appointment to the CEO role at Santander came as something of a surprise for the investment banking industry. Many had assumed that he would succeed Sergio Ermotti as the chief executive of UBS – Orcel even joked of that himself in an interview with the Financial Times in 2015. Given his competitive nature, it seemed like a more natural choice for him to remain within the dealmaking sector of the industry, which has historically been known for its bullish environment, governed by macho bravado.

Perhaps his decision to jump ship was driven by impatience. After all, Orcel had spent much of his 30-year career orchestrating deals for banking titans – it’s unsurprising that he leapt at the chance to become one himself. There’s also the emotional aspect of his attachment to Santander, precipitated by his relationship with Botín: to have occupied the seat of his departed friend must have felt like coming home.

Alas, the opportunity was dashed for the sake of a few dollar signs. Some have suggested that Orcel’s €50m ($56.7m) severance pay packet would have not have been so problematic had he chosen to move to another investment bank. But Santander, being a retail institution, has a duty to justify its spending decisions, and the board felt that its customers simply wouldn’t stomach such a large cheque. A decade may have elapsed since the financial crash, but faith in financial institutions is still very much in recovery mode, and honouring Orcel’s salary demands may have knocked Santander back a few steps in the lengthy process of regaining the public’s trust.

The future now looks a little shaky for Orcel; at the time of World Finance going to print, reports suggest he is weighing the merits of taking legal action against Santander. Meanwhile, it appears that any chance of reconciliation between Orcel and UBS is firmly off the cards, with Ermotti telling Reuters in late January that a return by Orcel was not a “realistic option”. The Italian banker now faces a choice: further destroy what remains of his relationship with Santander and the ruling Botín family, or accept that tending to his garden is not simply a stopgap between high-profile roles, but a retirement plan.

Turks and Caicos offers investors tax neutrality and quality of life

Posted on by World Finance

The Turks and Caicos Islands has committed to revitalising its financial services sector. It’s been one year since the islands’ updated National Investment Policy was approved, outlining key development priorities to maintain a dynamic, growing economy. James Bursey, CEO of Invest Turks & Caicos, and David Stewart, President of the islands’ Finance Industry Association, discuss the opportunities for investment on the islands, what makes Turks and Caicos an attractive jurisdiction for establishing a business, and their ambitions for financial services.

World Finance: The Turks and Caicos Islands has committed to revitalising its financial services sector. It’s been one year since the islands’ updated National Investment Policy was approved, outlining key development priorities to maintain a dynamic, growing economy. James Bursey is CEO of Invest Turks & Caicos, and David Stewart is the President of the Finance Industry Association.

David – what opportunities are there for financial services investors on the islands?

David Stewart: Turks and Caicos is a five-star jurisdiction and resort. We have a substantial population of ultra-high-net-worth visitors and residents; so there is a lot of opportunity in relation to trust, fiduciary, asset management, international wealth management and financial services for individuals.

We also have a strong reputation for our mid-market captive insurance industry, which mostly faces the US market. And I would say we’ve got an experienced regulatory environment – accounting, banking environment – that’s used to working with captive insurers. So that is another major opportunity.

But more broadly, we’re a wonderful place to live and work. And we want to attract a broad church of financial services businesses to consider the Turks and Caicos as the place to locate for their next opening.

James Bursey: The third pillar of the financial service industry of course is – banking. We have three Canadian banks already there. And we’re discussing with European, US and Asian banks. And I hope by the end of the next 12 months we’re going to have three more resident on the islands. So it’s a great place from which to locate a bank.

World Finance: What are the benefits of establishing a business on the Turks and Caicos?

James Bursey: First and foremost it’s a beautiful place to be. I get up with the sun, I can go for a walk on the beach – try doing that in London or New York.

So if that’s the kind of lifestyle you want, that’s a start.

Second thing is of course, we’re very closely located, and very easily accessible, to the whole of North America. But most importantly it is a great place to work. We have an environment where people know each other; but we also have a lot of people who pass through on vacation, or to monitor their investments – which is an opportunity to meet people that you often in larger financial centres don’t get.

David Stewart: And I think it’s a wonderful place to live if you’re internationally mobile, which lots of families are. You can be in New York in two hours and 50 minutes daily, and Florida eight times a day. Quality of life is very good – schools, shops, restaurants, the beaches – commuting time never more than 20 minutes, no matter where you are; and there’s no traffic jams. All of these things are tremendously attractive if, like me, you’ve lived and worked in big cities for most of your career.

World Finance: Sounds idyllic; what’s the path to incorporation for businesses?

James Bursey: It’s actually very simple. Primarily you could do it yourself, but I would frankly recommend: get a local lawyer whom you like, and let them do the paperwork. It’s about $2,000-2,500 depending on who you work with. Incorporation’s straightforward and simple. And you get your paperwork in less than two weeks. Not quite as fast as you are online, but: sit back and enjoy the beach, or just start building your next business.

David Stewart: But we are in the midst of digitising our company registry. So within a year we will have online incorporation, online certificates of incumbency and all of the other corporate paperwork. And I think that the other opportunity – particularly in preferred sectors like financial services – is that there are concessions and development incentives which are available on a case-by-case basis, which offer significant value to investors, in terms of a guaranteed immigration, guaranteed concessions on expenditure, and other concessions which people would find valuable.

World Finance: How else does Invest Turks and Caicos work with investors to match them up with opportunities on the islands?

James Bursey: Well for instance, I’ll be very specific on a case we have right now. We had a developer who came in, wanted to get into the islands – hadn’t been there before. And had a project that we liked a lot, and they were short of total capital.

So our organisation, we went with them off-island, to primarily North America. We arranged for the subsequent capitalisation that they required. And now they are able to proceed – we’re now at the point where we will be writing that development agreement – and they will be able to proceed fully funded. So that’s the kind of help that our organisation gives.

Conversely, we do a match-making service where we keep a list of organisations or individuals who want to invest in projects, but don’t have the time to go and suss them out themselves. So we do that match-making service.

So again: financial assistance, match-making, working through government regulation. That’s what we do.

World Finance: Finally David – you seem to have incredible ambitions for financial services on the islands – where do you want to see the industry in the next five to 10 years?

David Stewart: So right now the Turks and Caicos is a minnow – it’s a tiny, tiny market.

I would like to see the Turks and Caicos grow in a sensible, proportionate way. Focusing on its key, distinguishing factors which are: ultra-high-net-worth families, multi-family offices, trustees and fiduciaries on the one hand; and captive insurance on the other.

It doesn’t mean I’m not going to be hugely encouraging of fund management or any other clean, compliant, transparent, international financial services business.

The international financial services environment at the moment is a very challenged, very interesting one. But I believe that tax neutral jurisdictions – the aggregation of capital for international investment – is something that in a proper, compliant, and transparent way – properly regulated – is going to go from strength to strength. And I believe that the Turks and Caicos has a real role to play in that industry. And I look forward to seeing it grow.

World Finance: We’ll look forward to that as well. James, David: thank you very much.

James Bursey, David Stewart: Thank you.

Thanks for watching. Learn more at investturksandcaicos.tc, and please subscribe for the latest international business insights from worldfinance.com

The dollar’s stability appears illusory as tumult abounds in currency markets

Posted on by Max Tomlin

After a turbulent end to 2018, the New Year has gotten off to an equally volatile start. A ‘flash crash’ greeted investors in the first two days of trading, but since then, some of the pessimism surrounding the outlook for world growth has lessened. While 2018 was all about the US dollar, the greenback got off to a softer start in 2019 as expectations of further rate hikes by the Federal Reserve faded. But as predictions of a dollar downtrend start to gather, there is little on the horizon that bodes well for other currencies: a slowing US economy could still outrun its peers, albeit negligibly, which would keep any sell-off well contained.

Political gridlock in Washington and the constant threat of government shutdowns could haunt the US currency

Following a year of broad dollar strength – due to widening interest rate differentials, a booming US economy, and investors seeking the reserve currency’s safety amid global trade tensions – the risks surrounding the greenback in 2019 appear to be subsiding. The Fed is now approaching – or has arguably already reached – terminal rates, at a time when most other central banks are preparing to start their own tightening cycles. Hence, the monetary policy divergence theme may have largely run its course, and the dollar’s carry appeal could gradually lessen.

Separately, although markets have turned a blind eye lately, investor concerns about the twin fiscal and current account deficits could return, especially if the economy slows more sharply than anticipated and the higher tariffs have no impact in narrowing the huge trade deficit with China. Political gridlock in Washington and the constant threat of government shutdowns could also haunt the US currency.

However, there are also upside risks. Any further deterioration in US-China trade relations may in fact see the dollar attract fresh safe-haven bids. Likewise, if Congress agrees on a massive infrastructure programme that has the potential to boost growth and inflation, it would be a game-changer.

Risks to recovery
Despite starting 2018 on a strong note, the euro’s gains quickly evaporated, and the currency closed the year much lower amid cautious forward guidance by the European Central Bank (ECB) regarding Italian and Brexit risks, as well as global trade worries. While things currently don’t look good for the common currency, better days may lie ahead. The Italian financial crisis seems to have subsided and, more importantly, the ECB is preparing to lift rates sometime after the summer.

Markets still haven’t priced in much tightening by the ECB. This suggests the euro has lots of room to run higher if economic growth picks up some steam and allows it to take the next step, especially since the Fed will be near so-called peak rates by then. A potential euro comeback may also be amplified by an unwinding of heavy speculative net short positions. The obvious risk is that growth doesn’t recover, leading the ECB to delay or even abandon its tightening plans. A disorderly Brexit could also derail any euro rebound.

Meanwhile, for the Swiss franc, the most important drivers will be the Swiss National Bank’s (SNB) policy stance and safe-haven flows. The SNB seems unlikely to risk making a hawkish turn anytime soon: Swiss data continues to tread water and the bank will probably want to avoid tightening its policy before the ECB does, for fear of a drastic franc appreciation. Hence, aside from some major deterioration in risk sentiment that generates haven demand for the Swiss currency, (in particular, from a resurfacing of the Italian budget row or a new political headache from another eurozone member), the risks surrounding the euro/franc currency pair may be positively skewed over the coming year, as markets see little chance of SNB normalisation prior to the ECB’s action.

In the UK, delivering Brexit will be the government’s top priority in 2019, and hence the primary driver for the pound. On January 15, British MPs overwhelmingly rejected Prime Minister Theresa May’s hard-fought withdrawal agreement. However, markets are less fearful of a cliff-edge Brexit, as there seems to be a majority in Parliament that is determined to avoid a no-deal scenario.

The question now is whether lawmakers would back a revised deal with the EU, or whether a second referendum is becoming the only viable option. At the time of World Finance going to print, things remain uncertain, but a delay to the departure date is looking increasingly inevitable. An eventual compromise, or the remote possibility of the UK deciding to remain in the EU should a second referendum occur, could send the pound surging higher, as this would not only lift the Brexit fog from the UK economy, but it would also put the Bank of England on course to raise interest rates. However, if the UK leaves without a deal, it could send shockwaves through global financial markets, and the pound could well crash back below the $1.20 level.

Declining trend
After a brief spell of above-trend growth, the Japanese economy switched back into low gear in 2018 (see Fig 1), dissuading the Bank of Japan (BoJ) from scaling back its massive stimulus programme. Accordingly, the defensive yen has been trading mainly as a function of global risk appetite, paying little attention to domestic economic data.

Although market chatter suggests the BoJ could start normalising as early as this year, that prospect remains remote. The economy contracted in Q3 2018, underlying inflation is muted, and the government plans to raise the sales tax in October 2019. The last time it increased this tax, a recession ensued, so the BoJ will probably avoid any bold moves ahead of it. Hence, rate differentials between Japan and other economies may stay wide or widen further, which in isolation argues for a weaker yen over time. For the currency to soar, it may require an unexpected pick-up in inflation, or – more realistically – a sustained period of global risk aversion.

Similarly, the Canadian (CAD), Australian (AUD) and New Zealand (NZD) dollars all had a difficult time in 2018 amid struggling commodity prices, a resurgent US dollar and flaring trade tensions between the US and China. Given that these economies are heavily export-orientated, dwindling global trade volumes could impact them severely. For the CAD, collapsing oil prices were crucial too.

The outlook for 2019 depends predominantly on whether the US-China trade negotiations bear fruit or simply fall apart. In early January, optimism that the two trading giants were making progress in ironing out their differences over trade policy prompted an immediate rally in oil and commodity-linked currencies. This suggests the CAD, AUD and NZD stand to gain significantly from any Sino-US trade breakthrough.

In terms of monetary policy, no rate hike is expected by either the Reserve Bank of Australia or the Reserve Bank of New Zealand. In fact, market pricing implies a small probability for a rate cut by both central banks amid slowing growth and sluggish inflation. Odds for a rate increase by the Bank of Canada have also dissipated rapidly, though not completely, following the turmoil that jolted markets in December.

Downward skew
At this point in the year, many of the headwinds and uncertainties that determined price action during 2018 have yet to be resolved. As a result, monetary policy normalisation outside the US, which many traders saw as a sure bet at the start of 2018, is looking increasingly precarious in 2019. With growth and inflation in the eurozone and Japan – the world’s second and fourth-largest economic blocs – dwindling again, there’s a real danger that interest rates may not return to positive territory before the next recession. This raises questions about what additional policy tools would be available to central banks when the next downturn strikes, which could well be in 2019. Both economies are highly vulnerable to an escalation in the US’ trade fight, while the eurozone faces additional risks from a no-deal Brexit and from populist European governments upsetting the EU political order.

The risks for the Chinese economy are also tilted to the downside. A profound slowdown in China is likely to hurt the global economy more than the US’, which would likely still outperform the rest of the world even if trade frictions were to intensify. A bigger threat for the dollar than a Fed rate pause and moderating growth could be political instability in the White House, given President Trump’s continued, if not worsening, unpredictable and destabilising behaviour.

However, with US Treasury yields still at relatively high levels, any sustained decline in the dollar is likely to be limited in a risk-off environment. Without a rebound in growth in other parts of the world, the dynamics that came into play in the currency markets in late 2018 could persist well into 2019.

Top 5 tips for retailers looking to sell into Chinese market

Posted on by Max Tomlin

Everybody’s talking about China. And everyone wants to quickly enter the largest e-commerce market in the world these days. This is the right attitude, because if you want to be successful in China, you have to be flexible and often very fast. The country offers great potential, especially for international retailers and brands. But one thing should be clear to everyone who wants to expand their business to China: what works in Europe or in the US can fall flat in China.

If you want to be successful in China, you have to be flexible and often very fast

For international retailers, there are still good opportunities to enter the Chinese market as there are many products from abroad that are very popular among Chinese consumers. Chinese people, especially in large cities, are now more than ever looking for individuality – also in products and brands. But how can international brands and retailers get to Chinese consumers? A few years ago, the answer to this question would have most likely been TMall or JD.Com. But these large marketplaces have cost many retailers and brands a lot of money as they not only bring together a huge number of consumers on their platforms, but at the same time also millions of sellers and billions of products. Furthermore, today there are many channels that Chinese consumers use to get inspiration and information, and as many channels where they purchase the products they covet.

Let’s take a look at five tips for international retailers and brands to successfully sell to Chinese consumers.

 

1 – Design your strategy around localisation
China is far from homogeneous. It is, in fact, incredibly diverse—encompassing many ethnicities, a vast land mass, and cultural and societal differences between its regions. Approaching China as one single market is a great mistake.

When looking at the Chinese market you rather need to consider that it is divided into tier one, two, and three cities – with Tier one at the top, based on each city’s GDP, size of the population, and ongoing economic growth and development. Tier one cities are basically richer, coastal cities like Beijing, Guangzhou and Shanghai, where the business infrastructure is the most developed, and the standard of living and consumer pricing are highest. Tiers two and three do not yet share this per capita affluence, but China is committed to further developing these cities and regions, and this is where the greatest growth potential lies.

This circumstance means one size or price does not fit all. This applies to other regions of the world, but it does even more in China where income and social gaps are wide, and pricing and assortment reflect that fact. A consumer in Beijing or Shanghai will likely be more affluent than a consumer in a tier three city and will expect (and be willing) to pay higher prices. For instance, in 2012, the average family in Shanghai had an annual income that was more than twice as much as the average family in Gansu Province, which is far inland. But in every market, regardless of income, competition is fierce, and prices change frequently. Furthermore, Chinese consumers are particularly sensitive to pricing.

 

2 – Be aware that Chinese consumers actively use social media
As widespread as the use of social media has become worldwide, it is nowhere as popular as in China. Forrester Research describes the Chinese as “hyper social”, and it’s also a reason why Chinese consumers so eagerly share information on social media on their shopping experiences, buyer satisfaction, and where to find the best deals.

It is vital to be able to track what consumers are always saying about your product – not only across social media outlets, but across all eCommerce channels. You need the total visibility that enables you to easily access and analyse data from myriad platforms and sources 24 hours a day, to receive alerts when poor reviews are detected, and to keep your finger on the pulse of what’s trending with buyer opinion. By gaining this type of visibility and building instantaneous response into your business model, you can directly impact your B2C sales – and ultimately, the success of your brand.

 

3 – Always stay top of cross-border regulatory changes
In recent months, the Chinese government has issued a slew of new regulations which have changed the game for both gray-market ‘daigou’ sellers and those selling through cross-border e-commerce.

For one, China’s new comprehensive e-commerce law (effective since January 1st, 2019) cracks down on daigou sellers by forcing them to register as businesses and file tax returns. If you’re a retailer that relies heavily on daigou for your revenues, then you should consider alternatives because this market is likely to shrink in 2019.

China is also expanding the scope for cross-border e-commerce because this channel can be better tracked and taxed, when compared to gray-market daigou purchases. It also makes it easier for the government to regulate and protect consumers from fake goods, since they’re purchasing directly from overseas brands and retailers.

In November, the government raised limits on CBEC purchases from 2,000 RMB ($289) per transaction and 20,000 RMB ($2890) per year to 5,000 RMB ($745) and 26,000 RMB ($3875), respectively. The government at the same time lowered import duties on inbound postal shipments. Postal duties for the top two tax brackets were reduced from 30 percent and 60 percent to 25 percent and 50 percent respectively.

 

4 – Beware of the changing e-commerce environment
In 2018, several retailers announced the closing of their Tmall stores, with some opting to exit the China market altogether. US department store chain Macy’s, British apparel retailer New Look, and Hong Kong health & beauty chain Watson’s are the latest players to announcetheir departures from Tmall, likely due to lackluster Singles Day sales and high commission fees.

This is partly because large platforms such as Tmall, JD.com, and Netease Kaola are increasingly procuring inventory in bulk, directly from brands and at reduced prices. This makes it difficult for multi-brand retailers on their platforms to compete since they oftentimes sell the same popular brands and it’s very easy for customers to compare prices online.

Big companies such as Tmall also benefit from economies of scale and can stock inventory in bonded warehouses in China, where they can be shipped out at a moment’s notice and arrive at their destinations within just a few days. An overseas retailer such as Macy’s in the US can take as long as 20 days to ship their orders to customers in China.

Retailers should think long and hard about how they can differentiate themselves, and whether their products are compelling enough for customers to wait for cross-border shipping.

 

5 – WeChat mini-stores may hold the key for smaller brands and retailers
Big brands such as Dior or Lancôme are launching innovative marketing campaigns on WeChat to drive traffic and sales to their mini-program stores. Some of the features that are being built into mini-programs to increase e-commerce conversion rates are cosmetics tutorials, live-streaming influencers, and interactive games.

WeChat now makes it feasible for brands to both push content and at the same time sell products, thus creating a closed loop of customer interactions that can be completed within the WeChat ecosystem. Mini-program stores are more visual and accessible, given their 10-megabyte size limit, making it easy for customers to share engaging promotions with one another.

Given WeChat’s large user base, mini-program stores may give a fighting chance to smaller brands who cannot get on larger marketplaces or don’t want to pay their high fees. Emerging US baby lotion brand Ever Eden and UK cosmetics retailer FeelUnique are also some of the first to launch cross-border WeChat mini-program stores, which are equipped with cross-border payment solutions and logistics tracking features for goods shipped from overseas.

The dawn of AMLO: Mexico’s new president is a force to be reckoned with

Posted on by Max Tomlin

Andrés Manuel López Obrador, better known by his moniker AMLO, did not arrive for his swearing-in ceremony in the traditional flurry of pomp and circumstance. Rather, the man who on December 1 was sworn in as Mexico’s first leftist president under multi-party democratic rule arrived to take up his post in the same small white Volkswagen Jetta that he has driven for several years.

While AMLO’s morality-driven movement is popular with voters, critics have raised concerns about his radical approach

This rebuke of pageantry is characteristic of AMLO, who campaigned on the platform of personal frugality in favour of tackling the poverty, corruption, impunity and inequality that currently plagues Latin America’s second-largest economy. But while his morality-driven movement is certainly popular with voters, market critics have raised concerns about his radical approach, with some fearing that he will not protect business interests.

AMLO also has a powerful and unstable leader to contend with on the country’s northern border, with US President Donald Trump having laid the blame for the economic impact of the American drugs trade and illegal immigration solely at Mexico’s door. Balancing all of these respective interests while staying true to his political goals is a tall order for AMLO – is he up to the job?

Look to the past
Democracy and prosperity have always been intrinsically linked in Mexico – and both had something of a rough ride over the course of the 20th century. Following several decades of revolutionary insurgency, the authoritarian Partido Revolucionario Institucional (PRI) party occupied the seat of power from 1929 until 2000, effectively transforming the country into a one-party state. Until the 1980s, the PRI pursued collectivist economic policies, such as the nationalisation of the oil industry in the 1930s and post-war import substitution industrialisation, which created a number of vast, state-owned enterprises.

6%

of Mexicans were satisfied with how Mexican democracy was functioning in 2017

17%

of Mexicans trusted the national government to do what was right for the country in 2017

53%

AMLO’s share of the popular vote in the 2018 presidential election

1.3%

Drop in Mexican currency when AMLO’s victory was announced

In the 1980s, then-president Carlos Salinas de Gortari implemented a number of sweeping neoliberal reforms, which sought to control rampant inflation and boost productivity by curbing state power and creating a more attractive environment for foreign direct investment (FDI). “[The environment] became a lot more [conducive to FDI] – that was in fact a major goal of the Mexican politicians and technocrats [who] were carrying out the reforms,” Tom Long, Assistant Professor in New Rising World Powers at Warwick University, told World Finance. “They hoped to increase Mexican economic growth and improve its balance of payments situation, [a strategy that] was overwhelmingly successful,” he added. These reforms were further built upon in 1986, when Mexico joined the General Agreement on Tariffs and Trade, and in 1994, when it became a full participant in the North American Free Trade Agreement (NAFTA) alongside Canada and the US.

However, also in 1994, calamity struck when civil unrest pushed the incumbent administration to take action in order to calm nervous foreign investors and protect the country’s newly liberalised financial system. In a bid to demonstrate economic stability and control inflation, the Mexican central bank intervened in foreign exchange markets by issuing dollar-denominated public debt to buy pesos, which overvalued the peso and drove funds into the US. Facing a default on its dollar-denominated debt, the bank allowed the peso to float freely, which devalued it to such an extent that the country’s inflation rate hit 52 percent, forcing the IMF to administer a $50bn bailout package.

Following the crisis, Mexico fell deep into a recession that widened the inequality gap and drove extreme poverty up from 21 percent of the population in 1994 to 37 percent in 1996. “[The crisis] eroded purchasing power really quickly,” explained Long. “When the value of the peso dropped, imported goods became really expensive, which decreased people’s standard of living pretty quickly unless they had access to dollars, which only middle-class and upper-class people were likely to have.”

As such, throughout the 20th century, the country’s erratic economic milieu was closely tied to its interventionist political environment. This supposedly came to an end in 2000 when the PRI lost its grip on federal power, which in turn transformed the country’s democratic institutions from symbolic to functional. The eyes of the public were trained on subsequent presidents Quesada, Calderón and Nieto to implement policies that were democratic not just in name, but also in impact, and went some way in truly improving the lives of Mexico’s citizens. However, due to gridlock in the country’s bicameral political system, misdirected focus and a high level of bureaucratic corruption, desperately needed social reforms were not well implemented by any of these presidents. Consequently, the quality of life for many – particularly rural citizens – has remained low. Private-sector monopolies by a select handful of businesspeople and elevated crime rates in certain areas as a result of the Mexican drug war have also further sustained high levels of inequality.

Inaction in tackling key socioeconomic issues has led to an overarching absence of faith in Mexico’s political sphere

This presidential inaction in tackling key socioeconomic issues, even after the fall of the PRI, has led to an overarching absence of faith in Mexico’s political sphere from its citizens. According to a 2017 poll by the Pew Research Centre, just six percent of Mexicans were satisfied with how democracy was functioning in their country. After all, if politicians aren’t able to transform the lives of their citizens, there’s little reason for faith in the system. “Some of this [absence of faith] is derived from general economic dissatisfaction that democracy hasn’t brought more growth, particularly wage growth, but the other aspect of this [is] corruption,” Long said. “Democracy has not brought an end to the impunity that characterised the PRI system and continues to characterise Mexican politics today.”

Something new
Finally, though, it would seem that change is afoot. Mexico’s new left-leaning president campaigned on the platform of an absolute overhaul across all political, social and economic strata: he has pledged to put an end to corruption, roll back military intervention in the drug war and level out inequality by prioritising the poorest members of society.

Born in 1953 in Tepetitán, AMLO’s political career began with an administrative campaign position within the governing PRI party. He left the PRI in 1988 to join the dissenting left wing that would later become the opposition Party of the Democratic Revolution (PRD) party. His early political career, during which he notably appeared on national television drenched in blood following confrontations with the police over indigenous people’s rights, earned him a significant grassroots following among the liberal working classes.

AMLO was always going to have to tread a fine line between keeping markets happy and pursuing liberal policies

Between 2000 and 2005, AMLO was the mayor of Mexico City; with this authority, he introduced policies such as subsided transport fares and financial aid programmes for single mothers and senior citizens. This set the scene for his social-welfare-focused approach, which he would draw upon in presidential campaigns. AMLO ran for president as the PRD candidate in 2006 and 2012, but was defeated on both occasions amid allegations of electoral irregularities. Following his second loss, he founded the National Regeneration Movement (MORENA); as its candidate, he won 53 percent of the popular vote in the 2018 presidential election, with the party taking a majority in both chambers of Congress.

Off the starting line
AMLO set about implementing his radical reformist plans immediately upon taking office in December 2018. This has included establishing training programmes for unemployed young people, launching a universal pension scheme for over-65s, and championing a new law that will prevent any government officials from earning more than he does. Given that he has set his salary at just over $5,000 per month, this law would entail wage cuts for more than 30,000 public officials – a move that has not been popular with long-standing civil workers. If passed, it will also precipitate pension cuts for the country’s last five presidents.

While his policies and political persona have proved popular with the public, market reaction has been more mixed: exit polls that predicted AMLO’s win in July 2018 sent the peso soaring, but the currency then fell by 1.3 percent when his victory was officially announced (see Fig 1). The peso has since recovered, but the realisation that economic reform was on the agenda undoubtedly spooked investors.

 

As the summer drew to a close, the outlook grew rosier: Morgan Stanley analysts upgraded Mexico’s economic status from ‘equal weight’ to ‘overweight’ amid positive forward stock valuations and a strong corporate economic outlook. In October 2018, however, AMLO sparked concern when he announced the cancellation of the construction of a $13bn airport in Mexico City, which he said was wasteful and plagued by corruption. This sent stocks into free fall, while the peso lost almost four percent of its value against the US dollar. Construction of the airport was already more than 30 percent complete, and its cancellation will cost the government an estimated $6bn, according to a study by the Mexican Institute for Competitiveness.

The decision to terminate the project was reached following a referendum called by MORENA in which less than two percent of the Mexican electorate voted. This in turn raised the alarm for investors, who are concerned that AMLO may use this kind of arbitrary decision-making process to shape economic policy. “It’s unfortunate, because it could have been an opportunity for AMLO to enhance anti-corruption measures without necessarily having to frighten the Mexican business community,” Long told World Finance. “If he focused on carrying out a more efficient, transparent, corruption-free project, instead of throwing the baby out with the bathwater, he might have been able to [achieve more].”

Since that point, though, AMLO’s economic decisions have been popular with markets: his December budget, which redistributed public spending across environmental and educational sectors and boosted state oil firm Pemex’s funding to $23bn, sent bond yields sky-high and caused the peso to rise by 0.7 percent.

Ultimately, AMLO was always going to have to tread a fine line between keeping markets happy and pursuing liberal policies. In his campaign manifesto, he set out an ambitious target of four percent annual GDP growth – a figure the country has failed to accomplish since 2010 (see Fig 2). He will have to keep markets, corporations and investors on side in order to achieve that. However, he must also work to tackle corporate corruption, which necessitates making some unpopular market decisions.

“[AMLO] has an uphill struggle [with regards to] his campaign against corruption,” said Colin Lewis, an emeritus professor of Latin American economic history at the London School of Economics. Mexico is currently in 138th place out of 180 countries on Transparency International’s Corruption Perceptions Index, due principally to the level of corruption that underpins extremely high inequality between wealthy bureaucrats and poor rural workers. There’s also the issue of drug cartels, the leaders of which have historically wielded significant influence in both government and private business. “Tackling corruption means taking on some very powerful (and violent) interests,” Lewis added.

On a corporate level, the country is ruled by a handful of businesspeople who have maintained long-standing monopolies on key market sectors, aided by corrupt government officials who have rushed through paperwork on nefarious deals in return for a cut of the profits. For instance, state-owned oil firm Pemex has been accused of offering wildly inflated contracts to private contractors to build new refineries, many of which were extremely poor quality or never completed. According to a report by the Baker Institute for Public Policy, Pemex handed out $11.7bn worth of these contracts between 2003 and 2012, for which it has faced little retribution.

AMLO is teetering on a tightrope between staying true to his political goals and delivering on the economic growth he has promised. It’s clear the public appetite to tackle the issue is there: according to Lewis, “many Mexicans are fed up with corruption and violence – and the impact on daily lives and the economy”. As a publicly elected official, AMLO must answer first and foremost to his citizens; although actions to fight corruption may cause initial market mayhem, they are likely to lead to greater stability and a fairer business environment in the long term.

International relations
Alongside thorny business relationships, AMLO also has a combative neighbour north of the border to contend with. US President Donald Trump has been a frequent critic of Mexico and its citizens, calling the country “totally corrupt”, referring to its citizens as drug dealers, criminals and rapists, and insinuating that they are murdering US citizens. He has also pledged to build a wall between Mexico and the US, which he originally claimed that the Latin American country would pay for.

The president does have an ambitious mandate, yet it’s one he has been building upon during 20 years of public office

“It makes it difficult for AMLO to publicly cooperate with the US when Mexicans look at the Trump administration and see racism,” said Long. It also seems to be only a matter of time before the duo clashes. Their economic attitudes are very different – AMLO has just $23,000 in savings, while Trump owns a hotel covered in gold-infused glass – to say nothing of their political ones. Some, however, believe AMLO is playing the long game: in tolerating Trump, the Mexican president may be hoping to curb pressure on his country and secure economic support in the future.

That being said, the two countries’ administrations have so far worked together fairly cohesively on economic policy, including on negotiations for USMCA, the US-Mexico-Canada trade deal that is set to replace NAFTA. Both Trump and AMLO were critical of the original 1994 agreement, albeit for very different reasons: Trump argued that the pact undermined US jobs and salaries, given that at the time it was agreed, Mexico’s per-capita income was just under 30 percent of the US’. AMLO, meanwhile, has lampooned NAFTA for disadvantaging farmers in the agrarian south by introducing unsustainable competition from their US counterparts.

However, Central American migration is proving a more complex issue to resolve. Mexico bears much of the burden for migrants travelling up from conflict-stricken southern nations such as Honduras, El Salvador and Venezuela: it becomes a place of refuge for those who are not accepted into the US, but are unable to return to their homeland. Asylum requests in Mexico have increased tenfold over the past five years, hitting a high of 14,544 in 2018. That number is set to rise further this year, as AMLO’s administration has committed to taking in asylum seekers who have cases currently pending in the US. “This puts a lot of pressure on certain Mexican communities at the northern border, which are maintaining camps of central Americans waiting for asylum appointments that are taking longer and longer to process,” Long told World Finance.

Supporting such a high number of transitory residents comes at a steep price for the nation. With this in mind, in December 2018 AMLO introduced his own Marshall Plan – a $30bn initiative to tackle the root causes of migration in Central America and provide migrants to Mexico with visas, healthcare and employment. Meanwhile, the US Government has pledged its support, as well as $5.8bn in public and private investments. Long, however, warned that “there’s more rhetoric than substance” to US engagement, and suggested that “it is not really clear how much private investment has actually materialised”.

From a public-perception point of view, AMLO’s Marshall Plan is a brilliant PR strategy. By committing to values of openness, support and generosity in the context of migration, Mexico marks itself out as the stark opposite of the US under the Trump administration – an approach that will help curry favour with other democratic world powers. It’s also a productive solution to a crisis that has taken its toll on the region, and one that will strengthen Mexico both at present and in the future. The crucial question now, though, is whether the plan can fly economically if the US doesn’t foot its portion of the bill.

With this complex foreign policy to attend to, along with the pressing need to address endemic corruption at home, it’s clear that AMLO has his work cut out for him. The president does have an ambitious mandate, yet it’s one that he has been building upon during 20 years of public office. Whether any of his policies were simply pre-election showmanship remains to be seen, but voters are certainly convinced that AMLO has good intentions. His rhetoric has also provided real hope for the country’s poorest citizens. Six years is a long time, filled with plenty of opportunities to bring about positive change for Mexico’s people and its economy. As Lewis concluded: “Let’s see what the new president can achieve in this sexenio.”

PMI is recognising the need to forge a synergy between humans and machines

Posted on by Max Tomlin

The attendees at this year’s World Economic Forum (WEF) Annual Meeting could hardly help being inspired by the sight of thousands of corporate and government leaders from across the globe, united in their determination to tackle the most important issues facing the world today. Given this year’s theme was Globalisation 4.0, many discussions focused on the coming Fourth Industrial Revolution and the best way of navigating the effects of disruptive technology, how the world might respond to its implications for jobs, and what policy changes will be needed.

There is no question that automation, AI and other technologies are changing the nature of work

For Murat Bicak, Senior Vice President of Strategy at Project Management Institute (PMI), one of the most important issues raised during the many conversations he partook in during the event was the value of relationships, trust and cooperation. It quickly became clear that the only way of overcoming challenges relating to digital identity, privacy and cybersecurity was through collaboration. He spoke to World Finance about why PMI places such importance on workplace relationship-building and how people in a variety of roles across multiple sectors can work together to solve the most critical problems.

How do you make the issues raised at the WEF meaningful to your organisation?
When you listen to the conversations being had at the WEF, three things become immediately clear: first, we are only just starting to understand the complexity of the Fourth Industrial Revolution, and there is a lot more discussion and collaboration needed to fully comprehend it. Second, regardless of the scale, all of these transformative ideas and initiatives will involve a significant amount of change. All changes and strategic initiatives need to be executed and delivered via formal corporate programmes and projects so the benefits being strived for can be fully realised. And third, we must be ready for a future that requires a completely different set of skills than what we have today. We need to get ready for that and we need to work with other stakeholders to help them see the big picture.

At Davos this year, PMI hosted a panel discussion entitled Humans 2.0: Designing and Implementing a Future-Proof Strategy. The panellists stressed the importance of considering the human element within current change, which demonstrates the connection to Davos from a PMI perspective. Our stakeholders are the ones who will ultimately be responsible for executing big ideas in their respective organisations, governments and private enterprises. We must make sure they are prepared.

What impact will artificial intelligence (AI), automation and robotics have on the way people do their jobs, on what jobs people will have, and what training they’ll need?
I believe that, as with prior industrial transformations, the Fourth Industrial Revolution will enable us to be more productive and ambitious than it is possible to imagine today. It’s very important to understand that we are not going to open our eyes one day and find a world in which there are no jobs.

That said, there is no question that automation, AI and other technologies are changing the nature of work and taking away tasks – and in certain cases, jobs. Labour markets are under pressure and we need to invest in developing human capital. On the other hand, as a result of disruptive technologies, there will be a significant amount of new jobs created. Consequently, we may have more jobs and opportunities than we can fill.

The real question is this: what skills are going to be critical to the jobs of the future? Once we know this, we can be sure we are investing in the relevant areas. According to a recent WEF report, by 2022, 54 percent of all employees will require significant retraining and upskilling. It’s the responsibility of every organisation and government to invest in their human capital to make sure that people have the opportunity to make the transition to the next generation of jobs – that means investing in both our existing talent base and preparing the next generation of talent for a future that appears to be coming faster than anything we’ve seen before. It’s called future-proofing the talent base.

Unfortunately, investments in retraining and upskilling aren’t necessarily happening fast enough. The common denominator I heard in Davos was that continuous learning is a critical area that every individual and organisation must invest in. That’s something PMI has been advocating for quite some time.

Which skills will be the most relevant?
As we strive to stay ahead in this time of rapid change and technological advancement, we cannot overlook the technical skills that will be needed – but these alone will not be sufficient. At least as important, if not more so, is the need to develop skills that are uniquely human. So when we think about digital skills, it’s not purely about how we code better or how we become better software engineers – it’s about creating a world where there is significant digital enablement and enhancement of how humans perform their jobs.

Jack Ma, the co-founder and executive chairman of Alibaba, was at Davos. He pointed out that we need to teach kids to be more creative so they can do the things that machines can’t – and will never be able to – do. Creativity is actually part of the digital skill set, although people don’t typically think of it that way. Other skills that will gain more importance are innovation, originality, analytical thinking, persuasion, flexibility and adaptability. These are human skills.

How should we collectively prepare for this new approach?
There has been a startling lack of awareness and attention around the human context. Yes, there are some notable exceptions, such as Alibaba, but I haven’t seen this spoken about much, especially with regard to organisational responsibility for fostering these skills.

I would take Ma’s comment a step further. We need to teach our kids to excel at the skills that are uniquely human. Machines are great at sifting through data and finding patterns, but humans excel at creativity, originality, flexibility and ingenuity. How much do we train kids in those areas today?

When we look at educational institutions, we see incremental change, but most are 20 years behind the curve. We need a revolution to prepare our children for the future in terms of what we teach them, how we teach them and who teaches them. Similarly, the role of organisations in upskilling should also take into account that their employees will have a number of inflexion points in their careers where they need to reinvent themselves. That will put a lot of pressure on organisations as well.

What does this mean for the future of work?
There is no doubt that machines are increasingly going to be a part of the delivery team for almost any kind of project, programme or strategic initiative. We’ll see more and more tasks and functions performed by machines that frankly are better suited to those parts of delivery. That frees people up to do things that only they can: applying judgment, understanding, knowledge and, most importantly, wisdom. A machine can’t offer that.

Instead of fearing the presence of machines, we should embrace them and appreciate the value they provide, while not losing sight of the value that only humans can offer. We need to figure out what the future of work looks like, where machines and humans are collaborating as part of the same team.

Will competitive advantages come from people or machines in the future?
Hypothetically, let’s say you pair a designer with extremely powerful AI to develop parts for industrial machines. The AI can be an excellent tool for generating millions of alternative designs iterating on certain parameters, and in a short time frame, it will be capable of producing a design that a human cannot even imagine. But when human designers see what the AI has generated, they know what will work and what won’t because of the experience, the context and the
intuition that they bring.

Humans can complement AI – they shouldn’t think about competing with it. That combination of the human with a machine is the true source of power. It’s not one or the other; it’s the two together. That’s why I stress the importance of ‘augmented intelligence’, rather than AI. It’s not just a term that is less frightening to people – it more accurately expresses reality.

A company’s biggest asset is its people. That hasn’t changed, and I don’t think it ever will. What has changed and what will continue to change is how humans interact with machines and technology. Companies that are competitive in the future will have to be innovative, which is directly correlated with creativity, ingenuity and authenticity. Competitive advantage will come from how a company understands the value its people offer and how it will enable its people to use their collective creativity to deliver value.

How putting people first can help companies achieve positive growth

Posted on by Max Tomlin

Over the past 20 years, we have witnessed a tidal wave of globalisation, together with a massive increase in the flow of goods, services, people and technology. Yet, with every opportunity comes an element of risk: just when you think you have a solid plan for international growth, the very simple task of paying overseas employees creates more headaches than you ever thought possible.

If people feel heard and understood, it makes it much easier to solve problems together and come up with new and innovative ways of doing things

If there’s one way to inadvertently drive your business into the ground, it’s by making mistakes with how you pay your staff – or by failing to pay them at all. That’s why the most mission-critical component for any business’ back end is arguably its payroll operation.

Poor HR data, time and attendance systems, and incorrect classification of employment contracts are just a few issues that cause miscalculations for payroll. Managing an international payroll process can prove exceptionally difficult when cultural, language and time zone differences exist. This layer adds complexity to ever-changing employment and tax legislation.

Having only been spun out and rebranded from its parent company, The Taxback Group, in 2016, global payroll provider Immedis has seen explosive growth over the past few years. With a recent expansion into American and European markets, its global footprint now spans 150 countries worldwide. This exponential business growth has not been by accident. World Finance spoke with Patricia Butler, Global Marketing Director at Immedis, about the philosophy that goes to the heart of both its internal culture and the operations themselves – putting people first.

Why do you value a people-first culture?
Most of our day is spent at work with our colleagues, partners and clients. Nurturing those relationships and investing in their health makes sense not just from a personal perspective, but also from a commercial one. The time and cost spent on hiring new employees, finding new delivery partners and managing customer churn due to poor service is a direct result of broken relationships and communication.

Delivering payroll across 150 countries worldwide involves multiple stakeholders, partners, employees and suppliers. Technology is key to linking everyone together and ensuring an efficient process and secure handling of data.

However, at the end of the day, having good working relationships will ensure everything runs smoothly. If something goes wrong, you need to have that solid relationship and trust to be able to work through difficulties.

Working as a unit and being open about the goals you are trying to achieve ensures that all employees are aware of what others are doing, even when they are not directly involved. This in turn lets everyone know where they fit in to the bigger picture of the business.

How do you foster trust within all of Immedis’ business relationships?
Transparency in communication is the key to fostering trust. Being frank and honest with people as you work together to create win-win situations helps give people ownership of the outcome, whatever it is. If people feel heard and understood, it makes it much easier to solve problems together and come up with new and innovative ways of doing things.

It’s inevitable that sometimes things will go wrong, and when they do, bad news should be delivered quickly and dealt with head-on. Leaving things to fester only creates more problems further down the line and damages relationships irrevocably. Often by working through difficult situations, a relationship becomes stronger than ever. Long-term relationships are our goal. We want to grow with our clients’ businesses and help develop our employees to fulfil their career aspirations.

What kind of business culture do you look to create at Immedis?
Culture is hugely important at our company. We seek to create an environment built on passion, autonomy, honesty and fun. If you enjoy challenges, the opportunity to shape things from the ground up and the chance to grow in a rapidly changing environment, then Immedis is the place for you.

A successful brand is not built from the top down, but from the inside out. For any business to be a successful, its employees must be happy in order to thrive and deliver the best products and services in its market. The famous Richard Branson quote is more true now than ever before: “Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients.”

At Immedis, we believe that employee success leads to customer success. Our aim is to create an environment where employees can deliver the best for the business and for themselves.

How does this help with staff retention?
A successful culture has a double positive effect. Not only does it improve the quality of the business itself, but it also attracts new talent and retains the talent that is already at the company. This is increasingly important in an ever more competitive global talent pool.

Having a singular focus on these goals also allows us to navigate challenges between employees, clients and suppliers. Putting emphasis on the larger goal that the team is collectively working towards removes the emotional side of conflict.

Further, placing a higher importance on resolving issues rather than shifting blame is crucial in a situation that would otherwise prevent progress. It is likewise important to understand that the safeguarding of a relationship must be given priority over questions of who is at fault in any given situation.

Who is responsible for driving the people-based approach at Immedis?
Our CEO, Ruairi Kelleher, is passionate about ensuring Immedis is a great place to work. His vision of creating a company that people love to work for helps ensure our clients are happy as a result. However, driving this people-based approach is down to everyone in the business, not just the leadership team.

As such, our internal communications strategy enables everyone at all levels of the business to share information and post shout-outs to their team members, managers or colleagues in other offices around the world. This helps to foster an inclusive, friendly and supportive environment, where everyone’s voice is heard.

What kind of benefits have you seen for your business by fostering people-first, rather than technology-driven, relationships?
In order for a global payroll provider to offer a good service, we need to develop an intimate understanding of a client’s business, their requirements and the idiosyncrasies that make them unique. That can only be done by interacting with them face to face.

Every business is different and there is no one-size-fits-all solution. Understanding this has led Immedis to create a software solution that is used widely across a diverse range of sectors in industry, retail, NGOs and more. Today, the likes of Airbus, Canon, FatFace, the Clinton Foundation and the University of Glasgow work with Immedis services to manage their payroll needs.

With clients all over the globe, it is our ability to carry out market research and have one-on-one conversations with customers that enables us to understand the requirements of global payroll teams. Without this, we would not be able to operate the way we do, transcending cultures and currencies, as well as regulatory and tax jurisdictions. The logistical challenges of maintaining a high standard across geographies that are each continually evolving are substantial. Therefore, the fact that our clients can get in touch with us quickly and efficiently to sort out a problem is invaluable.

What are the benefits of operating on a single platform?
Our iConnect system is an enterprise-level, cloud-based global payroll platform that centralises payroll management and consolidates reporting into a single dashboard, giving real-time oversight of your payroll around the world.

A single platform integrated with your HR and finance system enables data accuracy and integrity improvements. It also leads to a reduction in errors and miscalculations, particularly as automation minimises the element of human error that is an inherent risk in manual inputting.

The process of integrating iConnect into a company’s business is also made frictionless through Immedis’ onboarding process. We have devised a five-step process through which our implementation specialists and senior payroll and tax experts work together with the client to deliver a roadmap tailored specifically for their business.

How do you harness the power of technology to deliver an optimal service to your clients?
Technology alone cannot establish relationships, but our platform gives us an edge over the competition. For our customers, we have consolidated all their payroll management needs into one easy-to-use interface – iConnect. This global, cloud-based platform allows managers to have a bird’s-eye view over all their payroll operations in real time.

Essentially, iConnect distils the information needed to handle the payroll for workforces numbering in the thousands – or even hundreds of thousands – into a single dashboard that managers can navigate with ease. Through it, management teams have an insight into their operations wherever in the world they have an office.

The software uses process automation and data validation technologies to make operations seamless, while also ensuring accuracy. Coupled with this, advanced data visualisation gives managers a clear picture of the business and more time for strategic decision-making and value-added risk management. This time would otherwise be spent undertaking repetitive work that can now be left to iConnect.

Technology, together with exceptional client service and a strict code of compliance, has propelled the company to new heights. At Immedis, we intend to keep excelling in everything we do.

Greece’s banking woes continue despite exiting bailout programme

Posted on by Max Tomlin

Back in August 2018, European officials were quick to congratulate Greece (and themselves) for the Mediterranean country’s completion of its third successive international bailout programme. Altogether, it took some eight years and a host of crippling cuts to public spending, but finally Greece was able to borrow at normal market rates – just like any other eurozone country.

Although Greece has exited its bailout programme, it is still heavily indebted to its creditors

“Greece’s salvation is also a sign of European solidarity,” Olaf Scholz, Germany’s Federal Minister of Finance, explained to the Handelsblatt newspaper at the time. “The conclusion of the Greece programme is a success. The bleak predictions of the prophets of doom have not come true.”

Not yet, anyway. Few Greek households would have celebrated the end of the financial bailouts last year, however, with citizens well aware that tough times remain ahead. Despite some improvement, unemployment is still far too high (see Fig 1) and the country’s economy remains more than 25 percent smaller than it was when the financial crisis erupted in 2008.

The Greek banking sector is another cause for concern. Many of the country’s financial institutions are barely profitable and bogged down with a host of non-performing loans (NPLs). This in turn ensures that many banks are reluctant to supply the lending that an economy needs in order to function properly. Unfortunately, with prospects for the global economy looking more precarious all the time and Greece’s own political situation unclear, the opportunity for banking reform may have already passed.

Off balance
Although Greece has exited its bailout programme, it is still heavily indebted to its creditors and must exhibit a strong degree of fiscal responsibility or risk damaging the market’s fragile confidence in its ability to reform. As of the end of 2017, Greece’s debt-to-GDP ratio stood at a staggering 188 percent (see Fig 2) – clearly, now is not the time to be complacent.

First of all, Greek banks must find a way to shift their huge quantities of NPLs. While it’s true that some headway has been made in this regard since 2016, NPLs still represent 48 percent of all outstanding bank loans. As of June last year, Piraeus Bank had an NPL exposure rate of 54.7 percent, Alpha Bank’s figure was 51.9 percent and the National Bank of Greece’s 42 percent. Meanwhile, the average NPL ratio across the EU is just four percent.

Greek banks find themselves in this mess because the 2008 crash greatly impacted the ability of borrowers to repay their loans. The recession that hit the country was so severe that even the Greek state went bust, meaning that banks had to accept write-offs on the government bonds that they held. The country’s political situation hasn’t helped matters either: Prime Minister Alexis Tsipras has not always seen eye-to-eye with European creditors, and at one point even threatened to take Greece out of the euro.

All in all, this has left Greek banks trapped in a state of limbo. They need to be able to lend in order for the economy to get going again, but they also need a functioning economy so they can resolve some of the NPLs on their balance sheets. The problem is not only one of banks being unable to provide an adequate supply of lending, but also of the Greek economy not delivering enough demand for said lending.

The blame game
Greek banks cannot justifiably claim that they have been the victims of circumstance. Although the financial crash may have been the straw that broke the camel’s back, underlying issues have been allowed to fester for too long regardless. A high proportion of bad loans are partly the result of bad decision-making.

In 2004, when things were going well for meat producer Nikas, an investment firm partly owned by Greece’s Eurobank Ergasias bought out the company. However, by 2006 things had turned sour, and Nikas had to agree loan write-offs with some of its creditors – Eurobank among them – in order to service debts of €77m ($87.7m). Although the loss to Eurobank was small in the grand scheme of things, it provides a snapshot of how the country’s banking system managed to entangle itself in the country’s private debt problem.

Improving corporate governance in Greece is one way of shoring up the banks. In the case of Nikas, executives from Eurobank were also board members at the firm, meaning Nikas managed to survive the crisis through a combination of debt write-offs and the sale of its mortgaged factory. Other firms have not been so fortunate.

Greek banks cannot justifiably claim that they have been the victims of circumstance

That being said, Greece should not take all of the blame for the state of its domestic banking sector. It was only in May last year that the supervisory arm of the European Central Bank published the results of its stress test aimed specifically at assessing the country’s four systemic banks – all were cleared. The tests did determine that nine percent of the banks’ regulatory capital would be at risk in the event of an adverse economic future, but found that their capitalisation rate was “acceptable”. Such proclamations make it sound as though Greek’s banking sector lies on stable ground, but recent events clearly throw this into doubt.

Piraeus, Greece’s second-biggest bank, lost more than 60 percent of its value during 2018, and analysts are doubtful over the bank’s ability to meet its targeted reduction of NPLs by 2021. As of February 2019, Greek bank shares on the Athens Stock Exchange General Index had lost » more than 50 percent of their value over the previous 12 months. Regulators seem to be taking a lax approach even as Greek banks stagger on as virtual zombies.

Clearing the books
The way out of the current Greek banking crisis will not be easy, but some efforts are being explored. In December, Eurobank announced a merger with Grivalia Properties, a real estate investor, which should provide it with enough capital to clear €7bn ($7.9bn) worth of NPLs. However, this approach may not work for the country’s other beleaguered banks, particularly where they do not have sufficient liquidity.

48%

of all outstanding bank loans in Greece are NPLs

4%

Average NPL ratio across the EU

Restructuring or writing off the loans is another option, but one that would deliver a further blow to banks’ shareholders, who have already taken multiple hits during Greece’s economic malaise. Banks could also sell their NPLs to investors, backed by a government guarantee, or create a special purpose vehicle from deferred tax assets to purchase them themselves. Neither option is ideal and both would require government support, or perhaps even European Commission approval.

“A big challenge for Greece in 2019 will be how to deal with banks,” Gianluca Ziglio, Senior Fixed Income Analyst at Continuum Economics, told Greek newspaper Kathimerini. “A clean-up of their balance sheets remains a key precondition for halting deleveraging, increasing bank lending and therefore [supporting] the economic recovery. However, doing so too abruptly could create dangerous capital shortfalls which must be avoided to avoid a collapse of the banking sector.”

Stimulating demand presents another challenge. With domestic consumption struggling, demand for bank loans may come from Greek exporters, but problems remain here too. Greece’s neighbours are not exactly in rude health either – Turkey’s economy had a disastrous 2018 and prospects for the year ahead are mixed, meaning potential export markets nearby are likely to be depressed. The resolution of the naming dispute with the state of Macedonia – now North Macedonia – has cleared one item from the government’s checklist, but plenty more needs to be done.

A general election is coming up later this year in Greece, with local and European elections providing further distractions. With forecasts predicting that Tsipras’ Syriza party will be unseated by the centre-right New Democracy, the likelihood of Greece enacting much-needed economic reforms any time soon looks unlikely. That could prove to be a costly mistake, particularly with predictions for global economic wellbeing recently being downgraded. A slowdown in the wider European market, for example, could render any domestic reforms ineffectual.

All hope is not lost, however. A report published last year by EY, titled Opportunity out of adversity, stated that if the Greek economy continued to show growth, it would represent an “attractive investment opportunity across all asset classes”. This includes the NPL secondary market, which would give banks a way of shifting NPLs without having to resort to write-offs.

With billions of euros’ worth of NPLs weighing down Greece’s banking system, it is hardly surprising that citizens remain apprehensive

Despite Greece’s recent troubles, investors will be watching closely to see if there is any value to be had in buying up some of the bad loans – at a discount, of course – from the country’s struggling financial institutions. Banks in the country did manage to sell €12.5bn ($14.2bn) of NPLs to investors last year, but the government will be hoping that sales increase significantly in 2019.

Back in January, Valdis Dombrovskis, Vice President of the European Commission, highlighted the difficult balancing act facing Greece in an interview with news agency ANA.

“Currently, Greece is back to growth and has implemented during the three consecutive programmes a major reform agenda,” Dombrovskis explained. “It is difficult to find some area where reforms were not implemented. This has helped to strengthen the competitiveness and the fundaments of the Greek economy, which is now growing. So clearly risks have receded. At the same time, Greece’s return to the markets is a very delicate task. It has been out of the markets basically for nine years [and] it has by far the largest debt-to-GDP ratio, so there is not much room for manoeuvre and there is not much room for mistakes.”

Just as there is not much room for error, there is also no time to waste. Predictions of a slowdown for the global economy are building, threatening to undermine the few reforms that Greece has managed to implement thus far. At the same time, uncertainty in the domestic political arena makes it difficult to pass further legislation. With billions of euros’ worth of NPLs still weighing down the country’s banking system, it is hardly surprising that Greek citizens and businesses remain apprehensive. Greece may have exited its bailout programme, but its banks are not out of trouble just yet.

Fullerton Markets is helping to drive forex’s age of disruption

Posted on by Max Tomlin

Forex continues to feature significantly in our daily existence, from one-to-one transactions to large-scale, cross-border dealings. An industry ripe for technological innovation, forex is witnessing increased disruption, with industry players leading efforts to make processes around currency trading faster, less costly and more reliable for traders and investors worldwide.

Forex is the world’s largest, most liquid financial market

The evolving demands of consumers also mean that brokerages are constantly pushing the boundaries of how we understand and participate in forex, with the aim of delivering improved customer experiences. New solutions that include tech-driven tools continually challenge traditional concepts and services that have long inhabited this space, making the industry all the more attractive to a tech-savvy crowd. Yet, it will take some time before we can assess the efficacy of these exciting developments in addressing the industry’s perennial concerns, such as price transparency and tightening regulations. World Finance spoke with Mario Singh, Founder and CEO of Fullerton Markets, to discuss the role of innovation in introducing higher levels of visibility and value, and the measures being taken to keep the industry robust and safe.

In your opinion, why is the market susceptible to scandal?
Forex is the world’s largest, most liquid financial market, with trade activity that amounts to an estimated $5.3trn each day. Yet, the market remains largely unregulated – a trait that appeals to market participants and new entrants, but also sets it up for bad actors wanting to take advantage of its relatively low levels of compliance.

$5.3trn

Estimated amount traded across forex markets every day

We’ve witnessed forex-fixing scandals and market manipulation of various scales over the past few years, which have been followed by trading probes, prosecutions of senior currency traders and billion-dollar fines. Such issues continue to cast a shadow over the forex community. While there has been pressure to keep institutions and traders in check, adherence to policy is often trickier than imagined.

How can scandal be avoided? What role does transparency play?
Efforts have been made to rebuild trust and credibility in the industry. In 2017, a global code of conduct for the forex market was introduced to promote fairness and integrity. The code’s 55 principles were drawn up by the Foreign Exchange Working Group and supported by a panel of industry participants. These set the framework for international standards on practices, such as the management of confidential information and settlement of deals.

A more transparent forex market also starts with market participants pledging their commitment to uphold regulatory codes. Companies, too, can have more comprehensive reviews of policies and procedures across their forex activities to ensure practices are communicated as transparently as possible to investors, shareholders and regulators. Greater adherence to established codes would provide the impetus for increased visibility in the market and would thereby mitigate risks of scandal.

What impact has regulators’ tightening control over the forex industry had on brokers and traders?
Tightening control will continue to shape the industry in more ways than one, though its effects may not necessarily be felt the same way across the market. For brokers, stricter regulations that include leverage restrictions or the mandatory provision of a negative balance protection will influence how they operate and perhaps the business model they adopt. Brokers would have to review their client acquisition and retention strategy more closely to make sure that they remain competitive while simultaneously meeting regulators’ requirements.

It is important to understand that the main purpose of regulation is not to restrict the trading activities of the client – it is to enforce a safer environment where best practices between the broker and the client can be conducted.

What are the advantages of moving businesses to more loosely regulated or offshore jurisdictions?
Beyond the commonly recognised advantages of lower taxes and reduced organisational or administrative expenses, setting up businesses in offshore jurisdictions offers a level of flexibility that is not accessible in more regulated environments. More and more companies are leveraging this increased autonomy and value its role in their overall business strategy.

When Fullerton Markets moved its headquarters from New Zealand to Saint Vincent and the Grenadines, it was a decision similarly influenced by the need to maintain our competitive edge in an environment that would best allow us to do so. Operating under an offshore jurisdiction has allowed us to provide clients with new services and a huge improvement in customer experience. We have also introduced Fullerton Shield, which is a triple-level protection plan designed to
safeguard client assets.

In which direction do you think the cryptocurrency market is headed?
‘Cryptocurrency’ has been a buzzword for years, though the extent to which it has taken off varies within the financial industry. Traditional financial institutions have been slower to adopt it and are still in the early stages of developing their own services to complement the emergence of cryptocurrencies. However, cryptocurrencies are predicted to enjoy more price stability in 2019, which will build institutional interest and encourage entry into the digital currency market. With broader regulatory acceptance and more support from institutional investors, there should be exciting developments to look forward to over the next few years.

What impact do you think cryptocurrencies will have on the forex industry?
Cryptocurrencies and blockchain have brought improved efficiency, accessibility and transparency to the industries they serve. Likewise, the forex industry will be able to benefit from increased visibility through crypto exchanges. By removing the need for human intermediaries, cryptocurrencies will help lower risks in the form of human error, hacking or corruption.

The popularity of cryptocurrencies has also seen brokers adding digital currencies to their offerings. Last year, Fullerton Markets started accepting bitcoin as a new funding method for client deposits due to a substantial number of requests by our customers. What this integration offers is an instant deposit process with no delays and transactions verified by blockchain technology. The added security and the protection of personal data continue to be huge draws for users of this service.

Why does Asia stand out in particular for the cryptocurrency market?
Asia’s propensity for taking on and developing emerging technologies places it at the front of the cryptocurrency revolution and makes it a hotbed for blockchain-based innovation. The region boasts incredibly high mobile usage and widespread acceptance of cashless payment solutions, such as WeChat Pay and LINE Pay, which might explain its readiness for crypto payment, a similarly mobile-based service.

The cryptocurrency landscape in Asia will be one to watch, as countries ease controls and gear up for distributed ledger disruption. In Thailand, for instance, digital currency enthusiasts have welcomed the news of the now-permitted investment in bitcoin, Ethereum, Ripple and Litecoin. Meanwhile, in South Korea, where a third of the population either owns or is paid in digital currency, plans are underway to boost cryptocurrencies’ legal status.

Why are mobile-first platforms of increasing importance these days?
There is no disputing the impact of mobile-led platforms and apps in our everyday lives – they have transformed the way we work, play and socialise. Above all, users prize the convenience and simplicity they offer. With mobile-first platforms set to eclipse traditional, desktop-based internet usage, companies will have to look at taking more of their business onto more accessible channels to cater to on-the-go, tech-savvy consumers.

In the forex industry, mobile-based solutions will serve as important tools for traders to store value and transfer assets seamlessly, and in some cases, may even double up as digital wallets. Brokers, on the other hand, benefit from their services being more accessible to clients and from connecting with them on an increasingly preferred medium. This largely means more engagement and more revenue.

The idea for Fullerton Markets’ own mobile app was conceived with the understanding that it was no longer enough to simply have a mobile-friendly or mobile-responsive website. To better serve our customers and provide a more effective mobile experience, we realised that our core services had to be fully hosted on mobile. Through the app, our clients can expect all the familiar trade offerings, with the additional features of superior responsiveness and a richer experience with in-app functionality and mobile notifications.

In your opinion, why are traders today more discerning than in the past?
The confluence of a stricter regulatory environment, the premium that is placed on increased transparency and the large number of forex brokerages available today means that traders are more aware of better protecting themselves from fraudulent activity and recognise the value of partnering with brokers that offer services that best align with their goals.

In order to retain their clientele and compete to attract new traders, brokers will have to go beyond commonplace offerings. A deeper understanding of traders’ strategies and goals will help brokers design and deliver more customised solutions. Take, for example, the growing number of clients who participate in copy trading: these customers prefer to spend less time on their trades, but still want to make healthy profits. Through our CopyPip system, traders can access a global network of reliable strategy providers to copy from. Strategy followers set the ratio between their account and that of the strategy provider so the risk and lot size traded are adjusted to their capital.

Data-driven tools have also gained traction among traders, providing them with intelligence-backed insights into their business or trading activity. I’m a big believer in data because you can’t manage what you can’t measure. Our business analytics tool, hosted on our digital platform Fullerton Suite, serves to do the same. By collating and presenting valuable metrics such as real-time trading volume to our partners, it allows them to make data-supported decisions that will help strengthen their business or trading strategies.

What are the benefits of partnering with an STP broker?
Straight-through processing (STP) brokers like Fullerton Markets operate by directly passing clients’ orders to their liquidity providers. The absence of an intermediary dealer in this case allows the processing of orders to be done immediately and ensures a higher level of price transparency. Competitive market bids and high liquidity in the market also mean clients obtain better and faster fills through an STP broker.

As it is in their interest that clients make profitable trades, STP brokers often provide traders with useful tools and resources to help them find more consistent success in their trades. Clients can expect to benefit from a whole host of services, including step-by-step tutorials, regular market reports, coaching sessions and live webinars, all of which are designed to bring clients closer to trading success.

FBN Holdings focuses on synergies, efficiencies, and good corporate governance

Posted on by World Finance

FBN Holdings is one of the foremost pan-African financial institutions in sub-Saharan Africa. UK Eke, its Group Managing Director, joins me now. UK, you assumed office in January 2016; explains why the group was created, its commitments to drive efficiencies, extract synergies, and grow the group’s non-commercial bank businesses. He also explains the importance of strong corporate governance to the group’s financial performance. In the other half of this interview UK discusses the group’s flagship brand, Firstbank, which is celebrating 125 years of operation.

World Finance: UK, you assumed office in January 2016; tell me about the company’s journey up to then.

UK Eke: Let’s step back and look at 2012. We took a decision to ring-fence the commercial bank, and hive out all the non-commercial bank activities into a holding company. And the holding company is now the listed entity.

From 2012 to 2015, the focus was really around laying the building blocks; creating the policies and then the framework. So when we took over in 2016, it was around building the super-structure on that solid foundation that had already been laid. And we made three commitments.

One was to drive efficiencies. And we just recently got approval from the central bank to implement our group shared services. Now the commercial bank, First Bank of Nigeria, will be the centre of excellence, and render services to the other operating entities – at a fee, of course. And so through that, we expect to drive down costs. We’ve already seen it trending down, and in absolute terms we’re seeing costs dropping below the inflation rate. And in some cases, even well below what it was for prior periods. So we are optimistic that the cost-to-income ratio will continue to trend downwards.

The second was to extract synergies. I have to confirm that we have seen year-on-year growth in the synergy numbers. As a matter of fact, we’ve achieved over 100 percent growth in the synergy revenue numbers year on year.

And the third was to increase the contribution of the non-commercial bank businesses to group revenue, and of course profits. And I think over the last three years we’ve done a great job delivering that commitment. I have to say that the insurance company, just to give you a sense, grew over 50 percent just in one year. And we’re seeing return on equity north of 40 percent year on year.

So these are excellent results we’ve achieved over the last three years, and I think the shareholders should be proud of the decision that was taken to restructure through a holding company.

World Finance: World Finance has awarded FBN Holdings Best Corporate Governance in Nigeria for 2019 – how important is world-leading corporate governance to the group?

UK Eke: Well, at FBN Holdings, we hold the view that there is a direct positive correlation between corporate governance and financial performance of institutions. And so that is why over the last 100+ years we have entrenched corporate governance in operations across the operating entities.

Now, if you check the local bourse, which is the Nigerian Stock Exchange, we are one of the four listed entities on the elite board. And what that tells you is that, unless you adopt and subscribe to the best code of corporate governance, you will not get onto the premium board. We’re one of the four.

Now, receiving this award from World Finance basically tells us two things. One: it’s an affirmation of what we are doing in corporate governance, beyond the giant strides we’re making in financial performance. So we see this as an endorsement of the brand, and it’s a bragging right for us. Because again, there are very few institutions in Nigeria that have benefited from this award. We are truly proud to receive this award.

World Finance: And what does the future hold for FBN Holdings?

UK Eke: The future is bright. We think that the successes we’ve recorded, which we’re celebrating this year, will be surpassed. That in the years to come, as we hand over to the next generation of managers, they will be inheriting a very strong institution, a solid institution, and therefore the accolades will get even louder than what we are hearing today.

We are proud of our accomplishments, and so the future definitely is bright for this great institution.

World Finance: UK, thank you very much.

UK Eke: You’re welcome.

Nigeria’s Firstbank celebrates 125 years of transformation and success

Posted on by World Finance

Firstbank, the largest bank in Nigeria, is celebrating 125 years of operation. UK Eke is Group Managing Director of FBN Holdings, the bank’s holding company. He discusses the bank’s origins as the British Bank of West Africa, the transformations that Firstbank has undergone through the years, and its vision for the future of banking. In the other half of this interview UK discusses the corporate restructuring that created FBN Holdings.

World Finance: UK, 125 years is a magnificent achievement; how does it feel?

UK Eke: Thank you very much Paul; for us, it’s been humbling.

In 125 years we’ve transformed. We started off as the British Bank for West Africa. But within a few years we became the monetary policy authority for not just Nigeria, but also the British West Africa. Becoming the foremost financial services institution in Nigeria, with strong presence in Africa, and also presence in Asia and Europe.

And so for us it’s been an amazing story. And we do feel proud of what we’ve achieved. This is a landmark celebration; it’s a heritage, it’s an iconic brand that everybody in Nigeria is proud to be associated with. So there’s a feeling of pride and accomplishment; and I daresay the future is even brighter than the past.

World Finance: Tell me more about the transformations that the bank has gone through; how has it changed, and what lessons are you taking forward to the future?

UK Eke: If you check what has happened in the last 125 years, we’ve gone through economic and market cycles. You can talk about the First World War, the Second World War, the Great Depression, even the Nigerian Civil War. And so we have gone through transformation over the period. But one thing that has endured is our full commitment to the nation. Supporting businesses, supporting societies. Not just in Nigeria, but also across West Africa and beyond.

What we have also done has been to deliberately make investments into our future. And that means technology has been at the forefront of delivering service.

Secondly, investment in people. Because the people make the difference. And we do believe that this is what has given us the edge. And so we do feel proud of what we have achieved.

From oil and gas to manufacturing; the retail sector to the government: we’ve supported business. So we are woven into the fabric of society. And that is why we believe that the future again, I repeat, is very bright for us.

World Finance: Tell me more about the investments you’re making in Firstbank’s future; what do you hope to achieve over the next 125 years?

UK Eke: Banking will continue to be relevant. What will change is the way banking services or products are delivered to the consuming public. So we are right now in the digital age, and we are prepared to ride that digital wave. We are building permanent system infrastructure. We are supporting financial inclusion. And we’re just redefining how banking is done.

So for us in Nigeria, and for us in Firstbank particularly, we see an opportunity to drive innovation. We are partnering with fintechs to create products for the future. And we believe that the investments we have made in the present will serve us into the future.

Just to give you a sense of how strong that investment is, today in Nigeria we are the only bank that has issued over 10 million cards. Today in Nigeria we have well over 15,000 agents that are helping us drive towards financial inclusion. And so today we are seeing a whole array of products internally, and then being deployed into the market. And acceptability has been very, very strong.

So our dominance will continue to be entrenched. We believe our relevance and our resilience will continue to endure, even into the future.

World Finance: UK, thank you very much.

UK Eke: It’s my pleasure.

Modi’s grand manufacturing vision may be falling flat

Posted on by Max Tomlin

When Prime Minister Narendra Modi contests the Indian general elections this year, he may not be quite as confident as he once was. Although he remains popular – opinion polls in February still placed him ahead of his nearest competitor, Rahul Gandhi – an election that was once viewed as little more than a formality suddenly looks considerably more interesting. Modi remains highly likely to be re-elected as head of state, but his Bharatiya Janata Party (BJP) may have to rely more heavily on coalition partners – a disappointing outcome after making huge gains in 2014.

While services have rapidly grown to account for more than half of India’s GDP, this has not been accompanied by a jobs boom on the same scale

If the troubles facing India’s ruling party are partly due to a more united opposition, they also stem from considerable voter dissatisfaction – particularly concerning some of Modi’s economic reforms. In 2016, the prime minister launched his demonetisation programme in an effort to crack down on corruption. Unfortunately, it also stunted economic growth and drew particular ire from rural, unbanked voters.

Another of Modi’s policies, his Make in India initiative, may not have created quite so many headlines, but it too is failing to have the desired effect. The initiative was one of the earliest of his political reign, coming just a few months after his election victory five years ago, but it has not managed to turn India into a global manufacturing hub just yet. Time may be running out – and not just for Modi’s political ambitions. India needs to develop its manufacturing sector rapidly to generate the huge quantity of jobs required to satisfy a young and rapidly growing population. If it doesn’t, voters are unlikely to remain happy with the status quo for much longer.

At your service
In September 2014, as Modi launched his Make in India programme, he proclaimed it would increase manufacturing’s share of the country’s economy from 16 percent to 25 percent. The proposal was certainly ambitious, but few would argue against its necessity. Approximately one million citizens join the labour force every month in India and job shortages are a common occurrence. In January, a recruitment drive by India’s state railway service received 19 million applicants for 63,000 jobs. While a thriving manufacturing sector would not completely solve India’s employment crisis, it would alleviate some of the strain.

Unfortunately, manufacturing remains insufficiently developed. Surprisingly for an emerging economy, the sector accounts for just 15 percent of GDP and 11 percent of jobs. One of the reasons for this is India’s dependence on services instead: long stereotyped as the go-to location for western businesses hoping to host their call centres, India also performs strongly in a number of other market sectors including real estate, insurance, hospitality and retail.

But while services have rapidly grown to account for nearly half of India’s GDP (see Fig 1), this has not been accompanied by a jobs boom on the same scale. In fact, despite its size, the sector provides just 34.49 percent of India’s jobs. This discrepancy between GDP and labour force contribution is unusually stark: in developed countries like the US and UK, the service sector’s impact on GDP and employment is roughly equal.

A 2015 IMF working paper explained: “Service exports growth in developing countries has been higher than in advanced economies, albeit from a low base… However, in India, growth in service exports has been much more rapid, resulting in the share of services exports in total exports to increase rapidly during the last decade. At 35 percent, it is even higher than the average in advanced economies. Several hypotheses have been put forth, such as colonial heritage, English-speaking population, policy and infrastructure constraints, making it easier to move to services compared to manufacturing.”

So while India’s performance in the service sector is certainly enviable and has enabled it to boost related exports to foreign markets – a feat that many other developing economies would love to match – this success has allowed the country to neglect its manufacturing sector for too long.

Making little progress
Having identified that a more developed manufacturing base would be required to fulfil the country’s labour needs, the Make in India policy initially focused on 25 key job sectors including automobiles, defence, textiles and electrical machinery. It aimed to increase manufacturing’s share of GDP to 25 percent by 2022 and, in doing so, create an extra 100 million jobs. So far, those aims are looking wildly optimistic.

Manufacturing in rural areas – where informal work is more prevalent – currently accounts for 51.24 percent of gross manufacturing value added

Since the policy was initiated in 2014, India’s manufacturing sector has actually contracted slightly, and further challenges could be on the horizon. In January, many of the country’s heavy industry firms raised concerns about potential production stoppages because of steel import limits imposed the previous August. Ironically, the restrictions could mean Indian businesses have to import industrial components rather than raw steel, leading to further questions over the efficacy of the Make in India initiative. Such setbacks demonstrate that it is not enough for economic policies to simply be well-intentioned – they need to actually be effective.

Part of the reason why India’s manufacturing sector has struggled is that the country has tried to run before it can walk. Imposing import restrictions is not a bad idea, per se, but it will always prove ineffective when domestic companies are struggling to match the quality, consistency and price of those based overseas. In order to solve this problem, the Indian Government needs to direct more of its efforts to ensuring its labour force has the skill set required for high-quality manufacturing.

India’s literacy rate compares poorly with those of China and most of the South-East Asian states, where a concerted focus on improving educational access has borne fruit. In India, education is still often seen as a means of achieving social mobility rather than an economic necessity. Education is currently compulsory until the age of 14, but according to the most recent census, as many as a quarter of under-14-year-olds are not in education. It is perhaps unsurprising, therefore, that just two percent of Indian workers have professional skill qualifications.

“Improvement of human capital requires far higher, targeted and outcome-based expenditure on health and education,” Kunal Kumar Kundu, Société Générale’s India economist, told World Finance. “The government of India spends more on interests and subsidies than on health and education. Even India’s official skill upgrade programme has achieved precious little over the years.”

There have also been policy missteps elsewhere. The goods and services tax (GST), launched in July 2017, has been criticised for being overly complex and, coming hot on the heels of the demonetisation disruption, causing a further slowdown in manufacturing growth. While the long-term impact of the GST may be beneficial to the Indian business climate, the rollout has caused substantial pain.

The failure of the Make in India programme so far is not for want of trying. Through a number of reforms, the government has issued incentives to boost the production of smartphone components, military equipment and pharmaceutical products. These initiatives could eventually have their desired effect, but the more fundamental issues facing the Indian economy must be dealt with first.

Off the rails
While Kundu is right to say that there have not been many Make in India successes thus far in terms of “actual investment taking place and meaningful progress”, there have been a few minor gains. India has climbed up the World Bank’s Doing Business rankings, rising from 134th position in 2014 to 77th place last year. Although this is the result of broad business reforms, including improvements to credit access and more reliable electricity connections, they will have been particularly felt across the manufacturing sphere.

15%

Proportion of GDP

11%

Proportion of jobs

16%

Share of economy

Even though they may have been few and far between, there have been other headline-grabbing achievements. As part of a $100m contract, India has agreed to construct six diesel multiple-unit trains and 10 locomotives for Sri Lanka Railways, the first of which made its maiden journey between Colombo and Kankesanthurai in January. Going all the way back to 2015, BMW increased the localisation at its Chennai plant to 50 percent in direct support of the Make in India initiative.

Nonetheless, these improvements are scant reward for Make in India’s grand ambitions. Some advocates of the government policy have claimed the continued increase in foreign direct investment (FDI) should be used as evidence of its success; closer examination makes this claim questionable at best. While it is true that FDI inflows rose consistently between 2014 and 2017, how much of this investment was truly ‘new’ is up for debate. Across 2017, for example, 28 percent of FDI was reinvested income. In addition, services continue to attract a larger proportion of this money than manufacturing.

In fact, there has been further evidence that the Make in India initiative may be doing more harm than good to the country’s domestic manufacturing sector. In January, Samsung announced it might have to slow smartphone construction in the country and even stop local production for certain models because of changes to the government’s Phased Manufacturing Programme timetable.

Initially, businesses were given until March 2020 to begin the local manufacture of certain components, or they would face a 10 percent import duty and a one percent surcharge. However, a decision to bring this deadline forward would mean it would no longer be in Samsung’s financial interests to continue production at current levels. Evidently, if the Make in India programme is enforced too stringently, it is likely to have the opposite effect to the one intended. No economy can afford to alienate the world’s largest smartphone maker, but certainly not one that is looking to produce more goods locally.

Fixing a broken system
In order for Modi’s Make in India policy to gather some much-needed momentum, the Indian Government must look at implementing some fundamental reforms. More flexible labour market rules would be a start. Currently, businesses with more than 100 members of staff must obtain official approval before they are permitted to fire anyone. Overly bureaucratic policies like this must be loosened if businesses are able to grow effectively.

Manufacturing firms in India start small and tend to remain that way

Manufacturing firms in India start small and tend to remain that way. A study conducted by India’s Exim Bank found that in the US, a company will grow to 10 times its original size on average over a period of 35 years. In India, the same company would see its productivity only double, while its employee number would actually decline. Given that smaller firms are unlikely to be as productive as larger ones, it’s no wonder India’s manufacturing sector is struggling to take off.

“The two most crucial reforms that India requires relate to the two most important factors of production: land and labour,” Kundu said. “The pace of these reforms [is] fairly slow, these being politically challenging. Policy uncertainty also plays a role. The abrupt and mass cancellation of 2G telecom licences is a case in point. The poor quality of India’s physical infrastructure must be considered as well, though there has been some improvement in this area at least.”

The aforementioned state of India’s infrastructure and the country’s shallow supply chain ecosystem contribute to the informality of its manufacturing sphere. Manufacturing in rural areas – where informal work is more prevalent – currently accounts for 51.24 percent of gross manufacturing value added. Here, workers are often without social security protection, and productivity is low. As with the country’s education system, India’s employment landscape is in need of modernising before the government can even think about truly reinvigorating manufacturing.

India’s recent turn towards protectionism in its steel industry highlights the misguided nature of Modi’s Make in India policy. Although import tariffs can be an effective way of allowing a domestic industry to develop, this is only true if the groundwork has been put in place first. As it stands, protectionism is simply preventing Indian businesses based higher up the value chain from gaining access to the components they need.

India’s future success in manufacturing is likely to depend on how easily it can improve the availability of basic production factors such as land, labour and capital. If Modi’s economic reforms continue to flounder, his popularity among the Indian public may start to wane too. To ensure this does not happen, he should canvass opinion from a wide range of Indian businesspeople, academics and government officials to ascertain where the Make in India policy is going wrong. They are likely to suggest a thorough overhaul of India’s education system, land ownership laws and labour market regulations. Only then will the manufacturing sector be able to attract the domestic and foreign investment it needs to compete on the global stage.

FXTM continues to revolutionise the forex market

Posted on by Max Tomlin

Both the forex and technology industries are changing and accelerating at an unprecedented rate. As regulation shifts to keep up with the growth, brokers are competing to unveil the latest technological advancements. As such, most have now expanded their offerings to include on-the-go trading through mobile apps. The challenge in the competitive field of retail trading, therefore, is to create an app that stands out from the pack – one that simultaneously adheres to regulatory changes while also meeting the needs of a new trading generation. In short, it needs to be an app that evolves with the times.

As regulatory bodies adjust regulations to meet increasing privacy and communication concerns, brokers must evolve for their clients

This challenge was at the heart of FXTM’s technological pursuits in 2018. The brand is one of the fastest-growing brokers of recent years, with more than one million registered clients by the end of Q2 2018. It also received widespread acclaim, picking up awards for best customer service and best trading conditions in 2017 and 2018 respectively in the World Finance Forex Awards. Furthermore, among the broker’s major milestones last year was the release of its first mobile trading app, FXTM Trader. But instead of rushing to release it as quickly as possible, FXTM chose to take its time and build the app in house to ensure it was tailored to the specific and localised needs of its growing client base.

Regulatory dexterity
Over the past year, a broker’s readiness for change has become absolutely essential. As regulatory bodies across Europe and beyond adjust regulations to meet increasing privacy and communication concerns, brokers must be prepared to evolve for the reassurance of their clients.

31%

of traders surveyed in 2017 would consider mobile trading

61%

of traders surveyed in 2018 would consider mobile trading

43.5%

of forex traders are age 25-34

For instance, January 2018 saw the introduction of the MiFID II framework, which ensures that the foreign exchange market reports and trades with transparency. The European Securities and Markets Authority (ESMA) has also implemented regulatory changes, requiring brokers and those accessing markets to impose trading restrictions. This includes limitations on products related to contracts for difference (CFDs) for retail clients, which are complex instruments that come with a high risk of rapid capital loss as they provide higher leverage than traditional trading. In December 2018, ESMA announced that these restrictions – which include limits on leverage between 30:1 and 2:1 – would extend for a further three months from February 1 of this year.

As more rules are implemented in 2019, the field of compliant brokers may narrow – potentially making a client’s choice of broker simpler. Standing out from the crowd is FXTM, which recognises the high level of risk involved with trading leveraged products like forex and CFDs, and complies with all updated regulations for transparency and customer assurance. For example, last year it became obligatory to promote the fact that 90 percent of European retail investor accounts lose money when trading CFDs with the broker. Moreover, all marketing material must now come with a clear message for potential clients, urging them to consider whether they understand how CFDs work and whether they can afford to take the high risk of losing their money.

Fortunately, technology is on hand to support the way brokers adapt to regulation. Regulatory technology, or ‘regtech’, aims to tackle the increased security risk associated with digital products, and is becoming more prolific in the industry. Using cloud computing, regtech tracks transactions online, thereby allowing for irregularities to be recognised in real time. Together, machine learning and data storage on the cloud allow financial institutions to identify and combat threats at an early stage.

The mobile market
Challenges aside, tightened regulation and improved safety have opened the door to the mobile market for many. This is because increased security reassures investors that their funds are as secure on mobile as they are on desktop. Advancements in mobile technology have reinforced this further; for example, the release of the iPhone X in September 2017 introduced Face ID alongside fingerprint unlocking as a new way for users to safeguard their phone’s data. Equipped with regulations to protect mobile clients and the security measures to keep funds secure, mobile trading is poised to continue expanding over the coming years.

This propensity for growth was evident in a 2018 study conducted by JP Morgan. In a survey of 400 traders, it was discovered that 61 percent were considering mobile trading. The percentage notably increased from the previous year, when just 31 percent of traders considered using a trading app. The market is swiftly meeting this rapid increase in appetite for mobile trading. Broker-agnostic platforms including MetaTrader 4, NetDania, and Trade Interceptor have grown in popularity accordingly. Alongside them, individual brokers like FXTM use in-house teams to build and release their own trading apps.

The mobile trading market targets a particular demographic of the forex trading industry. According to a study by BrokerNotes, 43.5 percent of forex traders are aged between 25 and 34, and this figure is on the rise. This Millennial target market is notorious for its heavy phone use. According to KDM Engineering, 43 percent of Millennials check their phone every 20 minutes, while the average user interacts with their phone more than 2,600 times a day. Adapting to this particular demographic means meeting the needs of a generation that is accustomed to quick, user-friendly applications.

Customer-first approach
Client service has remained a core value for FXTM since the brand’s foundation in 2011. In addition to the awards received from World Finance, the broker was recognised as the top customer service provider at the ninth Saudi Money Expo in 2016. Among its impressive features is multilingual customer support, with fully trained customer service representatives readily available should clients require any kind of assistance. The feedback is positive: over 90 percent of FXTM clients are pleased with their experience, according to statistics checked by PricewaterhouseCoopers. FXTM is determined to carry its high standard for customer satisfaction through to its mobile app now that it has been released.

At present, the in-house team at FXTM is focused on creating and maintaining a trading app for those who expect fast access to their favourite trading functions. The FXTM Trader app, which was released in December 2018, was created following rigorous research into how FXTM traders want to interact with their trading platform. The functions that traders used the most were prioritised in a user-friendly and intuitive interface. FXTM Trader’s navigation system was also tweaked until it met and exceeded the company’s user-friendly design standards.

In order for the app to become indispensable, it is designed to be personal and customisable. For instance, a user can arrange the FXTM Trader interface in a way that meets their specific trading style and needs. Clients can select the instruments they want to track, choose the chart type that suits them best, and focus on the particular time frame they want to monitor. Key statistics are accessible in a few quick taps, displaying balance, margin and profit in a user-friendly client dashboard. Traders can also swap between the administrative centre and live markets, going from managing their account details to taking long or short positions in a matter of seconds.

The next frontier
The use of artificial intelligence (AI) in the forex industry really started to increase in 2018. While the capacity for AI in mobile trading apps is yet to be fully explored, it’s already clear that the technology will play an essential role in the future of mobile trading.

In response, most ambitious forex brokers now have their own purpose-built mobile apps, but they have become relatively homogenous. The next big area of differentiation, it seems, will come in the form of personalisation that’s driven by AI. From early AI-supported education and assistance in a customer’s journey, to trade ideas and personalised trade analysis for active clients, AI is set to revolutionise our ability to interact with clients as individuals.

Most brokers still see significant trade volumes on desktop, but AI tech is poised to facilitate smoother customer experiences and therefore accelerate the move to mobile-only. These changes won’t happen overnight – the industry is still getting its head around this hugely complex topic – but all signs point to AI on mobile apps as being the next big frontier for the forex industry. It should come as no surprise, then, that forward-thinking brokers like FXTM are already starting to explore ideas around how AI could be applied to various aspects of their products and services.

The full potential of technology in the forex industry is yet to be realised. However, we are gradually seeing how technology can create a personalised experience for clients. The customised approach will interlace customer experience with state-of-the-art trading capabilities, thereby achieving high levels of customer satisfaction. Furthermore, being awarded the Best Trading Experience accolade in the World Finance Forex Awards 2019 is a testament to FXTM’s technological pursuits so far, giving the broker that extra drive to continue developing and perfecting its products and services for the trader of today.

The slow death of global stock markets

Posted on by Max Tomlin

This January, Interlink Electronics, a US technology company specialising in human-machine interface and force-sensing technologies, announced its voluntary delisting from Nasdaq. A quote by the company’s CEO, Steven Bronson, explained the reasons for the decision: “To better position Interlink to accelerate long-term profitable growth, we undertook a thorough and thoughtful review of our cost structure, including costs associated with being a Nasdaq-listed and SEC [Securities and Exchange Commission]-reporting company.”

There is nothing noteworthy about a company relinquishing the privilege of being listed on the stock market these days

It would seem that there is nothing noteworthy about a company relinquishing the privilege of being listed on the stock market these days – such a move is all too common. Since 1996, the number of public companies in the US has almost halved (see Fig 1), with delistings exponentially increasing and IPOs also dropping. The average number of listed companies per one million US citizens has also halved since 1976, according to a recent report by the National Bureau of Economic Research, a US think tank. The study found that the US has roughly 5,000 fewer listed companies than would be expected for a country of its size, population, economic development and rule of law. The picture is similar on the other side of the Atlantic: since 2000, the number of listed companies has dropped by 37 percent in Germany and by 23 percent in the UK (see Fig 2).

The research resurgence
Academics and market analysts do not agree on the causes of the crisis, or whether this is a crisis at all. A popular theory focuses on the rise of the knowledge economy. One of its main proponents, Professor René Stulz, argues that, in the technology sector, investment in research and development makes going public a risky option. As Stulz suggested in a recent paper: “If a firm invests in intangibles, it is much more difficult for its management to convince investors that it will make good use of its money. If the firms give too much detail, which they could be forced to do by disclosure laws if public, their competitors can use the information. If they give too little detail, investors will pay little for their shares. It is not surprising, therefore, that for such firms, participation in public markets with their disclosure requirements is likely to be onerous.”

The case of Interlink Electronics – a world leader in printed electronics with operations in Singapore, China, Hong Kong and Japan – corroborates this theory. The company’s delisting announcement noted: “The resulting reduction in operating expenses will allow us to invest greater amounts towards research and development and sales, which is a superior use of our limited resources.” The California-based firm had reregistered just three years ago, hoping to tap into capital markets to accelerate growth. However, things did not go as planned, as the firm’s leadership decided that “the benefits to the company and its stockholders of continued Nasdaq listing and SEC reporting did not justify the costs of maintaining that listing and continuing to publicly report”. Currently, the company asserts that it has “a strong balance sheet with no debt” and does not need to raise more capital to meet its targets.

But this case is the rule rather than the exception in the technology sector. For many companies, the obligations that accompany a listing are too costly and burdensome. John van Rossen, Managing Partner for EY’s private equity advisory business in Europe, the Middle East, India and Africa, told World Finance: “Governance and reporting requirements have strengthened in the public markets in the recent past, with a knock-on implication for the costs to maintain a listing.”

For some analysts, overregulation is the main culprit for the shrinking of stock markets

Another side effect of the increasing importance of the technology sector is the rise of the FAANG powerhouses – Facebook, Apple, Amazon, Netflix and Google – which dominate their markets and frequently acquire smaller tech companies before they become big enough to go public. This was the case with Facebook’s acquisition of Instagram. Dr Klaus-Heiner Röhl, a researcher at the German Institute for Economic Research in Berlin, said: “Investment in buildings, machinery and equipment becomes less important for companies, while investment in intangible capital, such as software and patents, is essential. The rise of intangible investment is often associated with network effects… A good or a service yields more utility to a customer when more people are using it. These network effects enable monopoly rents and thereby contribute to more concentration.”

Germany is a good example of such a market, Röhl told World Finance: “In Germany, non-financial corporations were traditionally highly interconnected to other corporations by their holdings of company shares. But German companies have decreased their holdings of listed shares and increased their direct acquisitions instead since 2000. This mirrors a new investment policy: in the knowledge economy, companies acquire the knowledge and the patents of other companies through the acquisition of the whole company.”

Some experts hope the trend may be reversed once more technology companies decide to go public. Sharing-economy powerhouses such as Airbnb, Uber and Lyft are expected to be listed this year. However, Professor Jay Ritter, an academic at the University of Florida who has been dubbed ‘Mr IPO’ for his work on the subject, is not optimistic: “It looks as though the long-awaited IPOs of some of the big tech unicorns will happen this year. But most smaller companies will not go public – they will merge instead, typically by being bought by a large company in their industry.”

Death by red tape
For some analysts, overregulation is the main culprit for the shrinking of stock markets. In the US, criticism focuses on the Sarbanes-Oxley Act, which was passed in 2002 as a response to the furore that followed the collapse of WorldCom and Enron due to illegal accounting practices. The law requires public companies to hire external auditors to scrutinise internal controls. Critics argue that this can be too onerous for smaller companies, costing them up to six times more for accounting compared with larger firms, according to the SEC. Others point to the JOBS Act, which increased the number of investors private companies are allowed to have before they need to report publicly.

Private equity firms have come under fire for their contribution to the shrinking of the stock market

Recognising the problem, SEC Chairman Jay Clayton has announced the commission’s intention to provide smaller, fast-growing companies with incentives to list. One of the proposals under consideration is the possibility of allowing these companies to hold informal talks with investors before announcing a listing so that they can test the waters for an IPO.

In the EU, one of the goals of the recently established capital markets union is to make listings easier for smaller companies. The policy enables firms with fewer than 500 employees to issue stocks under a less restrictive regulatory » framework, lowering the costs of an IPO. Markus Demary, a senior economist specialising in monetary policy and finance at the Cologne Institute for Economic Research, told World Finance: “What needs to be done additionally is to reduce the costs of being a public company through a reduction in the complexity of disclosure requirements, but without undermining investor protection.”

Market volatility in the markets may also prevent start-ups from considering an IPO. Last August, Elon Musk sent shock waves when he tweeted his intention to take Tesla, a hi-tech car manufacturer, out of the stock market. The price of the company’s shares skyrocketed, but plunged soon thereafter when the SEC launched an investigation into Musk’s behaviour. Leslie Pfrang, a partner at the IPO consultancy Class V Group who has previously led the sales team for hundreds of technology IPOs, told World Finance: “Short sellers can outsize the market in thinly traded stocks [that are] especially vulnerable post-IPO, and promulgate rumours, volatility and runs on stocks whether or not the fundamentals call for it. This is a big issue for companies looking at IPOs and access to future liquidity, because they see this kind of activity, especially around lock-up expiration and when the company has limited liquidity post-IPO, as something that creates risk.”

Double-edged equity sword
The impact of the drop in IPOs is exacerbated by the rapid increase of delistings. With the exception of one year, more companies have delisted from the US stock exchange than gone public over the past two decades. One reason is the explosion of mergers and acquisitions, driven by increasing private equity buyouts. Since 2000, around 15 percent of delistings in terms of market valuation have involved at least one private equity firm. Half of these companies are permanently delisted. Demary told World Finance: “Selling a company to another private equity firm or fund has become an alternative to an IPO. This is an attractive option for a firm, because the private market is less regulated compared to the public market.”

37%

decline in listed companies in Germany since 2000

23%

decline in listed companies in the UK since 2000

5,000

fewer listed companies in the us than would be expected for its size, population and economy

15%%

of stock market delistings since 2000 have involved at least one private equity firm

Private equity firms have come under fire for their contribution to the shrinking of the stock market and the dwindling participation of smaller investors. Criticism focuses on regulatory privileges that have driven the increase in buyouts, such as tax breaks and the treatment of profits as capital gains rather than income. Pfrang said: “Debt is tax-deductible, and carried interest is taxed at capital gains rates when drawn. This gives private equity firms that leverage up their equity investments and pay themselves in carried interest a big advantage, so private valuations have risen sometimes higher than public market valuations. And that private capital comes with very few strings attached and very little oversight by those investors – as we saw in Uber and a few other cases.”

For smaller companies, the exponential increase of private capital is a boon. Currently, just over half of all capital raised in the US by start-ups is coming from the private market. Staying private helps them skip the burdensome process of hiring lawyers and accountants to comply with SEC rules. Van Rossen said: “The direct governance model in private equity by the capital provider avoids the need for public-company-style reporting requirements. However, the industry and its funding sources are conscious of their role in the financial markets and their responsibility to stakeholders and have, in some cases, taken initiatives to enhance disclosures on a voluntary basis.”

The opacity of smaller markets
Smaller stock markets can have dire consequences for investors, many experts warn. Kara Stein, an SEC commissioner until January 2019, has repeatedly highlighted the importance of transparency in financial markets. Private companies are required to disclose a limited amount of data compared with public ones, although public information is necessary for investors and companies to make decisions. As Stein put it in an interview, the oversized growth of private markets at the expense of public ones could create “a deterioration in price discovery”. Less transparency also increases the risk of investors taking a major hit in the case of a crisis, given that investor protections in the private market are weaker.

In markets where private equity capital is less abundant than in the US, even start-ups may find it difficult to raise funds. Röhl told World Finance: “We observe that, at least in Germany, retail investors as well as institutional investors have decreased their holdings of company stocks, an indication that less capital is flowing into public markets. This can lead to funding shortages for potentially high-growth companies, which is mirrored in the declining number of IPOs. This is more of a problem for German high-growth companies than for their counterparts in the US and the UK, because in contrast to the US and UK, private equity is less available in Germany as an alternative to an IPO.”

Some experts go as far as linking the decline of listings with the rise of inequality and populism on both sides of the Atlantic. In an influential paper, Swedish economists Alexander Ljungqvist, Joacim Tåg and Lars Persson claimed that delistings can reduce citizens’ exposure to corporate profits and undermine support for business-friendly and free trade policies. The authors warned that “a shrinking stock market can trigger a chain of events that leads to long-term reductions in aggregate investment, productivity and employment”. By being excluded from capital markets, the average voter cannot reap the benefits of globalisation through increased share prices.

Many are worried that the shrinking of stock markets reflects a bigger crisis: the concentration of corporate earnings in a small number of companies

Fewer options on the stock market can also lead to a less diversified portfolio that can put smaller investors’ insurance and retirement plans at risk. Demary said: “The decline of IPOs could increase inequality, because it lowers the opportunities for average retail investors to put their money into high-growth companies. Instead of going public, these companies are acquired by private equity firms in which high-net-worth individuals can invest, but the average investor cannot.”

However, other experts find these concerns overblown. Ritter said: “I find the Ljungqvist et al hypothesis rather far-fetched. In the US, most stockholders own stock indirectly through mutual funds, and they have no idea whether their portfolio owns 100 or 500 or 3,000 different companies.” He added: “Total market cap has not declined, it is just split among fewer but larger companies. Investors still get the benefits of diversification. Although there are no autonomous vehicle companies that are publicly traded, investors can get exposure to this technology by owning Alphabet (with its Waymo division) or Tesla. Audi and other companies also are developing self-driving capability.”

Others believe that for most companies, the benefits of going public still outweigh the costs. Pfrang told World Finance: “A company that sells mission-critical SAAS [software as a service] or security software to large enterprises may win more customers when these see that the company they plan to rely on to run a key part of their enterprise technology has thousands of other customers who are buying more of their products every year and [has] a healthy balance sheet. We hear from CEOs all the time [who] have gone through the process that their companies become more focused and disciplined and better able to attack competitive opportunities.”

Many analysts are worried that the slow shrinking of stock markets reflects a bigger crisis: the concentration of corporate earnings in a small number of companies. Over the past few years, the earnings of the top 200 US firms have exceeded or approximated those of all other public firms combined. During the same period of time, US public firms have shown a preference for returning equity to investors rather than raising new capital, exacerbating fears that stock markets are becoming a mechanism for rewarding shareholders.

Several measures have been proposed to reinvigorate stock markets. To curb the increase in delistings, many experts have suggested that governments should strive to reduce the costs of investing in privately held firms for smaller investors, or alternatively force these companies to disclose more information on their activities. Others propose the elimination of tax breaks – or even tax hikes – for private equity buyouts. However, this is practically difficult, given the information asymmetry between retail and institutional investors. On both sides of the Atlantic, investment in private companies is almost exclusively reserved for ‘accredited investors’: funds and high-net-worth individuals. Roni Michaely, professor of finance at the Geneva Finance Research Institute, is not optimistic that things will change for the better: “The combination of increased concentration and increased profitability of the stock market will drive another wedge between people who own equity and those who make a living from their work.”