Author: itsupport

Artificially intelligent

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In their current form, it seems that machine learning algorithms excel at certain kinds of problems, but do less well at others. It is one thing to comb through countless strategies to produce a winning move in chess or Go; another, it seems, to nail the perfect movie recommendation (an early adopter of machine learning of course being Netflix).

In finance, machine learning has been used since the late 1980s by hedge funds. One popular machine learning approach is to look at investor sentiment, as measured by things like hashtags on Twitter. The limitations of such approaches are shown by the fact that the Eurekahedge AI Hedge Fund Index, which tracks the returns of 13 hedge funds using machine learning, has had an average annual return for the past five years of 5.5 percent, as compared to 12.5 percent for the S&P 500.

In healthcare, where data analytics is playing an increasingly important role, machine learning algorithms also tend to be frustrated by the noisy nature of the data, to the point where there are few rigorous studies that can prove superiority over expert-based methods.

The problem of bias in other areas such as recruitment is well documented. Amazon had to terminate one program because it consistently recommended hiring males, presumably because the other people to have been hired were also mostly male.

Superintelligence
In general, it seems that computers are highly efficient at finding patterns in anything from CVs to hospital visiting time data, but are less good at assessing whether they are relevant or meaningful. Machine learning algorithms therefore do well at analysing closed games with well-defined rules, such as chess, but must be used with care when it comes to complex

real-world problems. On the other hand, humans aren’t perfect either – so perhaps the solution is to combine the two.
According to the philosopher Nick Bostrom, who is head of Oxford’s Future of Humanity Institute, such a merger of human and machine can lead to what he calls a ‘superintelligence’ that can outperform either humans or machines acting alone. The problem is how to correctly integrate humans and machines to work together in synergy.

A merger of human and machine can lead to a ‘superintelligence’ that can outperform either humans or machines acting alone

One example of such a project is the MSI Brain system of Mitsui Sumitomo Insurance, which their CEO, Shinichiro Funabiki, described for World Finance as “a fusion of human and artificial intelligence, combining customer relationship management with sales force automation. The agent is able to uncover the customer’s potential needs through analysis of massive amounts of data, with MSI Brain then suggesting what insurance products to propose and in what way.” The aim is to “create a sustainable system in which AI and people grow together.”

Such hybrid systems may even play a role in geopolitics. As former NORAD chief Terrance O’Shaughnessy wrote of the artificial intelligence program known as Strategic Homeland Integrated Ecosystem for Layered Defense (SHIELD), it “pools this data and fuses it into a common operational picture. Then, using the latest advances in machine learning and data analysis, it scans the data for patterns that are not visible to human eyes, helping decision-makers understand adversary potential courses of action before they are executed.” One question of course is how computers themselves will evolve, particularly if and when quantum computers see widespread application. Many of the companies that currently lead in big data, such as Google and Amazon, along with governments and state-led consortia, are investing billions in the development of such computers.

Quantum chimera
As political scientists James Der Derian and Alexander Wendt note, there is “a growing recognition – in some quarters an apprehension – as quantum artificial intelligence labs are set up by tech giants as well as by aspiring and existing superpowers that quantum consciousness will soon cease to be a merely human question. When consciousness becomes a chimera of the human and the artificial, not only new scientific but new philosophical and spiritual cosmologies of a quantum bent might well be needed if we are to be ‘at home in the universe’.” A trope often explored in sci-fi movies, such as The Terminator when Cyberdyne Systems created Skynet, may not now seem so far-fetched – computers may really start to think for themselves.

Or even host life. Bostrom is perhaps best-known for his simulation hypothesis, which states that since computers in the future could one day produce consciousness, “we would be rational to think that we are likely among the simulated minds rather than among the original biological ones.” The hypothesis is taken seriously by people including Elon Musk, who probably uses it to justify the Tesla share price. Personally, I hold out hope that we are not just apps on some future teenager’s phone. However, it seems likely that the boundary between humans and machines will continue to evolve in fascinating ways.

Big Oil faces big transition

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In a period that has seen record lows and highs for gas, negative oil prices, more wells being abandoned than ever before, and drilling programmes slashed, the general consensus is that Big Oil is in trouble. Also, the industry faces pressure on all sides as the momentum turns against fossil fuels because of the looming threat of global warming. “If the world acts decisively, the scale of change will revolutionise the energy industry,” predicts international consultancy Wood Mackenzie in a landmark study released in April 2021 that foresees an “upending of oil and gas markets” as demand for oil shrinks and prices progressively collapse. As fossil fuels lose dominance in the energy mix, the oil giants are expected to lose their long-held power. “The steep fall in demand will prevent these key oil producers from managing the market and supporting prices in the way they do today,” Wood Mackenzie forecasts. “Only the lowest-cost producers such as the Middle East members of OPEC will remain core providers of oil.”

 

Preparing for a revolution
In this scenario Big Oil has 30 years – at the most – to prepare for this new era. That is the broad consensus of the latest reports into an industry that has kept the lights on for the best part of a century and powered nearly all of the world’s transportation. Demand for oil is expected to begin a long decline as soon as 2023, according to some forecasts. By 2030, the price per barrel could fall from today’s $60–70 on the Brent index to an average of $40 by 2030 and as low as $10 by 2050.

The vast refining industry is certain to suffer. “The scenario is grim for the downstream sector,” predicts Wood Mackenzie’s vice-president of refining and chemicals, Alan Gelder, who expects that all but the most efficient refineries will be shuttered. “The refining sector will have withered to a third of its current capacity,” he says. The challenge is how to slash fossil fuel-triggered emissions without running out of energy before renewables can take up the slack.

According to the Environmental Protection Agency in the US, the level of greenhouse gas emissions (GHG) in America, one of the world’s biggest users of energy per capita, fell by 1.7 percent between 2018 and 2019. And since 2005 they have plummeted by nearly 11.6 percent, largely because of increased use of ‘greener’ natural gas. “This is noteworthy progress and supports the larger point that natural gas is critically important in addressing the risks of climate change,” approved the EPA in early 2021.

 

Turning a blind eye
But is Big Oil ready for the revolution? Not according to Wood Mackenzie, which says “no oil company is prepared for the scale of change envisioned.” In the consultant’s scenario, “all companies face a decline with asset impairments and bankruptcy or restructuring on a scale far greater than that of 2020.”

Also, many countries have their heads in the sand, especially in Latin America, Africa, the Middle East and Asia, where entire nations rely on revenues from fossil fuels. According to a joint analysis by the OECD and International Energy Agency (IEA), in 2019 governments pumped over half a trillion dollars into subsidising the fossil-fuel industry. “The data show a 38 percent rise in direct and indirect support for the production of fossil fuels across 44 advanced and emerging economies,” the study noted. The findings provoked a scolding from OECD secretary-general Ángel Gurría, who criticised “an inefficient use of public money that serves to worsen greenhouse emissions and air pollution.”

However, some oil giants have seen the light. “After 112 years, we are pivoting from being an international oil company to an integrated energy company,” explained BP chief executive Bernard Looney in April. “We plan to be very different by 2030, reducing our oil and gas production by 40 percent and raising our low carbon investment 10-fold.”

Demand for oil is expected to begin a long decline as soon as 2023, according to some forecasts

Royal Dutch Shell has also recognised the dangers. In mid-April, chief executive Ben van Beurden took the unprecedented step of asking shareholders to approve a strategy that has set a target of net-zero emissions by 2050, in line with the Paris Accord. “We are asking our shareholders to vote for an energy transition strategy that is designed to bring our energy products, our services, and our investments in line with the goals of the Paris Agreement and the global drive to combat climate change.”

In concrete terms, Shell will embrace biofuels, electric charging stations, hydrogen and other renewable forms of power as well as the coming technology of carbon capture and storage (CCS). In the interim period though, Shell has no intention of axing its vast oil and gas operations which are fundamental to the current energy mix. “Ending our activities in oil and gas too early when they are vital to meeting today’s energy demands would not help our customers or our shareholders,” the chief executive warned in a 32-page explanation of the energy transition.

 

The switch to green
During the transition period to a mainly renewably powered future, low cost ‘green’ gas will become king as it steadily replaces coal and oil. According to the IEA, liquefied natural gas (LNG) will play an essential role in lowering global CO2 emissions. “In the generation of electricity, gas emits 50 percent less CO2 than coal,” points out US source RealClear Energy.

Meanwhile, the Biden administration has set America on an unstoppable course of clean energy, completely reversing the previous president’s policy of supporting Big Oil. Until Democrats took control of the White House, the trade body, American Petroleum Institute (API), was an unabashed supporter of Trump and fossil fuels in general, to the point of deriding renewables. The French giant Total, which has also set itself on a renewables course, resigned in disgust from the institute in January, while BP and Shell among others say the only reason they haven’t quit is because they believe they can reform it from within.

Lately though, the API may be acquiring religion. In March 2021, the institute issued a blueprint for the future that cited the importance of “tackling the climate challenge.” And president Mike Sommers, who spent much of 2020 praising president Trump’s anti-renewables policy, now sees Big Oil taking a lead in developing the technology necessary to achieve the great transition. “There’s nobody better equipped to drive further progress than the people who solve some of the world’s toughest energy problems every day,” he said.

 

Part of the solution
The API’s new tune could be put down to mounting evidence of climate change in the US. According to the US Drought Monitor, cited by Energy Bulletin, 2020 was the worst year for droughts in more than 20 years, with vast areas seeing little or no rain.

Big Oil could also play an important role in the transition. Blessed with much deeper pockets than most of the renewables companies, the industry has the financial firepower to change direction. Some of the oil giants are already leaders in the important but extremely costly technology of carbon capture that essentially traps the carbon dioxide that is produced by burning fossil fuels and isolates it from the atmosphere before, in some instances, reusing it. The US alone boasts 12 commercial-scale facilities that collectively handle about 25 million metric tonnes of CO2 a year.

In a highly volatile industry where abrupt fluctuations in fortunes mask long-term trends (see Fig 1), the tea leaves can be hard to read. In early April for instance, the price of a barrel of oil hit $66.09, up a promising 30 percent since the start of 2021. Yet most experts predict a steady retreat over the long-term. And herein lies an opportunity, according to the IEA’s executive director Dr. Fatih Birol. “Today’s low fossil fuel prices offer countries a golden opportunity to phase out consumption subsidies,” he said.

But will they take the opportunity? In its latest meeting, energy cartel OPEC shocked markets by tightening the taps to keep oil scarce and push up prices. As a result, in what may be one of the last flurries for oil, the Brent price approached $70 and some analysts forecast it could hit $100 or higher in 2022.

On one issue though, nobody is divided. Namely, demand for oil and especially gas will increase for a few years yet. “Fossil fuels are still seen as growing at least through the 2030s, even as renewables usage rises in popularity and affordability,” predicts Energy Bulletin published by America’s Post-Carbon Institute.

But the next 10–30 years will see the end of Big Oil as we know it, according to most forecasters. Citing an unlimited supply of sun, wind and water, they say that over the long term renewable energy will usher in an era of cheap electricity with the use of infinite and low-cost resources.

Backing up that claim, numerous research institutions such as America’s National Renewable Energy Laboratory, Bloomberg New Energy Finance and International Energy Agency are in no doubt that the capital costs of solar and wind will continue to decline well into the future. The writing really is on the wall.

Lira depreciation leaves Turkish banks vulnerable

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When Naci Ağbal, head of the Turkish central bank, hiked interest rates on March 18, markets responded with kindness. The value of the Turkish lira shot up by four percent. Within just four months in office, Ağbal managed to put out the fires surrounding the fragile Turkish economy. During his tenure, the lira rallied 24 percent from its lowest point this year. It was an unexpected triumph, but it did little to satisfy his boss, the President of Turkey, Recep Tayyip Erdoğan.

True to form, Erdoğan dismissed Ağbal with a terse announcement on the evening of March 19. According to the Turkish press, the decision found Ağbal working late in his office on a Friday evening that would be his last at the helm of the bank.

 

Another one bites the dust
For those closely following Turkish affairs, the decision was anything but surprising. “After the appointment of Ağbal as central bank governor, we put out a comment that even though he had a sterling reputation, one shouldn’t get overoptimistic about what could occur under him because, at the end of the day, his supervisor remained President Erdoğan,” says Dennis Shen, an analyst at Scope Ratings, a credit rating agency. Erdoğan’s preference for low interest rates has befuddled economists in and out of Turkey, and Ağbal’s decision to increase the rate allegedly played a role in his premature departure. However, the Turkish President’s motives, Shen says, are more political rather than economic in nature: “In his view, low interest rates support economic growth, and he’s down in the polls, so he’s liable to lose the election in 2023 or before. He feels that he needs higher growth through low rates to improve his likelihood of staying in power.”

Ağbal’s successor, Şahap Kavcıoğlu, is a former lawmaker for the ruling AKP party. Although he has pledged to keep monetary policy tight, he has previously embraced the unorthodox view of President Erdoğan that high interest rates cause inflation. But his economic beliefs do not matter as much as his willingness to go along with his boss, says Shen: “If he does not cut interest rates at the rate the president wants, he’s liable to be dismissed. Erdoğan appears to be getting impatient with his central bank governors faster these days.” The result, according to Ibrahim Turhan, former chairman of Istanbul Stock Exchange (currently part of Borsa Istanbul, the country’s main exchange), is that global markets are losing patience with Turkey’s institutions. “Central Bank independence is a very valuable political asset, which diminishes the cost of monetary policy. The groundless obsession of the government with the central bank and interest rates has had a high cost to the Turkish economy.”

 

 

Let the debt pile on
At first glance, Turkey’s fundamentals look bright. The country’s public debt stood close to 40 percent in 2020 (see Fig 1), a relatively low rate among G20 economies that allowed debt to grow precipitously during the pandemic, while growth hit 1.8 percent, a rare success story among OECD countries. Exports have also rebounded in 2021, despite disrupted global supply chains and paused tourism.

However, the vultures flying over the Turkish economy set their sights on a very different target: the country’s fragile banking sector. Although Turkish banks are well capitalised, they rely on short-term loans from the global syndicated loan market to stay afloat. So far, they have been able to kick the can down the road due to an idiosyncrasy of the Turkish financial system: unusually high dollar deposits, held by corporations and ordinary citizens who convert their savings into dollars to hedge against lira volatility. Turkey’s diaspora in Europe also chips in, lured by high interest rates. Whenever interest rates go up, as in Ağbal’s parting – and fateful – shot, the system gains time, says Edward Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle Investments. More capital comes from overseas, reducing domestic credit growth and operating as a stabilising force that helps the lira stay strong.

However, government intervention may have broken this idiosyncratic but well-functioning system. Complying with Erdoğan’s desire to keep interest rates low, the central bank has dipped into the dollar reserves of commercial banks through forced ‘swap’ loans to support the lira. Between local elections held in 2019 and late 2020, the central bank and state-run banks are estimated to have spent reserves of around $128bn to prop up the currency. The controversial measure has caused a political earthquake, with the opposition turning the number into a symbol of the government’s financial mismanagement.

The policy has yet to bear fruit, with the lira edging towards a year low against the dollar in May. High inflation causes a vicious circle of growing demand for foreign currency that makes ‘de-dollarisation’ difficult without higher interest rates, according to Enver Erkan, Chief Economist at Tera Investment, an Istanbul-based private investment company. Inflation surpassed the 17 percent threshold in April, with a long-term target set at five percent by the central bank. Although Turkish banks do not face a liquidity crisis for the time being, Erkan says, an increase in Turkey’s credit default swap (CDS), which measures the level of sovereign default risk, may worsen their borrowing costs in the syndicate market. Lira depreciation is also making Turkish banks more vulnerable to the whims of the global markets, as their external debt liabilities up to mid-2022 are estimated at a staggering $89bn.

Some worry that trouble is just around the corner. “It’s a very fragile setup. At some point, someone will call the bluff and say the central bank is bankrupt and that the dollar deposits in the commercial banking system have been lent out and only exist on paper,” says Al-Hussainy. The end result, according to Al-Hussainy, will either be a bank run when local depositors find out that their dollars have been lent to the central bank, or an attack against the lira in the global markets that will lead to a currency crisis and possibly capital controls. “Both of those outcomes are pretty bad. It’s a system holding together, but only with duct tape and promises.”

For some analysts, capital controls are already there. “When foreign institutions are selling the lira, regulations are put into place to try to slow the selling down. That’s a form of capital controls,” says Shen. But many worry that the Turkish central bank is running out of options. “The central bank has borrowed more than the deposit base in the banking system. So functionally, the central bank of Turkey is bankrupt. The net asset position is negative in dollars,” says Al-Hussainy, adding: “You can print Turkish lira, but you cannot print dollars to solve that problem. The only way to solve that problem is by reducing the current account deficit. And the way you do that is by raising interest rates.”

 

Halkbank in the middle of the storm
Ironically, Turkey’s economic future may be decided on the other side of the Atlantic. The country’s relationship with the US has been strained recently over a series of issues, from Turkey’s military involvement in Syria and Libya to its purchase of Russian S-400 missiles – an anathema to its NATO allies – and the recognition of the Armenian genocide by President Biden last April.

Just as worrying is the forthcoming trial of Halkbank, a state-run Turkish bank currently investigated in the US over breaching sanctions against Iran. Although the bank has denied any wrongdoing, the trial, expected to begin later this year, casts a big shadow over the country’s fragile financial sector. Some think that a heavy penalty on the bank may be the final nail in the coffin of the Turkish economy, particularly if the government is forced to bail it out. However, the US authorities may be careful to avoid a crisis that may get out of control, says Al-Hussainy: “The US Treasury will be aware of the risk. The intent is not to isolate Halkbank from the rest of the global financial system and cause systemic financial crisis in Turkey.”

 

Crypto no more
As in other countries facing a combination of spiralling inflation, currency depreciation and capital controls, many Turks are turning to digital currencies. Last year, Turkey was the leading Middle Eastern market in terms of transaction volume in cryptocurrencies, according to a report by Chainalysis, a blockchain analysis company. Two of the country’s largest cryptocurrency exchanges collapsed this spring, leaving investors in limbo. The trend has worried the country’s regulators, who banned the use of cryptocurrencies as a means of payment last April, citing concerns over volatility and fraud. Although the share of deposits converted to digital currencies remains small, many believe that the real reason for the crackdown is that Bitcoin and other cryptocurrencies, despite their own volatility, are used as a hedge against lira depreciation and rising inflation.

Two of the country’s largest cryptocurrency exchanges collapsed this spring, leaving investors in limbo

The government hopes that a bumper tourist season, rising exports and the rebound of the global economy will help Turkey weather the storm through a stronger lira. But for sceptics, such hopes may be at odds with reality. “Locals lose confidence in a currency, either because of the expectation that a currency will depreciate or because they think that the official value of the currency is artificial,” says Shen, adding: “In Turkey, we are not completely at that stage yet, because Erdoğan’s own reforms post-2003 included championing a flexible exchange rate.

But the lira is becoming less flexible, and the locals are beginning to lose confidence in the value of the currency because of government interference.” Some think that the roots of Turkey’s economic woes may lie in politics, rather than economics. “Compared to peer countries and given the country’s track record, Turkish assets are extremely undervalued and underweighted in investor portfolios. The main problem of the Turkish economy is governance,” says Turhan. “Should Turkey fix this problem, economic challenges could be easily settled.”

Using technology to tackle climate change

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Global energy-related CO2 emissions are heading for their second-largest annual increase ever, according to the latest report released by the International Energy Agency (IEA), marking the need for leaders across the globe to do their part in reducing their country’s carbon footprint.

In response to the IEA’s report, UK Prime Minister Boris Johnson has announced radical new climate change commitments, to set the UK on course to reduce carbon emissions 78 percent by 2035. For this to be successful, existing infrastructure will have to be updated and will need to be able to withstand extreme conditions, due to the impact of climate change. Commercial real estate represents a major portion of the infrastructure industry in the UK. Studies have shown that 20 percent of emissions originate from buildings and nearly half of those come from heating, ventilation, as well as air conditioning (HVAC) systems.

The adoption of proven technology innovations would be a key factor in addressing this issue. Frank Sullivan, chief business development officer at BrainBox AI, a company specialising in building automation, said that by employing artificial intelligence-driven solutions, buildings, including their HVAC systems, can autonomously learn how to efficiently reduce system operation costs, and more importantly, lower emissions significantly. “The existential threat of climate change is not going to just fade into the background any time soon, no matter what else is going on in the world. Legislation can only do so much, clear and decisive action is needed now, and a helping hand from leading digital solutions can provide a needed assist,” Sullivan said. As the world struggles to emerge from the pandemic, there is a global imperative to build back stronger.

In the UK, the US and many other countries, significant infrastructure investment programmes are already being announced and emerging trends are accelerating fast, as a result of COVID-19. Derrick Sanyahumbi, CEO of business development organisation British Expertise International (BEI), said that climate change creates significant challenges to shift towards renewable and green energy in place of CO2, to decommission the legacy infrastructure that needs to be replaced so that we can build back greener and cleaner.

Turning challenges into opportunities
While these are challenges the industry has faced for many years, now there are emerging opportunities that should not be overlooked, and both are key as the UK establishes itself as an independent trading nation post-Brexit.

“In terms of enduring challenges, it remains a constant focus to navigate the complex world of UK and International Governments and their agencies, to find and build consortia, to build and maintain effective partnerships and to establish and secure funding, and compete successfully through the maze of procurement and the different requirements they set out,” Sanyahumbi said.

“In terms of emerging challenges, we see a broadening of the term ‘infrastructure’ – with issues like digital and technology connectivity and cybersecurity rising rapidly in importance. We also see a growing focus on a real understanding and practical application of diversity and inclusion as well as safeguarding, and of course, the biggest challenge – and opportunity – lies in the global climate change agenda and the work towards carbon net zero,” Sanyahumbi added.

Further, he revealed that one of the biggest challenges that the UK is facing is that relatively few UK SMEs use exports as a means of growth. “It has been proven that companies that export are more resilient and productive so the challenge we face at BEI is to support companies of all sizes in their pursuit of overseas business development. However, more needs to be done to help countries develop robust business cases and so attract much of the available finance, especially in the ‘green’ space,” he said.

Likewise, Miriam Tuerk, co-founder and CEO of Clear Blue Technologies, a Canadian solar energy equipment supplier, said that predictive technology can be utilised to improve infrastructure resiliency. “Having an advanced warning about the weather and energy generation forecasting allows for reliable high-quality energy delivery from an off-grid system. This forecasting, paired with predictive data analytics based on vast amounts of operating data, will help in anticipating future problems for the maintenance and management of the systems, or even resolve them before they become an issue,” she said.

Also, Tuerk highlighted that as the world continues to change, the infrastructure industry must change along with it and it is going to be up to investors to show the industry that these solutions are viable alternatives by investing in them, to best operate in a world that is attempting to both mitigate and manage the severe effects of climate change.

Who wants to be a trillionaire?

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It wasn’t so long ago that a billionaire was considered to be unimaginably rich. But as new industries emerge in the digital age, billionaires have become almost two a penny and bets are being made on when we will see the first trillionaire. The individual will probably be male, American and somebody already among the top 10 wealthiest people in the world. And, according to venture capital billionaire Chamath Palihapitiya, he may emerge from a highly virtuous industry. “The world’s richest person should be somebody that’s fixing or fighting climate change,” he told CNBC in an interview.

Working from the latest Forbes list of the world’s billionaires, as of May 2021 the front runners look like being Amazon founder Jeff Bezos with $177bn, Tesla and SpaceX’s Elon Musk with $151bn and French fashion king Bernard Arnault and family with $150bn. Not far behind are Microsoft founder and philanthropist Bill Gates with $124bn, Facebook’s Mark Zuckerberg on $97bn and Chinese business magnate and philanthropist Jack Ma, co-founder of the Alibaba group, on over $51bn, who leads an Asian charge of the super-rich.

Constantly increasing in size
The wealth of these modern-day Midases fluctuates on a daily basis according to share market movements, but it steadily increases in the medium and long term. For instance, in just one trading day during April 2021, the net worth of Musk shot up by $7.8bn when Tesla’s stock rose by 4.7 percent. On the other hand the wealth of the Arnault family slumped by $87m when the shares fell by just 0.145 percent. However, the net worth of these individuals has soared over the years.

For instance, the wealth of the Arnault family has more than quadrupled since 2012, quite enough for parent company LVMH to buy Tiffany & Co for $15.8bn in January 2021. There is no obvious reason why the wealth of today’s behemoth billionaires should not continue to increase at comparable rates. Barring some kind of natural catastrophe that wipes out entire economies, Bezos could get to the trillion mark first, according to a study by American researcher Comparisun, while Zuckerberg could make it by the age of 51. Incidentally, the valuation of Amazon the public company is already approaching the $2trn mark. “Of the 25 individuals we analysed,” reports Comparisun, “only 11 realistically have a chance of becoming a trillionaire during their lifetime, based on their recent rate of wealth growth.” Adding weight to the research, this study was conducted before an astonishing post-pandemic rebound in the share markets, notably in the US, that has already created more billionaires and turbo-boosted the net worth of those at the top of the rich list.

In the first quarter of 2021 the big technology stocks, for instance, bounced back with a vengeance and are expected to keep on growing, according to most analysts, as they capitalise on pandemic-induced behavioural shifts. According to data interpreted by finance markets analyst Finbold, the market value of the top 500 US public companies soared by $1.99trn in the first quarter of 2021, rising from $33.38trn to $35.38trn. More importantly, since 2015 the value of these companies has grown by 88.47 percent, up from $18.77trn. Inevitably the wealth of the major shareholders, the super-rich, has increased simultaneously.

The new generation
Also, a whole new generation of billionaires is emerging, like Whitney Wolfe Herd, the 31-year-old co-founder of online dating group Bumble. In February 2021 Herd became the world’s youngest self-made female billionaire, with $1.3bn.

Globally, no fewer than 87 women became billionaires for the first time, bringing the total number of female billionaires to 328 spread across a wide range of industries. They are led by 67-year-old Françoise Bettencourt Meyers and her family, 33 percent owner of L’Oréal, whose net worth increased by $24.7bn to $73.6bn, largely because of the rebound in the stock. Collectively, the world’s female billionaires added more than $570bn to their wealth, bringing their combined net worth to $1.53trn.

Another huge beneficiary of the pandemic was 71-year-old Alice Walton of Walmart fame, who increased her net worth by $7.4bn, bringing it to nearly $62bn. The boost happened mainly because the retailing giant’s stock rose more than five percent as the stores posted a 69 percent increase in online sales in yet another demonstration of the power of the digital economy. Overall, e-commerce gathered momentum during the pandemic. Amazon, for example, hired an extra 175,000 staff to cope with demand for online sales while revenues shot to record highs.

The next crop of super wealthy is expected to come from the many industries that rely critically on artificial intelligence, big data and other next-generation tools. According to US investment site RealWealth, the winners will include biotechnology, online healthcare, online education and meeting platforms. Bezos and Musk, however, are both investing heavily in commercial rocketry.

There are still plenty of old-economy billionaires like India’s Mukesh Ambani, who has built up a net worth of more than $84bn through Reliance Industries, which is involved in petrochemicals and retail while having a foot in the telecoms door with a 4G phone service called Jio. But the evidence would seem to show that the path to trillionaire-hood lies in the digital economy.

Combatting fraud with online security

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Online banking is seen by many as the new and preferred way to bank and a potential replacement for physical banking structures around the globe. Not only is it sought after by technology-driven customers, but it is also an effective solution for banks to overcome present and future technological challenges. Moving to digital implies a significant cut in infrastructure and operational costs, allowing banks to reduce costs in payment processes, maximise resources and offer customer support 24/7.

Recently, HSBC UK has launched Kinetic, a banking app for small businesses to help them stay on top of their finances, enabling business owners to apply for an account in the app. Once approved, customers can order a debit card and manage their business payments through the app. The future of banking as a whole is online and digital, and the new players across financial services are almost universally establishing themselves as digital businesses.

However, while digitisation is enabling speedy, seamless and transparent transactions, with the deployment of new technologies new fraud risks emerge (see Fig 1).

Trade association UK Finance revealed that in 2020 Authorised Push Payment (APP) fraud losses amounted to £479m, up five percent compared to 2019. Banks and other financial providers returned £206.9m of the losses from APP fraud to victims, over three quarters more than the sum returned in 2019. As a result, UK Finance called for new legislation to make online platforms responsible for taking down fraudulent content and protect consumers from scams. A spokesperson from Barclays revealed that the British bank invested millions of pounds into multi-layered security systems to ensure that its online banking and app are secure. Also, as part of the bank’s work to protect customers, Barclays offers its clients information and tools to spot and stop fraud and scams, including TV advertising, its dedicated ‘Digisafe’ website and its ‘Digital Eagle’ online safety virtual sessions.

Mark Jenkinson, founder and COO of the UK-based digital financial services company Chetwood Financial, said that every interaction the company has with customers and applicants is digital, from applying for products to servicing them once opened and getting ad-hoc support. As such, Chetwood uses a wide range of tools to verify identities, guard against impersonation, and secure access to services.

 

Safety first approach
Barney Reynolds, Partner and Global Head of the Financial Services Industry Group at Shearman & Sterling, pointed out that while banks’ systems need to be audited for key checks, such as customer and seller identification and double-checking surprising transactions, customers also need to be careful of new purchasing techniques as technologies evolve. Reynolds suggested that the safest thing is to tell the public they should only rely on institutions that are listed on the FCA’s register.

Further, he revealed that the quicker the access through online apps, the more effort that banks need to put in to make their transactions safer. “Banks will have to find alternatives to make safety checks faster by using artificial intelligence to maintain market competitiveness. The most important thing is to find a balance: this will occur naturally as practices develop to catch up with consumers’ expectations. The most difficult period is the transition until those practices have developed,” he added.

Likewise, Carl Strempel, CFO and co-founder of Imburse, a cloud-based ‘payments as a service’ platform, said that online banking and new technologies will be highly beneficial additions to the existing regulatory banking systems in the long run, especially if there are effective fraud prevention approaches available, including multi-factor authentication, geo-location, and data collection. “Banks are still the quickest, easiest way to pay and get paid. Enhancing datasets gives banks the possibility to track customer behaviour with their consent and analyse this data to both prevent online fraud and better understand customers’ needs,” Strempel added.

 

Unique opportunity presented
By automating manual processes and using advanced analytics, banks can not only ensure scalability and optimise operations but also achieve significant cost savings while preventing cyber fraud too, according to Amit Dua, president of banking technology company SunTec. Also, Dua said that in offering services beyond traditional banking products and creating ecosystem partnerships, banks may drive the adoption of subscription-based models, which can prove hugely cost-effective. “We believe banks have a unique opportunity to become customer experience orchestrators and technology can aid in creating ecosystems that provide value-based engagement and hyper-personalised services. This will not only help empower customers but also meet their short and long-term needs – which will, in turn, enable banks to build and retain their loyalty in a cost-effective, secure way,” he concluded.

The ESG moral compass

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The global pandemic saw a lot of winners and losers in the world of business, but one industry that certainly benefitted from the effects of a global shutdown was home food delivery. A string of lockdowns lasting over a year made many of us connoisseurs of our local takeaways and, by proxy, the likes of Deliveroo and its nearest UK rival, Just Eat. When the former announced its initial public offering (IPO) on the UK stock market in March 2021, the company arguably could not have wished for better conditions.

After a year of almost constant lockdowns and with little or no access to the experience of eating out that so many of us missed, people turned to Deliveroo in their droves, causing the biggest upsurge in takeaway demand the industry had ever seen. At first glance, one would expect such perfect timing to result in a hugely successful IPO, with customers themselves being offered the option to buy shares in the company in advance of the general public, along with the usual investment giants. But the opposite was true.

Large UK pension funds such as Aviva and Legal & General shunned Deliveroo, in part because of the other reasons it grabs headlines – its treatment of the ubiquitous gig-economy riders that make up much of its workforce and its alleged lack of ethical working practices. Indeed, it is no coincidence that in the same month that the company sought to make its first public offering, a walkout was planned by hundreds of riders in London and beyond. Supported by the Independent Workers’ Union of Great Britain, the walkout cited the unfairness of workers’ terms and conditions and highlighted that, although the app brought convenience, ease and variety to its customers’ lives, the individuals working for the company were having a much tougher time.

 


PROFILE: TeslaElon Musk’s infamous battery car company Tesla makes a very small number of cars compared to enormous producers such as Ford, but investment in Tesla is a reflection not of the volume of vehicles it produces, but of confidence in the technology within those vehicles and the long-term potential that investors are seeking.

Of course, having had the electronic vehicle market mostly to itself in recent years, Tesla has had little competition and much greater potential for growth, but similarly to oil companies pivoting their offerings to renewables, traditional vehicle manufacturers like Ford are themselves pressing ahead with alternatives to gas-run cars.

Along with a reduction in reliance on fossil fuel will come a need for vehicles to also change the way they are fuelled. As a result, Tesla is a comparatively small electric car company but with a valuation greater than a lot of its older competitors in the industry.

A separate debate is whether the electricity grids available now and in the near future have enough power to charge a nation of electric cars, and there are concerns about whether EVs simply shift the emissions problem from the petrol pump to the power station, but the fact remains that investors seem to see that as less important than the more urgent need to invest away from non-renewable energy.

 

‘Moral’ investing
Deliveroo would appear to be a bellwether for a wider change taking place in the world of investing. Many major investment companies recognise this need for a different attitude, both for sustainability reasons as well as for profit. The term ESG stands for environmental, social and (corporate) governance, referring to the three main factors considered when assessing a company’s potential for sustainable investment in the long term and with it, its likelihood of turning a profit. Ethical investing is gaining in popularity, and ESG funds are now offered by numerous major pension funds and investment companies such as BlackRock, Hargreaves Lansdown and Aviva, offering the ability to invest while avoiding ethically ‘questionable’ areas such as big oil or arms trading, which are decreasing in popularity with everyday investors.

Investing in the stock market has never been simpler or more accessible to everyday investors

“Last year, I wrote that climate risk is investment risk,” says Larry Fink, CEO of Blackrock in his annual letter to CEOs. “In the past year, people have seen the mounting physical toll of climate change in fires, droughts, flooding and hurricanes. They have begun to see the direct financial impact as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system. They are also increasingly focused on the significant economic opportunity that the transition will create, as well as how to execute it in a just and fair manner. No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.”

CEO of Blackrock, Larry Fink
CEO of Blackrock, Larry Fink

Sustainability pays
Not only are investors increasingly turning away from the old model of exploiting natural resources and the workers who produce them, but there is also significant money to be made by doing so, instead investing in more progressive industries and business models. Some funds aim to help investors take an ‘avoid’ strategy, which seeks to remove from a portfolio certain companies or industries that are associated with a higher ESG risk profile. This can work to broadly eliminate entire sectors or be tailored to the individual investor’s views and values; avoiding tobacco, weapons, or fossil fuels, for example. An alternative option is to use an ‘advance’ strategy: rather than working by process of elimination, this strategy instead seeks to specifically pursue or prioritise companies or sectors that are viewed as sustainable, progressive, and having a positive ESG profile, such as ‘green’ energy. BlackRock’s ESG strategy, like many of its peers, allows investors a range of options that fall within this spectrum.

There are very few large energy companies today that do not have a renewable offering

Given the increased demand for ethical investing, then, it is not surprising to see big players making a push to promote these sorts of funds (see Fig 1). Investing in the stock market has never been simpler or more accessible to everyday investors, and with the like of apps such as Mint coupled with a generation of people generally more morally ‘woke’ and financially literate than their parents before them, the public’s finger is on the pulse. More and more ESG-focused products are coming to market, and in some cases the uptake for these is greater than with traditional exchange traded funds or index tracker funds.

In the same year that veganism became a multibillion-dollar mainstream market and emissions from tourist travel plummeted, perhaps an increased emotional need to feel at ease with spending decisions has translated into the world of investing once and for all. The results are speaking for themselves: “Over the course of 2020, we have seen how purposeful companies, with better environmental, social, and governance profiles, have outperformed their peers,” Fink explains. “During 2020, 81 percent of a globally representative selection of sustainable indexes outperformed their parent benchmarks,” he added. If more people are newly investing in ESG trackers over conventional ones, and if those trackers of companies scoring highly on ESG then outperform the market overall, no wonder their popularity has exploded.

 

Relentless spending
Another effect of coronavirus has been to provide the chance to slow down and consider how – and with whom – we spend our money. Concurrent with the closing of shops and the slowing of industry was an opportunity to take stock and reflect on the relentless spending culture we live in, and the attendant environmental and social concerns that this raises. Who can forget the good news stories about the natural world beginning to recover so quickly, and the sharp reduction in carbon emissions recorded last year while millions of people stayed at home experiencing a day-to-day life very different from normal?

 


PROFILE: EquinorEquinor, the biggest oil company in Norway, was known as Statoil until 2018 when it underwent a multimillion-dollar rebranding project, reflecting its plan to diversify its offering and change as a company.

Reuters reported at the time that the company was determined to develop its investments in renewable energy, and today it declares its target to be net zero by 2050, while pushing ahead with its investment in Dogger Bank, which it says will be the world’s biggest wind farm, currently being built off the coast of the UK.

There are very few large energy companies today that do not have a renewable offering, and realistically there will be very few new oil companies in the coming years. It is for those existing ones to pivot their offering because the science shows that sooner or later, we will run out of oil and have no choice but to pursue alternative options.

It is for the new companies that are founded to have a different approach, not only to resources, but also to the way those resources are pursued.

 

 

 

In recovering from coronavirus and in securing an environmentally sustainable and profitable future, companies will need to adapt or suffer the consequences, whether that be for their social and human rights practices, environmental reasons, or simple reputation. The worldwide management consulting firm McKinsey & Company said in 2020 that “we can already start seeing how the pandemic may influence the pace and nature of climate action, and how climate action could accelerate the recovery by creating jobs, driving capital formation, and increasing economic resiliency.” Consider the following examples:

In word and deed
Deliveroo has been heavily impacted by the exodus of investors pre-IPO who said they were not interested at all, and several large UK pension funds said this was specifically due to its working practices and the likelihood of future litigation around the business that will impact its profitability long term. There are various court cases in different jurisdictions that are concerning for investors.

The problem with these is that they do not just impact the business in the short term with the result of bad PR and direct strike action affecting profits and business-as-usual. If there are court cases that are unresolved, that is a risk to the business long term, because if the decision in the court is that food delivery companies must start treating staff in a different way and paying them as salaried or pensioned workers, they are likely to be less profitable as a result.

Another issue is that of valuation. Deliveroo was originally priced at £3.90 a share and is trading much lower than that at the time of writing at around £2.53, so the company has seen a loss in share value since coming to market. If the same had been true of a different company with no ESG concerns, those same large investors may initially consider the pre-IPO valuation too high, but then choose to invest later as the result of an unforeseen price drop.

It is for the new companies that are founded to have a different approach not only to resources but also to the way those resources are pursued

This will not be the case for Deliveroo or other companies that give investors cause for concern; if a company’s value drops 30 percent because of a non-ESG issue, investors may well change their minds and then invest. But if an investment company says no due to ESG concerns, no fall in value will make that less true. Deliveroo’s shares could plummet to a bargain price but while the ESG concerns are the same, a large investor that has explicitly stated those concerns would have it reflect very badly on them if they subsequently invested anyway.

Environmentally, there are legitimate concerns about the volume of food and plastic waste that has been generated from a year of extra takeaways, not to mention the emissions from thousands of delivery workers transporting the orders. Deliveroo has acted on this aspect to some extent, publicising a carbon neutral project for its Australian operation at no cost to its customers, but only for two years, beyond which it has made no further commitment.

 


PROFILE: AirbnbAirbnb is a business that built a name for itself by democratising the world of travel accommodation.

From 2008, when it was founded, travellers were suddenly given options other than hotel rooms or hostels, and the direct platform was slick, easy to use, and apparently transparent.Not only that, it was cheap – customers liked Airbnb because they could access interesting homes and spaces without having to pay for hotel staff or overheads.

Soon enough however, private individuals with enough money behind them began to capitalise on the platform’s model and the app was slowly filled with properties bought solely for the purpose of being Airbnb rentals.

People were using it as a method of wealth creation and running it as a business, which, although not against the rules of the website by any means, is arguably not in the spirit of why Airbnb started.

Furthermore, Airbnb has been repeatedly criticised for having a model that dodges the sort of regulations governing hotels.

It is very easy to set up as a property investment business on the platform, with the result that local private residents have been priced out of their own neighbourhoods due to cheap apartments and homes being bought up, renovated, marketed solely as Airbnb properties, and never lived in as regular homes.

This results in a gentrification effect and the character of the area begins to fade.

Movements in Amsterdam, Barcelona, London and New York have sprung up in response to this and some cities have begun to regulate more stringently, meaning the company’s reputation has fallen out of favour. But the Airbnb platform remains as popular as ever with travellers seeking unique experiences in exciting locations, and its stock market success reflects this.

After an IPO in 2020 of $68 per share, Airbnb’s stock soared as high as $165, and at the time of writing is worth around $134.

 

Full circle
It goes without saying that investment companies need to preserve their own longevity over the decades to come. It is in everyone’s interest to pursue sustainable, ethical investing, for if the world’s investments do not pivot in line with the global need for sustainability and future-proofing industry, the fiduciaries themselves will not be immune to the consequences.

Just because household name investment companies and pension funds have ESG guidelines however, certainly does not mean they are not continuing to invest in oil companies, arms manufacturers, aerospace and other unsustainable markets while the getting is still good. In a recent report, Greenpeace highlighted that asset managers and banks globally continue to invest in fossil fuel production. “Since the signing of the Paris Agreement in 2015, the world’s largest 60 banks alone have provided $3.8trn to the fossil fuel industry,” says Daniel Jones of Greenpeace UK.

Individual financial institutions might be voluntarily dialling down investments in such areas long-term, but Jones’ view is that until the institutions themselves are held to the same emissions standards as other industries, meaningful change will be stymied in favour of greenwashing as they are allowed to continue self-regulating. Blackrock projects that the sort of companies that adhere to ESG requirements will outperform peers over time because they are doing business the ‘right way,’ and if they continue this in the long term, they will be better underlying investments.

As for what power individual consumers and businesses have over the future, there are various schools of thought. One is classic purchase power, and there are numerous grassroots movements and larger online campaigns for consuming ethically or locally and making conscientious decisions about where one’s money goes, not to mention growing wealth sustainably. Surely a significant change will come even sooner if larger numbers of people holding pensions in investment firms drive an ethos that places sustainability and ethical business practices at the top of the agenda. BlackRock’s CEO certainly seems to think so.

A Greenpeace ‘greenwashing’ protest at the European Parliament in Brussels, Belgium
A Greenpeace ‘greenwashing’ protest at the European Parliament in Brussels, Belgium

A turning tide
Perhaps we need to ask what exactly is turning the tide, if indeed it is turning at all. Deliveroo is not the only business to have been hit with a raft of accusations of shady working practices, poor treatment of workers, and taking advantage of the very individuals whose technical skills, networks, ingenuity, and plain old hard work helped them build big capital in the first place. Large energy companies may well shout about investing in renewables, but until we experience a global shift away from their reliance on fossil fuels, accusations of greenwashing would appear to be justified.

Companies now report on modern slavery, the gender pay gap, ethnicity of their workforce, and future-proofing their organisations; ESG is a wide-ranging term and there is a lot of data being collected and reported on. Depleting natural resources and exploiting the work of many to channel wealth upwards will not be tolerated by the public for much longer. It seems that increasingly, investment companies are scrutinising not only the bottom line when it comes to assessing the value and potential of a business, but also the way in which that bottom line is reached. In order to achieve stock market success, businesses of the future would do well to pay attention to the trend.

The power of branding

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In May, Oatly made its market debut – and it didn’t disappoint. The now-iconic brand raised more than $1.43bn in the space of a day at its much talked-about IPO, reaching a valuation of more than $13bn thanks to an elevated share price of $22. Less than a decade ago, that would have been unimaginable. In 2013, net sales had totalled just 223,119 SEK ($27,000). Oatly was a niche milk replacement for the lactose intolerant, floating in the alternative aisles, limited by its Swedish print and largely unknown to the US market.

Roll on a few years, though, and the company recorded a turnover of $206m in 2019, reporting year-on-year sales growth of 88 percent, according to its sustainability report. So what changed? While an ever-growing trend towards dairy and meat alternatives has clearly played its part, many believe it’s Oatly’s incisive marketing strategy that has been the biggest catalyst. “For two decades, they were a pretty nondescript brand that resembled a Dutch multinational, far from the Oatly that we know today,” wrote Kim Ferguson, founder of the Brand Blog. “Everything changed when they hired Toni Petersson as their new CEO in 2012, who then hired John Schoolcraft to be Oatly’s new creative director.”

The pair put the emphasis on brand identity and changed tact by marketing Oatly as an eco-friendly alternative to dairy, commissioning a report to back up the claims. “What I soon realised was that although the brand was invisible, everything inside the pack was fantastic,” Schoolcraft said in an interview with the Challenger Project in 2016. “I then started working in stealth, so working with Toni on how we might turn this into what we called a lifestyle brand – not necessarily like a Red Bull or Nike, but a brand that would fit very naturally into people’s lives.”

The team set about redesigning the logo and packaging, devising a distinctive tone of voice (one that “flexes on the nonsensical,” in the words of Oatly’s creative and strategic director, Michael Lee, in an article for Marketing Week) and pushing the product in the US. That included approaching New York coffee shops to supply the drink as a dairy alternative.

It worked. Oatly is now sold in 25 countries across the world and is known for its bold, straight-talking approach, with advertising campaigns such as the controversial, UK-centric campaign, ‘Like milk but made for humans,’ creating buzz around a brand whose loyal following grows by the day. That’s living proof of the power of a solid marketing strategy – and it’s far from being the only incidence of a company transformed in part by its branding.

In this special report World Finance looks into five of the most prolific and memorable examples of companies whose financials have mushroomed on the back of a successful branding campaign – from Volkswagen’s iconic Beetle ads to Nike’s transcendent three-word slogan.

 

Nike: Just do it
Few brands are quite so iconic as Nike, whose ‘Just Do It’ slogan has been at the heart of the company since its 1988 campaign. The campaign, developed by ad agency Wieden + Kennedy, featured professional and amateur athletes sharing their achievements on a series of TV spots – including an 80-year-old marathoner runner who explained how he ran 17 miles every morning.

The brand drew again and again on the slogan so that it continues to resonate today

The words struck a chord with consumers across the globe, leading to others sharing their stories about how they ‘just did it’ – whether quitting a job, taking up exercise or making another major life change. It saw sales explode from $877m that year to more than $9.2bn worldwide a decade later, propelling the company to its current status as the world’s largest supplier of athletic apparel and footwear.
Importantly, it wasn’t just a one-off tagline. The brand drew again and again on the slogan so that it continues to resonate today, appealing to both athletes and mainstream consumers wanting to live out their dreams, and featuring across the company’s social media channels.

And for Davide Grasso, former VP of global brand marketing at Nike, it’s not just about catchy words. “We actually don’t believe in slogans,” he told Creative Review. “Instead, what we’ve found to be most effective is inviting people to join us in what we believe in and what we stand for. And what we stand for is to serve and honour athletes. I think that’s why ‘Just Do It’ has had such an impact over the last 20 years and continues to. It’s genuine and speaks to our core mission.”

It comes at a cost, though – Nike spent $3.59bn on advertising in 2020 alone. That compares to $2.56bn spent on marketing by closest rival Adidas – which has notoriously upped its ad spend to compete with Nike, getting the likes of Kanye West, Pharrell Williams and Beyonce on board in 2019 – and $1.05bn for Puma. But it’s clearly paid off; the company has a current market capitalisation of $215.6bn, with global revenues of $37.4bn in 2020, compared to $24.2bn for Adidas, and around $6.3bn for Puma. If there’s one company that can show the enduring power of successful branding, this is surely it.

 

 

Coca-cola: Share a coke
The world’s most distinctive fizzy drinks brand has long known how to market itself – from the 1931 Christmas ads that created Santa Claus as we know him today (a white-bearded grandad in a bright-red suit) to its sponsorship of the Fifa World Cup and associated ad campaigns.

But it’s the Share a Coke campaign that seems to have sparked the most traction. What began in Australia in 2011 with a series of bottles using the country’s 150 most popular names quickly spread to the rest of the world, spurring on a series of creative inventions in 70 countries – from nicknames on bottles in China to interactive signs greeting citizens on billboards in Israel.

Social was at the heart of the campaign right from the start, as sharing is a very social behaviour

It was in the US that it was the most successful, however, with 250 of the most popular names among teens and millennials printed on to the bottles in 2014 and a social media campaign that sparked conversation across the world. “To propel Coke sales, we needed to ignite the nation’s teens to share a Coke,” said Luis Mendoza, Connections Associate Director at Starcom Mediavest Group (which led the US campaign) in a report. “Social was at the heart of the campaign right from the start, as sharing is a very social behaviour. To make the Share a Coke movement really take off, we invented show-stopping ways for teens to participate.”

Experiences included interactive, human-sized Coke bottles displayed at bus shelters that people could take a picture of to share on social media, and a digital outdoor display in Times Square featuring the names of those who opted in via text.

Influencers got involved, and user-generated content took off; a video by a couple announcing they were becoming parents using ‘Mom’ and ‘Dad’ Coke cans went viral with four million YouTube views, 50 million impressions and media mentions in the likes of The Huffington Post, BuzzFeed and beyond. All of this caused brand engagement to soar, with 100,000 new followers on Coca-Cola’s Instagram page and an increase of 870 percent in traffic on its Facebook page. Sales rose too, with revenue and volume up 11 percent in the US compared to the previous year, and market share up 1.6 percent.

The US wasn’t the only market to record notable growth. In Australia, young adult consumption rose seven percent on the back of the campaign, and in the UK, retail sales climbed 2.9 percent year-on-year after it was introduced in 2013 – compared to 1.1 percent growth by rival Pepsi.

The campaign was so successful it was revived several years after; in 2016, ‘Share a Coke and a Song’ saw popular lyrics printed on bottles in the US, and in 2017, surnames were added to bottles – further building on the sense of personalisation, friendship and happiness that have long been at the core of the brand.

 

Dove: Real Beauty
When it was created in 2004, few could have predicted the power that Dove’s campaign for Real Beauty would have over the following two decades. This now eponymous campaign rose from a survey carried out by Unilever that revealed only two percent of women asked considered themselves ‘beautiful.’ Sixty-eight percent put that down to the fact media and advertising set “an unrealistic and unachievable standard of beauty” – so Dove, in partnership with Ogilvy & Mather, set about creating a campaign that would shine a light on ‘real’ women and turn the traditional standard of beauty on its head.

It began with a series of billboards in Canada, the US and the UK, where passers-by could vote from one of two tick-boxes next to images of real women with percentages on display (think ‘grey’ or ‘gorgeous’). It led 1.5 million visitors to the campaign website, raising Dove’s profile in the space of just a few weeks. A series of billboards showing ‘real’ women in their underwear followed, and in 2006 the brand brought out ‘Evolution’, a video ad showing a natural woman transformed by make-up and digital enhancements that quickly went viral.

Real Beauty has shown the power a brand can have in bringing about positive change

Roll on to 2013 and ‘Real Beauty Sketches’ stole the show, with a video showing a forensic artist sketching women based on how they described themselves versus how somebody else described them. It had more than 50 million views within 12 days of its release, and has now been watched by more than 180 million people.

At the heart of the campaign was Dove’s long-standing focus on natural beauty – and it resonated with women across the world, building trust in a brand with a campaign that became an entire social movement. “We believe that conversation leads to brand love, and brand love leads to brand loyalty,” Jennifer Bremner, brand director of skin cleansing at Unilever, told HuffPost in 2014. “That’s obviously a positive for us not just in the power of the brand, but also ultimately in sales.”

It paid off; sales soared from $2.5bn to $4bn between 2004 and 2014. In 2020, Dove was valued at $5bn – up from just $200m in the early 1990s, and it’s now the most popular soap brand in the US, the Simmons National Consumer Survey (NHCS) found.

Marketing specialist Mark Ritson puts that success in part down to Dove’s 60:40 focus on long-term brand-building and short-term product marketing. “On the one hand there was the focus on the Dove masterbrand; on the other, on simply their products within the category,” he said in a video for Marketing Week. “In 2008, Dove started to think that spending so much money on longer-term, brand-building activity was probably not the best for ROI, but when they pulled back, sales began to flatten. Nielsen analysts later confirmed that for every $1 they were spending on that masterbrand campaign it was delivering more than $4 in incremental revenue.” Dove re-invested in the ‘masterbrand,’ and it paid off; brand equity grew 267 percent from 2009 to 2019 – compared to 157 percent for Lancome, 59 percent for L’Oreal and 40 percent for Nivea.

The company hasn’t relented since. This year saw a revival of the campaign with the release of ‘Reverse Selfie,’ an ad showing a young girl digitally enhancing herself in reverse, as a sequel to the 2006 ‘Evolution’ video. It hasn’t been without its criticisms along the way, but Real Beauty has shown the power a brand can have in bringing about positive change – and the financial rewards to be reaped for those prepared to take the risk.

 

Budweiser: Whassup
From those three, ribbiting ‘Bud’, ‘Weis’ and ‘Er’ frogs to crabs, aliens and a Dalmatian training a horse, Budweiser is no stranger to successful ad campaigns – but it was the 1999, multi-award-winning ‘Whassup’ campaign that really shot the brand into the stratosphere. Featuring a group of African-Americans shouting ‘Whassup’ down the phone to each other, mouths wide open, tongues lolling, it played on popular culture and brought the phrase into the vernacular in a way that’s still used today. “Watching the game, having a Bud” became a catchphrase never to be forgotten.

At the time, Anheuser-Busch, the brewery producing Budweiser, already had more than double the market share of any competitor, and Budweiser was the country’s most popular alcoholic drink. But the company wanted to get a younger, 20-something demographic on board and build brand loyalty among the easily influenced – so DDB Worldwide carried out research to find out what might create ‘talk value’ (generate buzz) for their next Super Bowl ad.

In our lifetimes, we’ll never see so much value created from a single idea

They decided upon a short film made by Charles Stone III, entitled ‘True’, where Stone and his Philadelphia friends greet each other with the slang phrase ‘Whassup.’ Stone was made director, developing a series of TV spots in partnership with DDB that caught on in a way not even Bob Scarpelli, former chairman and chief creative officer at DDB, had predicted.

In the following months, talk shows, newspapers and DJs picked up on the phrase, with references in The Simpsons, Scary Movie, the Grammy Awards and beyond. “Four friends, ‘watching the game, having a Bud’ cut across all cultural barriers to become one of the most popular and memorable campaigns ever,” Scarpelli later told The Drum. “It was one of the first campaigns to go viral. ‘Whassup’ became a global phenomenon, popular even in countries where Bud isn’t sold.”

A series of other spots followed, including a 2001 parody on the original where a group of middle-class, preppy types replace ‘Whassup’ with ‘What are you doing?’; and ‘Language Tape,’ where viewers are directed to the website to download ‘Whassup’ in 36 different languages.

It was a success; Anheuser-Busch’s worldwide sales grew by 2.4 million barrels to hit 99.2 million in 2000, and by September 2001 the campaign was estimated to have generated $20m in free media, according to DDB. That’s without even counting the impact of internet publicity. ‘Certainly, the advertising is part of the success,’ Benj Steinman, publisher of Beer Marketer’s Insights, told the New York Times. ‘It’s a phenomenon.’

Above all, though, it was about brand loyalty. “In our lifetimes, we’ll never see so much value created from a single idea,” August Busch IV, former CEO of Anheuser-Busch, reportedly once said. “It makes Budweiser a brand for every culture, every demographic and every community. It makes Budweiser a younger, hipper, more contemporary brand.’

And while ‘Whassup’ might have taken a backseat after 2001, the phenomenon is far from over; last year, the company revived its original ad with a lockdown version, replacing the ‘watching the game, having a Bud’ audio with ‘in quarantine, having a Bud.’ A new version was also made in the US, featuring famous basketball players who ‘Whassup’ each other on FaceTime – showing the transcendental power of a strong idea.

 

Volkswagen: Think small
If there’s one campaign that changed the future of advertising for good, it was Volkswagen’s ‘Think Small,’ produced in 1959 at a time when cool cars meant big cars. Bill Bernbach, owner of ad agency DDB, was approached by Carl Hahn, then head of Volkswagen, to promote the Beetle (originally commissioned by Hitler) in the US.

At the time, most ads were based on facts and USPs – a style developed under advertising executive Rosser Reeves, according to writer Mark Hamilton. “Reeves believed the only purpose of an ad campaign was to see the sales line moving in an upward direction, regardless of how that was accomplished,” Hamilton wrote in an article for Medium. “He warned against creativity in advertising, calling it ‘the most dangerous word in all of advertising’.”

But Bernbach – spearheading the ‘creative revolution’ – believed in concept advertising. Products were flooding the market in the post-war era of consumerism, and brands needed to stand out. Unlike rival David Ogilvy, Bernbach put the emphasis on drawing interest from the consumer with one novel, dare-to-be-different idea.

The car was small and strange-looking, so they embraced it with humour

He paired art directors with copywriters to synthesise the disciplines in a way they hadn’t been before – and tasked creatives Helmut Krone and Julian Koenig in coming up with an ad to promote the Beetle. The pair put the idea of plain honesty at the heart; the car was small and strange-looking, so they embraced it with humour, putting the emphasis on functionality over luxury and coupling a tiny, black-and-white image of the car with fine print at the bottom explaining its advantages.

It was an immediate success, according to Hamilton. “People talked about it around the water cooler,” he wrote. “Teenagers ripped it out of magazines and pinned it to their walls. It became, temporarily, more than just another ad. Suddenly there was an ad that appealed to people’s intelligence in a way that the style-based campaigns of the past had not.”

A series of similar print ads followed, all using humorous headlines playing on its smallness and appeal to counter-culture; ‘Live below your means,’ read one. ‘And if you run out of gas, it’s easy to push,’ read another; ‘It’s ugly but it gets you there,’ said a third. It worked; in 1960, more than 300,000 Beetles were sold in the US, up from just 35,000 in the mid-1950s. By 1968, sales in the country had hit 423,000 a year, and by 1972, 15 million Beetles across the world had been reeled off the production line – breaking the record set by Ford’s iconic Model T, and making it the biggest-selling car in the world at the time.

All of that was achieved on a modest budget, according to Bob Kuperman, former chief executive of DDB. “All of a sudden, when you did something in an impactful, imaginative way, you could take Volkswagen’s budget, which may have been $28m, and go against General Motors’ budget, which may have been $300m, and have the same effect,” he said in a video for Ad Age.

That realisation has outlasted the Beetle itself – and the fundamental principal is still at the heart of campaigns today. “100 years from now, the idea is still going to be more important than all the technology in the world,” Bernbach reportedly once said. A quick look at the most successful brands of today suggests he wasn’t wrong.

A new dawn for Citi

Posted on by itsupport

For the first time in history, a woman is at the helm of a major Wall Street bank – the third-largest of its kind in the US, with a market capitalisation of no less than $164bn. But Jane Fraser, who stepped up to the role of Citigroup CEO in February, doesn’t just stand as a symbol of progress, or a token of diversity – she’s a strategising powerhouse, taken on to turn around a bank that’s long been overshadowed by its peers.

When the decision was announced last September, many praised the move, noting her ‘fix-it’ approach, demonstrated through more than 16 years spent climbing the ranks at Citi. During that time, she helped navigate the lender through the financial crisis, reshape its private bank, lead the mortgage division out of chaos and repair its Latin America business following a series of scandals in Mexico. As overarching president, she oversaw the global consumer banking division, gaining experience in an area that’s set to become a key focal point for Citigroup in the coming years.

But she has big challenges ahead; Citigroup’s shareholder returns have notoriously lagged behind those of its two biggest rivals. During the eight-year tenure under former CEO Michael Corbat, returns stagnated at 43 percent, compared to 137 percent for JP Morgan Chase and 169 percent at Bank of America over the same period, according to data firm Refinitiv.

Many have criticised Citigroup’s hodgepodge of different businesses, indicating a need to either consolidate or better unify them, and various mishaps haven’t helped the image. Turning that around is no small job at a lender still tarnished by its financial crisis struggles, when a $45bn bailout was needed to keep it afloat, and plagued by issues around technology, which many believe wasn’t a big enough focus under Corbat. Add in the blows of the pandemic – in the final quarter of 2020, revenues and net income fell 10 percent and seven percent respectively year-on-year – and it’s clear this is no easy feat.

Jane ‘change-agent’ Fraser
But many believe Fraser – twice named the ‘number one woman to watch’ by American Banker – is up to the task. Among them is Mike Mayo, securities analyst at Wells Fargo. “She is the right person, at the right time, to accelerate Citigroup’s strategic thinking,” he told World Finance.

“You can almost call her Jane change-agent Fraser. She’s had a decade at McKinsey and a long stint at Citigroup, so the opportunity is to McKinsey-ise the bank – to take a fresh and clinical look at all businesses, products, geographies, clients and distribution, and to reallocate resources. Because for the past decade, Citi has been too conservative in its strategy, with its balance sheet and loans and the type of customers the bank dealt with.” Dick Bove, Bank Analyst at Odeon Capital Group, agrees. “The job of this woman is to get new business and to solve the problem with the government on technology,” he told Reuters. “That’s her job, and I think if anybody can do it, she can.”

And Fraser hasn’t disappointed so far; she’s already announced plans to close Citigroup’s consumer banking divisions in 13 markets across Asia, Europe and the Middle East, and is ‘doubling down’ in areas including wealth management in Asia and the US. She’s also set about addressing work-life balance issues – scrapping Friday video calls and implementing a company-wide ‘Citi reset day’ – and has spoken openly about the need to diversify the organisation at a time when issues around inclusivity have shot into the limelight. These efforts seem to be paying off; Citigroup beat analysts’ predictions in the first quarter of 2021, reporting net income of $7.8bn – up from $2.5bn in the same period in 2020, with earnings per share up $3.62 from $1.06.

Bold beginnings
That success likely comes as little surprise to anyone acquainted with Fraser’s past. Born in St Andrews in Scotland, she studied economics at the University of Cambridge and began her career as an M&A analyst at Goldman Sachs in London in 1988. Shortly after, Fraser moved to Madrid to take a brokerage job, later explaining in a speech how she’d found herself “the boring British girl” and wanted something “more exciting,” according to The Financial Brand. “That was literally the driver of my decision,” she said.

Two years later, she moved to the US to study for an MBA at the Harvard Business School, then joined McKinsey in New York as a consultant in 1994. She reportedly said she would only join if she could work directly under the head of banking, Lowell Bryan. “She’s the only person who’s ever done that,” he told the Financial Times, who was so dazzled by her gutsiness he took her on. A few years later, Fraser had her first son and shortly after became a partner, opting to work part-time to balance work and family.

She spent the first six years of her McKinsey stint in New York and the final four in London, during which time she co-authored the book Race for the World: Strategies to Build a Great Global Firm in 1999. This involved travelling across Asia for research and interviewing clients about the challenges they faced globally. Citigroup executive Michael Klein was reportedly so impressed with her research that he spent several years trying to get her to join the bank. In 2004 she relented, beginning as head of client strategy in the investment and global banking division.

Climbing the ranks
At Citigroup, Fraser quickly climbed the ranks, becoming global head of strategy of mergers and acquisitions in 2007 and leading a restructuring process during the heart of the financial crisis. Two years later she was named chief executive of Citi Private Bank in London. During her four-year tenure she turned the ailing bank around, returning it to the black and increasing revenue by more than a fifth from the first half of 2010 to the first half of 2013.

Her strategy included overhauling the division’s leadership, and implementing a fee schedule that remained the same regardless of whether clients used Citi’s fund managers or those of an external firm.

But it was as chief executive of CitiMortgage that Fraser really earnt her stripes, moving to St Louis in Missouri in 2013 to work her magic on the struggling division. Demand for mortgage refinancing had dropped significantly; under Fraser’s leadership, Citigroup closed several mortgage offices across the country and switched the focus to selling residential mortgages to home buyers.

She also worked on developing better relationships with regulators. That included paying out $7bn in 2014 to settle charges made against the bank by the Department of Justice for allegedly packaging up bad mortgages in the run-up to the financial crisis. Many praised her strategy during the role; a fellow CitiMortgage employee told the Financial Times how she had brought “a focus and an energy” to an ailing area, noting how “she was able to have people excited about thinking about tomorrow instead of just how we cleaned up yesterday.” That strategy clearly paid off, and within a year, Fraser was promoted to run the US consumer and commercial banking businesses.

A handle on scandals
But Jane ‘change-agent’ Fraser wasn’t done there. In 2015, she was named head of Citigroup Latin America, moving to Miami to become both the first female and the first foreigner to lead the lender’s Latin America division, taking responsibility for 24 markets. During her time there, Citigroup closed its retail banking and credit card businesses in Brazil, Argentina and Colombia, and pumped significant sums into Mexican subsidiary Banamex (or Banco Nacional de Mexico), which the company had bought in 2001.

Heading up Banamex meant overseeing more than 1,400 retail branches across Mexico – at a time when the subsidiary was embroiled in a scandal related to fraud and money-laundering. In 2014, it had been fined $2.2m in fraud charges, and regulators were investigating control failures that would later lead to nearly $100m in fines.

That wasn’t the only challenge Fraser faced. “When I was first put in charge of Latin America, there were some pretty negative headlines in the press of Mexico about having a female foreigner with responsibility,” she told CNN in 2018. She said that instead of attempting to “out-machismo” the men, however, she embraced her femininity and was encouraged by her husband to buy “an elegant red dress, slightly higher heels than she was used to, and a new haircut.

He knew that if I could stride out there and be quite comfortable in who I am that would be a benefit.” Whatever she did, it clearly worked; under her four-year stint, like-for-like revenues at the Latin America division grew by nearly a third, while profits grew two-thirds. According to Michael Helfer, a board member of Banamex, Fraser “captured everybody, partly because she spoke Spanish” and partly because she “immediately began to exercise control in an appropriate way,” he told the FT.

It was likely that ability to ‘capture everybody’ that saw Fraser named president of Citigroup and head of global consumer banking in 2019. Some saw this role as a trial for the top-dog position. “It’s a training ground to see if she’s potentially the right person,” Jeff Harte, an analyst at Sandler O’Neill, told Bloomberg Quint at the time. “To name her president, both Corbat and the board must see her as the right person to be CEO.” Fraser clearly passed the test – less than a year into her role, it was announced she would be stepping up to the CEO throne.

Action stations
And she wasted no time in bringing about change. In the first quarterly earnings call since that announcement, Fraser hinted at realigning or selling off certain business lines to simplify the $2.3trn-asset company. She told CNBC, “as we look at the businesses over a decade ahead, we want to be a winner. We want to close the return gap with our peers. To do that you take a candid assessment of which of the businesses that you’re going to be in a position to succeed in winning, and which ones are perhaps in better hands with another bank.”

Closing 13 markets was one way of scaling back; under the plan, consumer banking operations in Australia, Bahrain, China, India, Indonesia, South Korea, Malaysia, the Philippines, Poland, Russia, Taiwan, Thailand and Vietnam are all set to be shut down, and instead operated from four main hubs in Singapore, Hong Kong, the United Arab Emirates and London. That announcement was made less than two months into the role, surprising many, according to Wells Fargo’s Mike Mayo. “I think investors were collectively surprised at how soon she came out with the decision,” he told World Finance. “But I think what’s interesting is that what might be perceived as a tough decision is probably not so tough for somebody with such a strategic background as Jane Fraser.”

That strategic approach is coming through in other ways, too; in January, it was announced in a memo that the group would be overhauling its wealth management division, creating a new global wealth unit that would bring together its consumer wealth organisation together with its private bank (formerly part of the group’s institutional clients group). She’s also addressing regulatory issues; in October, the bank was fined $400m by regulators after an employee accidentally wired $900m to creditors at cosmetics firm Revlon, calling into question its loan operation software. The mishap saw the company revise its fourth-quarter profits by $323m, and a source told Bloomberg that plans are now in the pipeline to recruit a horde of new coders and compliance officers to update the system.

Social change
But it’s not just in these areas that Fraser is making her mark. On day one of her tenure, she announced an ambitious plan for Citi to reach net-zero greenhouse gas emissions in its financing activities by 2050 – building on a $250bn pledge made under Corbat last year to finance low-carbon solutions in renewable energy and other areas. She said the group would be transparent in its progress, reflecting a wider move towards transparency in other areas too.

“Our environmental, social and governance agenda can’t just be a separate layer that sits above what we do day-to-day,” she wrote in a Citi blog post. “Our commitments to closing the gender pay gap, to advancing racial equity, and to pioneering the green agenda have demonstrated that this is good for business and not at odds with it.”

It was as chief executive of CitiMortgage that Fraser really earnt her stripes, moving to St Louis in Missouri in 2013 to work her magic on the struggling division

She’s also putting a renewed focus on diversity. “What we’ve really tried to do at Citi is to make sure diverse candidates see us as a place where they can thrive and advance their careers,” she told TIME magazine. “Things like strong parental-leave policies and maintaining an inclusive culture can make a huge difference.”

As the first female chief executive of a top-tier Wall Street bank, she’s clearly well placed to fight that battle – and she’s spoken openly about the obstacles that faced her, as a mother of two, in rising to the top. In 2008, her Cuban husband Alberto Piedra left his role as head of global banking at Dresdner Kleinwort to be a full-time father and support her career.

“Being a mother of young children and having a career is the toughest thing I have ever had to do,” she said after leaving McKinsey, according to an Axios report. “You are exhausted, guilty, and you must learn how to do things differently. It was the making of me because I became much more 80:20, focusing on what was really important. I got good at saying no, and also became more human to the clients who also face many of these issues too.”

That element of being ‘human’ is a trait that seems to run through much of Fraser’s approach to leadership. Former colleagues have noted her love of pranks, as well as her ability to boost morale. And despite the challenges that Fraser has faced as a female leader, she has also said how “being a woman has been helpful. You are a bit different from other leaders,” she said in an interview with the FT. “I’ve always enjoyed the fact that you can therefore play the game differently, you’ve almost got licence to have more degrees of freedom, and that’s fun.”

A new world
Those differences are already starting to shine through; in March, Fraser signed off plans for ‘Zoom-free Fridays,’ while encouraging employees to take more annual leave. “We are a global company that operates across different time zones, but when our work regularly spills over into nights, very early mornings and weekends, it can prevent us from recharging fully, and that isn’t good for you nor, ultimately, for Citi,” she wrote in a memo, reported by Financial News.

Whether that attitude spreads beyond Citi and into the wider realms of the banking sector remains to be seen, but Corbat, for one, holds faith in her ability to conjure up a new dawn, and to bring about the change Citi has long been waiting for. “As I pass the reins to Jane, I can confidently say that this 208-year-old institution has its best days ahead,” he wrote in a parting memo to staff, reported by Bloomberg. “I cannot wait to see how Citi helps shape this new world.”

And it seems only right that it’s Fraser – a woman at the top of her game, a change agent unafraid to throw out the old rules, a mother of two who’s managed to balance work and family – is shaping that ‘new world.’

And if her past performance is anything to go by, she won’t disappoint.

Finding a balance: how should global trade work?

Posted on by itsupport

Michael Pettis is a rare breed. A Wall street veteran-turned-academic who once owned a punk rock nightclub in Beijing, he has been teaching finance at Peking University since 2004, while being a prominent critic of Chinese economic policy. His latest book Trade Wars are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace, co-authored with Matthew Klein, questions almost everything we know about modern trade: the usefulness of the dollar’s reserve currency status to the US; the origins of the China-US trade war; and Germany’s much-celebrated trade surplus. In the book, Pettis and Klein argue that modern trade wars start at home, with British and American bankers and owners of financial assets benefitting from open markets at the expense of ordinary households.

 

Trade Wars are Class Wars is an idiosyncratic book. It’s part economic history, part financial analysis and part polemic. What prompted you to write such a book?
When I moved to China, the government was keen on making the renminbi a major reserve currency. That interested me in the role of reserve currencies and their cost. It was obvious that the role of the US as an absorber of excess global savings creates problems for its economy. I realised this by going back to the basic balance of payments, and seeing what the role of an excess savings absorber is, because that’s what gives you reserve currency status. I don’t think that the dollar gives the US an exorbitant privilege; it’s more of an exorbitant burden. And out of that came the recognition that much of what we discuss about trade is obsolete. Matthew and I discussed these ideas, so I asked him if he was interested in working with me on a book.

 

Should the international community drop the dollar as a global reserve currency and opt for something else, Bancor {a supranational currency proposed by Keynes} or some form of digital currency?
I don’t think a digital currency would solve the problem. In the Bretton Woods conference, Harry Dexter White and John Maynard Keynes agreed that trade should be more or less free, although they didn’t believe in totally unlimited free trade; that the more trade there was around the world, the better; and that free capital flows would be a big mistake.

They argued – and it’s even more true today – that the trade account and the capital account have to balance each other, and there’s no reason to assume that it’s the capital account that balances the trading account. As we show in the book, capital tends to be more volatile than trade. So, it’s trade that has to balance to the capital account. To the extent that the capital account primarily represents transfers of fundamental investment flows, it’s not a bad thing. However, most capital flows today are speculative, so trade is constantly adjusting to speculative flows. If you look at trade patterns over the last decades, the US absorbs 40 to 50% of global excess savings. Interestingly enough, the other Anglophone countries run about half of the remainder, so along with the US, account for roughly two thirds to three quarters of the global trade deficit.

All other rich countries primarily run surpluses, they account for roughly three quarters of global trade surplus. Why are Anglophone countries so different from other rich countries? I believe it’s because they have open, well-governed capital markets, so they attract excess savings. These are countries that have been running persistent large deficits since the 1970s, which violates our idea of trade. In trade theory, you can’t run persistent deficits, because they force adjustments that reverse the imbalance. But imbalances persist for decades, so that has to do with capital flows rather than trade flows.

 

So what should the US do?
The best option would be to organise a new Bretton Woods conference and redefine the rules of trade and capital flows, going back to Keynes’s original proposals. I suspect that’s unlikely to happen. So the alternative for the US is to unilaterally withdraw the dollar from its current role. The problem is that this role, the so-called ‘exorbitant privilege,’ gives the US geopolitical benefits at an enormous economic cost. So it would be difficult to do that because there are US constituencies – including banks – that want the dollar to maintain that role. However, other constituencies, notably producers, farmers and workers, should want the opposite. Ultimately, I think the US is going to withdraw the dollar as the dominant trade and reserve currency.

 

In the book you talk about domestic imbalances in the US, with its role as the world’s absorber of excess savings benefitting the financial sector at the expense of almost everyone else. The Biden administration has launched a stimulus programme focusing on infrastructure spending and will also increase corporate tax. Is all that towards the right direction in terms of addressing these imbalances?
The US has an investment problem. The reason businesses don’t invest is not that the cost of capital is high because of insufficient savings, but because there is not sufficient growth in demand. The Biden administration is trying to boost demand by spending on infrastructure and redirecting income from the wealthy to the middle class and workers. By increasing both forms of demand, they will increase incentives for businesses to invest. So what Biden is doing is the right thing, assuming he can pull it off in Congress. Even if that happens, the US will continue to run large deficits, perhaps even larger ones. But at least the counterpart to deficits will be higher investment.

We live in a world where investment isn’t constrained by the lack of savings. American companies are sitting on huge hoards of cash, but they are not investing. They are using them to buy stocks, which is just rearranging savings. If you export $100 into the US, investment will not go up, so it must cause savings to go down by increasing unemployment, household debt or fiscal deficit. So the US has to constantly choose between more unemployment and more debt to accommodate these inflows.

 

How do you think Biden’s domestic policies will affect the trade conflict with China?
In the long run, it would lead to better global relations, because trading imbalances would be associated with positive economic outcomes in the deficit countries. The problem with China is that the world is suffering from weak demand. And the only response China has is supply-side. It’s been talking about demand, in other words, boosting consumption, since 2007. More recently, the whole ‘dual circulation’ model is about boosting domestic demand. They haven’t been able to do it. All they do is subsidise manufacturing and infrastructure. It will involve substantial reforms, including political changes. So I’m pessimistic about US-China relations, I think they will continue to deteriorate – and not just US-China relations, but also relations with everyone else.

 

What’s the reason for China’s difficulty in reforming its economic system? Is it the nature of the regime or something else?
It requires significant political adjustment. During periods of great change, it’s democracies that can adjust. The problem is that the adjustment process is always complicated, and that’s why democracy seems to lose its prestige during these periods, like the 1930s or the 1970s. Ironically, that’s also when democracy proves its superiority compared to other systems.

It’s hard for countries like China to make these adjustments. After 50 years of war and Maoism, China was hugely underinvested for its level of social development in the 1980s. So the best it could do was force up the savings rate, and pour those savings into investment, because China needed commercial airports, it didn’t have a single subway system or many factories and the roads were bad. It did that very successfully, but the problem is that like every country following this growth model, it went too far and was seriously over-investing by the early ’00s. It took them a while to recognise that, but Beijing now accepts that all this investment in real estate and infrastructure is non-productive and is the source of the incredible rise in debt recently.

 

So what can they do now?
If you want to reduce non-productive investment there are four options. One is to allow growth to slow down, so have growth rates of up to two or three percent. They don’t want to do that. Much of what is happening in China assumes growth of five to six percent for many years, which is impossible anyway. The second option is to replace investment with a rising trade surplus. However, China is too big and the world cannot absorb an increase in Chinese trade surplus.

The third option is replacing non-productive investment by discovering new areas of productive investment. That’s what every country at this stage of growth tries to do, but it’s impossible. In China they believe they can shift all this investment into the tech sector, but there’s a limit to how much this can absorb. Even in a technologically advanced country like the US, the tech sector is small. In China, it might be about five percent of GDP, but investment in tech is about 45 percent and at least half of that is in non-productive property or infrastructure. You can’t transfer this huge amount of investment into the tech sector.

That leaves only one way: reduce investment and balance it by increasing consumption. The problem is that the consuming part of the Chinese economy, ordinary households, has the lowest share of GDP in history. In most countries, that is between 70 and 80 percent of GDP. In China it’s around 50 percent, with business and government retaining another 50 percent.

So if you want to solve the problem you have to increase the household share. If you want to raise the household share by 15 percent, it goes from 50 to 65 percent and the non-household share drops from 50 to 35 percent. How do you decrease the non-household share? Not from the business sector, because private businesses are the efficient part of the economy. If you force them to pay for the adjustment, you will destroy the Chinese economy. So that leaves the government. It’s hard to know what share the government retains, because there is no clear definition of government, but it is around 25 percent of GDP. So the relationship between the share of households and government must shift from 50-25 percent to 65-10 percent. Household consumption would have to move from being twice as big as government consumption, to being seven times bigger. You can’t do that without a significant shift in political power. From a historical perspective, there is no way to do it without political instability.

 

In the book you claim that “the euro area is now the world’s biggest source of global imbalances,” mainly because Germany runs ludicrously high trade surpluses. The Green Party may win the forthcoming election and they are talking about running deficits, which is a taboo in Germany. Would that solve the problem?
I have met the leaders of the German Green Party and they seem to understand the problems. Germany is obsessed with international competitiveness. There are two ways you can achieve this. One is to invest domestically and increase the productivity of workers. The other way is by lowering wages or some form of social or environmental degradation. If you increase your productivity, the reward of becoming more efficient in manufacturing is not a trade surplus. I don’t believe that some countries work harder than others, but even if you are a hard-working country your reward is not a trade surplus, but the ability to import more for a smaller unit of output, so basically you improve your terms of trade.

Germany’s way of achieving international competitiveness is lowering wages, the famous Hartz IV reforms. This is a classic beggar-thy-neighbour policy, because by lowering wages you lower your contribution to global consumption, and you are rewarded by taking a bigger share of everyone else’s consumption through a trade surplus.

Keynes warned us about this. He argued that countries compete by worsening their contribution to global demand, basically by constantly lowering wages. So today American companies tell their workers “if we don’t pay you less, we’re going to go out of business”, and you either accept lower wages or they move abroad. This is one reason why we see rising income inequality and demand growth has been low. It’s only with rapid increases in debt that we can keep growth and demand at reasonable levels.

If the Greens have a bigger impact on German policy, and it doesn’t even have to be running a deficit, it would be a positive change. As long as they eliminate the trade surplus by raising wages, Germans will be better off and Germany will be contributing net growth to the world, rather than subtracting growth. It’s true that Germany has lent a lot of money to other EU countries. But as long as it doesn’t run a deficit with its EU partners, it’s impossible for them to repay Germany.

 

In the UK, when we talk about trade it’s all about Brexit. You don’t discuss this in the book, but some of your arguments echo some of the arguments made by Brexiteers, notably left-wing ones. They talk too about domestic imbalances, particularly between the financial sector, which allegedly benefited from Britain’s EU membership, and other parts of the economy. Am I right to read it as a book that is indirectly pro-Brexit?
In the long term, politics will determine whether Brexit was a good idea. My instinct is to say Britain would have been better off as part of the EU, but it’s not a hill I am willing to die on. I don’t think it will make much difference from an economic point of view in the long-term.

The problem of the UK is that it has been running deficits since the 1970s. And that’s not surprising, because the UK shares with the US a friendly investment market and open capital markets. Like other Anglophone countries, it is a net recipient of foreign inflows, so it has to run a deficit. If it were a developing country, that could be a positive deficit driving domestic investment higher. But it’s an advanced economy and there is no savings constraint. So these inflows are bad for the economy.

One of the reasons Keynes opposed free capital flows was that the UK experienced this in the 1920s, a spectacular period for much of the world, but not for Britain. Under the gold standard in the 1920s, there were a lot of capital inflows and that hit its export industries. In 1931 they abandoned the gold standard and started implementing protectionist tariffs and the UK economy did relatively well, given the horrible performance of the rest of the world. To a certain extent, you could argue that Brexit may be a repeat of that story.

 

Some economists say that leaving the EU could end the country’s overdependence on finance and boost manufacturing. Does that make sense to you?
I am a Wall Street guy, I spent most of my career running trading and capital markets desks, but I think a country needs a decently sized financial services sector. Up to a point, the more sophisticated your financial system is, the better it is for the economy. But beyond that, what’s best for the financial system often comes at the detriment of producers, farmers and workers. There’s a real conflict between bankers, what I would call the State Department or Foreign Affairs constituency, and the domestic workers and producers constituency. I think in England, like in the US, the financial constituency is way too powerful.

Roaring 20s for SPACs?

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Even for a ‘super-app,’ the announcement was astounding, sending shockwaves through global markets. On April 13, Grab, a Singapore-based tech powerhouse that started as a ride-hailing app and has since branched out into banking, hospitality, insurance and other services, announced that it would join the latest Wall Street frenzy, going public on Nasdaq via a $39.6bn merger with Altimeter Growth Corporation, a SPAC. The merger has been the biggest M&A deal globally in 2021.

SPAC is the acronym of the year in finance. Also known as blank-cheque companies, a term many SPAC aficionados reject, these idiosyncratic shell corporations have been around for almost two decades. But it’s only over the last 18 months that they have finally found their way into the mainstream. A typical SPAC lists on the stock market with the explicit aim of acquiring a private company that wishes to go public. Targets tend to be tech firms with high-flying ambitions, such as electric vehicle makers and space transportation companies.

Even if the bulk of SPAC activity is concentrated in the US, their appeal is universal enough to attract Asian unicorns such as Grab, says Alexandre Lazarow, a venture capital investor and author of a book on emerging start-up ecosystems: “For the very best start-ups, partnering with a SPAC means partnering with experienced operators, investors and venture capitalists who offer a friendly, globally connected and founder-centric capital source that will be hugely beneficial in expanding their business.”

Boom and bust
Financial markets have welcomed the SPAC boom with relief, as one the few success stories of the year, with the global economy still reeling from the pandemic. The Ipox SPAC Index, which tracks the US market, almost doubled its value from its launch last summer to January 2021, although it has since lost some of its gains. By the end of May, 313 SPACs had gone public in the US, compared to 248 last year and just 225 in the previous decade (see Fig 1).

The trend drove global M&A activity to a staggering $1.3trn in the first quarter of 2021, a four-decade record, according to Refinitiv data. One reason for the unprecedented appetite for SPACs is massive liquidity in global markets. With historically low interest rates and aggressive monetary policy by governments and central banks to mitigate the impact of lockdowns, investors have been left with few options other than seeking lucrative, even if risky, deals. For those eager to take a bet on ambitious start-ups, raising debt has never been easier.

Some see in SPACs the latest example of a broader movement away from the old-fashioned IPO, foreshadowed by the increasing number of direct listings. In the first quarter of the year, SPACs accounted for 75 percent of US listings compared to just 25 percent for IPOs, whereas five years ago they accounted for a tiny 10 percent. Some point to the sheer convenience of swapping a legally burdensome IPO for a merger with a public company.

Companies that list on the stock market via a SPAC merger can save up to 15 months. In tech circles, IPOs are seen as costly compared to other options. “There is the perception that with an IPO you may leave money on the table, for example when the price goes up 25 percent in a single day. So people think that SPACs or direct listings provide an alternative,” says Scott Denne, an analyst at 451 Research, part of S&P Global Market Intelligence.

The pandemic has accelerated this process, with travel restrictions rendering road shows obsolete, says Daniele D’Alvia, CEO of London-based SPACs Consultancy and author of a forthcoming book on SPACs. “We live in the Zoom era. Roadshows don’t make sense anymore. In the past, if a Malaysian company wanted to go public, investment bankers supporting the deal would fly to Malaysia to check everything, from the company’s financials to its buildings. Now they cannot do that because of travel restrictions.”

Ian Osborne, prominent tech investor
Ian Osborne,
prominent tech investor

Smaller fish
Changes in regulation may have played a role too. Last year, the US Securities Exchange Commission (SEC) modified the criteria for accredited investors to include those with more than $5m in assets.

The change has allowed smaller fish to participate in PIPE investment, the financing mechanism through which SPACs raise capital, hitherto reserved for institutional investors. Although a typical SPAC raises money when it goes public, it often needs investors to cough up extra capital to complete an acquisition. PIPE investors also add their gravitas to the status and valuation of the target company. Grab received $4.5bn for its merger, of which $4bn was in PIPE investment from BlackRock, Morgan Stanley’s Counterpoint Global fund, sovereign wealth funds such as Singapore’s Temasek and Malaysia’s Permodalan Nasional Berhad and several other institutional investors.

‘Sponsors,’ the financiers who launch SPACs and then chase promising companies, are the main driver of the market. They tend to be prominent tech investors and dealmakers such as Ian Osborne, a British pioneer of SPACs who has invested in European tech powerhouses Spotify and TransferWise (currently Wise). “Sponsors make huge returns on SPACs on average, so the supply will be there if there is enough demand,” says Jay Ritter, an expert on IPOs who teaches at the University of Florida. Once a merger – a process known as de-SPAC – has been completed, sponsors typically take up to a quarter of the merged company’s equity, and thus have a strong incentive to close deals.

For tech firms looking for a quick buck, merging with a SPAC can be hugely lucrative

For target companies, identifying sponsors with a long-term plan is a boon. In the case of Grab, one reason for the partnership with Altimeter Capital was the latter’s long-term commitment to the company, Lazarow says, evidenced by the fact that they locked up their shares for three years and led the PIPE process. For tech firms looking for a quick buck, merging with a SPAC can be hugely lucrative. In 2021, the average tech firm that merged with a SPAC received nearly 13 times its revenue, according to 451 Research. The prospect of tapping into public markets is irresistible, says 451 Research’s Denne: “The opportunity to raise money on the public market, while using the same numbers and language you would use to raise money from venture capital firms, appeals to many tech companies.”

Not your usual bubble
In a market where ballooning debt, zombie companies and all-too-generous central banks reign supreme, the fear of a bubble that is just about to burst never goes away. Many worry that the SPAC frenzy will give way to a stampede for the exit, once the tide of free money goes out and those swimming naked are exposed. By April, the proceeds of SPAC listings in the US had surpassed the $100bn threshold, nearly 10 times more than the amount raised in 2019, but the market has significantly slowed down since its first-quarter peak.

One reason for the unprecedented appetite for SPACs is massive liquidity in global markets

One reason is that institutional investors are increasingly reluctant about the market’s prospects, overwhelmed by the sheer numbers of SPACs. Out of 966 SPACs that have been launched since 2003, less than half had announced or completed an acquisition by the first half of the year, while 90 had been liquidated. Sponsors typically have two years to find a target, otherwise they have to return the raised funds to investors. Some think that the market has run out of target companies with a reliable business plan. PIPE investment is drying up, with banks reducing lending to hedge funds that invest in SPACs. Short-sellers are also zeroing in on the market, increasing their bets against SPACs.

Their stock market performance has also been lacklustre. By May, around two out of three SPACs were trading below the $10 threshold, a significant drop from the first quarter when they typically offered a premium to investors. The picture is similar for most SPACs that have found a target. A case in point is Canoo, a US electric vehicle manufacturer whose share price halved just a few months after its listing on Nasdaq last December. Academics Michael Klausner, Michael Ohlrogge and Emily Ryan estimate that although SPACs raise $10 per share in their IPOs, by the time of the merger they hold just $6.67 for each outstanding share, while shares lose around a third of their value a year after the merger (see Fig 2).

Critics mock the lofty projections made by companies that merge SPACs. Some have never run a profit or started production. Arrival, a UK electric vehicle manufacturer, listed on Nasdaq via a SPAC in March, projects its revenue to reach $14bn in 2024, despite not having produced any vehicles yet. “Not all, but most companies choosing the SPAC route weren’t ready or easily able to complete an IPO.

Either they were in businesses that had some issues (gambling, cannabis); or fascinating but unproven business models (OpenDoor); or products that aren’t ready for prime time (flying cars, self-driving cars, LiDar systems); or they just didn’t want to deal with the scrutiny that comes with an actual initial listing as opposed to a ‘back door’ merger to become public,” says Lise Buyer, a partner at the US-based IPO consultancy Class V Group who was involved in Google’s 2004 listing. “Most of the companies that have a strong business model and ‘clean’ story are still choosing an initial listing via a sale.” Some point to WeWork as a case point. The US commercial real estate company has gone on a slippery slope from a valuation of $47bn to near bankruptcy after its botched IPO in 2019. With the pandemic further hitting its bottom line, the firm has reportedly attempted to go public via a SPAC.

Some point to the recent history of the M&A industry as a cautionary tale for the market’s future prospects. Ivana Naumovska, an academic who teaches finance at INSEAD, draws parallels with reverse mergers, a trend that boomed in the previous decade but rapidly petered out in 2011 due to negative media attention and regulatory intervention. SPACs themselves faced a similar boom in 2007, ominously just before the Great Recession kicked off. However, few of them found target companies eager to go public. One of the clearing houses for SPAC companies was Lehman Brothers, the investment bank whose collapse sparked the financial crisis. But similarities stop there, says Milos Vulanovic, an expert on SPACs who teaches corporate finance at EDHEC Business School: “The financial crisis took liquidity out of the market, shutting down the offering of securities.”

A celebrity market
If there is one indication that SPACS may have bubbled out of control, it is the involvement of celebrities who are not usually associated with the financial sector. Celebrities promoting SPACs include Jennifer Lopez, Serena Williams, Shaquille O’Neal, Stephen Curry and Alex Rodriguez, with some even sitting on company boards.

Concerns over a SPAC bust that could jeopardise the fragile post-Covid recovery have alerted regulators

A sprinkle of glitter may be welcome to a market where digital native millennials are taking over and attention is becoming the ultimate commodity. “Sponsors are bringing in celebrities so that they can stand apart from the crowd. You can think of some of the celebrities as offering marketing services, just as in the advertising business,” Ritter says. “Celebrity involvement in SPACs is irrelevant to the market, because most of them are doing nothing but lending their names to an investment vehicle. Institutional investors pay little attention to it, or worse, they may discount a SPAC’s credibility,” says Don Duffy, President of ICR, a US communications firm that works with SPACs.

However, regulators think otherwise. In March, the SEC issued an ‘investor alert’ warning that celebrity promises for a quick buck should not be taken at face value. “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” the bulletin said.

Regulators on alert
Concerns over a SPAC bust that could jeopardise the fragile post-Covid recovery have alerted regulators. The SEC has warned target firms against offering misleading predictions and is currently scrutinising their accounting methods. In a statement that sent chills to the markets, John Coates, the SEC’s acting director of corporate finance, said that “Any simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst.”

Ominously, he warned that de-SPACs should be subject to “the full panoply of federal securities law protections,” adding that “a de-SPAC transaction gives no one a free pass for material misstatements or omissions.” Some interpret this as a sign that the Commission may start treating SPAC mergers as IPOs, thus scrapping their legal protections. Many SPACs have exploited a loophole in US security law that protects companies going through a merger from lawsuits over overambitious forward-looking statements. Banks backing SPACs may also have to undertake the same liability risks that typically accompany an IPO.

In some cases, regulatory intervention has stopped SPACs in their tracks. One example is space transportation company Momentus, whose $1.2bn merger with Stable Road Acquisition Corp is under investigation over statements made about the deal. Other firms face shareholder lawsuits over allegations that their directors misled shareholders and investors. In the latest blow to the market, last spring the SEC forced SPACs to account warrants, which permit early investors to purchase shares at bargain prices, as liabilities rather than equity.

Many believe that the measure triggered the abrupt slowing down of the market in the spring. “Sponsor warrants are part of the compensation of the sponsors, and are a cost to the other stakeholders,” says Ritter. But others think that the market will slowly recover, unless regulators overreact and stifle the market: “Financially, it does not change much. For a $200m SPAC the cost would be a few $100,000s,” Vulanovic says, adding: “But it is an extra burden because many SPACS need to restate their financial statements. They need to contact the auditors and lawyers again and essentially go back in the queue.”

What worries regulators, and increasingly politicians, is SPAC-fuelled speculation that may hit retail investors. Critics argue that some SPACs have mastered the art of regulatory arbitrage, permitting fledgling start-ups to skip the rigorous due diligence process that comes along with an IPO; some have dubbed SPACs ‘Special Prevention of Accountable Control.’ “Paying attention to SPACs is justified, because there is a transfer of risk from venture capitalists and private equity investors to public market investors.

The rapid rise of SPACs has been met with a mix of bewilderment and excitement by investors and financial analysts

Many of them understand that risk, but some don’t,” says Denne from 451 Research, adding: “With a traditional IPO, the investment decision is based on the company’s historical performance. Most SPACs disclose some data on historical performance, but not in detail, so the investment is often about the future.”

However, others believe that the risk is minimal, given the idiosyncratic structure of SPACs. “In essence, a SPAC share is a convertible risk-free bond. Funds raised in the IPO are deposited in escrow accounts and kept there until the merger. There is no possibility that investors would lose any money,” Vulanovic says, adding: “The only people who risk any capital before the merger takes place are SPAC founders.” In some circles, SPACs are seen as the latest revolt against mainstream finance, coming on the heels of the GameStop saga that saw Reddit investors bet against hedge funds that were short-selling the US video game retailer.

Some think that SPACs offer to retail investors an opportunity to invest in small but fast-growing companies that were previously accessible only to bigger fish, notably venture capital firms. “I like to call a SPAC IPO a ‘democratised IPO’ because in a typical IPO the only people who get access to the shares are the investment bank’s clients, whereas anyone with a brokerage account can buy a SPAC’s shares in the open market,” says ICR’s Don Duffy.

Conquering the globe
Although the SPAC frenzy is largely a US phenomenon, it has already crossed the Atlantic. Prominent European investors, including ex-Credit Suisse CEO Tidjane Thiam, French telecoms billionaire Xavier Niel and luxury tycoon Bernard Arnault, have launched their own SPACs or are considering doing so. The trend has sparked competition among European financial hubs to attract SPAC listings, with Amsterdam leading the market so far.

Xavier Niel, CEO of Illiad and Bernard Arnault, CEO of the LVMH group
Xavier Niel, CEO of Illiad and Bernard Arnault, CEO of the LVMH group

Deutsche Börse expects up to 12 SPAC listings this year, according to an interview of Peter Fricke, an executive of the German exchange, to the financial newspaper Handelsblatt. In the UK, the Financial Conduct Authority (FCA) is considering implementing reforms that would make it easier for SPACs to list on the London Stock Exchange. Currently, restrictions such as suspension of trading following a SPAC merger hamper growth. But even some of the proposed reforms, such as setting a minimum of £200m to be raised when a SPAC goes public, may push many firms to list elsewhere, says D’Alvia from SPACs Consultancy.

The picture is similar in Asia, with regulators in Singapore and Hong Kong contemplating changes in regulation to attract home-grown SPACs. However, many Asian tech companies such as Grab have opted to list overseas via mergers with US-based SPACs. Such deals are symptomatic of the proliferation of fundraising options in regions that historically lacked access to global capital, Lazarow says: “As innovation models continue to scale internationally, and companies with strong future growth prospects seek capital beyond the limited options on established Asian Exchanges, SPACs will certainly be a key tool in the quiver.”

Tidjane Thiam, ex-Credit Suisse CEO
Tidjane Thiam, ex-Credit Suisse CEO

Two worlds coming together
The rapid rise of SPACs has been met with a mix of bewilderment and excitement by investors and financial analysts. Optimists see in this nascent market the first sparks of the forthcoming ‘roaring 20s’ that will follow two years of pandemic-driven doom and gloom. Others interpret the boom as a belated tie-up between Wall Street and Silicon Valley, hitherto seen as rivals due to the rise of fintech start-ups that threaten incumbent banks and financial services firms. Critics worry that the only string that holds together such a fragile marriage of convenience is greed, noting that the roaring 20s of the previous century ended with the biggest stock market crash in history.

Ironically, for some of the companies jumping on the SPAC bandwagon, their brightest moment may be the beginning of their downfall too. Regulators, policymakers and even the companies themselves should be worried about “the speed with which they made the leap from private to public, with much of the preparation and infrastructure-build required to be a listed company happening while public, as opposed to in anticipation of being public,” warns Lise Buyer.

“As one CEO said to me, it’s like standing in the town square naked and trying to put on your clothes, while dancing. Some will work out just fine and there will definitely be winners. But there will also be those that end up on the ‘don’t be this company’ posters.”

Money, money, money

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In June 2020, University of Oxford Professor Ludovic Phalippou caused a ruckus in the private equity (PE) world when he alleged that the industry is nothing but a “billionaire’s factory.” A diehard PE critic, Ludovic has become something of a champion of the alternative view regarding PE. He has interrogated the performance of PE investments, their glorified returns and general impacts. Yet, the author of ‘Private Equity Laid Bare’ remains largely isolated. The popular consensus is that PE is a game changer in the world of finance and investments.

The PE industry is today deeply entrenched and widely recognised. In fact, with assets under management (AUM) increasing from $423.6bn in 2001 to $1.3trn in 2010 before shooting to $5trn in 2020, the industry is poised to play a greater role in the form of driving economic recovery and anchoring future growth. The evolution of the industry attests to the fact that the days when PE investments were basically meant to keep companies afloat are long gone. In its place a powerful force that is a cog for sustainable economic development has emerged. It is bolstered by the emerging trend of PE investors taking a longer-term perspective beyond the five-year investment horizon.

Phenomenal growth
The new formidable PE industry is backed by a colossal number of resources. Data by Preqin show that by 2025, PE AUM will hit a staggering $9.1trn, a 15.6 percent compound annual growth rate. At this pace, the industry will in due course overtake the insurance industry in terms of gross premiums, which stood at $6.3trn in 2019 but contracted to $5.8trn last year. “The PE industry has achieved phenomenal growth over a few decades,” says Eric Deram, managing partner at global private investments firm Flexstone Partners.

The industry is today sitting on almost $1.9trn in dry powder. This is unallocated capital that is ready to be invested and that can be central to accelerating recovery in emerging markets and developing nations particularly in Asia, South America, Latin America and Africa (see Fig 1). The amount is bound to increase with surveys showing that more than 80 percent of international institutional investors – the largest investors in the industry – say they will invest in PE in 2021 at least as much as they did in 2020.

There is no doubt that across emerging markets and developing nations, COVID-19 badly ravaged economies in 2020. The World Bank reckons that due to the brutality of the pandemic, East Asia’s economic growth stalled for the first time in 60 years, growing by a mere 1.2 percent, with 19 million people plunging into poverty. Latin America and the Caribbean experienced the worst economic contraction with the economy declining by 6.7 percent. The economic downturn could push 28 million people into extreme poverty, with unemployment rates projected to reach 13.5 percent. Sub-Saharan Africa experienced its first economic recession in 25 years, with the economy declining by two percent.

The recovery begins
The pangs of COVID-19 are slowly easing. Vaccine roll out coupled with government intervention have seen countries embark on a cautious journey to return to normalcy. However, for most countries, it will be a while before economies can fully recover. For instance, it’s projected that the Indian economy, the world’s fifth largest, could take years to recover from the effects of the pandemic. For years, India has been among the stellar performers with economic growth averaging 7.2 percent the past decade. However, a brutal wave of COVID-19 this year is threatening to have prolonged negative impacts. During the first week of May this year, the country was experiencing an average of 380,000 in daily infections and 3,600 deaths.

It would be hyperbolic to expect the PE industry to save the world’s economy on the road to recovery. However, the industry has the potential to be a strategic catalyst in the recovery. No doubt the pandemic has negatively impacted traditional providers of capital, such as banks. In some regions, banks have seen an unprecedented spike in non-performing loans, prompting them to be more conservative. This has opened up opportunities for PE firms to fill the funding gap considering the need of private companies for fresh capital either to strengthen balance sheets weakened by the prolonged crisis or to make fresh investments to profit from new business opportunities arising from the crisis.

“As companies recover and emerge from the impact of COVID-19 they need growth and working capital,” says Anthony Mwangi, International Finance Corporation (IFC) Private Equity Lead for Africa. He adds that PE can play a seminal role in deploying capital towards recovery, especially considering the investable opportunities at attractive valuations that have emerged from the crisis.

The opportunities are vast, and diverse. They come at a time when the face of PE is fast evolving and investors appear to have a stronger risk appetite. When the industry started gaining prominence some two decades ago, the traditional PE model was PE firms buying into undervalued companies, building them up and exiting. While PEs are not ready to entirely discard this model, a shift towards the principles of sustainability guided by environmental, social and corporate governance (ESG) is emerging. PEs are investing in longer-term quality assets in sectors like technology, media, and telecom (TMT), medical, renewable energy, infrastructures, real estate, financial services, education, agriculture, water and sanitation, among others.

A McKinsey report on ‘Unlocking private-sector financing in emerging markets infrastructure’ contends that while developing countries require massive resources to finance infrastructure projects, they face challenges in mobilising the resources. To keep pace with projected gross domestic product (GDP) growth over the next 15 years, they need to invest more than $2trn annually. Africa alone must raise power and transport infrastructure investments to $55bn and $45bn annually respectively. Other countries facing huge financing gaps include Indonesia, Mexico, Brazil, India and Saudi Arabia.

Tragically, despite these financing gaps, many countries, including most of Africa, have shot themselves in the foot for failing to create an environment to attract PE funding for infrastructure projects. This explains why major private equity investors like Carlyle and Blackstone have left the continent ostensibly because they could not find large enough deals.

A dependable source of capital
Apart from investments in mega projects, private companies provide a vast arena of opportunities. In developing countries and emerging markets, the private sector is the engine of economic growth, job creation and poverty alleviation. PE firms have amassed substantial experience in investing in private companies and have become important providers of liquidity, debt and equity financing that is a catalyst for growth and transformation. “One of the primary sources of fresh capital for private companies that cannot tap the public equity markets and may not be able to incur more debt is PE,” observes Deram.

In fact, PE firms have proved they can be a dependable source of capital for companies. According to the Global PE Report 2020 from intelligence and research firm Acuris, the long-term growth of private credit has been nothing short of stratospheric. Two decades ago, the market scarcely existed, considering it was worth $40bn. It has since ballooned to more than $800bn. “This has been propelled by direct lending funds, which have grown in number and size in tandem with the leveraged buyout market they almost exclusively finance,” avers the report. It adds that private credit continues to grow in popularity, with 35 percent of firms having increased their use of these loans in the past three years and almost half (49 percent) now using private credit as much as traditional bank financing in their buyouts.

Unlike traditional lenders, particularly banks whose sole drive is to provide credit, the success of companies inspires PE firms. That is why PE investors take a hands-on role by providing advice and support in areas such as strategy, financial management and operations. This emanates from the understanding that for a majority of private companies, liquidity alone is never enough in guaranteeing growth. “Investing in PE is hands on. Fund managers generally take control (or significant minority positions) of the private companies they invest in because they want them to grow,” notes Deram.

The impact of PE investments and ripple effects on economic development are evident taking into account the value and volume of deals in regions like Asia-Pacific and Africa. A report by Bain & Company indicates that in the Asia-Pacific region, deal value defied the impacts of COVID-19 to rise to a record of $185bn last year, up 19 percent over 2019 and 23 percent over the previous five-year average. The region is forecast to be the biggest growth market with AUM set to increase from $1.6trn to $4.9trn in the next five years.

During the period 2015–20, a total of 1,257 PE deals worth $21.7bn occurred in Africa according to the 2020 Annual African Private Equity Data Tracker report. The rise was indicative of investors’ confidence in the continent’s economic resilience. Even at the height of the COVID-19 crisis last year, deal value declined only marginally to $3.3bn from $3.8bn in 2019. The ripple effects sprouting from the firms that have received PE funding are notable. They range from business expansion (for some, beyond their home markets), job creation and tax revenue for the exchequer.

“Emerging markets in Africa and Asia remain fundamentally attractive,” says Tristan Reed, economist at the World Bank. He added these markets are attractive because they offer PE firms excess returns owing to their limited financial sector development. “This makes sense because these are economies where capital is scarce, and there is also less competition for deals from other investors,” he says.

Helping hand from the IFC
The economic impact is well amplified by IFC, the private sector arm of the World Bank. IFC, which works to increase the involvement of PE funds in emerging markets, is often the first PE investor in some of the world’s poorest countries. Today, the organisation boasts of significant PE investments amounting to $7bn committed across a portfolio of over 330 funds. Through these investments, IFC has managed to deliver impact and development by addressing gaps in access to equity and growing private sector participation.

This stems from the fact that in emerging markets and developing countries, lack of risk capital hinders economic growth and slows entrepreneurship. By providing capital where it is scarce, IFC’s support of PE plays a critical role in development by helping build up companies that create jobs, drive prosperity, provide affordable and relevant goods and services, and strengthen a growing middle class. The organisation’s participation has also contributed significantly to sustainable development goals (SDGs) such as access to education, affordable housing, agribusiness, financial inclusion and job creation.

In Kenya, IFC investments in companies like Twiga Foods have had transformative effects. The agri-tech start-up buys agricultural produce from smallholder farmers and makes them available to urban populations at affordable prices. Last year IFC invested $30m in the firm to support more than 300 irrigated medium-scale contract farmers to complement its seasonal farmer supply base. As a link between smallholder farmers and the market, Twiga Foods has been instrumental in improving the livelihoods of over 4,000 farmers by providing a ready market for their produce. With its model a success in Kenya, the firm intends to use the funding from IFC and other PE investors to scale up and replicate the model in other African countries including Rwanda, Uganda, Tanzania, Nigeria and Ghana.

To ensure that PE firms become more involved in driving economic development, emerging markets and developing countries need to implement structural adjustments to tap more capital. On this front, they haven’t performed well. Currently, only about 13 percent of PE investments go to these regions. This is a fraction of the $1.9trn PE dry powder. Broadly, it is an indication that compared to developed markets the scale of PE in emerging markets remains substantially limited and is mostly concentrated in Asia. In 2018, for instance, only 23 percent of PE global fundraising went to emerging markets even though they represent 60 percent of global GDP.

“Emerging markets PE is far from homogenous, with stark differences between different markets. However, there are some headwinds that to varying extents do affect most of the regions,” says Mwangi. The stark differences are glaring. About 85 percent of PE capital raised in these regions goes to emerging Asia, with China and India accounting for 38 percent and eight percent respectively. Only a paltry amount of the capital finds its way to a region like sub-Saharan Africa.

Apart from investments in mega projects, private companies provide a vast arena of opportunities

Addressing the headwinds is imperative. In essence, emerging markets and developing nations must undertake structural adjustments to create an environment that is conducive to growing the pie of PE investments. This includes increased transparency, better governance and more supportive legal and regulatory environments. Others are creating deeper and more sophisticated capital markets, providing a wider plurality of exit options and allowing for more open market-based economies with increased entrepreneurial activity and competitive pressure. Another critical factor is the need to put in place a reasonable, transparent and stable tax system.

The forex factor
While these measures are vital, the forex factor remains a cornerstone in the PE industry. For PE funds, investing in emerging markets usually comes with a currency risk. Consequently, uncertainties regarding foreign exchange are not healthy and the absence of, or weak, forex controls has often been a deterrent for investments. This is because most PE funds are either dollar or euro denominated. Mitigating currency risks thus becomes crucial.

“Having a stable and predictable exchange rate is probably the most important factor in attracting PE investment,” says Reed. He explains that international PE firms typically book returns in dollars. This implies that currency devaluation can severely harm returns even if a portfolio company is growing fast in local currency terms. Moreover, when the price of foreign currency is ambiguous, for instance given the existence of multiple rates on formal or informal markets, it is difficult for PE investors to accurately price investments in dollar terms. “The uncertainty will make them less likely to invest,” he reckons.

Risk factors notwithstanding, PE firms are always on the lookout for quality deals in emerging markets and developing nations. Apart from the drive to make impactful economic contributions, impressive returns are a major motivation. To a large extent, it explains the rapid bounce back of the PE industry following a challenging year occasioned by COVID-19. Preqin data show that in the first quarter of the year, PE fundraising activity had managed to return to pre-pandemic levels. Funds raised amounted to $188bn across 452 funds during the quarter, up from $163bn and 431 funds in the same period last year (see Fig 2).

In terms of returns, the PE industry continues to maintain a splendid trajectory outperforming public equity markets and outpacing other private markets asset classes. By all accounts, they put into disrepute the logic propagated by Professor Phalippou that PE managers, as opposed to investors, are the key beneficiaries of PE returns owing to the exorbitant fees they charge.

Good governance and transparency are basic requirements in private companies in which PE firms invest

In the first quarter of 2020, the industry recorded a sharp decline in performance, according to McKinsey. But it recovered quickly to post a nine-month trailing pooled net internal rate of return (IRR) of 10.6 percent through September 30. On a pooled basis, PE has produced a 14.3 percent annualised return over the trailing 10-year period, beating the S&P 500 return of 13.8 percent by 50 basis points.

Notably, all other private markets asset classes posted negative returns over the same period. Infrastructure and private debt with 1.3 percent and 2.1 percent returns respectively came closer to breaking even. However, closed-end real estate and natural resources – at 4.2 percent and 16.7 percent – faced more challenging return environments.

“The long-term performance of PE remains strong,” observes Preqin in its 2021 report. It adds that while it is too early to gauge the full impact of the pandemic, buoyant stock markets, the resumption of economic growth and prolonged low interest rates augur well for future performance.

The inspiring returns are encouraging yield-hungry institutional investors and high-net-worth individuals to continue directing resources to PEs. Last year, 66 percent of institutional investors like pension funds and insurance companies invested in PE, up from 57 percent in 2016.

The World Bank headquarters, Washington, DC
The World Bank headquarters, Washington, DC

Emerging unscathed
The resilience of PE has been momentous. Across the globe, COVID-19 has caused devastating damages on the private sector. Despite the Covid-inflicted disruptions, PE-backed private companies have fared relatively well and are emerging somewhat unscathed. A key reason has been the ‘all hands on deck’ attitude of fund managers who were instrumental in supporting companies during the difficult months of the pandemic. Entrenching the principles of ESG and impact investment is a key factor in propelling the PE industry to the centre stage of economic development. The PE industry acknowledges the world is facing threats on all fronts. These threats, which cut across climate change, environmental pollution, bad governance, and corruption to name a few, are even more pronounced in emerging and developing nations.

In Africa, for instance, climate change is a major threat to human health and safety, food and water security and socio-economic development. At the current rate of global warming, the continent is on the verge of losing up to 15 percent of GDP by 2030 according to the Economic Commission for Africa. The PE industry is determined to be a champion of sustainable development.

The headquarters of management consulting firm, Bain & Company, Boston
The headquarters of management consulting firm, Bain & Company, Boston

In this respect, PE firms have avoided investing in polluters like fossil fuels, mines and sections of the manufacturing sector. Besides, good governance and transparency are basic requirements in private companies in which PE firms invest. This explains why more investors are actively incorporating ESG into their due diligence processes and investment committee decision-making. Blackstone, for instance, is leading on this front. Last year it announced that its next step in ESG is reducing emissions in new acquisitions by 15 percent.

“There has been increasing awareness that investments need to take account of ESG risks and in our experience investments that do so generate better financial returns,” explains Mwangi. He adds that as more PE investors embrace investing for impact, it will be a win-win for all because financial returns will be generated while taking care of the greater good by protecting the environment, generating jobs and reducing poverty.

Economic value
The PE industry has visibly demonstrated its ability to propel economic recovery and drive future growth in emerging and developing nations. Though still on a smaller scale, the changing dynamics point to the industry increasing its contributions substantially in the coming years.

As American billionaire investor Bill Ackman accurately observed, PE investors have proved they create a lot more economic value than they destroy.

View from Singapore: one year of the VCC structure

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On January 15, 2020, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) launched the Variable Capital Company (VCC) framework, a new corporate structure specifically designed for investment funds, strengthening the foundations for its continued prominence as a global financial services and fund domiciliation hub. We are now over a year on from its introduction and it is time to take stock of its initial impact. In this piece, we examine the early adoption of the structure and consider the areas of focus to build on its early successes.

 

Background to the VCC
The VCC is a new corporate entity structure that is purpose built for investment funds. It also offers the flexibility of compartmentalisation via umbrella structure, just like a Protected Cell Company or a Segregated Portfolio Company. Umbrella funds can house different strategies/investors in different compartments called sub-funds, with each of the underlying sub-funds ring-fenced from one another providing legal segregation of assets and liabilities. As it’s a corporate fund structure with no regulatory definition of investment strategies that can be housed in it, VCC can be used across alternative fund strategies (both open-ended and close-ended). This new corporate entity structure gives funds an alternative to existing fund structures available in Singapore, such as limited partnerships, unit trusts and private limited companies, as well as plugging some of the gaps and constraints of using these structures.

Along with this, the VCC offers the flexibility of incorporating via re-domiciliation. Re-domiciliation is a feature of incorporation that allows a corporate entity in other compatible jurisdictions to be brought over to home jurisdictions and retain its characteristics from day-one, thereby retaining the track record.

 

The attraction of VCC for fund managers
For Singapore-based managers, the VCC provides them with an additional option for structuring their funds. In the past, managers here have mainly used offshore structures, and now they have a flexible and versatile framework in the same jurisdiction.

Service providers in Singapore will play a crucial role in supporting funds looking to adopt the VCC structure

Primarily, the VCC benefits those fund managers with a broad Asian investor base or those who invest in Asia, as they can take advantage of access to Singapore’s 90+ tax treaties.

The structure offers significant flexibility as it can be used to incorporate new funds or re-domicile existing comparable and compatible overseas investment funds. It can also be used for both closed-ended and open-ended funds, unlike some structures offered in other jurisdictions. We see that this flexibility is proving to be one of the key attractions behind the popularity of the VCC and has been central to its early success.

 

Early successes
The VCC structure proved to be immediately popular: the VCC went live on 15 January 2020 and 20 VCCs were launched on the same day. Data shows that total of over 50 VCCs were incorporated in the first four months, and over 300 VCCs by June 2021. This compares favourably with the initial rate of take-up of similar structures in other geographies such as Europe, especially when taking into account the added complications of Covid.

We have seen many of the early adopters of the last year hold similar characteristics: early stage wealth managers, smaller investment groups and debut funds. In part, this is due to the generous financial incentive which plays a powerful role in the decision-making process for these players: as part of the launch of the VCC, the MAS introduced the VCC Grant Scheme (VCCGS) to encourage adoption and conversions to VCC. This grant covers 70% of eligible expenses (capped at $150,000 per VCC, and up to three VCCs per fund manager) for work done in Singapore in relation to the incorporation/re-domiciliation of the VCC. This includes legal fees, tax advisor fees, regulatory advisory fees towards set up, and consulting fees.

Into late 2020 and certainly in 2021, we have seen the adoption extend to mid and larger asset managers and global players taking up the VCC.

In addition, the speed and simplicity of incorporation is a unique benefit of the VCC which has contributed to this initial success. It takes 14 days (for the most straightforward structure) to 60 days to get approval with the ACRA. The process is accelerated, because, unlike Hong Kong, there is no pre-approval process for at least alternative funds by the regulator. As such, many of the early adopters are those for which speed to market is a key priority.

 

Areas of future focus
Undeniably, Singapore has seen initial success with the launch of the VCC, with the market welcoming the new structure and we expect it to gain further momentum as the market becomes more familiar and comfortable with the regime. We see international funds looking to re-domicile under the VCC to be a key source of future growth.

To build on the initial success of the VCC in the years ahead, the market and regulator will continue their focus and collaboration to attract a diverse range of asset and wealth management niche sectors, to accommodate complex investment strategies and investor pooling concepts. With the VCC framework in place for over a year and half, enhancements are being proposed based on feedback and experiences from the industry that are being reviewed by the regulator. Included in these proposals are an extension of VCC’s utility ranges from family offices to real estate funds.

The structure offers significant flexibility as it can be used to incorporate new funds or re-domicile existing comparable and compatible overseas investment funds

At the end of April 2021, MAS also established the Singapore Funds Industry Group, a new public–private sector partnership to strengthen Singapore’s value proposition as a global full-service asset management and fund domiciliation hub. One of the points of focus under SFIG would be working on enhancing and further developing the VCC framework.

Service providers in Singapore will play a crucial role in supporting funds looking to adopt the VCC structure – ensuring managers have access to the right advice, expertise and operational excellence. For example, experienced service providers are required to navigate the structure, help funds come to market swiftly and efficiently, as well as adhering to and understanding the requirements for the umbrella VCC with respect to corporate secretarial, fund administration, custody, directorship, and audit to name a few.

 

Outlook for the VCC
Singapore has always been an attractive financial hub, with a stable political climate and a proactive regulator which sets a legislative environment to encourage innovation, foster continued growth and provide certainty of its application.

As global investors become more familiar with the VCC, it will emerge as a very strong contender to attract capital flows and further support Singapore’s growing aspirations as a global financial jurisdiction.

Vaccine hoarding inhibits global recovery

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Over a year ago, a vaccine for COVID-19 would have been unthinkable, with many vaccinations taking 10 years to develop. However, in Spring 2021, many wealthy countries’ populations have already had one dose of the vaccine; as of mid-May almost half of the US population (47.6 percent) have had the first dose, and therefore as a country they are well on their way to immunisation.

However, the majority of people who have been offered a vaccine so far are from wealthier countries, due to their governments having the finances to purchase it (see Fig 1). Canada has been found to have the biggest per capita hoard of the eight vaccines currently available, with enough vaccinations for five complete immunisations per citizen (Canada has a population of 38,020,682 as of May 2021). This statistic was found by the People’s Vaccine Alliance, a coalition of organisations campaigning for a ‘people’s vaccine’ for COVID-19.

America and the UK are not too far behind Canada, with four vaccinations and three vaccinations per citizen, respectively. Covax, co-led by Gavi, the Coalition for Epidemic Preparedness Innovations (CEPI), and the World Health Organisation (WHO), was set up with the aim of achieving global access to the COVID-19 vaccine, and this organisation has consequently been at the forefront of encouraging the need to vaccinate everyone, arguing it is for the benefit of all of us.

At a COVID-19 press conference in May, the Director-General of the WHO, Dr Tedros Adhanom Ghebreyesus, told the media that “at present, only 0.3 percent of the vaccine supply is going to low-income countries.” This has been particularly concerning in recent months when witnessing what has been happening in India, to which the WHO has shipped thousands of oxygen concentrators.

However, unfortunately it is not just India in this dire situation; Nepal, Sri Lanka, Vietnam, Cambodia, Thailand and Egypt are also some of the countries that are dealing with spikes in cases and hospitalisations.

It is important to note not all developing countries need the same support from Covax; in Latin America, billionaire Carlos Slim has funded a deal for 150 million doses of the AstraZeneca vaccine.

However, not all countries are as lucky to have this financial backing. In countries such as Nigeria, the officials are battling with both a shortage of supplies, as well as vaccine sceptics, and therefore at present less than one percent of people have had a dose. Currently, 67 countries have made no purchases of the vaccine themselves, and so are wholly reliant on the Covax programme.

 

 

Pledges made
Fortunately, many vaccination companies are already recognising the need to support lower-income countries, and are taking a positive stance on this. One of these is the AstraZeneca Vaccine, developed by the University of Oxford, who have pledged to distribute 64 percent of their vaccines to developing nations. However, according to the People’s Vaccine Alliance, this distribution will at best only reach 18 percent of the world’s population next year, in 2022. The alliance is therefore calling on vaccine makers to share their intellectual property with the WHO’s COVID-19 technology access pool, although in practice, this is difficult and complicated to enforce.

This makes it all the more important for countries and vaccine organisations alike to be reminded of the costs that will come from international linkages that will remain uncoupled while all countries are not vaccinated. Anna Marriott, Oxfam’s Health Policy Manager, told World Finance on behalf of the People’s Vaccine Alliance, that “While vaccine programmes are being rolled out in many countries, there simply aren’t enough for the global population.

The WHO has said we need to vaccinate at least 70 percent of the world to manage coronavirus properly. Yet at the rate we are going, some are predicting this won’t be achieved for five years or more.”

The current slow speed of delivery for vaccine programmes being rolled out globally shows why it is important that richer countries support countries who are less able to get their hands on as many vaccines. Anna expanded on the current difficulties that the People’s Vaccine Alliance are facing at present in their pursuit for availability of vaccines for all, explaining that: “The science, technology and know-how behind the vaccines is protected by patents and intellectual property rules and this allows pharmaceutical companies to block other qualified manufacturers around the world from making the vaccines. All power rests in the hands of the pharmaceutical corporations to make secret deals to the highest bidder, and this means rich countries have been able to buy more than they need, leaving less for others.”

 

In everyone’s interest
The economic benefits of vaccinating all countries, including developing countries, are crystal clear, because countries’ exports cannot fully recover as long as there is weak external demand from the lower-income countries. Similarly, wealthier countries’ imports of goods will be affected for as long as the supplier countries remain unrecovered from the pandemic.

Affordability of the vaccines is a major challenge, and the one that is predominantly standing in the way of lower-income countries

Therefore, it is in the interest of all countries for global society to recover as quickly as possible from the pandemic, with the vaccine currently looking like the sole way of preventing the pandemic from continuing indefinitely. Recent estimates suggest that if disruptions to the vaccination reaching the developing world continue, this could cost up to $9trn to the global economy, with developed countries holding the majority of the responsibility for footing the bill.

Cem Çakmaklı, professor and co-author of the paper The Economic Case for Global Vaccinations: An Epidemiological Model with International Production Networks, highlights this need to work together globally. Çakmaklı told World Finance that “the message of our paper is very simple, yet eye-opening: no one is safe until everyone is safe, and no economy is an island. No country can fully recover until all are recovered, that is, until we have global equitable access to vaccines.”

Affordability of the vaccines is a major challenge, and the one that is predominantly standing in the way of lower-income countries. However, other issues such as the availability of the vaccines is also prevalent, as well as the practicalities of how the different vaccines need to be stored. Licensed vaccines alone are not enough to achieve global immunity and ensure economic stability; they must be priced affordably and produced mass scale.

It is crucial to consider how the vaccine is manufactured, and how it needs to be stored. For example, on paper, the AstraZeneca vaccine looks best suited to lower-income countries, due to it being both less expensive, and requiring storage at fridge temperature, between two to eight degrees Celsius. In contrast, the Pfizer vaccine needs to be stored at minus 70 degrees Celsius.

Johnson & Johnson, which is currently in the testing process, is also looking like a promising contender for these countries. Similarly to AstraZeneca, it only needs to be stored at a refrigerated temperature. The J&J vaccine also has the edge because it will be administered via a single dose, and it is promising that the company have pledged up to 500 million shots of this vaccine to low-income countries, making it more accessible. However, due to manufacturing limits on all of the vaccination programmes, it could take up until 2024 for many low-income countries to obtain enough vaccines for them to be able to fully immunise their populations.

Vaccination companies are trying to find a way around these limits though; the EMA have approved Pfizer’s request to increase their batch sizes and scale up their manufacturing site in Belgium, while Moderna’s product manufacturing site was also approved to have a new filling line in Spain, in order to scale up the process.

Vaccine production faces many ongoing issues, not least because it is new technology, and therefore a lot of the process involves having to start from scratch, and tackling new challenges as and when they arise. It is ultimately highly encouraging that so many companies are already looking into ways around these production issues, in order to get vaccines developed as quickly as possible.

 

Looking to the future
Going forward, we must remain flexible, and open to changes in the vaccine programme, because while we are still not at the end of the pandemic, we do not currently know if the vaccination will be required every year. In addition, with the rise of new variants, there is still uncertainty over how effective the different vaccines will be against these as they emerge. It is also well worth appreciating that without all countries being vaccinated, global travel will not be fully possible or safe.

Permission for the tourism industry to operate at full swing again will in turn significantly aid many economies in their recovery, post pandemic. It is crucial that we all continue to work together globally to deliver the different vaccination programmes to the countries most in need, to ensure that global immunity is achieved universally, and the recovery of the global economy can begin.

Mozambique is walking an LNG tightrope

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Governments in Africa have a penchant for operating in hubris. This has often led to bad decisions. In Mozambique, the discovery of liquefied natural gas (LNG) has sent the government into a frenzy owing to an anticipated gas-related economic boom.

Although production is far from guaranteed, the government has promised to utilise non-existent revenues to settle controversial debts based on future projections of a windfall. Going by central bank estimates, the country is staring at a staggering $96bn bonanza. “Mozambique has already spent some of the anticipated gas revenue windfall, at high interest, and this gas bonanza may now never happen,” says Robert Besseling, risk and intelligence firm Pangea-Risk chief executive. The effect is negotiations for more restructuring due to non-payments and increasing likelihood of sovereign default.

Tragically for Mozambique, LNG is unravelling as a concoction whose main ingredients are hope and despair. Hope in the sense that the discovery of around 150tr cubic feet (tcf) of proven natural gas reserves could propel an economic renaissance for the impoverished Southern Africa nation. Mozambique is one of the world’s poorest countries, with a gross domestic product (GDP) per capita of $500 and with about 45 percent of the country’s 30.8 million people living below the poverty line.

However, the International Monetary Fund (IMF) reckons LNG can be a game changer for the country’s economic transformation in terms of sales, taxes, royalties and dividends. At current LNG prices of $8.50 per million British thermal units, the country can generate $12bn annually by exporting 30 million tons from its three ongoing projects.
The massive revenues will not only help Mozambique tackle the debt conundrum but also bring stability in the fiscal regime and could push GDP growth to double digits. Ripple effects of the gas industry have potential to spur other sectors, effectively lifting many out of poverty.

 

Fuelling conflict
There is despair in the sense that Mozambique is fast joining the league of African nations grappling with a ‘resource curse.’ The onshore LNG project in the Cabo Delgado province being implemented by French multinational Total, at a cost of $20bn, has fallen foul of an Islamic State insurgency uprising that is not only threatening to tear the country apart, but could also fuel an economic burst.

The US-based Armed Conflict Location & Event Data Project (ACLED) estimates that more than 2,600 people have been killed and 700,000 have fled their homes since the insurgency began in 2017. In the latest attack in March–April this year, approximately 30,000 people were forced to flee the town of Palma with dozens reportedly killed by the Islamic State (ISIS)-linked armed group known as Al-Shabab. “The ongoing and intensifying insurgency in Cabo Delgado has undermined the commercial viability of Mozambique’s LNG industry,” notes Besseling. He adds the ‘Battle of Palma’ has ultimately shattered the country’s dream of becoming a major LNG export hub in the near to medium term.

In April, Total issued a force majeure on the project and went on to withdraw personnel from the Afungi site. The move throws the project, one of three LNG projects being implemented in the country and the only one that has achieved significant progress, into jeopardy. Before invoking a force majeure, Total had promised to ship the first LNG cargoes in 2024 from its project whose capacity stands at 13.1 million tons per year.

“The schedule for this project has now slipped significantly,” notes Simon Nicholas, analyst at the Institute for Energy Economics and Financial Analysis. He adds that unless the Mozambique government manages to address the security issue, Total could take the drastic decision of walking away. So far, the government’s promise to set up a 25km perimeter around the Afungi peninsula site by deploying troops has not deterred the attacks. “The renewed violence will cause significant uncertainty, which is no friend to major investments,” he observes.

Total can take a cue from US giant ExxonMobil, which is leading the $30bn Rovuma LNG project. The company is seriously weighing the option of abandoning the project after repeatedly pushing back the signing of the final investment decision for its 15.2 million tons per year project.

This is a sign that its commitment to the project is largely pegged on the unfolding security situation in the country. Besides, other companies that were investing in related projects are abandoning them in droves. Shell, which was planning to build a gas-to-liquids plant, intends to walk away from Mozambique after announcing it will no longer develop a new greenfield GTL plant.

Norwegian chemical company Yara International has also cancelled plans to invest in fertiliser and power plants. “Mozambique LNG production was only ever going to benefit international oil and gas companies, and a few influential Mozambicans,” explains Nicholas. He adds the fact that the majority of the country’s population feels left out from the expected windfall is one of the factors fuelling violence in the northern part of the country. Worse still, the rise in gas-related corruption cases including the $2bn ‘Tuna Bond’ scandal are fuelling belief that the resource will only benefit a select few.

 

An uncertain future
With the future of these two key projects uncertain, Mozambique’s LNG dream remains with an offshore Coral South floating production facility being implemented by Italian company ENI. The project’s progress has been largely untouched by the insurgency and remains on track to begin exports in 2022. It has a capacity of 3.4 million tons per year. “Despite the recent violence, and the setback for Total’s project, the country is still likely to become an LNG exporter in the coming years,” avers Stuart Elliott of S&P Global Platts.

There is some hope that Total’s LNG project is not entirely dead. In fact, the declaration of force majeure was aimed at satisfying creditors in the syndicated financing structure. “The prospect of a resumption of the project remains primarily dependent on an improvement in the security environment, and is not necessarily diminished by a declaration of force majeure,” notes Besseling.

For the consortium of the 28 financial institutions providing $14.9bn debt financing for the project, shielding themselves from anticipated and unforeseen risks was paramount. Despite being a risky venture, the financiers saw an opportunity for huge returns amidst the pressure of environmental, social and governance (ESG) financing. Proponents of sustainability believe natural gas is not going to be a transition fuel between coal and renewable energy. This means financial institutions might soon start opting out of gas projects.

Mozambique has already spent some of the anticipated gas revenue windfall, at high interest, and this gas bonanza may now never happen

“There is certainly an increasing backlash, especially in Europe, against fossil gas and LNG projects. But gas and LNG can still be a bridging fuel toward a low-carbon future,” notes Elliott. Total has in fact promised that its Mozambique project will be cleaner than other projects of its kind. The company is aiming to reduce the carbon intensity of Mozambique LNG to 25kg of CO2 per barrel of oil (boe) equivalent, well below the rate at historic LNG plants whose carbon intensity is 40–50kg of CO2 per boe.

Apart from the environmental promise, the Total LNG project was attractive in many aspects for financial institutions. The project has largely been de-risked because it has binding, long-term sales agreements in place with a number of big industry players. In essence, it has managed to secure long-term offtake agreements amounting to more than 11 million metric tons annually with companies like Shell, France’s EDF, China’s CNOOC, a partnership of the UK’s Centrica and Japan’s Tokyo Gas, and a joint venture between Japan’s JERA and Taiwan’s CPC Corp.

 

The prospect of failure
Failure of the Total LNG project would certainly be a catastrophe for Mozambique. In recent years, the country has experienced devastating economic crises instigated by the $2bn scandal and two tropical cyclones that struck in 2019. COVID-19 has exacerbated the situation. The effect has been real GDP contracting by an estimated 0.5 percent in 2020. This was the first decline in 28 years after growing at 2.2 percent in 2019 according to the African Development Bank. For a country that has witnessed sustained growth averaging 6.5 percent for close to two decades, this was a significant plunge.

With other sectors of the economy struggling, the government was desperately banking on LNG revenues to stabilise the economy and restore the growth trajectory. In particular, the country needs to mobilise resources to repay massive external debts that have ballooned to $14.7bn in 2019 according to the IMF. This has seen Mozambique fall into the category of countries in debt distress. In fact, according to Fitch Solutions, easing of the public debt burden over the longer term is solely dependent on LNG-generated revenues. If the revenues start flowing, the debt to GDP burden is projected to fall to 60.2 percent of GDP in 2029 from 108.2 percent this year.

“All foreign direct investments in Mozambique over the past 10 years have been geared toward eventual gas production and a massive increase in state revenue,” observes Besseling. He adds that going by the current reality, the government and foreign investors must return to the drawing board to ensure that LNG projects remain commercially feasible. This is even more critical due to price volatility and unpredictable market conditions due to oversupply.

Luckily for Mozambique, LNG demand is projected to continue on a growth path. According to McKinsey’s Global Gas Outlook report to 2050, LNG is set for stronger growth as domestic supply in key gas markets will not keep up with demand growth. Demand is expected to grow by 3.4 percent per annum to 2035, with some 100 million metric tons of additional capacity required to meet both demand growth and decline from existing projects. Demand growth will slow distinctly but will still rise by 0.5 percent from 2035 to 2050, with more than 200 million metric tons of new capacity required by 2050.