Author: Max Tomlin

New Bank of Mexico governor faces tough inflationary challenge

Posted on by Max Tomlin

On November 28, the Bank of Mexico unveiled Alejandro Díaz de León as its new governor, replacing the outgoing Agustín Carstens. Díaz de León, who has been deputy governor at the central bank for less than a year, will begin his term on December 1.

Díaz de León’s industry knowledge will no doubt prove vital as he attempts to tackle a number of issues facing the Mexican economy

The appointment of Díaz de León had been widely expected, given his many years of experience within the Mexican financial sector. In fact, he began his career with a 16-year spell at the central bank before moving into government, where he worked as the head of the public credit unit in the Ministry of Finance.

Díaz de León’s industry knowledge will no doubt prove vital as he attempts to tackle a number of issues facing the Mexican economy. Inflation currently stands at 6.6 percent, more than double the bank’s three percent target, while the economy contracted during the third quarter of the year.

Many analysts believe that Díaz de León may be forced to raise interest rates again to rein in inflation, but the new governor explained that any decision on monetary policy would have to be supported by data in order to prevent unexpected impacts.

“In the last months we have been quite clear to highlight that we have been facing the shocks that I have alluded to and we are still not free from potential additional shocks,” Díaz de León told Reuters. “We cannot assume that the disinflationary path will necessarily go as expected.”

Díaz de León has been keen to stress that the role of the central bank should not extend beyond meeting its inflationary target. Given that this is already proving a difficult task, perhaps it is understandable that he is reticent to add to the bank’s list of responsibilities.

The new governor is also well aware that many of the factors creating inflationary pressure in the country are beyond the bank’s control. Seasonal increases in fuel prices, the threat of a breakdown in the ongoing NAFTA talks and a recent earthquake in Mexico City have made the central bank’s unenviable task all the more challenging.

Chinese regulators thwart $1bn Paramount Pictures deal

Posted on by Max Tomlin

On November 7, Paramount Pictures confirmed that it had been forced to cancel a $1bn funding deal with China’s Huahua Media after failing to overcome regulatory obstacles. The agreement was announced earlier this year and would have provided Paramount with enough cash investment to finance a quarter of its films between now and 2019.

Viacom, the parent company of Paramount Pictures, expects the cancellation to have a negative net impact of $59m on its fourth quarter results. In response, it has sought alternative funding methods for scheduled film releases. Agreements are already in progress with new financing partners, including SEGA and Skydance Media.

The failure of Huahua and Paramount to push through the deal reflects stronger efforts by the Chinese Government to curb irrational overseas spending

Putting a positive spin on the cancellation, Paramount’s Chairman and CEO, Jim Gianopulos, said that the company now had a financing model in place that was better aligned with its strategic goals.

“Our focus on a more balanced slate – a mix of big, broad-audience films and more targeted and co-branded films made with greater fiscal discipline – demands a more flexible and tailored financing model going forward,” he said. “This structure positions us to capture more upside beyond 2019 as the new slate takes full effect.”

The failure of Huahua and Paramount to push through the deal reflects stronger efforts by the Chinese Government to curb irrational overseas spending. In March, Chinese conglomerate Wanda Group was forced to scrap the acquisition of US entertainment firm Dick Clark Productions following similar government pressure.

Investments in overseas film studios do not align with Beijing’s macroeconomic policies and are seen to run contrary to the interests of China’s own entertainment sector. Although the Chinese film industry does not carry the same cultural heft as Hollywood, it has huge growth potential.

Wolf Warrior 2, a patriotic action film part-funded by the state-owned China Film Group, became the second highest grossing film of all time in a single market following its release in July. Indeed, it is hardly surprising that the Chinese Government would prefer investment to go into its own film studios, rather than those based overseas.

Daimler announces corporate restructure in preparation for electric car boom

Posted on by Max Tomlin

German carmaker Daimler has announced it is taking steps to prepare for a new era of electric cars with what will be the largest overhaul in its corporate structure for more than a decade.

As part of the restructure, the company will create three legally independent entities, effectively separating its Mercedes Benz cars and vans business from the Daimler trucks and buses division. According to the Financial Times, the restructure will cost the company €100m ($117.6m).

In the last few years, the acceleration in the electric car market has forced traditional carmakers to adjust their business models

“This project intends to strengthen the future viability of the business units and better utilise the potential for growth and earnings in the various markets,” the company said in a statement.

However, the move is still subject to approval from Daimler’s board of management, board of supervisors and shareholders, with a final decision expected in 2019. For the time being, Daimler is designing a road map to help the business keep pace in a fast changing market.

Bodo Uebber, a member of the Daimler board responsible for finance and controlling, said: “We want to secure Daimler’s future from a position of strength. For that reason, we not only need to be as close as possible to our customers’ pulse, but also to be able to react as quickly and flexibl[y] as possible to market developments and a fundamentally changing competitive environment.”

In the last few years, the acceleration in the electric car market – spurred by new players like Tesla – has forced traditional carmakers to adjust their business models. In September, Daimler revealed plans to disburse $1bn to the production of electric cars in the US, building on its presence in Europe and China.

UOBAM (Thailand): navigating Thailand’s transforming investment market

Posted on by Max Tomlin

Over the past five years, the asset management industry in Thailand has changed considerably. Specifically, investment trends have now shifted away from a fixed-income-driven core. Investors are exploring more opportunities in the market – including investment solutions from foreign fund houses – to tap into the benefits of diversification.

Notably, a deregulation measure from Thailand’s Securities and Exchange Commission has also allowed accredited investors to invest in all securities. This means they can now buy funds that are invested into repurchasing agreements, hedge funds, securities lending and borrowing.

Capturing the growing opportunities of this rapidly developing market is UOB Asset Management (UOBAM). As one of the first asset managers in Thailand to introduce diversified investments and real estate subsectors globally, the firm continues to develop new funds across different market cycles, while also investing in new technology and providing responsive customer service.

From peer competition in Thailand to staying nimble in the face of technological changes, the firm is ahead of the curve when it comes to managing investments for clients. World Finance spoke to Vana Bulbon, CEO of UOBAM (Thailand), to get a better understanding of the company’s progress over the past year.

What progress has UOBAM made over the past 12 months?
For the year 2016, the company recorded historically high assets under management (AUM) of THB 306bn ($8.6bn) – this encompasses the full range of investment management services, including mutual funds, private funds and pension funds.

Amid the uncertainty in the investment climate, UOBAM (Thailand) has expanded the offering of products that can deliver sustainable returns during different market cycles. For example, we recently launched two foreign fixed income funds, a global asset allocation fund and a global real estate fund.

The company recommends the United Small and Mid Cap Fund (UTSME), which mainly invests in Thai small and mid-cap stocks outside the SET50 index. In 2016, UTSME generated a 35.5 percent return, compared with its benchmark at 19.79 percent. Consequently, UTSME has been ranked the top year-to-date performing fund among 571 Thai equity funds.

Are there any specific funds the company has developed recently?
A variety of funds have been established for customer demand. These include the Foreign Investment Funds, which were launched to capture income trends and investment opportunities – the end result is the creation of solid business fundamentals and highly attractive valuations. UOBAM (Thailand) also launched the United Income Daily Plus Fund and United Platinum Income Plus Fund, which invest in both local and foreign companies.

UOBAM (Thailand) has also stayed ahead of the market by exploring new products for distribution channels and investment innovation

It is worth noting that the United Income Focus Fund was created in order to provide regular income to investors with an all-round strategy, as it adopts a disciplined and multilayered risk management approach to mitigate risk and volatility. In addition, there is the United Flexible Income Fund, which has been structured as a global real estate fund with a flexible portfolio management strategy.

For the company’s private wealth investment arm, UOBAM (Thailand) has harnessed an in-depth understanding of its individual investors. This has enabled the firm to provide customised products and advisory services that cater to the changing investment needs of clients. As a result, AUM in 2016 increased 18.8 percent to THB 81.6bn ($2.3bn) from THB 68.7bn ($1.9bn) the previous year [see Fig 1].

What has made UOBAM (Thailand) so successful?
Throughout its 20 years of investment experience in Thailand, the company has continued to place a very strong emphasis on customer satisfaction. Indeed, customer service remains the bedrock, long-term business strategy, as well as in day-to-day operations. UOBAM (Thailand) has also stayed ahead of the market by exploring new products for distribution channels and investment innovation. This also includes being responsive to customers’ needs, as well as their changing requirements and expectations.

What are some of the products the company has introduced?
Our Foreign Investment Funds were launched in order to capture income trends and investment opportunities in the areas in which we had witnessed solid business fundamentals and attractive valuations. Leveraging on the collaboration within the UOBAM group – which has been named the Best Fixed Income Fund House by Morningstar – we recently launched the United Platinum Income Plus Fund. This fund invests in instruments that encompass Thai domestic and foreign fixed income investments, foreign deposits, Asian high-yield fixed income and contingent capital securities.

How is the company placed within the region?
One of the company’s strengths is its advantage as a regional fund house, which connects investment managers across the region and selects the best performing funds from them.

UOBAM is headquartered in Singapore and has an extensive presence throughout Asia, with regional business and investment offices in Malaysia, Thailand, Brunei, Japan and Taiwan. It has two joint ventures: Ping An-UOB Fund Management Company in China, and UOB-Sumitomo Mitsui Asset Management in Singapore. In addition, the company has forged strategic alliances with UTI International in India and Wellington Management in Singapore.

As a result of this extensive reach, the company has secured a wide array of investment opportunities through numerous regional and strategic partners, thus creating a distinct advantage over other local houses. Essentially, it is our regional network and presence that enables us to provide such an exciting variety of investment products, which in turn distinguishes us from our competitors.

How does the company analyse and manage risk?
We achieve success through an astute process of managing risk, conducting fundamental research and internal control. To achieve this, all of our stakeholders are given a clear understanding about the levels of risk involved at any given point, which is supported by our highly experienced risk officers, monitoring tools and review processes.

What are UOBAM (Thailand)’s plans for the coming year?
The company’s investment approach aims to provide a wide range of products for investors, thereby assisting them with finding suitable investment solutions and achieving their long-term objectives.

With this core objective in mind, UOBAM (Thailand)’s retail business strategy for later this year and next is to continue expanding the business and explore new ways to meet customers’ investment goals. With our foreign investment expertise and network of strategic partnerships, we are confident in achieving further growth and finding new opportunities for our customers. The company is also developing and upgrading its technology platforms at present, which involves revamping online trading platforms to enhance user experience, as more clients are now trading on the go. Finally, a mobile app should be available by Q3 2017.

What does the future look like for the company?
As a company, UOBAM (Thailand) is deeply committed to its customers, and we are grateful to be recognised across the industry. Looking forward, we will continue to provide a wide range of innovative investment products and services that will enable our customers to meet their investment goals – even with the changing economic market cycle. With this strategy in place, we will continue to drive the growth for the business.

By the end of 2017, the company expects to increase total AUM by 15 percent to more than THB 350bn ($10bn), from THB 306.2bn ($8.98bn) in 2016.
To do so, a two-pronged strategy will grow both the retail and institutional businesses. For the retail business, UOBAM (Thailand) will expand its distribution network, both through existing distributors and new distributors, in order to broaden our client base.

Moreover, we plan to increase the number of new agents that are fully equipped with the knowledge necessary to serve our client base. We are also making sizeable investments to upgrade our technology platforms. For example, we are using enriched data to help us better understand our clients’ needs, resulting in more strategised solutions. We also recently revamped the UOBAM (Thailand) website to enhance user experience for customers.

In the institutional business, the company will approach growth in two ways. For private funds, collaboration will be deepened with our parent company UOB (Thailand) to offer innovative investment solutions to our customer base. For provident funds, the firm is working with UOB’s personal financial services branch to develop a bundled banking and investment solution for retail banking customers.

Hiding in the shadows: the truth behind China’s controversial shadow banking sector

Posted on by Max Tomlin

In 2013, Bank of England Governor Mark Carney asserted: “The last financial crisis in the advanced countries is finished. The greatest risk is the parallel banking sector in the big developing countries.” Following Carney’s remarks, analysts were quick to point out that he was likely alluding to the fast-materialising Chinese shadow finance sector.

In the years since, aggressive growth in China’s non-bank financial institutions – from securities firms to trust and asset management companies – has led commentators to stress the threat of a Chinese shadow banking crisis, often warning that such an event could have global implications.

Such concerns were once again brought into focus in late April, when a regulatory crackdown in China triggered a dramatic exodus of funds from wealth management products known as ‘entrusted investments’. As the funds unwound, $315bn in stock market value was erased over the course of just six days.

It was against this backdrop that the Chairman of China’s Banking Regulatory Commission, Guo Shuqing, quipped the state of the Chinese financial landscape amounted to “chaos”. This incident confirmed the anxieties of many onlookers, who believed the Chinese shadow sector had become too large and unruly for authorities to control.

Shedding light on China
Though one could be forgiven for assuming the Chinese shadow banking sector was on the verge of collapse, this concern may be overhyped. While on the surface the sector appears to be growing at an alarming rate, this fact masks some of the more critical details regarding the nature of Chinese shadow banking.

Risks of shadow banking:

$34trn

Total assets at risk from shadow banking in 2015

$315bn

Stock market value erased
in 2017

World Finance spoke to Daniela Gabor, Professor of Economics and Macro-Finance at the University of the West of England, whose research focuses on shadow banking activities. “It is just an alarmist story”, she said. “I don’t see the same potential for systemic crises and runs that you have in the US shadow banking sector.”

In the US and Europe, the kind of runs triggered by the shadow banking sector are characterised by liquidity and haircut spirals, prompting shadow banks – as well as ordinary banks – to lose access to wholesale collateralised funding. According to Gabor: “The systemic risk comes from volatile collateral valuation practices: when you have asset prices falling, then those assets that are used as collateral to raise wholesale funding generate margin calls.”

Unlike the US and Europe, China doesn’t have fully liberalised repo markets, and its collateral valuation practices differ considerably. As a result, it remains relatively protected from the kinds of fire sales or liquidity crises seen in the western finance sector.

Darker shadows
Meanwhile, more substantive dangers lie elsewhere. “For now, everything depends on whether there will be a major revision to Basel III… [something] that Donald Trump seems to be intent on”, Gabor said.

Owing to post-crisis regulations, growth in the wider shadow banking sector has been somewhat restrained in recent years. The latest figures published by the Financial Stability Board (FSB) revealed its ‘narrow measure’ of shadow finance – which focuses on areas within the non-bank financial sector where risks to financial stability may arise from shadow banking – reached $34trn in 2015, up 3.2 percent from the previous year.

At the same time, reliance on wholesale funding from other financial institutions (a proxy for shadow banks) has actually declined. Indeed, according to Gabor: “The Basel III new rules on liquidity and leverage, together with the FSB rules on reform of money market funds and repo markets – however diluted – are constraining the kind of pre-crisis dynamics that we have seen.”

As a result, the relative stability seen today is severely threatened by Trump’s conviction that such post-crisis regulation acts as a gratuitous obstacle to bank lending. Basel III regulations aim to provide a global framework that levels the playing field between banks in different geographical locations. Crucially, this means if the US reneges on its commitment to the rules, it is likely Europe will follow suit, which amplifies the risk of such a move from the Trump administration.

Accordingly, when it comes to concerns over the emergence of an unmanageable shadow banking sector, advanced economies would be at fault to assume all risks have shifted elsewhere.

How Vietnam’s attracting foreign investment despite global market instability

Posted on by Max Tomlin

The global economy experienced a sluggish year in 2016, with several unexpected events, such as the Brexit vote and Donald Trump’s surprise election victory, stunting growth around the world. However, despite the uncertainty, Vietnam’s economy remained stable, with GDP growth exceeding the averages posted by neighbouring south-east Asian countries and emerging Asian economies.

The country’s stock markets also generated significant uptrends throughout the year, with the VN and HNX indexes having grown a combined 15 percent year-on-year and the total market capitalisation of Vietnam’s most prominent exchanges amounting to 37 percent of GDP.

Vietnam’s success can be largely attributed to the state’s commitment to creating an attractive business environment for both domestic and international companies. Building on the country’s solid foundations, the government has introduced a number of regulatory changes to help increase both foreign direct investment (FDI) and foreign portfolio investment. This pro-business attitude has also stimulated growth in the private sector, driving local business and improving competition.

By leveraging the country’s political stability, sustainable economy and high quality investment opportunities, Vietnam has become an attractive proposition to investors around the world. Here at BIDV Securities Company (BSC), we fully expect Vietnam’s steady growth to continue in the years to come.

Cutting the red tape
Under the management of the State Bank of Vietnam (SBV), the Vietnamese financial system has continued to thrive. The government’s commitment to creating a favourable business environment has seen foreign investment grow significantly in the past decade, with FDI businesses now accounting for 71.6 percent of the country’s export turnover. The introduction of new regulatory frameworks has been key to attracting these high levels of foreign investment, and has helped control inflation, motivate economic growth and stabilise the interest rate domestically.

By adopting active and flexible fiscal policies, the government has turned Vietnam into a business hub. Some changes involve a daily adjusted rate, providing tax breaks to specific sectors, reducing corporate tax and providing a number of support packages to both foreign and local businesses. These packages have primarily focused on growth and attracting investment, aiding the development of social housing and hi-tech agriculture while also providing support to the country’s rising number of start-ups.

With a significant increase in foreign investment, BSC’s role in the Vietnamese financial market has continued to grow

These pro-business changes have been spurred by the long-term stabilisation of interest rates, which has provided the means for increased capital expenditure. This capital has been largely devoted to the development of the private sector, which has become an important driver of the economy in recent years, contributing 40 percent of GDP.

To this end, the Vietnamese Government is carrying out a comprehensive renovation of the regulatory system. By simplifying procedures, enhancing national competitiveness and improving transparency, the government has created an environment geared towards international business. In fact, the changes implemented by the government witnessed Vietnam rise nine places on the World Bank’s Business Environment 2017 report. The report cited the country’s significant improvement in areas such as the protection of small investors, taxation and international trade as the reasons for the rise.

With a view to encouraging further growth, the government has sought to clarify its position within the market. Since the start of 2016, SBV has given daily updates on both the country’s central exchange rate and the foreign exchange market. These announcements have helped standardise market valuations and dull any potential shocks to the Vietnamese economy.

The government has also publicly clarified which industries it intends to maintain a controlling stake in, and which enterprises it will pull funding from in the near future. This clarification has reinforced the country’s stock market, giving investors a clearer understanding of the market and strengthening the position of state-owned businesses.

Furthermore, the announcement is expected to encourage a flurry of IPOs in the coming year, with many industry-leading state-owned enterprises planning to participate. Should these IPOs come to pass, the Vietnamese stock market will be provided with quality investment choices, and foreign investors will be able to diversify their portfolios within the market, in turn bringing further capital into the country. As a result, Vietnam’s stock market is expected to record an uptick in both index value and liquidity in 2017.

In addition, the government has sped up the reorganisation of Vietnam’s banking sector, restructuring the debts held by joint stock commercial banks and consolidating or merging unprofitable banks in order to increase capital capacity. This has helped to standardise state-owned enterprises and has allowed foreign investors to buy shares in both public and private companies.

Foreign investment
With a stable government and a growing level of economic integration, Vietnam is now considered to be one of the world’s most attractive markets for foreign investment. The state’s commitment to establishing a business-friendly environment has seen FDI rise steadily since 2009, reaching a staggering $15.8bn in 2016, according to the Ministry of Planning and Investment (MPI) (see Fig 1). Manufacturing has remained the most popular industry for foreign investment. In the coming months, the government will continue to invest in supply industries, advanced technologies and environmentally friendly practices in order to attract foreign investment and strengthen the link with domestic enterprises further.

Vietnam’s sizeable marketplace and relatively large population – 60 percent of which is aged under 35 – have attracted growing interest from the likes of Hong Kong, Japan, South Korea and the US, all of which have committed to economic integration in general and free trade agreements in particular. In fact, Vietnam now holds 16 independent free trade agreements with strategic partners from around the world.

As a result, Vietnam has witnessed an increase in the number of mergers and acquisitions (M&As) in the last few years. The United Nations Conference on Trade and Development suggested the number of M&As rose by as much as 61 percent in 2015, with 531 deals with a total value of $5bn executed during this time. This growth continued into 2016, with more than 600 transactions taking place, and is expected to rise again in 2017. The size of these deals has also increased, with the total value of M&As in 2016 reaching $6bn. More impressively, foreign investment accounted for 46 percent of all M&As during this period.

With the economy opening up, many high profile transactions have been carried out between Vietnamese and foreign industry leaders. For example, Thai retailer TCC Holding successfully acquired Metro Cash and Carry Vietnam, while Japanese carrier ANA Holdings purchased Vietnam Airlines. These deals helped Vietnam rise to 15th place on the global M&A rankings, a stark contrast to the slowdown experienced across the Asia-Pacific region.

Indirect investment in Vietnam has also reached a record high. The improved transparency demanded of Vietnamese businesses, along with a reduction in foreign ownership limits and the introduction of new investment products, has seen foreign investors’ holdings in the stock market skyrocket. By February 2017, investment in the Vietnamese stock market had reached $20bn.

Nonetheless, despite reaching record levels, foreign investors appear to have remained relatively cautious, favouring companies with traditionally high dividend yields, such as those in the food and beverage, real estate, or consumer goods markets. Investors also predominantly looked towards the market leaders and those companies set to lose state funding.

International development
With a significant increase in foreign investment, BSC’s role in the Vietnamese financial market has continued to grow. Presently, we manage more than 2,000 foreign trading accounts, with a combined trading total in excess of VND 1.3trn ($57.3m). With business relations extending to around 50 foreign funds, BSC is one of the most active market participants in Vietnam, and has facilitated the country’s growth over the past decade.

As a local financial advisor, BSC guides clients through M&A transactions, whether buying or selling. In just one year, we closed two gigantic deals, helping a Danish private equity fund divest its shares in a Vietnamese window manufacturer to a Japanese investor, and assisting a multi-national Korean-based firm purchase a Vietnamese food processing company. We currently have a further three deals active, and have also continued expanding relationships with funds around the world.

These relationships will be essential to BSC’s growth in the future, as we look to build on the successes of the past few years and extend our operations internationally. The strength of the economy has allowed Vietnam to take to the world stage, and as investment continues to facilitate growth and provide a platform for expansion, BSC will seek to play the leading role in Vietnam’s international development.

Global politics help Philippine investments soar

Posted on by Max Tomlin

The US has seen renewed optimism over the past year or two, as much-anticipated fiscal recovery finally set into the world’s largest economy, allowing the US Federal Reserve to raise interest rates once more in March 2017. As rates continue to increase, with another two hikes expected this year alone, the US dollar is projected to strengthen further against other currencies.

While global power shifts and surprise political events such as those of the past year may cause some investors to lose faith and sell their stock investments, they can occur to the immense benefit of far-removed markets such as the Philippines. In comparison to potential market volatility in the US, the Philippines’ improved demographics offer a safe respite for stakeholders looking for a new investment opportunities.

Given that no elections are due in the Philippines this year, the country’s own economy is projected to grow more slowly at 6.3 percent, compared with the previous year’s 6.8 percent. Nonetheless, there could be a pleasant surprise in store for the economy if Rodrigo Duterte’s government proceeds with the immediate implementation of a sound tax reform programme or rolls out several major planned infrastructure projects. With a higher interest rate in the US, the US to Philippine exchange rate is expected to rise further to PHP 51.50 ($1) by the year’s end.

With so many variables across global economies over the next six months, World Finance spoke to Ador A Abrogena, Executive Vice President and Trust Officer at BDO Unibank, to discuss the group’s position within the Philippine market, how the company can help both new and current investors improve the economy even further, and how it plans to stabilise its retirement programme.

What are BDO Trust’s flagship products?
In 2005, Unit Investment Trust Funds (UITFs) were introduced in the Philippines, offering much greater investment options. Similar to mutual funds, UITFs are investment vehicles that allow funds to be pooled from different investors with similar investment objectives. These funds are managed by professional fund managers, and are invested in various financial instruments, including money market securities, bonds and equities. BDO is the leading provider of UITFs, comprising nearly 40 percent of industry assets under management, as well as a number of investment accounts.

There are various UITFs available, depending on an individual’s investment goals and risk preference. These are generally classified into four types: money market, bond, balanced and equity funds. Money market funds are meant for investors whose main concern is liquidity and preservation of their principal investment. These can also be used for parking funds in while waiting to use them for other investments. For those who want higher yields and can invest for longer, the bond funds are more suitable.

Most Filipinos are risk averse, and they prefer short-term, fixed income placements

In between bond and equity funds are the balanced funds, which provide a middle ground between the high risk of equity funds and the relative stability of bond funds by investing in a proportion of bonds and equities.

What is the current state of the Philippines’ investment market?
Investors are optimistic that the Philippines can sustain its GDP growth momentum of six to 6.5 percent. This is because the country’s growth instigators, which are predominantly associated with consumer demand, domestic investments and government spending, remain intact. There is also ample liquidity and a stable currency.

The last 12 months have been positive for fund investors in the Philippine market, but that has not always been the case. Since UITFs were introduced in 2005, they have gone through both positive and negative periods. There was volatility, but as a company we pursued this industry, as we believed in its potential to help the financial needs of many Filipinos.

Early on in BDO’s history, we focused on making sure funds were sold correctly and that clients understood what they were getting. BDO has conducted many seminars, prepared materials and sponsored events to inform the public on products they may require. As of now, those that invested are benefiting, as BDO’s UITFs have grown from a low of PHP 85bn ($1.7bn) in December 2008 to PHP 333bn ($6.6bn) as of last year.

With regards to the country’s rate of savings, the Philippines has one of the lowest rates across Asia for retirement preparation. At BDO, we want to provide products that make it worthwhile for our clients to save and invest. We also want clients to invest over a longer period of time to maximise their returns.

What kind of asset classes and products are you focused on?
We offer products that are in line with market needs. Most Filipinos are risk averse, and they prefer short-term, fixed income placements. Our best seller is the money market fund, as the low volatility and higher-than-deposit yield is a good place to start. However, we also emphasise increasing risk, as this creates better yields and improves the country’s economy. This is why BDO has seminars – to help explain the benefits of risk, and how to manage it.

Where should potential Philippine investors place their money?
Navigating through the changes from last year’s global and domestic developments was challenging. However, BDO deals with professionally managed money markets, bonds, balances and UITFs – available in both Philippine pesos and US dollars. When navigating through difficult financial situations, the company advises clients to invest in the BDO Dollar Money Market Fund. For the more experienced, the BDO US Equity Feeder Fund provides diversification via exposure to US companies that are expected to benefit from Trump’s pro-growth policies. As market conditions have evolved, BDO aims to give informed, prudent and effective investment options.

When is the best time to invest?
There is no better time to invest in UITFs than now, as the Philippine economy looks good, and will improve. The Philippines is now in a better place than it was in the 1970s to 1990s. Today, we have become a net lender because of the economy’s development.

What are BDO’s initiatives in socially responsible investing?
BDO has launched the BDO ESG Equity Fund, a UITF that invests in local companies showing good environmental, social and governance (ESG) practices. The fund is the first ESG-themed UITF in the Philippines. ESG has become known as the socially responsible approach to investing. Responsible investing supports companies adhering to ESG practices that ensure environmental protection and community development which, in turn, sustain both the company’s and its investors’ profitability.

Investors are optimistic that the Philippines can sustain its GDP growth momentum of six to 6.5 percent

The fund is available to retail and institutional clients with an aggressive risk appetite, who want exposure to companies with responsible business practices. The fund can be accessed via BDO branches nationwide as well as via Invest Online, BDO’s UITF online investing facility.

Would BDO consider investing outside the Philippines?
We are diversifying our investments right now, moving from predominantly Philippine-based assets into a mix of local and offshore bonds and equities. We have collaborated with external fund managers for the feeder funds we offer. These include the major global fund managers BlackRock, Legg Mason and SLI Investments.

What about the institutional business of BDO Trust?
At BDO we manage segregated portfolios for institutional accounts – retirement plans, educational institutions, religious organisations and foundations. We are one of the more aggressive managers and have recommended a larger share of equities against fixed income equities over the past five years. Many institutional clients are conservative, so we provide good recommendations and suggest they diversify and buy riskier assets, if they can take the volatility.

Rules on corporate retirement funds have been in place for several decades now, but many companies have not set up pension plans – that’s where we help. Some are hesitant as they have to separately ringfence the funds and cannot use them for current operations. Still, some companies are looking at this now as an employee incentive. It is a slow process, but it is happening. BDO has been advocating the implementation of defined plans that would allow employee contributions, allowing employees to save on their own and make their investment earnings tax exempt at the same time.

How is BDO helping Filipinos with their post-employment security?
After hurdling the stringent qualification requirements of Bangko Sentral ng Pilipinas (BSP) and the Bureau of Internal Revenue (BIR), the Trust and Investments Group of BDO became the first institution in the Philippines to be accredited as a Personal Equity and Retirement Accounts (PERA) Administrator.

The PERA implementing rules and regulations were issued on October 21, 2009 by various regulatory bodies. These were detailed in regulatory issuances by the BSP and the BIR, the latest of which was dated December 2016.

PERA is the Philippine version of similar laws covering retirement savings vehicles prevalent and long standing in more developed countries, such as IRA and 401(k). It establishes the legal and regulatory framework for voluntary personal retirement plans as a means to promote savings, capital market development and long-term fiscal sustainability. It also provides Filipinos with a means to supplement their future pension benefits from the Social Security System/Government Service Insurance System.

At BDO, we believe that being the first PERA administrator is a distinct privilege. This will allow us to promote our advocacy for financial inclusion. Implementing PERA is complex as it involves efficient coordination with the various PERA participants, like the cash/securities custodian, investment product providers and investments managers, as well as providing the required regulatory reports. More importantly, it involves educating and inculcating financial literacy across PERA contributors.

The challenges notwithstanding and with the continuous support of BSP as the government agency working for the implementation of PERA, BDO looks forward to fulfilling its responsibilities as the country’s first PERA administrator.

How competitive banking is taking Macau global

Posted on by Max Tomlin

A rising hub in China’s banking sector, Macau is working to link the country to the wider world by helping emerging markets connect with the Asian nation. A key component in this strategy involves helping local SMEs to extend their reach across the entire region and beyond.

The Special Administrative Region’s banks are leading this push, with Banco Nacional Ultramarino (BNU) a particularly active example. A subsidiary of Portugal’s Caixa Geral de Depósitos, BNU’s focus is on building bridges between China and the Portuguese-speaking world, while simultaneously working to improve the already-competitive local banking industry in Macau.

In light of this, World Finance spoke to CEO Pedro Cardoso, the 2017 Banker of the Year for Asia, about how BNU has tackled recent economic hardships to maintain growth and connect Macau to other countries and continents.

How has Macau’s banking industry dealt with the recent contraction in the economy?
Macau is a very competitive market. The territory only has around 650,000 inhabitants, with 28 banks in operation competing to serve them. Nonetheless, some of the large Chinese banks are now seeking to gain market share in Macau, which is resulting in a decline in the profitability of banking operations. That said, despite this challenging environment, the banking sector in Macau has continued to perform well, with good solvency, liquidity, profitability and asset quality indicators.

What’s more, under the guidance of the Macau Government and Monetary Authority, the banking sector is looking for new avenues to expand into. These include cooperation with Portuguese-speaking countries, financial leasing and wealth management.

What strategy have you implemented and how has BNU fared in this climate?
Following this pattern of growth and diversification, BNU has grown steadily and prudently over the past few years. Since 2011, our total business has grown by an accumulated 107 percent, and over the same period our ratio of loans overdue over 90 days has also declined from 1.68 percent to just 0.97 percent. The main focus of BNU’s expansion has been in the areas of SME finance and retail banking. We have, above all, concentrated on Macau’s residents and companies, while also exploring synergies with the very strong network in Portuguese-speaking countries that our parent bank – Caixa Geral de Depósitos – has created.

Deciding whether to keep investing in physical branches or to guide customers towards digital services is one of banking’s great dilemmas

Unlike some banks that focus on gaining market share at low prices, BNU has geared itself towards growth. We aim to create the necessary conditions to generate value in an increasingly competitive environment, and to build ourselves up to better provide what the market demands. And, of course, we always aim to stay in tune with our clients’ needs.

In terms of everyday banking, we have been working to better understand our customers’ behaviour and expectations through surveys and mystery shopping. Alongside this, we have also worked very hard to provide new and innovative products and services, as well as providing extensive training and knowledge to our team members, and motivating them to excel in the pursuit of our mutual goals. To this end, we have frontline staff that are proficient in English, Mandarin, Cantonese and Portuguese, and are able to provide all of our services to our diverse client base.

As a result, we have seen an increase in our customer base of about 17 percent, to around 225,000 customers – more than a third of Macau’s total population. Additionally, our top line has progressed quite smoothly, with a 93 percent jump in net interest margin since 2011. We have also decreased our cost-to-income ratio from 35 percent in 2011 to just 29 percent in 2016. We’re particularly proud of this indicator, as it’s in line with the highest international standards.

What new trends are now emerging in the Macau banking sector?
Macau is a world centre for tourism and leisure, but good progress has also been made recently in economic diversification away from this traditional core sector. As a result, banks are now expanding their corporate resources to serve other industries. Construction and public works are important customer sectors for banks in Macau, with the industry still growing. The local banking community is continuing to support and finance large infrastructure projects, but there is also a new focus on supporting small and medium projects too.

As well as this, since 2014, deposits have been growing slightly faster than expected, leaving banks flooded with money. Competition is, therefore, very keen in credit products such as loans and credit cards – a further boon for consumers and the industry as a whole.

How are banks adapting to accommodate changing consumer demands?
The way customers interact with their banks is indeed changing. For one thing, customers are choosing more and more to bank through a variety of digital means. Banks, therefore, need to adapt themselves and diversify their banking channels in order to allow customers of every age to carry out routine transactions in whatever way they demand – be that in a traditional branch or digitally.

What’s more, in spite of the convenience of tech-based interactions, trust and security are still crucial for customers; a strong in-branch experience remains important, especially in terms of driving engagement with banks. To put it another way, customers are coming to branches less often, but their preferred sales/purchasing model is still to meet with an account officer face to face. Whether to embrace this and keep investing in physical branches, or to guide customers away from the in-person experience and towards enhanced digital services, is one of banking’s great modern dilemmas.

Why has BNU chosen to enter mainland China?
The opening of our Hengqin branch, on an island located in Guangdong, is intended to provide a bridge for economic and financial cooperation between China and Portuguese-speaking countries, and to provide financial cooperation between Guangdong and Macau, based on the China-Portugal financial services platform. It will open up opportunities to support Chinese investors and companies from Portuguese-speaking countries that are trying to expand into the Chinese market.

650,000

The total number of inhabitants of Macau

225,000

of these are BNU customers

107%

BNU’s business growth since 2011

At the same time, another key objective is to assist Macau-based enterprises in expanding their businesses into mainland China, thereby promoting closer cooperation between Macau and Guangdong. In this respect – as an innovative step in strengthening economic cooperation between the two regions – the Hengqin branch is a milestone for BNU. The branch represents the first instance of a Macau local bank opening a branch in mainland China, and it also makes BNU the first bank to enter mainland China with immediate renminbi business operation.

How does BNU make use of new technology?
BNU has been a pioneer on the technology front, working to improve efficiency through the development and implementation of modern operational systems, such as workflow systems, document management and new front-end teller systems. What’s more, our online banking experience has now been extended to mobile, allowing services such as transfers, bill payment, time deposits and insurance subscriptions to be accessed in-branch, online or by mobile.

To solve the common problem of low foreign currency availability in Macau, a service has been introduced to allow customers to request foreign currency banknotes through online banking and collect them at a chosen branch. This system, pioneered by BNU, is the first of its kind in the Macau market.

What does BNU have planned for the future, and how do you see Macau’s banking climate developing?
We aim to continue along the path of innovation, focusing on product development and the development of better services for our clients. Alongside this central aim, we’re also looking to build ties with local and international businesses, with a particular focus on links between Portuguese-speaking countries and China. We’ll also continue to lead the local banking industry on various fronts, including excelling in the provision of high quality customer services, rapid time-to-market product development, efficiency enhancement and budget control.

As far as Macau as a whole is concerned, 2017 is looking positive for the financial industry. The sector will continue to vigorously develop ties with emerging markets and emerging businesses. What’s more, a range of opportunities will arise as a result of the Chinese Government’s One Belt, One Road national strategy, and the implementation of the five-year development plan outlined by the Macau Government.

In this context, Macau’s banking sector will act as something of a herald for the wider diversification of the entire Macau economy. In particular, the banking industry will provide support to local SMEs through various preferential service schemes, and will also make further positive adjustments to loan structures in order to support those SMEs in overcoming the various difficulties that accompany early-stage growth. By thinking ahead, we’re working to ensure a positive and stable future for Macau and the surrounding region.

Saudi Arabia’s Vision 2030 plan spurs international investment

Posted on by Max Tomlin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Posted on by Max Tomlin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Swisscanto Invest: how to protect your investments against the unexpected

Posted on by Max Tomlin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How politics impacts forex

Posted on by Max Tomlin

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

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

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

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

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

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

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

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

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

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

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

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

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

JPY 118.66

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

$1.28

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

$1,295

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

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

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

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

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

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

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

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

How to prepare for the future of forex

Posted on by Max Tomlin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

70%

of daily turnover in the forex market stems form electronic trading

30%

The same share 10 years ago

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

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

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

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

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

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

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

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

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

Danish Government raises retirement age as benefits system continues to prosper

Posted on by Max Tomlin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

168%

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

5

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

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

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

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

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

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

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