2022 | World Finance

Geo-political turbulence

Posted on August 4, 2022August 4, 2022 by itsupport

Major financial firms have always been reluctant to talk about geo-political risks, at least publicly. They have been comfortable in a globalised world where the growth of international trade and cross-border investment made the deep political fissures of the Cold War seem like a distant memory. This has left them ill-prepared for a new era of sustained geo-political turbulence.

Many did not even analyse the potential risks to their business thoroughly because they did not view some of the more cataclysmic risks – such as a war in Europe – possible, or because the issues raised are just too sensitive – such as with China and the threat it poses to Taiwan. The disruption caused to global trade and the international financial services sector by the Global Financial Crisis of 2008–09 seems like a bump in the road when compared to the huge craters being caused by the Russian invasion of Ukraine.

The immediate consequences with the massive spike in energy prices and the draconian sanctions are hard enough for many economies and businesses to swallow, but the effects are going to stretch far and deep beyond that. Resilience has become a popular concept for financial institutions to talk about but, all too often, it has been resilience to those risks that are more predictable and the impact of which can be quantified with a reasonable degree of certainty.

Those critical uncertainties, only visible in the far distance of horizon scanning exercises, were often passed over. Brexit provided a jolt to that complacency for firms with well-established cross-border business between the European Union and the UK but it was the COVID-19 pandemic that made boardrooms think harder about those risks it had previously pushed into the background as unthinkable.

Failure to prepare
Pandemics had long been on the list of major threats to society, economies and financial institutions but, if they are being honest, few western governments and businesses seriously explored the possible impacts and put in place robust contingency plans for a pandemic.

The huge public relations disaster of the way the insurance industry – especially in the UK – responded to business interruption insurance claims from businesses forced to close by lockdown measures, amply demonstrates how unprepared major business sectors were for a pandemic. That was one wake-up call. It may have had the bosses of the world’s financial institutions looking harder at what might be looming on the far horizons of business risks but it still did not elevate geo-political threats to the top of many boardroom agendas. It would be unfair to characterise all firms as blinkered when it comes to geo-political risks, says Oksana Antonenko, a Director at the Global Political Risk team at Control Risks. She told World Finance that regulators must also share some of the blame for overlooking these threats, by forcing firms to focus their risk management expertise elsewhere: “Financial regulation has not developed a sound, consistent, coherent and rigorous approach similar to that which firms were required to adopt after the global financial crisis. That introduced stress testing for financial risks but did not do the same for geo-political risks.”

Antonenko continued: “Unless there is a regulatory requirement to undertake this and regulators in the west require financial institutions to publish geo-political risks analysis they will not do so. They won’t get visibility and financial institutions will not talk. There were some requirements, especially in the US, to look at emerging risks but there has never been a clear definition of what these risks are.”

She also points to the perils of talking openly about geo-political risks, highlighting the loss of licences by some firms in Turkey when they voiced concerns about the reckless economic policies of Viktor Orbán’s government. Similarly, the silence from major financial institutions on the risks China poses is deafening. No one will talk about them. The fear of upsetting crucial client relationships is all pervading, and many firms cite genuine concerns for the safety of their staff in China or the families of London-based Chinese staff if they are seen to venture opinions that might be interpreted as hostile in Beijing.

Monitoring exposure
Russia’s assault on Ukraine has potentially changed much of this reticence. Now, financial firms are looking at their exposures to a wide range of geo-political hazards and, in particular, the risks of getting caught by suddenly imposed sanctions or enmeshed in social unrest ignited by growing internal tensions and economic pressures. The response of western liberal democracies to Russia’s invasion of Ukraine has surprised many in its strength and unity and has added to the volatility across the world’s financial markets.

Measuring, predicting and protecting against the consequences of that volatility is now a priority. “Many firms do now have teams embedded at a senior level and are now looking at these risks in a more rigorous fashion,” says Antonenko. There are many ways of looking at these threats and trying to make sense of them using the various scenario planning tools that academics have developed.

Plotting the risks on a matrix that maps both the critical certainties and critical uncertainties is one favoured tool for bringing out the threats – and the opportunities (see Fig 1). Those that are placed on the far left of the certainties matrix are the issues that should already be part of day-to-day business planning, strategy and delivery. Moving across the matrix are the issues surrounded by a higher degree of uncertainty. It is those that migrate to the top right hand corner – extreme uncertainty but with potentially high impact – that should attract the most attention but which are often put in the ‘too hard’ tray.

Potential for escalation
Other tools embody the notion of horizon scanning to draw out the major disruptive threats to their business. “Horizon scanning is vital in this area. In many ways the Ukraine crisis has been one of the key risks to watch since late last year. We certainly saw the potential for escalation,” says former BBC journalist and anchor Susannah Streeter, now senior investment and market analyst at financial firm Hargreaves Lansdowne.

Streeter adding: “Because the horizons are often further away it tends to be the current risks that concentrate minds and are pushed to the top of the agenda. We saw this with the pandemic. The risks to Europe were downplayed, even when it took hold in Italy. Countries didn’t move up to that emergency gear until it arrived in their own countries.”

Pro-democracy protesters are arrested by police in Hong Kong

Many scenario planning tools categorise each risk as is plotted on their matrix or across their horizon. This helps highlight the sort of knowledge and expertise needed to understand the issues. The most common categorisation is PESTEL (Political, Economic, Socio-demographic, Technological, Environmental and Legislative). This also makes it easier to see the potential connections, how one event can act as a trigger for another, something highlighted in a recent Informed Insurance report from leading corporate law firm DAC Beachcroft.

Looming large
In the context of Ukraine, this immediately connects energy conflicts, trade disputes and sanctions, terrorism and cyber-attacks with social unrest also looming large in this complex risk scenario. It also shows how dramatic geo-political events can quickly cut across other priorities, such as the fight against climate change and the development of broad environmental, social and governance (ESG) strategies, says Helen Faulkner, head of insurance at DAC Beachcroft: “Up until the Russian invasion of Ukraine the emphasis in insurer ESG strategies was firmly on the environmental aspects. Ukraine has not so much diminished that focus but brought the social and governance issues to the fore as well.”

Financial firms are looking at their exposures to a wide range of geo-political hazards

Faulkner explained: “Energy strategies are at the heart of the European response to the invasion as we all rush to disconnect our reliance on Russian gas and oil. This could either set back the shift away from fossil fuels, or accelerate it as nuclear energy and renewables enjoy increased government investment.”

Global supply chains have been sensitive to concerns about environmental sustainability and have been very focused on reducing their carbon footprints, especially following the COP26 Summit in Glasgow last November, which imposed new net zero targets on international transport by road, sea and air.

The war in Ukraine has forced firms to change priorities says Oliver Chapman, CEO of supply chain specialist OCI: “Everyone was trying to do their best on sustainability and reducing their carbon footprint. But their number one priority is to make sure their supply chain is secure and this means sustainability has taken a bit of a lower priority. It still matters, but if a business has to put more trucks on the road to keep its business going then that is what it will do.” The ‘S’ and ‘G’ parts of ESG will also come into sharper focus, according to Faulkner: “The social part of ESG is also important. How businesses treat refugees will be judged as much as how governments treat them.

From how easy financial institutions make it for refugees to get insurance cover and banking services, to offering them employment opportunities, will all come under the microscope of public opinion. Governance is also crucial as sanctions are extended and enforced. Most insurers and brokers have withdrawn from Russia but the complexity of international sanctions requires constant review and monitoring.”

Serious questions to be asked
Sanctions are one of the major hazards and have myriad consequences for financial institutions and the economies of the western liberal democracies that have implemented them. “It was a surprise to see such unity of purpose, especially how quickly the Europeans adopted sanctions that have damaged their own economies, especially in relation to energy costs,” says Antonenko. Further adding: “There is a serious question around how sustainable this will be over time. This could go on for months, if not years, and the price will be quite high for Europe.”

The price could be high for businesses that get it wrong too, warns Streeter: “It is the reputational risk that really worries firms. Even when governments haven’t necessarily imposed specific sanctions there is the court of public opinion holding firms to account. Some took longer than others to withdraw from Russia but the power of social media gradually impacted some major global brands and forced them to act.”

Nuanced positions are hard to sustain in the face of strong, often sharply polarised, public opinion, Streeter continues: “HSBC’s standpoint on the Hong Kong protests in calling for stability seemed to many to be supporting the authorities. It shows just how difficult it is to walk that tightrope.” Wherever you look, sanctions compliance is an issue, says Chapman. Many of his clients have complex international supply chains and feel very exposed to the potential risk of making a mistake by inadvertently dealing with a sanctioned entity.

“There has been a huge focus on due diligence. It is now important to look beyond your own suppliers and look at their suppliers and their suppliers’ suppliers. What we don’t know is how these will be implemented and enforced over time and what sort of fines and penalties could be issued for breaching them in some way,” said Chapman.

Antonenko agrees: “Compliance is very difficult. There are just hundreds and hundreds of people and firms on the sanctions lists. We are seeing over-compliance at the moment with banks being very cautious. One consequence could be that sanctions will encourage the rise of cryptocurrencies. They are certainly going to benefit from this.”

The crypto markets
At the moment, the price of bitcoin and other leading cryptocurrencies does not show much impact from the Ukraine conflict. Since the heavy build-up of Russian forces on Ukraine’s border started last November, the price of bitcoin has fallen by 50 percent with trading levels relatively low. The cryptocurrency markets are not exhibiting the sort of volatility you might expect if firms were switching to them, either to facilitate legitimate payments or find a way of getting round sanctions. Many of the key sanctions are financial, including the effective freezing of assets held abroad by Russia’s central bank and selected Russian commercial banks, and the exclusion of most Russian intermediaries from the SWIFT messaging system used to facilitate cross-border transactions among banks.

The tough sanctions imposed on the large foreign currency reserves Russia has built up caused many a sharp intake of breath across the international money markets, but perhaps were only to be expected once the major western economies and Japan started to move to isolate Russia financially. The freezing of the reserves is directly linked to the desire to limit Russia’s ability to finance its war against Ukraine. The Bank of Russia had accumulated more than $600bn of international reserves, including gold (see Fig 2).

This was a 50 percent uplift over five years and, in retrospect, is being seen as laying the ground for financing the expansionist policies of the Russian regime. This will be an area where sanctions could develop quickly. Economists Richard Berner, Stephen Cecchetti and Kim Schoenholtz, writing for the VoxEU research and analysis website, warn: “Sanctions trigger an arms race. Once in place, the target looks for paths to evade them, while those imposing sanctions work to increase their effectiveness. Put differently, sanctions are a game in which one party looks for leaks to exploit while the other works to plug the holes. Furthermore, an essential aspect of the arms race is that the two parties seek to demonstrate their resolve in an effort to convince the other side to concede.

Consequently, the most important aspect of effective sanctions arguably is a credible commitment to modify and update them as needed – that is, to do whatever it takes.” It is the ripples that are already spreading out further that will cause the most concern, as they bear all the signs of a financial contagion that could be hard to contain.

A problem exacerbated
One part of the international financial markets that has already felt the impact is the sovereign debt market. On April 12, Sri Lanka announced that it would suspend payments on the $35bn it owes the world. This is not solely a consequence of the Ukraine conflict. Its impact on energy and commodity prices quickly exacerbated an already shaky economy and a country beset with social unrest. Less than a month later, on May 9, the government fell.

This is where the shifting sands of geo-political power games start to have a serious impact on financial stability. During this century, many emerging economies have become heavily indebted to China. According to the World Bank, 60 percent of the poorest economies are in debt distress or at high risk of it and with interest rates rising across the world this could turn out to be a conservative figure. The problem here is that the prospects of co-operation between western lenders and China on debt restructuring is being diminished by the strains of the Ukraine conflict.

So nervous eyes are being cast towards South America, where serial defaulter Argentina is already sending up distress signals and the political instability already very visible in Venezuela, Chile and Colombia is already nurturing economic and financial crises. Colombia has been gripped by political unrest for over a year, when an unpopular attempt to reform taxation was a trigger for popular anger. Sri Lanka shows how social unrest can quickly escalate in major political and economic upheaval. Social unrest often leads to a chain-reaction with political authorities implementing tough, sometimes brutal, responses.

The issue is how much you are prepared to put at risk in terms of your balance sheet and shareholder funds

These, in turn, lead to calls for sanctions and for businesses to withdraw from countries. Antonenko said: “Social unrest will become more frequent in the second half of this year and into 2023, especially as the knock-on effects of the lack of harvests from Russia and Ukraine are felt. The potential for a crisis in the food chain is very high and it will be sustained. Commodity price pressures coming on the back of over-stretched public finances in the wake of the Covid pandemic mean that even developed economies will suffer, especially with higher inflation.”

With Ukraine being one of the world’s largest producers of wheat and cereal products and its last major port not in Russian hands, Odesa, blockaded, the prospect of a major crisis in the food chain is looming, says Streeter: “The big issue we have here is the commodity impacts which are adding to the inflationary concerns around the world. Emerging economies, such as Egypt that imports so much wheat, will come under severe pressure. Around the world we will see rising social unrest as prices rise.”

A wake-up call
Europe and the US will not be immune from the impacts of this, says Antonenko: “This could rekindle the populist movements we saw rise in the last decade. The signs are already there. It is really shocking that Le Pen got 42 percent of the vote in France. It is a wake-up call for all of Europe and the US.” All the while, China simmers in the background. Western concerns about its treatment of the Uyghur minority in Xinjiang and the suppression of democracy of Hong Kong may not be in the headlines now but they have not gone away as issues that have increased western antipathy to the current Chinese Communist party leadership.

It is the prospects of escalating tensions in the South China Sea and a Chinese invasion of Taiwan – the “reunification of the renegade province” as Chinese leader Xi Jinping calls it – that should cause the most concern. Predicting anything with China is notoriously hard, says economist George Magnus, an associate at the China Centre, Oxford University and author of Red Flags: Why Xi’s China is in Jeopardy. “The idea you can articulate exactly what might happen in five to 10 years is almost impossible. People will take a view and say the likelihood of a shooting war in the South China Sea is less than five percent and so I’ll back my 95 percent judgement that it will be okay. Good luck with that. It might turn out that way but nobody can be certain. The issue is how much you are prepared to put at risk in terms of your balance sheet and shareholder funds.”

Magnus continues: “They should be on the defensive if they say that because there is a strategically adversarial relationship between China and the rest of the world, the liberal democracies. You have to be pretty brave to say that it doesn’t matter.” It does matter, says Antonenko. China might be distracted as it struggles with the implications of its zero-tolerance policy toward Covid but it is a major player in the world’s response to the Russian invasion of Ukraine: “China has stayed neutral and has so far provided an avenue for Russia to bypass western sanctions. This will see China becoming increasingly dominant in the Russian economy.” Antonenko adds: “China is unlikely to change its own strategy and plans for Taiwan. It will continue to view Taiwan strategically, not opportunistically, although it will try to measure the likely western response. It sees the US distracted and committing resources to defend and later rebuild Ukraine.”

Major implications
The pictures of the destruction in major cities in Ukraine give an idea of what that rebuilding might entail. Estimates of the cost are very speculative at this stage but are already north of $700bn: by comparison the post-WW2 Marshall Plan cost $160bn at today’s prices. Financing this will have major implications for government debt, bond markets and infrastructure capacity and investments for decades to come. There are few causes for optimism that this might be a short-lived disruptive phase in the evolution of a globalised world, says Antonenko: “We need to acknowledge that the rest of the world beyond the G7 and EU are largely sitting on the fence in this conflict. This is not going to change so we are entering a new Cold War era with the world divided.”

Clearly, there is now a well-entrenched understanding that we are in an era of geo-political turbulence. There is no clarity on when or how we might arrive at a new system and a global settlement. This could take many years.

End of the line?

Posted on August 3, 2022August 3, 2022 by itsupport

In 2019, Kenya’s President Uhuru Kenyatta was at pains trying to defend accusations that the country had built a standard gauge railway (SGR) to ‘nowhere.’ This was during the commissioning of phase 2A of the SGR project that abruptly terminates in the thorny shrubs of Naivasha, some 120km from the capital Nairobi. To the Kenyan leader, those critical to the project were ‘visionless.’

Four years after its commissioning, the 140km line from Nairobi to Suswa that cost $1.2bn has remained largely idle. In fact, infrastructure along the 20km stretch from Suswa to Duka Moja (One Shop) where it ends, is fast rotting away because both the freight and passenger service trains terminate their journey at Suswa. Kenya’s railway to ‘nowhere’ was built by Chinese loans. It forms part of the SGR from Mombasa to Nairobi, constructed at a cost of $2.7bn. The total cost of the entire project from Mombasa to Naivasha was a staggering $3.9bn.

Today, Kenya is struggling to service the loan for a project that is far from breaking even and continues to return massive losses. High operational costs and dwindling revenues saw the SGR post a loss of $205.4m in the 2020–21 financial year. Notably, China refused to grant Kenya an additional loan of $3.8bn for phase 2B to extend the line from Naivasha to Kisumu. This is despite the fact that for the entire project to be economically viable, it needs to extend to Kisumu, and further to Malaba and connect with the Ugandan SGR.

Track laying machine at the construction site of the standard gauge railway in Kenya

In many ways, Kenya’s SGR is a depiction of China’s adventures in Africa. The Asian giant has had a roller-coaster ride in the continent over the past two decades. Over the period, the overriding theme of China’s engagements and partnership with Africa has been infrastructure financing through debt. World Bank data show that in the period from 2010 to 2020, China’s lending to Sub-Saharan Africa more than quadrupled from $40bn to $170bn. The result has been China’s imprints being engraved not just in railways but across highways, ports, airports, energy and ICT projects in all corners of the continent.

“Africa has benefited immensely from the strategic partnership with China,” says Prof David Monyae, Director of Centre for Africa-China Studies (CACS) at the University of Johannesburg, South Africa. He adds that by adopting a ‘non-interference policy’ in its engagements with Africa, China has helped the continent achieve exponential socio-economic transformation. “Bretton Woods institutions lending came with conditions and caused havoc in the 1980s and 1990s. The continent got a befitting partner in China,” he avers.

Strategic shift
Apart from China slashing its commitments, the first time it is happening since 2006, China is also changing its modus operandi. Most notably, the country intends to stop government-to-government lending. This has been the hallmark of China’s engagements in Africa and has endeared it to the continent’s heads of states, particularly autocratic regimes.

Chinese loans are tied to natural resources as collateral in at least eight countries

By cutting the cord with governments, Beijing wants to end the culture of opaqueness that has traditionally characterised its deals with African governments. No doubt the secrecy in the agreements, specifically in mega and cash-intensive infrastructure projects, has fuelled corruption and lack of transparency in the continent. “In most of its interactions, China lacks transparency,” states David Shinn, former US ambassador to Ethiopia and Burkina Faso and a lecturer at the Elliott School of International Affairs at George Washington University. He adds that secrecy is one of the most significant flaws in China’s system of governance.

While outlining the new path of financial commitments in December last year, China’s President Xi Jinping was clear where Beijing’s money will go over the next three years. First, the Asian dragon will encourage its businesses to invest $10bn in the continent. China will also provide credit facilities of $10bn to Africa lenders to support small and medium enterprises. Another $10bn will be directed towards trade finance to support African exports. Lastly, $10bn would be channeled to Africa via China’s share of the International Monetary Fund’s (IMF) special drawing rights.

Chinese Ambassador to Kenya, Wu Peng, at the official launch of the standard gauge railway

Of critical importance, and something that is going to reverberate loudly and uneasily in Africa, is the fact that henceforth, China is going to discontinue ‘handouts’ in terms of grants and interest-free loans. Worse still, no money has been allotted for development financing. This is tragic for Africa considering about 65 percent of China’s lending was going to infrastructure. The significant shift from China’s traditional lending practices comes at the worst moment for Africa. The continent is grappling with a mammoth $100bn annual infrastructure financing gap according to the African Development Bank (AfDB). The amount could hit $170bn by 2025. With economies of most countries ravaged by the impacts of the COVID-19 pandemic, and government coffers squeezed by debt, the window for mobilising development funds has become thinner.

The need for China to rethink its strategic focus on Africa has been inevitable. Apart from global geopolitics, the dynamics in Africa have significantly changed. Top on the list of the changing dynamics is the alarming level of debt that Africa is shouldering, a problem largely caused by Beijing. According to the World Bank International Debt Statistics 2022 report, Sub-Saharan Africa total external debt stood at $702bn in 2020. This is a staggering increase from $305bn in 2010. China accounts for about 20 percent of the continent’s total external debt.

Unbearable debt
Across the continent, the burden of debt is colossal. It is even more unbearable for individual countries (see Fig 1). Though Africa’s top economies like Nigeria and South Africa that have seen their external debt stock balloon from $18.8bn to $70.3bn and $108.4bn to $170.7bn in a span of a decade respectively are relatively able to service their obligations, the situation is tougher for other countries. Kenya and Ethiopia whose stock has increased from $8.8bn to $38.1bn and $7.2bn to $30.3bn respectively are among nations pleading for debt relief, waiver and restructuring.

Ethiopia has borrowed $13.7bn from China in about two decades while Kenya currently owes Beijing $6.9bn. Zambia, whose stock has swelled to $30bn from $4.2bn in a decade, has defaulted on its sovereign debts. The country owes China $5bn. “As Africa’s largest bilateral creditor, risks of defaults are posing major challenges to Chinese lending,” notes Abhijit Mukhopadhyay, a Senior Fellow at the India-based Observer Research Foundation. He adds that with Zambia’s default, and the rising chorus of debt waiver and restructuring, Beijing is feeling it is time to count its losses and reduce its exposure. In essence, China acknowledges the serious debt issues in some African countries is not just forcing rescheduling but is also raising the possibility of non-payment.

This is a reality that is unravelling horribly for China. For the better part of the past two decades, Africa has witnessed a prolonged period of political stability. The result has been impressive socio-economic growth to a point where the continent was seen as the last frontier for growth. Over the period from 2000 to 2016, Africa was the world’s second fastest-growing region, experiencing average annual gross domestic product (GDP) growth of 4.6 percent. Growth accelerated to 4.8 percent between 2017 to 2019 before plunging and contracting by 2.1 percent in 2020 due to the pandemic. Recovery is projected to be modest at around 3.4 percent.

Africa might not record a return of stellar growth in the coming years. While many factors are conspiring against the continent, an old ghost is again rearing its head. The continent is witnessing a resurgence of contagious waves of conflicts and coups, which are a major concern for China. Due to its ‘non-interference policy,’ China continues to act aloof amid the rising instability. Irrespective of the strategy, Beijing is alert to the fact that every eruption has a direct impact on its strategic interests in the continent. “Chinese financing will continue to flow into Africa, the question is the scale,” reckons Yun Sun, Director of the China Programme at the US-based Stimson Centre.

Angola’s President Joao Lourenco (L) shakes hands with China’s President Xi Jinping

A case in point is Ethiopia, a big Chinese debtor. Until the outbreak of conflict in 2020, Ethiopia was among Africa’s shining stars, not only in terms of political stability but also in socio-economic transformation, posting an average growth of 10 percent for a decade. Conflict in the northern region of Tigray has set the country on a path of uncertainty.

For China, this does not augur well first in terms of debt servicing and second in terms of Beijing’s massive interests in the country. Currently, there are about 400 Chinese construction and manufacturing projects, valued at over $4bn, in Ethiopia. China has also helped Ethiopia invest in numerous industrial parks that are at the heart of the country’s blossoming manufacturing and agricultural sectors. Government data show that in 2020, Ethiopia raked in $610m from the 13 operational parks that have created job opportunities for more than 89,000 Ethiopians.

Importance of bauxite
In West Africa and the Sahel region, the hotspot for coups, China has reasons to be anxious. Cumulatively, the West Africa region received $18.2bn in Chinese loans from 2000 to 2017 according to the Organisation for Economic Co-operation and Development data. Since 2019, the region has witnessed six coups. Four in Guinea, Burkina Faso and Mali, of which two were successful, plus two more in Guinea-Bissau and Niger that failed. Though Chinese interests in a country like Burkina Faso are marginal due to the latter’s dalliance with Taiwan, the situation is different in Guinea. Guinea is home to the world’s largest reserves of bauxite, with China as the main export market. In 2020, the Asian giant imported 53 million tons of bauxite from the country, accounting for 47 percent of all its bauxite imports. This earned Guinea $2.5bn. Notably, the coup in Guinea has had material impacts on bauxite prices and supplies.

Bauxite factory of Guinea’s largest mining firm, CBG

Being a shrewd negotiator, and always privy to the fact that Africa is a volatile and unpredictable continent, China has often ensured it safeguards its investments. This explains why Beijing has been brutal in adopting a resource-secured lending model. In essence, Chinese loans are tied to natural resources as collateral in at least eight countries. These are Angola, Equatorial Guinea, Republic of Congo, Guinea, Ghana, Sudan, Democratic Republic of Congo (DRC) and Zimbabwe. Resource-tied lending might pass as insignificant as it accounts for only eight percent of all Chinese loans in Africa. However, it has direct impacts on sovereignty.

Angola is the most notable case. The country, Africa’s second biggest oil producer and whose public debt stands at $67.5bn, is China’s largest borrower on the continent. It owes more than $20bn to various Chinese entities. To service the massive debts, Angola entered into deals with China to repay the loans by shipping its main natural resource, oil, to China at market rates at the time of shipment.

The era of easy Chinese money for big infrastructure projects in Africa is certainly over, and perhaps for good

The arrangement worked well for Angola when oil prices were high. However, the collapse of crude prices from 2015 through 2020 saw the country struggle to repay the loans. Today, the country is on its knees pleading with China for payment relief and is also exploring refinancing alternatives through multilateral and commercial lenders. “In these countries, a portion of earnings from some natural resource exports are committed to repayment of designated loans,” explains Deborah Brautigam, Director of the China Africa Research Initiative (CARI) at Johns Hopkins University’s School of Advanced International Studies (SAIS). She adds that under the arrangement, China gets paid before anyone else. “Other lenders might rightly hesitate to lend into a situation where much of the foreign exchange is already pre-committed to earlier lenders,” she avers.

Seizing assets?
The strategy of tying loans to resources is one key reason why Beijing is often accused of debt trap diplomacy in Africa. The other major reason is China’s lending with hopes of seizing a strategic national asset in case of a default. This has been the popular consensus in countries like Kenya and Uganda, among others. In Kenya, the belief has been that China has the right to seize the Mombasa Port if the country defaults on the SGR loan. The same can be said in Uganda where China Eximbank provided the $200m loan for the Entebbe International Airport upgrading and expansion project. “I do believe that Chinese debt trap diplomacy is real because China doesn’t want to take the risk of defaults,” reckons Robert Atkinson, President of the US-based Information Technology and Innovation Foundation.

An oil tanker berthed at Kipevu oil terminal, Kenya

In Kenya, CARI has moved to debunk the myth that Mombasa Port was used as collateral for the SGR loan. In April, the think tank released a working paper that shows the port was actually not used for the SGR loan. The paper contends that although Kenya’s government has not released the actual loan documents, evidence points to the fact that Mombasa Port was not used as collateral. “Further, there is no question of the port ever being ‘seized’ by China Eximbank should Kenya default on the SGR loans,” states the CARI report.

Beijing wants to end the culture of opaqueness that has traditionally characterised its deals with African governments

In Uganda, US-based research group AidData also established that Entebbe Airport is not a source of collateral. However, the terms of the loan are stringent and mainly favour Eximbank. “The idea that Chinese banks deliberately lend for loss-making projects so that they can seize collateral is widespread. Yet every time a serious researcher investigates these cases, they fail to find evidence to support these fears,” observes Brautigam.
The era of easy Chinese money for big infrastructure projects in Africa is certainly over, and perhaps for good. Joshua Meservey, a Research Fellow for Africa at the US-based Heritage Foundation thinks that while China will still fund some projects, it will be more judicious in ensuring viability. “There could be a silver lining to China pulling back on its lending,” he says, adding that this will encourage the building of only necessary infrastructures that have been rigorously vetted. “It will also avoid the building of some of the Chinese infrastructure that are of dubious economic value or which were built at inflated costs or using opaque tendering,” he notes.

Spending priorities
Under the current realities, China has no options but to be judicious. Apart from the developments in Africa, China is also grappling with internal upheavals back home. The Asian dragon’s spectacular GDP growth of yesteryears is no more, with the country entering a path of slow growth.
The situation is being exacerbated by COVID-19, with every new wave taking a toll on the economy. According to the IMF, the Chinese economy is forecast to grow at 4.4 percent this year, down from 8.1 percent last year. The slowing economy, coupled with President Xi’s agenda for China’s ‘Common Prosperity’ that demands more domestic expenditure, means that Beijing has to be more inward-looking in terms of its spending priorities. “China is at a point where it can no longer afford to spend as much money in Africa,” notes Atkinson.

Significant influence
Cutting infrastructure spending in Africa, however, does not mean China is willing or ready to loosen its tight grip of cooperation with the continent. Beijing is still determined to exert significant influence through China-Africa trade, Chinese investments and military cooperation, among many other areas. China-Africa trade, for instance, is roaring. Last year, China not only maintained its position as Africa’s largest trading partner (see Fig 2) but also saw trade relations hit an all-time high. China customs agency data show the value of trade between China and Africa in 2021 stood at $254bn compared to $208.7bn in 2020, representing a 35 percent increase. South Africa, Nigeria, Angola, Egypt and DRC were China’s top five largest trading partners, accounting for more than half of all China-Africa trade in 2021.

Africa’s share of trade with China is quite minimal at 3.8 percent, compared to other regions like Asia at 46.9 percent, Europe at 18.1 percent and North America at 12.9 percent. However, the fact that the balance of trade is in favour of Beijing makes the Asia giant want to maintain its grip on the continent. Last year, China exported goods worth $148bn to Africa, up 29.9 percent from 2020. During the year, the value of Africa’s exports stood at $106bn, a 43.7 percent increase. “China understands that Africa is an important market for its exports and a source for raw materials,” explains Prof Monyae. He adds that for this reason, China feels obligated to safeguard its interests in the continent.

On this, China has no guarantee. Beijing’s decision to cut financial commitments for Africa is bound to accelerate the geopolitical shifts that are already happening as other countries target to increase their strategic presence in the continent. In recent years, countries like the US, UK, France, Germany, Japan, Russia, South Korea, India and Turkey have all enhanced their overtures to Africa. For most of the new suitors, loading Africa with more debt is not their intention. Rather, they see opportunities in increasing trade and foreign direct investments. “A few countries may step up their engagement modestly but I don’t see Africa today as the new battlefront for geopolitical supremacy,” says Shinn.

Private capital
China’s cut is also certain to instigate an influx of private capital into Africa. Currently, a majority of development financial institutions and global multi-lenders including the IMF, the World Bank and AfDB already have deep exposure. This opens doors for private capital to come and fill the void in infrastructure financing. The IMF, in a paper titled Private Finance for Development, reckons the private sector has the ability to inject an additional annual financing equivalent to three percent of Africa’s GDP for physical and social infrastructure by the end of the decade. This represents about $50bn per year. While this is an achievable goal, African governments have a big role to play in terms of policies and identifying priority and bankable projects.

“There is a lot of private capital in the world looking for infrastructure investments. What Africa needs is some truly credit-worthy projects that produce economic benefits in excess of their costs,” states Atkinson.

In retrospect, Africa must accept the days of Chinese-financed megaprojects are over. By cutting financial commitments to the continent, China has already acknowledged this new reality.

Hollywood vs. Streaming

Posted on August 2, 2022August 3, 2022 by itsupport

However, recent subscriber losses at Netflix suggest that streaming’s golden era may be coming to an end already. As the battle for our attention and our views rumbles on, who will come out on top, cinema or streaming?

While the 2022 Oscars will forever be defined by a certain headline-grabbing slap, it was far from the only significant story of the night. Away from the on-stage celebrity drama, history was quietly being made at the 94th Academy Awards. When it came to the coveted ‘Best Picture’ award, feel-good family drama CODA beat off stiff competition from established auteurs to scoop the top prize. With this momentous win, Apple became the first streaming service to achieve a Best Picture Academy Award.

In many ways, it was a moment that felt somewhat inevitable. It is certainly no secret that the streaming giants – Netflix, Apple TV+ and Amazon – have had their sights firmly set on awards success for some years now, eager to prove that their content has as much artistic merit as anything produced by Hollywood’s traditional movie studios. Having now won over the Academy, it appears that we are witnessing the seemingly unstoppable rise of streaming platforms. And while the golden age of streaming is good news for big tech, it could spell big trouble for tinseltown. With their high ambitions and deep pockets, do the streaming giants threaten to bring about the end of Hollywood as we know it?

When the curtains closed
The idea that streaming might kill cinema seems steeped in moral panic. After all, new technologies have always been treated with some suspicion. In fact, technophobia stretches back to the advent of the written word, with Greek philosopher Socrates suggesting that transcribed texts might lessen the importance of oral tradition and verbal communication.

Since then, all technological advances have been subject to some scrutiny, with each new invention purported to be ‘killing off’ whatever had come before. Just as the radio was supposed to kill off books and television was meant to kill off the radio, now streaming will be the demise of cinema. In the past, this tech-related panic may have seemed hyperbolic. But in today’s world, questioning the scope and influence of big tech is far from a fringe idea.

In March 2020, as countries around the world found themselves placed into government-mandated lockdowns, life very suddenly moved online. Overnight, almost all human interactions – both work-related and social – began to take place virtually, and one by one, entertainment venues shut their doors, their owners unsure as to when they would open to the public again. A few weeks in lockdown then turned into months, and technology provided some much needed entertainment and escapism for the millions who found themselves largely confined to their own homes.

From the safety of the sofa, the quarantined masses could lose themselves in an endless stream of content courtesy of their trusty streaming providers. And as cinema doors remained firmly closed, blockbuster releases such as Wonder Woman 1984 and Disney’s live action Mulan found themselves punted to the small screen, eagerly consumed by lockdown audiences. In 2020 alone, Netflix gained more than 36 million subscribers, while its rival Amazon Prime saw its subscriber base grow by more than 50 million over the course of the pandemic.

The lockdowns saw the streaming giants post record profits

Launching somewhat fortuitously mere months before the onset of the pandemic, Disney+ hit 73 million subscribers in its very first year of operation, boosting the US streaming market to record growth in 2020. Just as remote working and virtual meetings quickly became the ‘new normal’ in our working lives, the pandemic dramatically reshaped our behaviour when it comes to entertainment and socialising. Even as successful vaccination drives enabled the world to cautiously open back up again, our old habits and pastimes did not immediately revert to their pre-pandemic norm. While global box office revenue picked up in 2021, it was still down by 50 percent when compared with 2019 figures – perhaps unsurprising given ongoing pandemic restrictions and widespread trepidation over emerging Covid variants.

But as cinemas started to open their doors again, it soon became apparent that the audiences they were welcoming back had changed. Granted, the average age was now skewing younger, with older movie-goers hesitant to return to cinemas, but the real difference was one of habits and expectations. If streaming is the ‘new normal’ when it comes to how we consume entertainment, then where does that leave cinema?

The shut-in economy
The pandemic may have seen streaming services flourish while the traditional box office floundered, but the pandemic can’t be given all the credit for the rapid rise of streaming platforms. Long before COVID-19, streaming services were disrupting the global movie industry, as customers began to show an increased appetite for ‘on demand’ services. In the post-financial crisis era, the so-called ‘shut-in’ economy has thrived.

In a recession-ridden world, staying in has become the new going out, with a whole host of new apps specifically engineered to ensure that you never need to leave your house again. Need a food delivery? Getir promises to get your groceries to your front door in 10 minutes. Need to hire a handyman?
Taskrabbit will have somebody on your doorstep that very same day. Need a responsible animal-lover to walk your dog for you? Just download Rover – you’ll even receive a GPS map of your dog’s walk, complete with toilet break alerts. With just a couple of taps on a smartphone screen, almost any demand can be fulfilled within minutes, while routinely low wages for gig workers keeps costs down for consumers.

Simply put, the rise of the shut-in economy shows that we have been self-isolating long before COVID-19. Studies have shown that younger millennials and those belonging to Generation Z are less interested in going out socially than previous generations, preferring to ‘Netflix and chill’ than head out for a hedonistic night on the tiles.

Whether the proliferation of ‘on demand’ apps prompted a change in our collective behaviour or vice versa, by March 2020, our social habits were already shifting – we were going out less and streaming more. The pandemic only served to accelerate this trend, firmly establishing streaming as the default way to watch new releases.

Already growing at an astonishing rate, the lockdowns saw the streaming giants post record profits, growing their deep pockets and extending their influence over the global film industry. As the world began to cautiously reopen and cinemas welcomed back audiences, streaming companies found themselves in a very powerful position. Well-funded, and with a steady stream of subscriber income flowing in, Netflix, Amazon and Apple have been able to acquire a broad array of films over the course of the past two years, releasing them directly to consumers through their online platforms and limiting the pool of films available for bricks-and-mortar cinemas to screen. So for those who prefer the cinematic experience to the at-home alternative, there are simply fewer new releases to enjoy when they do venture out to their local multiplex – they have been gobbled up by streaming.

Even as the world moves towards something of a post-pandemic reality in 2022, the shut-in economy is here to stay, and so too are the big tech companies that allow this home-based consumerism to flourish (see Fig 1).

The Big Tech boom
In April 1976, the Apple Computer Company was founded, debuting its first computer device a few months later. In the summer of 1994, Jeff Bezos launched his online bookselling service, Amazon, from his garage in Bellevue, Washington. Three years later, Netflix started life as a mail-based DVD rental firm, eager to replicate Amazon’s online success.

Fast forward to 2022, and it’s hard to fathom just how colossal these three firms have become. From humble beginnings as computer builders, booksellers and DVD dealers, Apple, Amazon and Netflix have far outgrown their origins. Today, the three companies make up half of the ‘big six’ tech firms, and are worth a combined total of just shy of $5trn. At this size, these far-reaching tech behemoths exert an almost unimaginable influence over the global economic and cultural landscape.

Wielding enormous financial power, these six tech companies have the ability to influence politics and public opinion – spending a collective $64m on political lobbying in 2019 alone. And it doesn’t stop at politics. As Apple’s recent Academy Awards success has shown, the big tech giants are beginning to dominate the cultural conversation too, beating the traditional entertainment industry at its own game.

While the lockdown streaming boom certainly helped to propel big tech to a new level of cultural dominance, the reality is that streaming platforms have been boosting their position within the film industry for many years now, through a series of ambitious acquisitions.

The modern wave of consolidation in the media landscape arguably began in 2009, when Disney purchased Marvel Entertainment for $4bn – a bargain deal given the box-office revenue Disney has earned from Marvel movies over the course of the last decade. In 2012, Disney further solidified its status as a pop culture juggernaut with the purchase of Lucasfilm for a further $4bn, giving the company the rights to the ever-popular Star Wars empire.

Then, in 2018, Disney achieved the seemingly impossible – purchasing rival Hollywood studio 21st Century Fox for an eye-watering $71bn. The deal ushered in a new era for the global film industry, instantly bringing the number of Hollywood movie studios down to five – Warner Bros., Sony, Universal, Paramount and Disney. The era of the ‘big six’ studios was now over, with Disney taking one of its biggest rivals out of the picture.
The record-breaking acquisition gave Disney a staggering 35 percent share of the movie market, adding a vast array of film and television material to its already impressive arsenal of content.

The content race
The Fox acquisition also signified a substantial shift in Disney’s priorities. While its previous acquisitions had been focused on blockbuster big hits, Disney’s takeover of 21st Century Fox was motivated by streaming. In order to compete with industry pioneer Netflix, Disney was looking to beef up its catalogue of content ahead of launching its subscription service Disney+, and Fox’s vast library of TV series helped to successfully pad out Disney’s streaming offering. Bringing fan-favourite Fox shows such as The Simpsons, The Walking Dead and It’s Always Sunny in Philadelphia into the Disney domain, the company was betting big on streaming. So far, the controversial move appears to have paid off – with Disney+ gaining 10 million subscribers on its very first day of operation.

But Disney isn’t the only firm looking to beef up its streaming arsenal. Amazon has also been playing the streaming long-game, and in March of this year, purchased historic Hollywood studio MGM for $8.45bn. The deal gave Amazon control over MGM’s vault of over 4,000 movies and countless hours of TV, including the entire James Bond catalogue and the Rocky series, in a huge boost to the firm’s Prime Video streaming business.

As outgoing CEO Jeff Bezos explained during the company’s 2021 annual shareholder meeting, the acquisition was so attractive to Amazon because of MGM’s “vast deep catalogue of much-loved intellectual property.”

His comments echoed those of Mike Hopkins, Senior Vice President of Prime Video and Amazon Studios, who said that “the real financial value behind this deal is the treasure trove of IP in the deep catalogue that we plan to reimagine and develop together with MGM’s talented team.”

After a blockbuster two years of record subscriber growth, the first cracks have begun to show in the streaming landscape

As the streaming wars continue and firms compete for audience attention, intellectual property is the hottest commodity around. Just as Disney has produced a wealth of new content featuring beloved characters and locations from Star Wars and the Marvel universe, Amazon is keen to follow suit, prioritising spin-offs and reboots as it looks to bolster the position of Prime Video in what is an increasingly competitive environment.

Despite its deep pockets, Apple is taking a slightly different approach to streaming. Granted, the firm is spending big on Apple TV+ – reportedly splashing out $6bn on content in order to launch the service back in 2019 – but instead of snapping up established Hollywood studios with their immense libraries of historic titles, Apple is prioritising investments in original features. And it isn’t following the Netflix approach to original content either, which tends to favour quantity over quality. Last year, Apple TV+ released just six original feature films, compared with 69 Netflix original movies released in the US. But with annual revenues of approximately $366bn, far outstripping Netflix’s $30bn, Apple can easily afford to pursue the prestige angle and aim for awards show glory. With one Best Picture award already under its belt, Apple might just prove that slow and steady will win the streaming race.

No more worlds to conquer
After a blockbuster two years of record subscriber growth, the first cracks have begun to show in the streaming landscape. For the first time in its history, Netflix announced that it had actually lost subscribers – with 200,000 users cancelling their accounts in the first three months of 2022. While this may seem like a fairly insignificant drop given the company’s 222 million-strong subscriber base, it is indicative of a worsening trend.

Netflix’s subscriber growth has been slowing for some months now, as the effects of increased competition and the escalating cost-of-living crisis begin to make themselves known. The company warned that it expects to lose a further two million subscribers by July, with executives considering introducing advertising along with a crack-down on password sharing in order to get the firm back on track. The shock news wiped over $50bn from Netflix’s value in just one day, with investors left asking – has the streaming bubble burst?

In a note to investors, Netflix explained that its “high household penetration” made sustained growth more challenging. It is certainly true that the company is reaching something of a saturation point in its US and European markets – 52 percent of UK households have a Netflix subscription, which, when taking into consideration password sharing among families, leaves relatively little room for growth. Quite simply, Netflix is dependent on subscriber growth for revenue, and with 222 million people already signed up, there is nowhere else for it to go. What remains to be seen, however, is whether Netflix’s subscribers are abandoning the platform in search of better content elsewhere. While streaming providers are increasingly competitive with one another, consumers don’t feel forced to choose between them – in fact, they like to have their cake and stream it too. In the US, 46 percent of homes have four or more subscription streaming services, while in the UK, a recent study showed that 65 percent of homes subscribe to two or more streaming providers.

But as the cost-of-living crisis starts to have a real impact on consumer spending habits, squeezed customers may find themselves forced to cut back on ‘unnecessary’ expenditure. Multiple streaming subscriptions may become hard to justify as bills begin to soar, and if consumers do find themselves reviewing their subscription packages, Netflix can’t count on its reputation as the pioneer of streaming to save itself from being axed from the monthly budget. For the company’s rivals, Netflix’s recent turmoil should be taken as something of a warning sign. Amazon, Apple and Disney have spent considerable time and money trying to emulate Netflix’s groundbreaking streaming model – a model that may well already be broken. Granted, each of the three firms is much more diversified and has far deeper pockets, but they have all been convinced that streaming is the future of entertainment.

Among cinema owners and industry professionals, there is a sense of cautious optimism over the future for cinema

Indeed, Disney has completely restructured its operations to prioritise streaming over traditional cinema releases, while Amazon is set to spend $464m on just one season of its upcoming The Lord of the Rings series. Apple is estimated to have spent more than $10m on the Oscar campaign for CODA alone, demonstrating its dedication to its newly-established streaming arm. Streaming has been a big investment and a big commitment for each of the three firms, and while subscriber sign-ups look healthy for now, they too could be heading towards the Netflix cliff edge. The next challenge won’t be subscriber growth but subscriber retention. In an age when everything is ‘on demand’ and we are spoiled for choice, convenience is no longer a selling point – it’s quality that really matters in the end.

A new hope?
As the streaming giants continue to compete for our attention and affection, cinemas are welcoming a steady flow of customers through their doors. Already, blockbuster hits such as The Batman and Spider-Man: No Way Home have seen ticket sales bounce back from the historic lows seen in 2020 and 2021, while UK box office sales are set to double this year to £1.1bn – just below pre-pandemic levels. Among cinema owners and industry professionals, there is a sense of cautious optimism over the future for cinema.

Of course, in order for there to be a wide and enticing array of movies to attract film-lovers to bricks-and-mortar theatres, these movies need to be made and produced in the first place. According to entertainment analyst Matthew Ball, go back 15 years and the ‘big six’ studios would each release around 20 to 25 films every year. Now reduced to a ‘big five,’ the stalwart Hollywood studios might release as few as nine new films in today’s competitive climate. In 2022, we can expect to see 71 major studio films released in cinemas – significantly below the pre-pandemic figure – reflecting a generalised push to prioritise streaming for smaller, less ‘showy’ movies.

But as the cracks begin to show in the growth-obsessed streaming model, the traditional methods of film production, distribution and consumption are suddenly not looking quite so passé. Box office sales are slowly bouncing back, and there is something still to be said for the magic of the big screen. Hollywood and Silicon Valley may be uneasy bedfellows, but they can coexist – if the tech giants’ studio acquisition spree is kept under control, that is. Watching a film in 4DX, the immersive experience created in South Korea, proves that cinema is evolving, not dying. And if it wants to stay relevant, streaming will need to evolve right alongside it

Why more institutional investors are joining DeFi

Posted on August 1, 2022August 1, 2022 by itsupport

Decentralised finance (DeFi), an entire ecosystem built on blockchain technology and that doesn’t rely on a central authority, is booming. The total value locked – the overall value of assets deposited in DeFi transactions – grew from $601m at the beginning of 2020 to $239bn in 2022, according to blockchain data provider Amberdata. However, unlike what we have seen before, this rise hasn’t been driven mainly by professional and retail investors, but instead has been led by institutional investors who have either recently joined or are strengthening their presence in DeFi.

Indeed, according to blockchain data platform Chainanalysis, large institutional transactions – those above $10m – accounted for over 60 percent of all DeFi transactions in Q2 2021, up from around 10 percent in Q3 2020.

Additionally, a September 2021 survey, carried out by Nickel Digital Asset Management (Nickel), of institutional investors and wealth managers who don’t currently have exposure to cryptocurrencies and digital assets found that 62 percent expect to invest in these for the first time within the next year. The speed at which institutional investors have joined DeFi in the last year hasn’t gone unnoticed, so many people are wondering; what is driving this trend?

A popular answer has been that institutional investors have recently realised the opportunities available in DeFi. While this response explains the reasons for joining crypto, investors’ success stories in DeFi and crypto have been making headlines for around 10 years. Instead, I would argue that, in recent years, DeFi has become more accessible, transparent and secure. This has not only made the decentralised markets more appealing to institutional investors, but has enabled them to meet the internal and regulatory requirements necessary for these organisations to enter DeFi.

Just a few taps away
DeFi started as an intimidating sector, the domain of the tech-savvy. However, much has changed since then and we are now seeing many platforms that allow investors to easily connect their digital wallets, exchange their fiat, such as US dollars and euros, into cryptocurrency and access the yields available in DeFi with just a few taps.

Although these platforms initially focused on retail investors, in the last year, new solutions aimed at institutional investors have been developed to enable them to maintain close oversight over their investments, as well as to meet asset custody and ‘Know Your Client’ requirements, to name a few. Asset custody, for instance, is not only a legal requirement for large funds and financial institutions, but according to a 2022 survey carried out by Nickel, asset security was cited by 79 percent of investors surveyed as their main consideration.

So, before these tools became available, many institutional investors – even those keen about entering DeFi – were unable to do so because they couldn’t secure the necessary internal buy-in as they didn’t meet key internal and regulatory requirements. Most companies in DeFi are small businesses that, while they may be very good at what they do, don’t have the credentials needed to reassure investors that they are legitimate. Consequently, many institutional investors have been unwilling to trust them with their assets. Fortunately, some DeFi-focused companies have been leading the shift towards more transparency in the DeFi sector by becoming publicly listed companies. As listed companies, these organisations are providing regular information on their activities and their expertise, reassuring investors that their money is in trusted hands.

Bank grade security
The media’s coverage on DeFi has led many people to mistakenly believe that, if they invest in the decentralised markets, their money will fall into the hands of hackers. While nobody’s money is ever completely safe (in a bank or in DeFi), the risks in DeFi have been greatly exaggerated.

Nonetheless, to provide reassurance to investors that their money is safe, many DeFi companies are learning from traditional finance and implementing solutions that banks use. For example, AQRU.io uses multi signature wallets, which require two or more private keys to sign and send a transaction, and next generation protocols to ensure the safety of the assets in the platform. While DeFi still has a long way to go before investors feel completely safe, these efforts have already started helping secure the buy-in from many large investors and they will continue doing so in the coming years.

Since it started, DeFi has proven to be an innovative sector that has sought to appeal both to institutional and retail investors by becoming more secure, accessible and transparent. We shouldn’t be surprised if DeFi continues innovating to attract new investors and keeps growing until it becomes a true competitor to traditional finance.

Has entrepreneurial spirit turned sour?

Posted on July 29, 2022July 29, 2022 by itsupport

We are living in the golden age of the entrepreneur. Thanks to our collective fascination with billionaire business leaders, start-up moguls are the hottest celebrities of the 21st century. When they aren’t being photographed at red carpet events, they can be found making television cameos or dominating the cultural conversation on Twitter. Long gone are the days when tech founders and start-up moguls lived quietly in the background, making millions yet rarely making headlines. Today, tech entrepreneurs are household names, achieving rockstar status the likes of which was traditionally reserved for – well, rockstars.

The only thing that interests us more than a business success story, however, is one of fraud and failure. Take a look at the biggest pop culture hits from the past few years and you will notice an interesting trend – many of our most-watched television dramas, binge-worthy streaming series and must-listen podcasts have chronicled the rapid rise and fall of would-be entrepreneurs. From the Fyre Festival fiasco to the spectacular fall from grace of WeWork’s Adam Neumann and Theranos’ Elizabeth Holmes, these stories continue to captivate audiences around the world. But does the recent proliferation of these tales – of fraud, deception and wrongdoing – suggest that something has turned sour in the entrepreneurial world?

Rather than being the work of a few ‘bad apples,’ these cases may be reflective of a more pervasive cultural problem in Silicon Valley. It appears that Wall Street is no longer the epicentre of white-collar crime, with California’s tech bubble birthing a new generation of fraudsters and tricksters. As new stories of start-up chicanery continue to emerge, has the ‘fake it till you make it’ mantra corrupted entrepreneurial culture as we know it? The life of a successful entrepreneur is certainly seductive to many a young business founder. Fame and fortune awaits those who land on that ‘needle in a haystack’ billion-dollar idea, with today’s zeitgeist venerating start-up moguls to an almost unhealthy extreme. And for those plucky go-getters set on making a name for themselves, the start-up landscape has never been so alluring, and the rewards never so great. With just an internet connection and an idea, anyone can launch their own business, while investors remain spend-happy and hungry for the ‘next big thing.’ Last year, investors poured a record $330bn into US-based start-ups – an approximate four-fold increase in the amount of money being invested in start-ups when compared with five years ago.

Just as popular culture turns business moguls into celebrities, investors can find themselves seduced by ‘visionary’ leaders. Modern-day entrepreneurship celebrates audaciousness, self-belief and a disregard for the rule book. We are drawn to those bold risk-takers who have an unwavering belief in their idea. While traditional companies relied on a strong brand name and an instantly recognisable logo, 21st-century technology firms almost always have their founder as the face of their business. The Facebook empire is fronted by Mark Zuckerberg, Tesla is synonymous with Elon Musk, and Amazon will forever be associated with Jeff Bezos – despite its founder having stepped down as CEO last year. Elevated to celebrity status, these tech moguls have convinced investors and consumers alike of the validity of their products and services – achieving spectacular success and working their way onto world rich lists in the meantime.

The cult of personality
It’s not hard to see why many would be keen to emulate the success of the early 21st century tech elite. Elizabeth Holmes, founder and CEO of ill-fated blood testing company Theranos, was even said to have modelled herself on the late Apple co-founder, Steve Jobs. In business, and particularly the start-up world, the cult of personality is strong, at times blinding potential investors to possible red flags and early warning signs.

Such was the case with Holmes’ Theranos. In 2003, aged 19, Holmes founded the health tech firm Theranos, with the aim of revolutionising diagnostics through a simple finger prick blood test. Just one year later, Holmes had raised $6.9m in early funding, giving Theranos a $30m valuation.

Over the course of the next 10 years, Holmes succeeded in ramping up investor interest in the firm, with US Treasury Secretary George Schultz and media mogul Rupert Murdoch among her high-profile backers. By 2014, the firm was valued at $9bn – making Holmes the youngest self-made female billionaire.

Just one year later, however, and the cracks were beginning to show. After a whistleblower sounded the alarm over the validity of Theranos’ blood testing equipment, the Wall Street Journal published a series of shocking exposés on the company, casting significant doubt over the firm and ultimately leading to its collapse. The question everyone found themselves asking was: just how did Holmes get away with it? To investors, she was a captivating leader with a good story. And for some, it seems, that was enough to part with millions.

The power of personality and story-selling is also evident in Adam Neumann’s controversial leadership of co-working company WeWork. While Neumann favoured a more gregarious, outlandish leadership approach than that of the more reserved, composed Theranos boss, both won over investors with their charismatic style and unfaltering belief in their ideas.

Co-founding WeWork from a single office space in SoHo in 2008, Neumann was messianic about the benefits of flexible, multi-use co-working spaces, convincing investors that his ‘physical social network’ of office buildings was the ‘future of work.’ His optimism proved infectious, and by 2018, he had turned WeWork into the largest private occupier of office space in Manhattan.

But it wasn’t to last – reports of Neumann’s erratic management style tainted the company’s planned IPO with the firm slashing its valuation and ultimately abandoning its efforts to go public at the last hour. Its value tanking, the troubled firm was forced to lay off 2,400 employees (see also Fig.1). Much like Holmes, Neumann was able to successfully acquire billions of dollars in venture capital from investors, his enthusiasm and self-belief enough to make up for what was ultimately a flawed business plan. And while there is an important lesson for investors to learn from these scandals, there is little evidence that these high-profile cases have dampened VC enthusiasm for finding the next tech ‘unicorn.’ Investors are continuing to pour money into start-ups at record rates, seemingly undeterred by the lofty valuations of the Silicon Valley start-up bubble.

A cultural crisis in Silicon Valley
While it would be perhaps more palatable to dismiss cases such as WeWork and Theranos as one-off scandals, we may find that these cases are actually the canary in the coalmine, indicative of a wider, more entrenched cultural problem within Silicon Valley. Just as the uncovering of the Bernie Madoff Ponzi scheme scandal prompted a profound reassessment of the investment industry in 2008, these cases should, at the very least, cause us to question the modern entrepreneurial landscape.

Nobel Prize-winning Holocaust survivor Elie Wiesel, who lost $15m to Bernie Madoff’s swindling, said of the financier: “We thought he was God. We trusted everything in his hands”. Similarly, the current culture within Silicon Valley seems intent on making messianic leaders out of start-up founders, creating a climate where the authority and judgement of these perceived visionaries is unshakable and unquestionable.

The current culture within Silicon Valley seems intent on making messianic leaders out of start-up founders

In 2014, entrepreneur and Paypal co-founder Peter Thiel penned an article for Wired magazine, entitled: ‘You Should Run Your Start-up Like a Cult. Here’s How.’ In the article, Thiel claimed that “the best start-ups might be considered slightly less extreme versions of cults,” and admitted that “cultures of total dedication look crazy from the outside.” It appears that many budding young business minds took note of this advice, with Silicon Valley fast earning a reputation for a pervasive ‘cult-like’ culture. Indeed, Thiel theorised that every tech start-up should be made up of “a tribe of like-minded people fiercely devoted to the company’s mission.” Looking at Silicon Valley today, many start-ups seem to have succumbed to this cult-like mentality. And when founders are elevated to near mythical, ‘cult leader’ status, then mistakes, misjudgements and even malpractice can be overlooked. While innovation and vision should be rightly celebrated, Silicon Valley must be careful not to turn a blind eye to wrongdoing – even when it is disguised as industry ‘disruption.’

If this recent wave of Silicon Valley scandals have exposed the dangers of the ‘fake it till you make it’ mindset, they may also remind investors that impossibly high valuations for young, trendy start-ups may be just that – impossible. Tech unicorns are no longer the mythically rare creatures that they used to be. As of March 2022, there are 607 active unicorn companies in the US, with 75 reaching that coveted $1bn valuation since the start of the new year. With valuations continuing to soar and venture capitalists betting big on start-ups, investors need to make sure that they aren’t taken in by a charismatic leader and a good story alone – or they could end up chasing a unicorn that simply doesn’t exist.

Plan ahead by investing early in young employees

Posted on July 28, 2022September 8, 2022 by itsupport

Recruitment is expensive. Not only do hiring managers have to find the time to prepare the role profile and manage workloads during a vacancy, but the interview process is especially resource intensive. This is exacerbated when, at the point of salary discussions, it becomes apparent that the candidate and the organisation have two alarmingly different ideas when it comes to pay.

University graduates and young people entering their first real employment this year are finding a brave new world – one where some employers are desperate to live by old rules, but others believe the rule book has been torn in two. A starting salary has the potential to affect your income for the rest of your life and can have a significant impact on later choices available to you, including the size of your pension pot, your lifestyle and of course your career prospects. It is important, therefore, for young people to enter the workplace equipped not only with the skills and knowledge that their education has provided them, but also with the empowerment that skills in negotiation can bring.

Art of negotiation
The UK curriculum for schoolchildren is finally including basic financial literacy as part of the curriculum, meaning that tomorrow’s school leavers won’t be as helpless around money as yesterday’s. But there is scope to take things further. If university students and school leavers were given the opportunity to attend salary workshops and were practised at the art and science of negotiation, then by the time they sit down for their first job interview, questions about salary expectations wouldn’t get palms sweating in quite the same way. This could make millions of dollars of difference over the course of a long career. This is not automatically bad news for business owners, either; indeed, the end goal of a successful negotiation is a win-win for both parties.

Staff and employers all know that valuing workers goes beyond a pay cheque

Gravity Payments in Seattle in the US made headlines around the world in 2015 when its CEO Dan Price took some stark feedback from a colleague about the enormity of his own pay cheque compared to the salary offered to his lowest paid staff. Price decided to take a million-dollar reduction in his own pay in order to give every member of staff in the company a minimum salary of $70,000 – the amount that research via a Gallup World Poll shows is the ‘ceiling’ past which money can’t buy you happiness. An income of $70,000 allows you to live in a decent house in a nice area, have certain lifestyle expenses like a reliable vehicle and be able to save for children’s education while still having a couple of holidays a year and so on.

Gravity’s theory was that if employees didn’t have to use mental bandwidth on financial issues, they would feel more satisfied at work, loyalty and productivity would increase, and staff turnover would reduce. Price later stated that staff turnover had indeed reduced by half, which increased and improved employees’ knowledge and ability to help their clients. It’s certainly a fascinating concept, if slightly alarming, for the modern CEO who understands the need to value employees highly but also watch the bottom line. What to do if you wish to attract and retain good staff but you don’t happen to be a multi-millionaire tech CEO?

Know your value
In the post-Covid world it’s about transparency, trust, and clarity at work as well as the amount of take-home pay. Job hunters faced with hundreds of vacancies (and make no mistake, the market is inundated because of the Great Resignation) want to see at a glance how much a company thinks their role is worth. ‘Competitive’ is vague and subjective. Putting a number on it means employers are putting their money where their mouth is and letting candidates judge for themselves how ‘competitive’ that is. Staff and employers all know that valuing workers goes beyond a pay cheque, so flexible working, generous benefits and emotionally intelligent recruitment all allow potential staff to look under the bonnet of the employer beyond the starting salary and really get a feel for the company.

That is the ultimate purpose of an interview, and the subsequent salary negotiation. It isn’t about paying what you can get away with; it’s about attracting the right candidate for the role and for your company culture. With an eye firmly fixed on the horizon, smart employers can offer the whole package, and young people skilled in flexible working and financial knowledge will be more than worth the offer. Pay them well from the get-go and you could earn their loyalty for years.

Investors shown to be actively pursuing passive funds

Posted on July 27, 2022September 8, 2022 by itsupport

Passive funds, which track indices such as the S&P 500, are gaining market share worldwide as investors become more reluctant to pay the higher fees demanded by active fund providers. The perspective of the private investor best illustrates the appeal of low-cost funds. A fund’s charges are often a barrier for those with not much to spend. For example, an investor putting $10,000 in an equity fund may suffer a loss if the companies perform poorly. But if he has to pay a fee of one percent, this will reduce his wealth by a further $100.

Active funds pay a fee to help cover the salary of managers, in some cases high-profile figures, for the benefit of their skill in picking the right investments, such as stocks. This may involve researching companies, which can be costly. Passive funds, also known as trackers because they track an index, incur no such expense. BlackRock, Vanguard and a host of other asset managers have been offering low-cost trackers for decades. However, in recent years, the competition to lower fees has become even more intense, due to a combination of regulatory pressures and more products coming onstream. The Ongoing Charges Figures (OCF) for some of the major trackers is just 0.07 percent, and in some cases even lower.

Actives underperform
Performance data is also boosting the case for passives. It shows that the vast majority of active funds are repeatedly failing to outperform their benchmarks. The Standard & Poor’s Index Versus Active (SPIVA) scorecard spells out the statistics. It looks at thousands of active funds and how they have performed compared with their benchmark. In 2021, large-cap funds continued their underperformance for the 12th consecutive calendar year, as 85 percent of active large-cap funds trailed the S&P 500.

Fund managers often respond to evidence of active underperformance by claiming to offer better returns after adjusting for volatility, reports SPIVA, but add: “This would be an appropriate counterargument, if only it were true.”

Hundreds of passive funds are available covering specific sectors or themes

SPIVA said the vast majority of actively managed funds underperformed over the long term even after allowing for risk. SPIVA cited data based on the S&P Composite 1500, which covers approximately 90 percent of US market capitalisation. Among domestic equity funds, while 90 percent have underperformed the S&P Composite 1500 over the past 20 years, an even greater 95 percent did so on a risk-adjusted basis. For most investors, such as pension funds, the long-term investment picture is more important.

Fans of active management have frequently put forward the argument that passive funds have benefited from a strong run in recent years for world stock markets. The S&P 500 regularly hit new highs in 2021. The rising tide that has lifted nearly all ships makes it more difficult for active funds to demonstrate their value and how they cope better with downturns, say active proponents.

However, the temporary downturn and the volatility brought on by the pandemic should have provided the perfect opportunity to show actives in a better light. The evidence says actives failed the test. Proponents of active funds may argue that a deeper, more prolonged downturn will help their case. This theory could soon face a fresh test, with the S&P 500’s sharp downturn in the spring of 2022.

SPIVA’s data is slightly more encouraging for active bond funds. Bond prices have fallen sharply with central banks around the world signalling the end of quantitative easing, and raising interest rates. Many benchmark bond indices were in negative territory for 2021.

The most notable success for actives was in funds of US government bonds with longer maturities: about 82 percent outperformed their benchmark, the Barclays US Government Long index. For short and intermediate maturities, the proportions outperforming were 26 percent and 52 percent respectively. On the face of it, this might give some hope for the active case. But the outperformance was short-lived.

For example, with the Barclays US Government Long index more than 95 percent of actives underperformed over three, five, 10 and 15 years. This is also a familiar pattern for some equity funds, which outperform in the short term, but fail to sustain this performance over longer periods.

The cautionary tales of high-profile fund managers falling from grace also boost the case for passives. For many years, London-based fund manager Neil Woodford was highly regarded for the returns he achieved at Invesco. However, when he left to set up his operation, Woodford Investment Management, disaster ensued. He had to close down the company after investing heavily in unlisted, illiquid companies. Investors suffered heavy losses.

Short-term outperformance is, to some extent, part of the laws of statistics. If thousands of players throw a dice twice, you can expect one in 36 of them to throw two sixes. Extend the exercise to three throws, and only one in 216 will throw a six every time. Go to six throws, and it’s one in 46,656. Active proponents will argue that a fund manager is engaged in skill, not a game of chance. But most don’t seem to have the skill to outperform.

Efficient markets hypothesis
What makes outperformance difficult, in some ways, is the phenomenon known as the Efficient Markets Hypothesis (EMH). This is the theory that the prices of shares, and anything else widely traded such as bonds and currencies, already have all relevant information, such as profitability and economic risk, priced into them. If a company’s shares are trading at $10, they are probably worth about $10, says EMH. If they were worth $15, investors would have snapped them up and forced the price up to $15. EMH is unlikely to apply to all tradeable financial assets all of the time, but may apply sufficiently to make prolonged outperformance difficult.

Even Warren Buffett, one of the world’s best-known active investors, has also helped the case for passives. The Sage of Omaha oversees more than $800bn in investments through his Berkshire Hathaway insurance company but has recommended that investors should put a large proportion of their money into an S&P 500 tracker, citing the low cost.

Investors seem to agree. Assets under management (AUM) in index funds accounted for 40 percent of the total AUM in the US, at the end of 2020, compared with just 19 percent 10 years earlier. This data, from Statista, also showed that Exchange Traded Funds (ETFs) had grown most rapidly and now accounted for the majority of US passive equity funds. Bloomberg Intelligence, meanwhile, says that in domestic US equity funds, passives have already overtaken active.

It forecasts that passives will have more than 50 percent of the total US market by 2026, possibly earlier.

For the providers, there remains a conflict. Companies such as Vanguard and BlackRock still have a sizeable active business and have no interest in seeing it disappear. The fees they earn from active products are much higher than from a passive fund of the same size.

That said, some of the biggest passive funds are very lucrative for the providers if they can achieve sufficient scale. State Street’s S&P 500 ETF has some $400bn in AUM. Even with fees as low as 0.07 percent, the revenue generated is in the hundreds of millions for the bigger funds. For institutional investors, investing is usually a combination of active and passive. As a spokesman for abrdn, an almost entirely active house, told World Finance: “There is a place for both active and passive investment approaches in a well-diversified portfolio and a combination of both can be beneficial in different market conditions.”

Investors can use passive funds to obtain basic market exposure. For example, they buy S&P 500 tracker products to gain exposure to US equities. To execute more nuanced stances on the market, they might then buy some active funds, or individual stocks, bonds and other instruments.

However, passives are increasingly making inroads at the more granular level. Hundreds of passive funds are available covering specific sectors or themes. This includes sectors such as mining, energy and information technology.

The theme of inflation
Trends and developments in the market might seem to offer active funds a chance to show their value. A major theme in 2022 is inflation. Some active funds argue they can better pick stocks that can navigate the dynamics by selecting certain shares. For example, they might buy into supermarkets on the premise that they are better able to pass on increased costs to customers, as they are selling essential items. Deborah Fuhr, founder of ETF data provider and consultancy ETFGI, told World Finance: “I don’t buy it. Every time something happens, they say this is the time for active management. Consistently, hedge funds and active mutual funds don’t deliver the alpha they tell people they’re going to do – why would I pay high fees when I could get better performance with a low-cost ETF?”

In any event, the raft of passives available to address the issue include ETFs of inflation-linked bonds, as well as ETFs of equities selected for pricing power. Fuhr also cited the recent popularity of products tracking the gold price, which some investors see as a hedge against inflation.

Trackers are now also addressing environmental, social and governance (ESG) issues, a massive theme on the investment landscape. Index compilers such as FTSE and MSCI are covering a vast range of issues: climate change, controversial weapons and labour practices, to name but a few. They have come up with an array of indices that are now being tracked by hundreds of low-cost products. Some products cover specific themes; others aim to cover the whole ESG spectrum.

Smart beta
Passive funds also include products based on smart beta. Smart beta strategies are those that have been shown to beat the market over a period of time by investing in companies with certain characteristics. This might include companies that pay higher dividends or have lower market volatility. Indices for such companies are compiled. However, unlike mainstream trackers, the index is based on the relevant theme rather than market capitalisation.

These strategies sometimes outperform, but sometimes disappoint. The dividend strategy struggled when many companies cut payouts during the pandemic. Sceptics will argue that if EMH really applies, they shouldn’t work at all.

The big picture is that passives have it covered. This includes emerging markets, where actives might appear to have an opportunity to discover hidden value. But SPIVA data shows that in emerging markets, as with other areas, short-term outperformance is simply not maintained.

We need partnership and innovation to achieve a more sustainable future

Posted on July 26, 2022July 26, 2022 by itsupport

How is the packaging industry stepping up to the sustainability challenge?
We saw from the COP26 climate change summit that if the world is to limit global warming to 1.5°C or less by the end of the century, we all have to really increase our efforts.

The packaging industry is taking climate change challenge very seriously. Sidel’s customers, which include well-known global brands and companies, are setting ambitious targets to reduce greenhouse gas emissions, not only for themselves but also their whole supply chain.

We all recognise that progress on sustainability relies on cooperation, especially if you consider that analysts expect to see a 2.6% rise in sales of packaged consumer goods by 2025 – that’s another 423 billion units.

How are you going about it at Sidel?
We’ve really stepped up our commitments. Having agreed only a year ago to reduce greenhouse gas emissions at our own sites and facilities by 30 percent by 2030, we have now moved those targets up a gear, pledging to halve our emissions in that timeframe. So, we are now committed to being on the 1.5°C pathway and being part of the best efforts to limit global warming.

All our sites will be 100% green energy-powered by the end of this year. Our new site in Santa Maria da Feira, Portugal (pictured) is a good example, featuring intelligent lighting control and electric car charging stations.

All of Sidel’s sites such as this one in Portugal, will be 100% green energy-powered by the end of this year.

As an equipment manufacturer, what can you do to influence the supply chain?
Sidel is fully embracing this challenge. We want to be at our customers’ side and to lead our suppliers towards a more sustainable future: it is only through working with partners that we can make a difference. We make sure we understand their sustainability goals and we’ve let them know they’re not alone! It takes continuous dialogue and we will use all our technical knowledge and smart data analytics to help them.

We’ve already reduced the energy consumption of our machines – our blowers now use 45% less energy. We also halved the water consumption of our bottle washers and have developed a digital suite that can help customers monitor and adjust their production line energy consumption. We’ve upgraded existing lines, so they are more energy-efficient and sustainable, which last year saved more than 1,500 tonnes of CO2. As an example, helping our UAE-based customer Zulal move to a new integrated packaging line configuration brought them energy savings of 56%.

Our designers can optimise product design to make packaging that uses less material and fewer resources when it is blown and transported. Our moulding technology allows bottles weight reduction, cutting down on material use as well as energy consumption and transport emissions.

We help customers deal with regulatory changes – for example, the move to tethered caps which will become mandatory on all bottles in Europe and the UK from 2024 to minimise litter.

We’re committed to reducing emissions on everything we buy and sell by 25% by 2030, against a 2019 baseline. We recently started a supply chain initiative to support our suppliers to start their own commitment and track progress against our common goal.

Our efforts have been recognised as we have been given an A- rating for our supplier engagement by CDP (Carbon Disclosure Project), a global environmental non-profit organisation.

Sidel helps its customers’ lines to be more energy efficient, last year saving 1,500 tonnes of CO2

Where are the regulatory and government pressures on the packaging industry?
There is now a general request for manufacturers to take on more responsibility for waste management, with the intent of making a drastic shift from a linear to a circular economy model. Currently 63 nations have enacted Extended Producer Responsibility measures to encourage schemes such as product takeback, deposit-refund, and waste collection guarantees. More governments are open to funding and creating better recycling infrastructures.

Plastic packaging is often seen as the enemy of the environment. How can you make a positive case for it?
It’s hard to change perceptions, but the truth is that lifecycle analysis shows that plastic, and PET in particular, has the best carbon footprint among materials currently available. If it is properly collected and recycled, PET can offer the best answer to the current sustainability challenge.

We need to see packaging as a resource, not a waste. If we can prevent it from ending up in the environment by keeping it in a circular economy loop, PET plastic packaging can play a pivotal role in protecting and distributing our most precious products.

Since 2019 we’ve been a signatory of the New Plastics Economy Global Commitment, launched by the Ellen MacArthur Foundation and UN Environment Programme to accelerate the transition to a circular economy.

Like it or not, plastic packaging is going to be with us in the near term and indeed is expected to rise, especially in Asia Pacific, the Middle East, Africa and India. So, we have to make this growth more sustainable, and for that we all need to engage all the 5Rs levers: Reduce, Recycle, Reuse, Replace and Reinvent (see diagram).

Reduce is the first and most important action, and it needs to start from the actual design of the packaging. Reuse will come to the fore, with more refill options for the consumers, both at home and on the go. Increasing Recycling is of pivotal importance, both in quantity and in quality: return schemes such as reverse vending machines that incentivise consumers are proving to be a great tool to achieve both. Easier-to-recycle solutions by using one single mono-material layer instead of many layers of multiple materials are on the rise.

PET is already the most recycled type of plastic, thanks also to its ability to achieve food grade quality even when recycled. It will become more prevalent in line with the ambitious targets the big brand owners have set for themselves in terms of percentages of recycled PET, known as r-PET, in their packaging.

We’re also actively seeking to Replace with new bio-sourced or bio-based materials and looking at ways to completely Reinvent the way packaging is conceived.

What is preventing the widespread adoption of recycled PET?
The amount of recycled PET in packaging is increasing but progress is slow, with an estimated global average of 8% compared to 5% in 2018. In Europe, the average is already 15% and is projected to be around 35% in 2030.

Sidel offers a testing and validation service to help customers deal with r-PET’s inherent variability and we have set up our own pilot-scale PET recycling line near Le Havre in France. Sidel has also signed up to R-Cycle, the open tracing standard for sustainable plastic packaging. It provides a digital product passport, and is a big step towards the implementation of a genuine circular economy and highly efficient process chains. Partners from around the world can record and retrieve all the relevant properties of the packaging to improve their product sustainability, quality, and manufacturing process.

It takes time to put recycling facilities in place, but we are seeing a lot more investment in recycling facilities in Europe. Materials and chemicals companies such as Eastman, Indorama and Carbios have recently announced major recycling initiatives in France and another, Suez, is creating new recycling capacities in Belgium.

Overall, are you optimistic or pessimistic about the role the packaging industry will play in sustainability?
I am optimistic because I believe in the resourcefulness of our engineers and a growing collective determination to set and meet tough targets. In the end, it will be a combination of innovation, ingenuity, and collective will from regulators, industry and consumers to make the best use of our precious resources.

Sidel’s latest sustainability report is available at sidel.com

Lifestyle branding for financial services

Posted on July 26, 2022July 27, 2022 by itsupport

During recent years, global brands have been resonating well with consumers to such an extent that they have become a way of life. Last year, Apple’s brand loyalty reached an all-time high of 92 percent, as the tech giant focuses on delivering unique customer experiences and on the promise of continuous innovation. As such, like-minded groups of people identify with the company’s purpose and vision, naturally becoming strong advocates. Financial services can use this positive word-of-mouth as another form of marketing to build up, interact and grow from their own evangelistic community, similar to how technology businesses have benefited from this growth in the past.

Lifestyle branding has been growing among younger generations like the digital native Gen Z as they favour self-expression and listen to influencer recommendations. While advertising and TV shopping defined the pre-social media era, it is the social influencers who are shaping the purchasing decisions of the new generation, with the market growing from £1.7bn in 2016 to a staggering projection of $16.4bn this year. It might not be surprising that the finance world is looking to tap into this trend. Branding expert Apple has even ventured into this space by introducing a one-of-a-kind titanium credit card to allow consumers to benefit from individuality in their lifestyle. With the customer experience front and centre of these strategies, how do banks and fintechs venture into lifestyle-based banking?

Design is key
It is important that banks and fintechs focus on a holistic, engaged approach that improves the customer experience, and there are plenty of examples out there of a successful strategy that puts the customer front and centre. Monzo is one example of an app-based challenger bank looking to disrupt the traditional way of banking, as the firm places a key focus on its customers’ requirements. Its super-colourful bank card means it has a distinctive look. The bank’s head of design, Hugo Cornejo, described this as an intentional move to grab people’s attention and create a discussion when handed over to make purchases.

This strategy is reflective of a brand that truly understands its desired customer base. Understanding the motivations of consumers will enable banks and fintechs to select the right design elements for their bankcards, as these are the physical symbol for the lifestyle they promote.

This is just one instance of how a card can amplify someone’s lifestyle. The design could reflect exclusivity, innovation or sustainable practices for customers that want to support green initiatives. For example, a metal card is resilient against fast-paced lifestyles; it is defined by its longevity and ultra-sleek design. Eco-cards made of 100 percent recycled, ocean-sourced, or bio-plastics can also resonate with environmentally conscious consumers, which is particularly crucial as a 2020 report discovered that 73 percent of Gen Zs were willing to pay more for sustainable products. A further study also revealed that nearly 90 percent of Gen X consumers would be willing to spend 10 percent extra for more sustainable products.

Apart from design, communication to consumers is critical, with social channels now a crucial medium to spark conversations with younger customers. As an example, the launch of digital US bank Step was promoted on TikTok by leading influencer Charli D’Amelio and achieved support from celebrities such as the rapper Nas. For younger consumers who do not have an interest in finance, harnessing the power of social media and influencer marketing will help to resonate with their interests.

Alongside impactful and sustainable bankcards that can also be personalised to reflect the tastes and personal interests of the consumer, digital applications will allow for effective online experiences as part of a combined ‘phygital’ approach, where digital and physical experiences are brought together. This will be critical as more consumers decide when they want a physical or digital touchpoint, with the banking situated where the customer is.

Embracing a holistic approach
For banks wanting to create a successful lifestyle brand, the key lies in fully understanding their consumers and boosting the user experience by taking a more holistic approach. The most successful banks understand their customers’ aspirations, speak their language, know where they ‘hang out’ online, and offer them personalised and unique products and services that resonate and are instantly recognisable. Effectively utilising data at hand could certainly help with seeing valuable customer insights, their behaviours, motivations and interests. The subsequent building of a strong image, targeted products and use of relevant personalities will place banks and fintechs in much stronger positions to attract new customers and ensure their loyalty and advocacy moving forward.

Can quantum computers predict financial crises?

Posted on July 23, 2022July 4, 2022 by itsupport

One of the reasons for the excitement around quantum computing is the hope that it will spawn the creation of highly powerful computers capable of looking far into the future. When or if this will happen is up for debate. Will the necessary technology develop quickly, or will – like energy from nuclear fusion – the promise of useful quantum computers remain tantalisingly close but just slightly out of reach? And even if we can build super-fast machines, will they be much better at prediction?

These are such difficult questions, that perhaps in order to answer them, we need a quantum computer. (This joke is an updated version of a remark by Robert Peel during an 1848 House of Commons debate about Charles Babbage’s Analytical Engine, in which he suggested the device “be set to calculate the time at which it would be of use.”)

Anyway the Bank of Canada is pressing ahead regardless, and recently hired the quantum outfit Multiverse Computing to look into the question of whether a quantum computer could predict a financial crisis in Canada. The only problem, according to Multiverse CTO Samuel Mugel, was that “The Canadian economy, in their view – and I hope it’s true – is too stable to have a high likelihood of financial crashes. So basically, they said any financial crash we predicted would probably be wrong.”

In other words, the central bank was far smarter than any of those new-fangled quantum devices. But while this sounds like great news for Canadians, you don’t need a quantum computer to realise that the Canadian economy is not as stable as the bank thinks. And the reason is related to another quantum technology – our financial system.

A mathematical thing
The word ‘quantum’ is from the Latin for ‘how much,’ which is what anyone says when they look at the price of a home in Toronto, Vancouver, or pretty much anywhere in Canada these days – though it is usually pronounced “how much?”

The common story about house prices is that they are the inevitable result of supply and demand. Canada has a lot of immigrants, and they aren’t building houses fast enough. As Finance Minister Chrystia Freeland explained in April 2022, “it’s just a mathematical thing, Canada has the fastest growing population in the G7.” Unfortunately, Freeland is using the wrong kind of maths.

Demographics give only a partial explanation for house price growth. One international study found that “if population growth increases by one percentage point, house price growth increases by 1.4 percentage points.” In the five years from 2016 to 2021 the Canadian population grew by an impressive 5.2 percent, but house prices went up by around 10 times that in many cities.

So obviously something else is going on. And that thing is money creation by private banks.

As argued in my book Money, Magic, and How to Dismantle a Financial Bomb, which applies the tools of quantum probability to the financial system, money has a dual real/virtual nature, and relies on a fuzzy and unstable link between value and price. In particular, money creation through loans is a dynamic process which can lead, through positive feedback, to rising asset prices. As the value of a ‘real’ home increases, so does the amount of virtual money which can be created, however the two are always linked.

And a property of positive feedback is that it can work in both directions – money (and value) can be destroyed as easily as it was created.

Meltdown
Since house prices in Canada have been on a steady march upwards for some three decades, hardly dented even by the 2007–08 financial crisis, most Canadians have become accustomed to the idea that prices can only go up. After all, those immigrants need to live somewhere! But what is less often remarked upon is that mortgage interest rates have also been on a fairly steady slide down over the same period.

This meant not only that existing mortgage holders saw their payments decline with time, but that new buyers could afford to pay more for the same house.

As in many countries around the world, house price growth has been cheered on by the government and central bankers because it serves as a partial substitute for real income growth. In July 2020 Bank of Canada Governor Tiff Macklem even went out of his way to announce that: “Our message to Canadians is that interest rates are very low and they’re going to be there for a long time.

If you’ve got a mortgage or if you’re considering making a major purchase, or you’re a business and you’re considering making an investment, you can be confident rates will be low for a long time.”

Unfortunately, inflation – initially written off as ‘transitory’ – started to spike in 2021 and then exploded higher, taking interest rates with it.

Real estate bubbles are the financial versions of out-of-control nuclear devices. We don’t need a quantum computer to tell us that the Canadian economy – like many others around the world – is looking less stable than it has long appeared to be on the surface. But what does need a long-overdue update is our financial mathematics.

Ireland sets out on its post-Brexit pathway

Posted on July 22, 2022July 4, 2022 by itsupport

Financial services are important to the Irish economy. The sector is a big employer. Over 105,000 people work in the domestic and international financial services sector, just over 4.2 percent of total employment, and it contributed €19.3bn to the Irish economy in 2019, 5.5 percent of total GDP. It was on a growth trajectory before Brexit (see Fig 1).

A key ingredient of the sector’s success has been the International Financial Services Centre, established in 1987 in the old Custom House Docks in the heart of Dublin. The IFSC was conceived as a regeneration project, mixing commercial and residential development, and has largely succeeded on both counts. It has been the key to Ireland’s huge growth in international financial services, which employed just 100 people when the then Taoiseach (Prime Minister) Charles Haughey backed the ambitious plans 35 years ago.

The IFSC still provides a centrepiece for the sector, although many firms are now based elsewhere in Dublin. New offices are still springing up all around the city centre, both north and south of the iconic River Liffey that flows through its heart.

Brexit looks to be giving the sector another boost, with strong encouragement from the present government, says Minister of State for Financial Services, Seán Fleming: “The international finance sector is doing exceptionally well. Employment has increased by over 2000 in the last year,” taking it to over 50,000. He is quick to point out that this is not just a Dublin success story: “People traditionally thought it was just Dublin, but one third of employment in the wider financial services sector is now based outside Dublin.”

Ireland has been playing its European Union and financial services credentials for all they are worth, said the minister, citing the country’s openness as a great strength. On a recent visit to one major financial services firm in Dublin he was told that it employed people from 66 different countries. “We have a very diverse workforce and that is another strength. We get great diversity of thought,” Fleming said.

Raising its game
One challenge that Ireland has turned from a potential weakness to a strength is regulation. Over the years, it has been beset by failures, especially in the insurance sector, and this has damaged Ireland’s reputation. A key element in the government’s ambitious Financial Services Action plan has been to ensure its regulatory regime raised its game to ensure that such failures were firmly consigned to the past.

This was essential if Ireland was to take advantage of the potential opportunities it saw in the wake of the United Kingdom’s departure from the EU. Any regulatory slip-up would have severely undermined its pitch to UK firms looking for an EU domicile from which to service European clients.

The years of collapses, with high profile names such as Quinn and Setanta, have left their mark, acknowledges Moyagh Murdock, the chief executive of trade body Insurance Ireland. “There was significant volatility and a race to the bottom in those years, made worse by weak regulation. We have moved away from that and now have very robust regulation and the best in class. There has definitely been a change in culture as the regulator and the consumer are now very well protected,” she said.

The response, says the Minister, has been to set the regulatory bar deliberately high. “We are not a brass plate country. People must have boots on the ground. It is stricter because it is better but we think that is sustainable,” Fleming continued.

This is a message you hear repeated wherever you go in Dublin. “Robust regulation is very important for confidence,” says Paul Sweetman, director of Financial Services Ireland, the leading sector lobby group.

“The regulator [the Central Bank of Ireland] and the government were clear that there was not going to be any truck with brass plating. Companies were very clear on what was being said to them and when they got through the process they knew it had been tough,” says Michael D’Arcy, chief executive of the Irish Association of Investment Managers, which has seen its membership grow from 13 firms pre-Brexit to 21 today. Dublin now offers a home to 17 of the top 20 global asset managers.

Attractive proposition
The case for tough regulation has got through to international firms looking to establish a European presence. Stephen Cross, CEO of the European arm of US multi-national insurance broker McGill and Partners, says it was a major factor in their search for the right European base in 2020. “Our approach was always to go to a domicile that had a very good reputation and a strong regulator.”

Other options promised an easier ride to authorisation but they weren’t attractive: “We didn’t want to pick lower standards and then have to start again,” a reference to the determination of the European Insurance Occupational Pensions Authority (EIOPA) that everyone should be levelled up to the same standards.

Building on the momentum of post-Brexit opportunities remains a priority, says the minister: “Initially some of the new authorisations were defensive but now people say it is a platform for growth.”

We want people to know that if you are looking for talent and skills you will find them in Ireland

Marrying the growth in international financial services with the well-established reputation of Ireland in the technology sector is where he sees some exciting opportunities: “The big move has been in Fintech. Fintech has really come along.”

Sweetman says the whole sector shares this focus. Brexit has created “a very strong opportunity for Ireland with international financial services. The sector has grown and attracted new capital and foreign direct investment. We have a very strong tech sector and a very successful international financial services sector. In the International Financial Services Centre we have world leading firms in both sectors next to each other. The potential for collaboration is unparalleled anywhere else.

“We have punched above our weight in the technology sector for some years. In the Fintech world we are on the cusp of exponential growth,” Sweetman continued. Sustainable finance is another area where Ireland believes it can carve out a specialist niche. “We want firms to house their key sustainable finance international capabilities here. This will help Ireland reach its own climate action targets and it will win inward investment to become an international hub for businesses sustainable finance activities,” Sweetman told World Finance.

Ensuring that the talent and skills are there to support this growth will require a delicate balance between ensuring a pipeline of well-qualified young people and bringing in the right people from outside. The talents and skills are in place, says Sweetman, but “we know we need to grow that pipeline. The challenge is to show how we have nurtured those talents and skills and turned that into a competitive advantage. We’ve done it in the tech sector where they have blended home grown talent with bringing in the skills we need.”

He continued: “It makes sense that you’ll have a mixture of home grown talent and international talent. That makes for greater success. We want people to know that if you are looking for talent and skills you will find them here.” In technology “Ireland has started to market itself as a location to advance your career,” says Sweetman.

The challenges ahead
Like everywhere, Ireland is emerging from the restrictions of working through the pandemic. Those who opted for home working are slowly going back to their offices but at a slower rate than in the UK as the empty offices and quiet cafes in Dublin’s business districts testify. Generally, people are working just one or two days in offices and there is no great pressure on them to return any faster.

Ukraine is now also inevitably casting a cloud over the sector. Along with major investors and financial institutions around the world, the Irish-based asset managers are watching the unfolding crisis in Ukraine and the response of western liberal democracies very carefully.

Sanctions are the obvious concern: “No-one wants to be caught making an error over sanctions because the potential reputational damage is huge,” D’Arcy told World Finance.

Asset management will probably feel relatively little direct impact from the sanctions. According to the Irish Department of Finance and IAIM between 0.3 percent and 0.5 percent of the assets under management in Ireland are Russian backed. “Of that, only a small percentage is sanctioned,” says D’Arcy.

The biggest challenge to the growth of the wider financial services sector as a result of the war in Ukraine will be the huge impact on aircraft leasing, another sector that features prominently in the Irish success story: 14 of the top 15 aircraft lessors are based there. Trade body Aircraft Leasing Ireland says 60 percent of the world’s leased jets are owned by Ireland-based leasing companies. EU sanctions have forced the leasing companies to cancel all of their contracts with Russian airlines, covering over 500 planes worth upwards of $12bn.

ALI says its members had “limited success” in getting their planes back from Russia before the sanctions clampdown. Now, most have been appropriated by Russian airlines and the leasing companies are turning to their insurers. Most market experts predict that these claims could take several years to settle. It will be a drag on a sector that has enjoyed rapid growth and made a significant contribution to the growth in Ireland’s financial services sector but not fatal.

Despite the odd frown over Ukraine, post-Brexit Irish eyes are definitely smiling and full of optimism. FSI’s objective of making Ireland a top 20 global financial centre by 2025 is still within its grasp.

A bank that puts the customer first

Posted on July 21, 2022July 4, 2022 by itsupport

India-based IDFC FIRST Bank posted its highest ever profit in Q1 2022 of Rs3.43bn ($45.7m) and is perhaps emerging as one of the most dramatic turnaround success stories in Indian banking. Formed by the merger of India’s leading infrastructure financing promoted Bank and Capital First, a leading technology-led NBFC in the second half of 2019’s fiscal year, IDFC FIRST Bank started with a string of losses for six consecutive quarters until December 2019.

Incredibly, the merged entity turned itself around in its third year after two rounds of fund raising, a differentiated retail strategy, new technologies, digitisation, expansion of branch network, a successful rebranding exercise and a customer-first approach. With a capital adequacy now at 16.8 percent and profitability improving, the bank appears set for growth. World Finance spoke to V. Vaidyanathan, Managing Director & CEO of IDFC FIRST Bank, who earlier led retail banking at ICICI bank, later launched an NBFC, before merging with IDFC Bank and taking over the combined entity as the MD & CEO.

It’s been three years since the merger with Capital First. What has been the progress?
Our bank has made tremendous progress. We have laid the foundation for a highly successful megabank of the future. Our CASA (current and savings account) ratio grew from under 10 percent to 50 percent, our capital adequacy has grown to 16.8 percent and our business model is clear. Now we are all set for growth. We are building a new age digital bank that is agile and highly scalable. This new avatar will be prominently visible to all very soon.

Your loan book has grown at only six percent since merger. That’s rather slow in a growing country. Can you explain?
The erstwhile IDFC Bank was formed by de-merging the assets and liabilities from IDFC Limited into a commercial bank. As it was a new bank, it didn’t have CASA. Capital First was an NBFC, and had no retail deposits either. So, assets plus assets make more assets. Neither had retail liabilities. So on merger, we had a large loan book of Rs1.04trn ($14bn) but very low retail deposits of only Rs104bn ($1.4bn). So, we slowed down our overall loan growth by moderating legacy wholesale book but growing the granular retail book.

How was the balance sheet funded, and how has it changed since?
Because our bank had recently acquired a commercial banking license at merger, we were largely funded by wholesale deposits, certificates of deposits and institutional borrowings including legacy long term borrowings. I’ve been around long enough in banking to know never to take chances on the liabilities side. We wanted to first secure a highly stable and diversified liabilities base before growing loans. What if short tenor certificate of deposits didn’t roll over? What if corporates withdrew deposits in a crisis? I’ve seen these situations before in the industry, and never wanted to take chances. So, on merger, we first raced to the door to raise public deposits in the 2020 fiscal year and we grew deposits 84 percent CAGR (compound annual growth rate) between the merger quarter until March 2022.

We grew CASA ratio from under 10 percent to 50 percent in the last three years. By the time COVID-19 struck in March 2020, we had already retired almost all of our certificates of deposits in a hurry, had lesser corporate deposits and swam through the pandemic comfortably. I would say managing liquidity proactively before the crisis was the biggest success we have had.

But how did customers place deposits, even while you were making losses all through the 2018–19 and 2019–20 fiscal years?
Our corporate governance and positive image came in very handy here. In fact, both IDFC Bank and Capital First were always seen as entities with high corporate governance. We lived up to it even under extreme circumstances. Every quarter of 2020 we posted large losses, primarily due to incremental provisions on stressed legacy wholesale accounts, but we were always straightforward with the public.

We want to build a world class bank in India, with three key themes: ethical, digital and social good

We called out the specific accounts that had gone bad by name, in a transparent manner without resorting to complicated client-confidentiality clauses. So, the public trusted us. We never postponed the recognition of an issue whether it was legacy infrastructure, Dewan Housing, Reliance Capital, or our exposure of Vodafone Idea. More important, along with our earnings releases, we described the future business model with great clarity and simplicity. The incremental business model was giving us strong ROE (return on equity) of 18–20 percent, and we broke down the components of the incremental business model line by line for explanation. People got confidence from all this.

Can you expand on the role that corporate governance played in stabilising the bank?
In our case, it played an immense role. One thing was the transparent disclosures and accounting of pre-merger accounts which I talked about. But more importantly, our board members have between 30–40 years of work experience mostly in financial services, and they have worked at senior positions, most of them in multinational corporations. They are extremely cautious and conservative about corporate governance. In fact, I can say corporate governance is their number one agenda. All our important committees are headed by independent directors. Coming back to disclosures, we disclose more than the regulatory requirements or conventional market disclosures.

Can you share the incremental business model with us?
Our business model is easy to understand. We have developed immense capabilities for financing small entrepreneurs and retail consumers at scale, using technology. We have maintained low gross NPA (non performing assets) of less than 1.9 percent, and low net NPA of less than one percent for a decade. The COVID-19 year apart, not in a single quarter in 12 years did we have any fluctuation on this trend. On the retail side, despite moving to lower yielding, safer assets and prime home loans, we are making ROE of about 18–20 percent. On the corporate banking side, we have not had any new NPA since merger, and our ROE is about 14 percent. The Indian retail credit to GDP is just about 15 percent, which can grow manifold to 70–80 percent over the next few decades, on a growing base. We have unlimited space for growth. We have launched and scaled many new businesses like wealth management, CMS, FASTag and so on.

Are these economics reflecting in the profitability of the bank?
The operating profits for the first half of the 2019 fiscal year, combining both IDFC Bank and Capital First, was Rs5.51bn ($73m), annualised to Rs11.01bn ($146m). In 2020, this grew 60 percent to Rs17.64bn ($235m). Then, during 2021, it grew only eight percent to Rs19.09bn ($254m) as it was pandemic affected. But the moment COVID-19’s second wave wore off in 2022, operating profits grew 44 percent from Rs19.09bn in 2021 to Rs27.53bn ($367m) in 2022. So, in summary, while our loan book has grown at a three-year CAGR of six percent, our operating profits have grown at three-year CAGR of 36 percent. So that explains the power of our incremental profitability model. We expect operating profit to grow at 45 percent CAGR again over the next two years.

Do you provide guidance to the market on earnings?
Not just earnings, at the time of the merger in 2019, we provided 2024–25 guidance on all key metrices, including deposits, loan book, asset quality, returns. Every quarter, we report our performance against that guidance. I’m happier to say that on every single metric we are on track, and confident of meeting them despite the pandemic interruption.

What is the core culture that you are building in the bank?
We are a new bank and we are coding our employees’ DNA to think ‘customer first’ at all times. We were the first universal bank in India to launch monthly interest credit on savings accounts. We stripped most of the fees that banks usually charge on one count or another. Our credit cards have differentiated offerings like dynamic pricing, comparatively lower rates and fees, better ease of usability, truly customer first. You might think this is not beneficial to shareholders. But you’d be mistaken, as in our current construct, customers are automatically drawn to us from word of mouth and our retention rates are high.

What is the role the vision statement plays in building the culture?
We went over the vision statement over and over to get it right. Our vision statement effectively says we want to build a world class bank in India, with three key themes: ethical, digital and social good. ‘Ethical’ is the means by which we wish to deal with everyone. ‘Digital’ is the medium we want to use. ‘Social-good’ is the purpose of our existence. We tell our employees to earn income the clean way. We made a seal on this and shared with our employees, so it stays on their table.

What is the next stage for the bank?
We have made significant investments in building a quality technology stack for scalability. Our products are great. The culture is good. Our mobile app is great. Our asset quality is proven. Our capital adequacy is strong. We tick all boxes, barring one. We are low on profitability, but we’ll fix this soon. Our trajectory of profits is strong. By 2023’s exit quarter we believe we will cross double digit ROE, and then on to the next milestone of 16 percent ROE. It will happen. We will be a world class, technology led bank with high teens ROE. We will tick the profitability box soon, and remain strong.

Antigua and Barbuda – an investor’s paradise

Posted on July 20, 2022July 20, 2022 by itsupport

The idyllic Caribbean nation of Antigua and Barbuda has long been a favourite port of call for luxury yachts and exclusive high-end tourist clientele. And since the establishment of its increasingly popular Citizenship by Investment Programme (CIP) in 2013, the country has been welcoming a steady stream of high-net-worth individuals. The programme provides one of the most efficient routes anywhere to a second citizenship for wealthy individuals, ensuring both financial freedom and peace of mind at a time of increased global uncertainty; and the Antigua and Barbuda citizenship programme is one of the most attractive offerings in this fast-growing market.

It takes less than four months for investors approved under the CIP to receive their citizenship, giving them visa-free travel to more than 160 countries, as well as a safe and secure base for their families and residence in a low-tax and business-friendly jurisdiction. Furthermore, there are no restrictions on dual citizenship and no tax on worldwide income. The crime rate in the country is low and the standard of living high.

An innovative programme
As far as innovation is concerned, Antigua and Barbuda was the first Caribbean nation to permit investment in approved businesses, an initiative that other jurisdictions have now added to their respective portfolios. The most recent addition to the investment options is the University of the West Indies option. This avenue will entitle one member of the family to a one year, tuition-only, scholarship at the University. The National Development Fund and UWI option in particular have become the market leaders in the sub region, as they are remarkably well-suited to growing families.

Ongoing research into the market has indicated that the pandemic has driven people to seek out investment opportunities as it relates to alternative options for relocation. As such, the following expansions have been made. Firstly, successful applicants now have the ability to take the citizenship oath by designating overseas offices and missions, in their respective jurisdictions using a local notary public, as well as by use of various audio-visual platforms.

Secondly, the definition of ‘Dependent’ was expanded allowing investors to include an intended spouse, adult children up to 30 years of age, unmarried siblings, intended spouses of adult children, grandchildren and parents or grandparents 55 years and older. And finally, expanding the investment opportunities under the real estate option to include the construction of new property and expansions in existing high-end properties.

The four pathways that
investors can select from:
1. Contribution to the National Development Fund:
For a single applicant, or a family of four or less: $100k contribution
Family of five or more: $125k contribution
2. Real estate investment option:
single investor $200k,single investor $400k, joint investment at a minimum of $200k each
3. Business investment option:
Single investor $1.5m, joint investment $5m, with each investor making a minimum contribution of $400k
4. Investment in the University of the West Indies:
For a family of six: $150k contribution

Following these new opportunities, a growing number of new citizens are now investing in real estate and luxury tourism projects, providing them with attractive potential for capital gains and returns on their investment. With flexibility and resilience constantly at the forefront, the CIP of Antigua and Barbuda is proving to be the one to watch in the investment migration industry. The Antigua and Barbuda programme is known for its foresight and innovation and this trend can be expected to continue into the foreseeable future. The variety evident in the investment thresholds positions this programme uniquely in the market. The current offering illustrates marked improvement over time, and it will continue to evolve with the market to ensure that it maintains its relevance.

A good time to invest
The Antigua and Barbuda Citizenship by Investment Programme is an excellent choice for the ability to have visa-free access to more than 160 countries, no restrictions on dual nationality, citizenship for life, no tax on worldwide income, inheritance, capital gains or investment returns, a stable economy and democracy and a safe and secure paradise from where you can live freely and work remotely.

New citizens can reside comfortably in a safer, less densely populated country that has demonstrated a greater ability to manage the pandemic. Future applicants should know that now is the time to invest in their future. The Antigua and Barbuda Citizenship by Investment Programme is the premier choice for second citizenship.

Managing the growing wealth of women

Posted on July 20, 2022July 4, 2022 by itsupport

Women already control around one third of global wealth, and their share is rising fast. They are expected to be the big beneficiaries of the Great Wealth Transfer, in which baby boomers pass their assets on to the next generations. They are also making more money themselves, thanks to social changes such as increased representation in the workforce, including top management positions, and higher levels of education.

In 2010, for example, just 14 of 89 women on the Forbes billionaires list were self-made; in 2022, it was 101 out of 327. Even COVID-19 did not dim women’s growing financial confidence. In 2021 research conducted by Fidelity Investments, 50 percent of women in the US said they were more interested in investing since the start of the pandemic.

And the 2021 UBS Investor Pulse survey found that 68 percent of women had started talking more about finances within their families.

A bespoke approach is best
In response to this accelerating trend, many articles and research pieces have appeared targeting the specific investment needs of women. But while investing is important, it is only one aspect of family wealth. And at Kaiser Partner Wealth Advisors, segregating clients according to their attributes, including gender, runs counter to our bespoke approach.

In our view, a successful wealth management plan is both holistic and highly personalised. That means it ensures global mobility and encompasses the full spectrum of a family’s assets, from lifestyle and real estate to venture capital and philanthropy. It also means it serves the unique needs of the wealth owner and their family, and reflects their shared values.

We are not disputing women face specific financial challenges. We simply believe that every client is different and deserves a custom-made plan. For example, BCG names five challenges that affect the financial life journey of women: the gender pay gap, maternity leave, flexible conditions, a longer life expectancy and a tendency for lower risk tolerance. But recent research shows that huge differences exist.

Geography: in Asia, around 41 percent of female wealth is self-made compared with just four percent in Europe.

Age: approx. 72 percent of millennials are the main decision makers for financial planning in their households, compared with less than circa 50 percent of baby boomers.

Culture: around 60 percent of women in China see themselves as investors, compared with just nine percent in Japan.

What’s more, where women do have vulnerabilities, the solution is the same as it would be for any client: a strong wealth plan that covers all contingencies. Take their longer life expectancy, for example. At various points in women’s lives, they will deal with business partners, need to protect their children’s interests, inherit spousal wealth or support ageing parents. A tailored, holistic plan would address all these factors.

A reliable sparring partner
One clear distinction we see is in women’s need for a particular kind of wealth advisor. Research shows that only around 35 percent of female clients talk to their financial advisor quarterly or more about retirement planning or to see if their goals are on track. And approx. 67 percent of female investors globally feel their wealth manager or private banker misunderstands their goals or cannot empathise with their lifestyle.

We believe women need a reliable sparring partner who invests the time to understand their needs and situation. An advisor who puts them in the driving seat and encourages them to take ownership of their wealth plan. And an advisor who constantly monitors whether the plan needs adjusting to reflect any changes in family- or business-related circumstances. Whoever the wealth owner, though, the key is to start the dialogue early. The sooner a family sits down together, the more time they have to build a long-lasting plan that prepares for all contingencies and works in everyone’s interests.

A plan for all seasons
So, what might this plan look like? First, it protects the wealth owner and their family from contingencies and negative implications legal or otherwise, while making sure they maintain some flexibility in global mobility terms. It diversifies their risks, so their income is protected in the event of a major geopolitical occurrence. And it protects them against all other contingencies, including divorce, death and unscrupulous business partners.

Our role as advisors is to ask the right questions, understand their needs and guide them through the planning process

From a business perspective, a strong wealth plan ensures continuity and a smooth transition to the next generation and beyond. It also protects the business from internal and external risks and builds a strong corporate governance system that includes – and provides for – the most trusted people in the family’s inner circle.

Finally, the plan protects the wealth itself, so it’s preserved for future generations and passes down smoothly. It also defines who has access to the wealth, and for what (to try out a new business venture, for example). And it constantly flexes to reflect the evolving needs of all parties.

Strong governance must underpin the plan, particularly those aspects relating to the family. This can help to avoid inheritance disputes, and the risk of younger generations squandering their wealth because they do not appreciate the responsibilities it brings.

Three strategic steps
Effective and sustainable wealth planning is more about understanding internal and external risks, allocating roles within the family and creating security mechanisms than it is about considering wealth from a single perspective. Having said that, a good-quality plan will address any issues female wealth owners face, such as a lack of financial independence or information about family assets.

The challenge can be getting the family to have an open dialogue about wealth in the first place. Few families regularly discuss their financial situation, its potential risks and challenges and how to mitigate them. By giving everyone a voice and the chance to contribute, especially the younger generations, wealth owners can help the whole family buy into the final plan.

Although, the planning process is always tailored to the specific needs, there are three key aspects that we focus on when advising wealth owners and their families:

1) Defining the family’s values and long-term aims. Wealth is almost always a family matter and therefore, should primarily be seen through the lens of relationships and family values. We always ask families which shared values they would like the plan to reflect, as these can keep the family united and thriving for generations.

We also ask them to think about what they want the plan to achieve for themselves and their family, during their lifetime and beyond (recent history has demonstrated that short-term plans, set up for very narrow tax purposes, backfire eventually). And we remind them that their plan will have the power to affect family members negatively as well as positively. So, whatever its purpose, relationships must be at the forefront.

2) Keeping the plan dynamic. Once we understand the objectives of the plan, we use our Dynamic Asset Model to conduct a comprehensive inventory of the family’s assets. We divide them into categories – business-linked, lifestyle, financial, real, direct investments and sharing and impact – to show how they interact. And we help to strategically allocate those assets in line with the plan.

Next, we stress-test the model by asking ‘what if-questions’: what happens if the business fails tomorrow? Would the other assets be able to sustain all the varying financial needs and priorities of the family, or help set up a new business? And we flex it if circumstances change or challenges arise.

3) Getting support from the right people. At Kaiser Partner Wealth Advisors, we put the wealth owner in the driving seat. Our role as advisors is to ask the right questions, understand their needs and guide them through the planning process.

As their wealth grows, though, no single advisor is able to handle everything a wealth owner needs. Our solution is to create a Wealth Table – a bespoke team of advisors, experts from different areas and disciplines, and family members to provide a comprehensive view. Together, we can focus on the long term while avoiding the blindness that can come from being too close to an issue or person. Our clients appreciate the synergy and the quality of advice it brings.

A relationship built on trust
Of course, we can only achieve all this if wealth owners put their trust in us to deliver. We earn that trust over time by knowing our clients well, by creating custom-made solutions and applying a holistic approach. That means understanding the planning horizon, long-term purpose and needs of the family, while addressing the specific vulnerabilities of the wealth owner – irrespective of gender. Ultimately, what we provide is highly personalised support. And that does not involve defining a person according to a limited number of attributes.

Financial inclusion and education in the spotlight in Peru

Posted on July 19, 2022July 22, 2022 by itsupport

When it comes to financial inclusion, Peru has considerable room for improvement. The country falls below the regional average in terms of access to financial products and services, ranking sixth out of seven Latin American countries surveyed in Credicorp’s Financial Inclusion Index for 2021. According to this survey, 52 percent of Peruvians do not possess any financial savings products at all, while 72 percent perceive at least one barrier to having deposit or savings products.

While the financial sector has promoted initiatives over the years aimed at improving access, the single biggest problem is the informal nature of Peru’s labour market. According to data from the National Institute of Statistics and Informatics, the official statistics agency, only 27.3 percent of the country’s employed population is in formal employment. There is also a fundamental lack of knowledge as to how financial products and services work, with the pension system being one of the least well understood areas. We at Prima AFP believe it is important that the private sector and the state share the task of helping the population towards greater participation and understanding. The coronavirus pandemic has only underlined the lack of financial inclusion in Peru.

As a result of the economic crisis caused by COVID-19, 73 percent of Peruvians did not put aside any savings last year, Credicorp’s survey found. Furthermore, in the face of the health emergency, hundreds of thousands of people received financial support from the government in the form of subsidies to lower-income families, but the low level of participation in the banking system complicated this effort. Nevertheless, looking beyond the challenges that the country has had to overcome over the past two years, I take the view that the pandemic can be an important starting point for improving financial inclusion in Peru.

Nurturing the habit of saving
Prima AFP’s own efforts in this area include the development of various products aimed at cultivating and strengthening the habit of saving among Peru’s citizens. These products now have more than 84,000 customers. For example, through the AhorroYa! programme, we have signed business alliances that allow our clients to ‘save through consumption’ when purchasing fuel and household appliances from affiliated organisations. Part of their spending is transferred to the client’s individual capitalisation account, meaning that thousands of customers build up savings without even realising it. Also, our Cuenta Metas and PaMayo products allow for savings for medium-term objectives, with similar returns to those offered by pension funds. These actions demonstrate Prima AFP’s commitment to promoting financial inclusion in society and reducing inequalities.

Understanding pensions
Financial inclusion and financial education are closely linked, and Peru scores poorly on both. According to the OECD’s most recent survey of the issue, Peru has a rate of financial illiteracy that is close to 80 percent. This means that most Peruvians have no knowledge when it comes to the state of their finances and are unaware of how their finances are managed. This lack of understanding also translates into a low level of interest among the population in financial products and services. This is a problem that affects not only Peru, but also other emerging countries around the world. In developed countries, the opposite is true. According to research from Standard & Poor’s, the US is among the countries with the highest financial literacy rates and this is reflected in a greater number of people benefiting from access to financial products and being able to achieve their financial objectives.

The pandemic can be an important starting point for improving financial inclusion in Peru

Prima AFP is committed to strengthening the financial knowledge of both its clients and non-clients. Education in the country’s private pension system (PPS) forms a part of the company’s sustainability pillars. To this end, we continue to work with platforms such as our web-based series El Depa, which addresses PPS concepts in a playful and humorous way. Its 18 episodes, grouped into six seasons, have more than 53 million views on YouTube. We are also set to launch a web page, Ahorrando a Fondo, devised to educate users about basic pension concepts and address the most frequently asked questions.

We are aware that the technical aspects of the PPS can be complicated, but in recent years Prima AFP has been working to improve the transparency and simplicity of the sector. For example, in 2021 we launched Micros Abiertos, the first event for clients and non-clients that sought to answer the main questions that people have about Pension Fund Administrators (Administradoras de Fondo de Pensiones, or AFPs), of which Prima AFP is one. Through initiatives such as Micros Abiertos we have made it clear that we are a company that is willing to listen to its customers. Our aim is to respond in an open manner to all queries about the PPS.

Gender equity in pensions and at work
It is also worth noting that Peru has a gender gap when it comes to pension savings. It is far from alone in this; research published in 2021 found that, for a variety of reasons, women over the age of 65 in OECD member countries take 26 percent less retirement income than men. According to a recent study by the Pontifical Catholic University of Peru, a gender pension gap of 37 percent exists in Peru, and gender gaps are present in each percentile of pension fund distribution. These findings are a reflection of the situation in the Peruvian labour market, where women earn almost a third less than men for doing similar work.

With regard to gender equity among our own employees, at Prima AFP we believe that actions speak louder than words. That is why we have created the Equity Now programme, which operates across various fronts. For example, we have improved our recruitment and selection processes, seeking to have equitable shortlists. We are also working to ensure that variations between salaries, where roles and responsibilities are similar, are not the result of gender bias.

As part of our fight against sexual harassment at work, we have joined the ELSA programme, a digital project developed by GenderLab with support and financing from the Inter-American Development Bank. ELSA (a Spanish acronym that translates to Labour Spaces Without Harassment) helps organisations to implement a culture of prevention with regard to sexual harassment. Among other things, Prima AFP participated in ELSA’s 2021 Workplace Sexual Harassment Survey, together with other companies that have signed up to the programme. We believe in gender equity as a tool that allows for the development of a truly impartial meritocracy.

Meeting responsible investment goals
Prima AFP has highlighted the growing importance of responsible investment in previous articles for World Finance, arguing that it has become integral to all financial decision-making and investment processes. The coronavirus pandemic did not change the execution of our strategy in this area in 2020 and 2021, and we have made progress in accordance with the main goals of our responsible investment plan. We have gone from 52 percent of assets under management with environmental, social and corporate governance (ESG) analysis in 2020 to 73 percent in 2021.

We expect this share to reach 81 percent by the end of 2022 and 100 percent by the end of 2023. As part of the responsible investment plan, we have worked to create and implement our relationship plan, have implemented our climate change plan, and improved ESG integration in the investment processes of third-party funds. We have meanwhile continued to train our risk and investment employees in ESG topics and have maintained our market awareness programmes on responsible investments.

An important part of our strategy in this area is our partnership with the Responsible Investment Programme (which goes by the Spanish acronym of PIR), the local network of investors that encourages good ESG practices. We are also proud to highlight our signature to the Principles for Responsible Investments (PRI), a United Nations-supported initiative put in place by a group of institutional investors to promote responsible investment worldwide.

Going forward, one of the main ESG issues that Prima AFP intends to focus on is climate change. During 2021 we carried out an analysis of our portfolios using information from several data sources on the risks and opportunities related to climate change. We subsequently created our climate change policy. We have discussed the actions needed to build portfolios that are resilient to climate change in the medium term, and the objective we have set for 2022 is to approve and implement these actions in order to support our goals.