The US economy’s growth rate last quarter was recently revised on the basis of stronger investment from businesses and government bodies than previously assessed. GDP in Q3 was revised up to 3.3% annual growth rate compared to the previous quarter. This was according to the US Department of Commerce in a press release on the 29th November 2017.
This week Finance Monthly reached out to sources across the globe to hear their take on the current situation in the US, what has impacted growth across several industries, and what the forecast for 2018 looks like.
Josh Seager, Investment Analyst, EQ Investors:
US growth was revised to 3.3% annualised on Wednesday, up from an initial reading of 2%. This was the fastest growth rate in 12 quarters but there is likely to be some hurricane distortions, so we must interpret the data with caution, we don’t expect it to continue at this level.
Looking into the numbers and things look broadly positive. Consumer spending, which accounts for around 70% of the US economy, remained strong, growing 2.3%. This wasn’t quite as strong as last quarter but is a good level nonetheless and shows that the US consumer is relatively healthy. For the consumer to continue to spend, we really need wage growth. So far, this has been pretty anaemic in spite of very low unemployment. We believe this could be about to change. NFIB Small Business Surveys show that 35% of small business are now finding it hard to fill jobs and 21% are planning to raise compensations as a result. This data points are at cycle highs and this is highly likely to feed into US wage growth at some point.
Business investment picked up, contributing 1.2% to growth, up from 1% the quarter before. This is a pleasing sign as it suggests that corporates are gaining confidence in the economy and are willing to make the investment necessary to capitalise on this. Corporate profits were also up last quarter which should give corporates the financial freedom to continue to develop and (hopefully) growth wages.
Dan North, Chief Economist, Euler Hermes North America:
Consumer
- Despite tepid income growth and only modest spending growth, consumers are exuberant.
- Consumer confidence rose 3.3 points in November to 129.5, the highest in 17 years.
- The present situation component rose 1.9 to the highest level in almost 17 years, while the future expectations component gained 4.3, also a 17-year record.
Home Sales
- The actual level of annualized sales can be more revealing, and at 685,000 units it is the highest in ten years, which is undoubtedly good news. But it also illustrates the damage a burst asset bubble can cause.
- Despite having grown annually at 15% since the bottom, the current level of sales is still only half of what it was at the peak of the housing bubble, and it has only rebounded from the collapse to levels seen 20 years ago.
- But to repeat, the recent news is strong.
Holiday Shopping
- According to Adobe Insights, on-line sales rose 16.8% on Cyber Monday and 17% on Black Friday, extraordinary growth rates.
- But online sales are still only about 10% of total sales so these growth rates are not unexpected.
- The National Retail Federation (NRF) had predicted 164 million people would shop over the holiday weekend, but the actual results were 174 million.
- But then despite seeing more shoppers than expected, the NRF did not increase its previous forecast of 4% sales growth.
- The reports are mixed, but in the end we expect to see very modest growth in brick and mortar sales and very strong growth in on-line sales.
Tim Sambrook, Professor of Finance, Audencia Business School:
The upward revision, from previously 3.0%, was mainly due to a higher than expected increase in public and private spending.
The increase compares favourably with the second quarter of 2017 of 3.1%, and the third quarter of 2016 of 2.8%. It is the fastest rate since Q3 2014.
If the current estimate of growth in the Q4 GDP is realized, then this would represent the first time since 2004 that the US economy has posted three consecutive quarters of over 3%.
The growth rate is in line with the government’s target. They are engaging a tax cut plan to lift GDP to 3% annually. However, economists see such a pace as unsustainable and expect growth to slow sometime in 2018.
If you were to look for some bad news in the revision, then you could point to the fact that the revision comes from public and private spending and not consumer spending, which makes up 70% of the US economy. In addition, inventory build-up was significant and could prove to be a drag on growth in the future. However, this upward revision comes with a backdrop of severe hurricanes and low wage growth, which should have been quite negative for consumer growth.
This positive news will strengthen the case for the Fed to raise rates next month, although the announcement had little effect on the dollar or the markets.
Duncan Donald, CEO, The London Academy of Trading:
The highlight of last week’s US data card was the release of the GDP numbers for the third quarter of 2017. The number brought US GDP from 3% to 3.3%.
This is slightly above the median expectation of 3.2%, and shows the US economy continues to expand progressively with the GDP reading being the most aggressive since late 2014.
But in context, what does this mean for the US rate path, as the December rate decision from the Federal Reserve rate setting committee comes next week? From freshly inaugurated Federal Chair Jerome Powell’s perspective, the data is on course for a hike. Even the departing Janet Yellen appeared to shift her dovish tone, referencing data with the possibility of a hike in December.
We need to look no further than the recent performance of US stocks and the dollar for confirmation that the market believes in the upcoming rate hike. Despite the ongoing investigation into President Trump’s electoral campaign, which is an obvious anchor, there are no signs of a slowdown in the US positivity story. The one final hurdle for the market to overcome ahead of next week’s decision is the Non-Farm Payrolls on Friday. The data has been somewhat muddied over the last few months, as hurricanes have taken their toll. However, this month, we should expect to get a true reading on the strength of the US jobs market.
A strong Friday performance will push the market up the final few percent towards a December hike.
John Lorié, Chief Economist, Atradius:
Across the Atlantic, the US economic outlook is also robust, which is reflected in high business confidence. US GDP is expected to expand a solid 2.0% in 2017 and 2018. The positive outlook is supported by strong job growth, very low and still declining unemployment, and even firming wage pressure. In this environment, the number of bankruptcy filings is at historical lows. In Q3 of 2016, the number of bankruptcies in the US reached its lowest quarterly level since Q4 of 2006. We forecast a 4.0% decline in the overall number of insolvencies this year and a mild 2.0% decline in 2018. The US outlook is subject to risks, on the upside (tax reform) as well as downside (trade, NAFTA).
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
With plenty of change coming in 2018, here Emmanuel Lumineau and Thomas Schneider, Founders of BrickVest, delve deep into the future of real estate for the coming year, prospects of growth and challenges ahead.
2017 was a strong year for the real estate industry. Despite a number of external factors that could have easily affected market performance, low interest rates remained stable and demand in real estate investment products continued to rise.
Brexit
Brexit has clearly had an effect on the UK but we believe that across Europe, there remains strong deal flow levels and investment opportunities. Our recent research1 showed that one in three (33%) commercial real estate investors highlighted Germany as their preferred region to invest in. This is the first time that Germany has been chosen as the number one region to invest in and ahead of the UK which was selected by a quarter (27%).
The UK saw a drop from 31% in the last quarter and from 32% in the same Barometer 12 months ago. The Barometer also revealed that UK, French, German and US investors are now less favourable towards the UK since last year. 45% of UK, nearly a quarter (21%) of US, a fifth (19%) of French and 18% of German investors suggested they favour the UK this quarter, representing a decrease from last year across the board from 46%, 26%, 28% and 21% respectively.
Despite investors seemingly focussing away from the UK, there has been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.
Moreover the average risk appetite of BrickVest’s investors continues to rise to 52% from 49% last quarter and from 48% this time last year, meaning a sentiment shift from low to balanced risk
Interest rates
The Bank of England’s decision to raise interest rates in the UK in November was momentous for the economy and should signal the start of a series of gradual increases. The Bank decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. In contrast, the ECB’s decision to unwind its QE programme to €30 billion a month is a glowing endorsement of healthy Eurozone growth and falling unemployment, which will more than likely mean that interest rates will stay at historic lows until at least 2019 in order to help financial markets adjust.
Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. In a low interest rate environment, European real estate yields will continue to look attractive and real estate serves as a good alternative to fixed income.
Value in 2018
We expect to see increasing demand for real estate in 2018. Indeed our research2 showed that two in five (40%) institutional investors plan to increase their allocation to European commercial real estate while 44% expect commercial property yields to increase in the next 12 months, just 22% believe they will decrease.
We believe that the best value can be found in real estate deals that are not too sensitive to price erosions. Investors should keep a close eye on the risk of high leverage and DSC ratios. We believe that the best investment options for 2018 will most likely be found in value-add real estate in combination with a conservative financing policy.
Investment strategy 2018
Given the fact that we believe demand will remain relatively high in 2018, one of the main challenges will be to find good deals.
Investors will have to find the right balance of higher leverage (due to continually low interest rates) and being able to handle potential price corrections in the event that the market cools off due to external factors such as Hard Brexit, escalation in the US vs. North Korea conflict, etc…
Institutional investors are investing in less liquid secondary and third level cities to achieve acceptable going-in cap rates (cap rates in major markets such as Paris are historically low). Investors will also be forced to look at less traditional investment products such as student housing, services apartments, and senior housing or industrial to get better returns. The overall risk of these investment is that they are in general less liquid and if the market bounces back, cap rates will also increase much faster than in downtown Paris.
In order to manage this problem, some institutional investors are now investing in real estate debt products so that they a.) have their exposure to real estate but b.) also have an achievable exit (i.e. when the loan maturity is reached). We think this might be smart strategy in 2018 given real estate prices are already very high and might fall in the long term (so no upside opportunity but also no real downside risk).
Sectors to watch
We continue to see the highest level of volatility from the office sector as many international firms put decisions on hold over their long-term office space requirements. Our research2 with institutional investors highlighted that more than a third (34%) believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.
Three in ten (31%) thought the industrial sector would present the biggest commercial real estate investment opportunities over the next 12 months while one in five (19%) cited the retail & leisure sector.
Mifid II
When implemented in January 2018, revisions to the EU’s Markets in Financial Instruments Directive (MiFID II) will radically change the regulation of EU securities and derivatives markets, and will significantly impact the investment management industry. It will have a significant impact for wealth and asset managers on profitability, product offer and their distribution across Europe, operating models and pricing and costs.
As a consequence, we expect MIFID II to widen the gap between global, infrastructure-based players, and local players. Crowdfunding platform may be affected by these changes.
General Data Protection Regulation (GDPR)
GDPR comes into force on 25 May 2018 and represents the biggest change in 25 years to how businesses process personal information. The directive replaces existing data protection laws and will significantly tighten data protection compliance regulation.
Like other industries, real estate companies will have to conduct a risk analysis of all processes relevant to data protection.
Below Mark Boulton, Insurance Sector Lead at Fujitsu UK&I, delves into the introduction of automation and AI in the insurance sphere, touching on the future prospects of the insurance sector throughout 2018.
Insurance has always been a grudge purchase, often seen as a necessity or safety net, but not something that immediate benefit is felt from.
It will have been frustrating for many, therefore, to see that car insurance premiums have risen by 11% on average in the last year alone, according to the Association of British Insurers (ABI).
Many of us may even start to question the value we’re getting for our insurance purchases in light of such news.
The price – which is the most important factor in choosing an insurance package (A New Pace of Change, Fujitsu) – is just one element, however. Compounding this situation is the fact that people often find insurers difficult to deal with, particularly when trying to make a claim.
It’s this group of factors that demonstrate the opportunity the insurance industry has to transform itself into a more value-driven service for customers.
At the heart of any change will be technology, and two of the leading areas here are Artificial Intelligence (AI) and automation. How is technology impacting insurance for the better? There are three main areas to consider - customer experience, assessments and risk mitigation.
Personalisation
Think of going through a process for a life insurance policy. Multiple in-depth questions to taken into account age, lifestyle, and health, with an existing model applied to the answers provided.
Such models have been used for decades at some companies, resulting in off-the-shelf packages for people that do not necessarily reflect them as individuals.
Technology is helping change this. Based on any assessment and wider data analytics, automation can quickly produce more personalised experiences for the customer. This might be a payment model that suits their lifestyle or financial situation or a more nuanced insurance package to reflect their needs.
Such personalisation sit at the heart of the transformation. We’ve seen this across other industries, and it is one crucial way insurers can start to move from transactional-based relationships to value-based relationships with their customers.
Convenience and speed
It’s not just adding value of course, it’s getting the basics right. Services like Amazon Prime and Netflix have totally transformed the expectations we have of all companies when it comes to speed and convenience. We want things served to us exactly how we want them, and quickly.
Insurers have certainly made progress in recent years – for example, it is standard now for policies to be quoted and purchased online. More interestingly, however, is the use of apps and chatbots.
These give a holiday maker who may have lost their camera easy access to their policy, but also the chance to ask questions to the chatbot. Powered by AI, we can expect chatbots to play an increasingly important role in the relationship between insurers and policy holders.
Given the often complex nature of insurance policies, chatbots can be a simple way for people to get the answers they need. No need to phone customer services or wait an hour in a call queue; just direct answers delivered instantaneously.
Of course, there is still progress to be made with chatbots, but these will only get better in the years to come.
Apps and chatbots are also interesting because they both rely on and deliver vast amounts of data. The more these are used, the more they can be refined to give people services that suit them better. They fuel the personalised services.
Working together
It’s all very well talking about the benefits and transformative powers of technology, but making these a reality is something many organisations are grappling with.
Something I’ve observed in the financial services industry is the existence of distinct groups of employees. On the one hand, there are those innovation-focused, digital savvy experts who want agility, speed and flexibility. On the other hand, there are those who want to focus on the central facets of their areas products - keeping those long-standing traditions working in good order for the customer.
These two groups are naturally at odds. They often speak in different terms, work in different ways, and approach problems completely differently. Imagine the kinds of conversations that might come up with discussing emerging trends like AI and automation. It’s not easy for them to get to the place they need to.
To be able to respond to the concerns being voiced by consumers, and to harness the business agility needed to respond to market trends, insurance businesses from the c-suite down need to make a culture shift. Driving change from the top is the only way to future proof the business in a digital world that has already changed the state of play for good. We simply cannot afford to rely on the same rules.
Find your digital path now
Our ‘Fit for Digital’ survey found 98% of insurers believed their organisation had been affected by digital. A further 72% said their sector would fundamentally change in the next four years.
Change is inevitable. And the technology that will enable that change - including AI and automation – is here today. Insurers must find the cultural harmony to embrace new digital services and products, without losing the heart of what they already do well.
The next few years will see some insurers thrive and others struggle. To be a thriver, it’s vital to the right digital path now.
Millennial leaders are set to shake up traditional company management as they focus on building businesses based on both profit and purpose, new research from American Express has revealed.
Redefining the C-Suite: Business the Millennial Way, surveyed over 2,300 global leaders and Millennial managers - the future leaders of business - to better understand how businesses will change as Millennials rise to senior management roles. The findings also provide an insight into how business leaders today can set their companies up for success in the future.
The research found that while over half (56%) of Millennials surveyed in the UK said that a C-Suite role is attractive to them, and that they are more likely than their Gen X counterparts to want a job that gives them status, Millennials also indicated that they want to shake up traditional business leadership.
75% of Millennials think that successful businesses of the future will see management look beyond the usual models of doing business and be more open to collaborating with new partners. Millennial professionals also think that teamwork is a more important quality in leaders than Gen X-ers, suggesting that the C-Suite of the future will promote a much flatter structure in the organisations they lead. Millennials also ranked passion as an important quality in leaders (30%) much more highly than their Gen X counterparts (19%).
As part of their C-Suite shake up, Millennial leaders will put employee wellbeing at the top of their agenda. When asked what the biggest challenges are to businesses of the future, Millennials’ top answer was paying employees fairly (49%), followed by retention of talent (40%). 74% of Millennials also say that successful businesses of the future will need to support employees outside of work, compared to just 67% of Gen X-ers.
The research also found that while the majority (76%) of future Millennial leaders think that businesses of the future will need to have a genuine purpose that resonates with people, they also recognise the importance of driving a profit – something often perceived as being at odds with doing purposeful business.
According to the research, 63% of Millennials say that it is important for them to be known for making a valuable difference in the world, and Millennials are more likely to invest in CSR when running their own businesses (58%) compared to their Gen X counterparts (50%).
At the same time, UK Millennials were found to have a keen eye on maximising shareholder profit, with 53% of Millennials saying that shareholder profit will be important for the success of businesses in the future compared to 46% of Gen X-ers. To achieve success in the future, 71% of Millennials also think that businesses will need to manage costs tightly, and 77% say that financial transparency will be important.
Commenting on the findings, Jose Carvalho, Senior VP and General Manager at American Express Global Commercial Payments Europe said, ‘Millennials are demanding more from the businesses they work for – and will come to lead. This is setting the stage for an evolution of the C-Suite, where they will seek to put both profit and purpose at the heart of their businesses whilst also structuring them in a way to ensure tight cost management and efficient processes.
Jose continued, ‘This offers valuable insight for today’s business leaders as they seek to future proof their organisations and prepare for Millennial leadership. At American Express, we are dedicated to providing payment products and services that are designed to help companies effectively evolve and navigate change to ensure they continue to get business done now and in the future.’
(Source: American Express)
Anticipation, scepticism and fear are holding more Brits than Americans back from embracing Artificial Intelligence (AI) in the workplace, according to a new study by CITE Research for SugarCRM.
The research on business executives in the US and UK reveals that that Brits are lagging behind when it comes to adopting Artificial Intelligence (AI) technologies into their work and personal lives. The survey reveals that 47% of Brits are currently using technology powered by AI in the workplace, compared with 55% of Americans. This trend transcends into people’s personal lives, with 62% of Brits and 64% of American’s using AI for non-work-related tasks, such as Amazon Alexa or Google Home.
The research also highlighted that when looking ahead, Brits are less open to embracing AI in the future. 69% of American respondents plan to deploy AI in the next two years, compared to 57% in the UK. Brits were twice as likely not to ever want to use AI, with one in five respondents (20%) opposing the technology, compared with 1 in 10 Americans.
Top concerns about AI on both sides of the Atlantic revolve around trusting the technology. More than half of respondents (52%) worry about data security, with 30% saying it is their top concern. Another 40% said they fear AI technology will make errors, and 41% fear losing control over the data. While 30% said they fear job loss because of AI, only 12% list it as their top concern.
When it came to the applications for AI in the world of work, US participants were more likely than Brits to say they would want AI to help with communication with customers (54% vs. 42% of Brits) or planning their day (46% vs. 35%). Automating data entry was the most popular task across the board for AI, with more than half (53%) believing it would help in their organisation, followed by gathering information on the internet (51%).
“The results of CITE Research’s survey reflect the industry's view on “the cloud” “big data” and other disruptive technologies over the years, said Clint Oram, CMO and co-founder at SugarCRM.
“You have a group that is ready to jump in with both feet and a group of naysayers who are absolutely against the technology. The rest of us are in the middle. Many have heard all the hype and are intrigued, but they would like some assurances that the positives will outweigh the negatives before they are ready to start spending money on AI tools.
“It’s interesting to see how attitudes differ across the Atlantic and that there is more reluctance from Brits in how AI can be used in their work. The technology offers the potential to reduce monotonous aspects of our working lives but there is a need to be realistic on its capabilities. It won’t replace people entirely and there is still a need for human interaction.”
In general, the survey showed that younger participants, those 34 or younger, were more excited and less fearful of AI. Younger participants were more likely to say their organisation will utilise it in the future (70%). Those 55 or older were more likely to worry about being overwhelmed with features they do not need (55% list this as a concern compared to 24% of those aged 18-54).
For the complete survey report, please visit here.
(Source: SugarCRM)
With news that the performance of ICOs has been ‘nothing short of outstanding’, hitting average returns of 1,320%, here Laurent Leloup, Founder and CEO of Chaineum, discusses with Finance Monthly the prospects of ICOs in 2018, and the staggering capacity they have to make an investment golden.
First introduced in 2014, Initial Coin Offerings (ICOs) have seen a meteoric rise in 2017; resulting in $2.3 billion being raised to date as blockchain startups turn to cryptocurrency to raise funds. Typically described as a cross between an IPO and online crowdfunding using Cryptocurrency, an ICO requires an investor to contribute a certain amount of an existing token, such as Ether, to receive a share in a new currency at a set conversion rate.
As the popularity of ICOs continues to grow, it’s important that organizations understand the range of benefits, both for companies seeking investment and those looking to invest, the ICO model provides compared to traditional investment avenues.
Benefits of an ICO
For organizations looking for investment, an ICO is considered a much faster and easier fundraising method to undertake as anyone can start one. Additionally, the online nature of an ICO means that marketing and settlement costs are significantly lower than traditional fundraising with settlements finalized through the blockchain. This removes many additional costs that are associated with traditional investment which could incur legal fees amongst other expenses.
An ICO-funded startup also benefits from a network of supporters, similar to online crowdfunded businesses, whereby those supporters hold tokens that increase in value based on usage. Essentially, this means that an ICO-funded business already has a customer base in place and is in a stronger position to see faster growth.
As well as offering benefits for companies looking for investment, ICOs also have significant advantages for those looking to invest. Many investors are attracted to cryptocurrencies for their liquidity. Rather than playing the long game and investing vast amounts of money in a startup which could then see your investment locked up in equity of the company, ICOs offer the opportunity to see gains much quicker and can take profits out of the company invested in more easily.
An additional advantage of an ICO for investors is that it has the potential to remove geographical limitations seen with traditional venture financing which typically tends to be tied to global financial hubs such as New York, Silicon Valley or London. ICOs remove this restriction and opens up opportunities for anyone in any geography. This democratization essentially allows anyone to contribute and profit from an investment.
Furthermore, cryptocurrencies can appreciate much faster in value than standard currencies. For example, Bitcoin was worth just $100 in 2013 and in September 2017 was trading between $4,000-$5,000. As well cryptocurrencies from Blockchain startups Monero and NEM both saw huge increases in value at 2,000% increases. Therefore the potential ROI for investors using cryptocurrency is much higher.
What to look for in an ICO?
From an investment point of view, not all ICOs are created equal. Whilst there are apparent benefits to this new investment model, a number of poorly-managed operations have caused some concern within the industry towards the transparency and legitimacy of some ICOs.
However, previous successful ICOs have demonstrated that ambitious blockchain firms can achieve their objective in raising funds through this innovative new model. So what should investors look for when thinking of investing in an ICO?
Firstly, before considering investing in an ICO, it’s important to look for those that offer due diligence. There is currently no formal process to audit an ICO organization which means a company is able to start selling cryptocurrency tokens before a functioning product even exists. Understandably this has led some critics to comment on the legitimacy of some projects.
Before investing, it’s important to carry out a detailed analysis of the project, its objectives, and resource to gauge the likelihood of the project coming to fruition. In addition, the project should be able to provide regular operational updates on its status to ensure the investor feels confident with its progress.
As well as ensuring the legitimacy of an ICO through their due diligence, investors should look for an ICO with a certain level of transparency so they feel confident in their venture. Due to the nature of Blockchain technology, it can be difficult to identify who is purchasing tokens. This means that the true extent of the transaction is not quite clear. However, some blockchain platforms enable organizations to require and share personal information when making a transaction. Therefore before investing, it’s wise to consider the project’s Know Your Customer (KYC) measurements in place.
ICOs have seen rapid growth within the last year with more projects planned in the near future. However, for those looking to invest or launch their own ICO, it’s essential to understand how to navigate the ecosystem, including risks associated with the mechanism. Despite being a relatively new fundraising model, the rate at which they have grown in popularity means that we will continue to see more and more blockchain startups turn to the cryptocurrency community."
The UK’s Banking and Financial sector has experienced a strong quarter, despite ongoing uncertainty caused by the Brexit negotiations, according to figures recently released in the Creditsafe Watchdog Report. The report tracks quarterly economic developments across the Banking and Financial and 11 other sectors (Farming & Agriculture, Construction, Hospitality, IT, Manufacturing, Professional Services, Retail, Sports & Entertainment, Transport, Utilities and Wholesale).
Sales are up 4.19% from Q2, and the number of active companies and new companies have both increased by 5.9% and 8.5% respectively over the same period. This is supported by the rate of company failures, which has dropped by 4.0%. Total employment has also increased by over 1% in Q3.
The research shows a continued return to form for the Banking and Financial sector in terms of these core metrics. However, the financial health of the sector has been hit as the volume of bad debt owed to the sector has increased by 118.8% in Q3, with the average amount of debt owed to companies coming in at £246,318. Suppliers bad debt, the volume owed by the sector, has also seen a big increase of 127.1%.
Rachel Mainwaring, Operations Director at Creditsafe, commented: “While today’s Creditsafe Watchdog Report show signs of optimism for the UK’s Banking and Financial sector, despite the ongoing political and economic uncertainty throughout Europe and beyond, the levels of bad debt seen in Q3 are a serious cause for concern.
“One company, Pearl Finance Co Ltd, is responsible for over £80 million of bad debt owed to other sectors and we can see the potential for contagion if debt spreads across businesses in the UK. With a big increase in bad debt owed both to and by the Banking and Financial sector this quarter, we’ll need to keep a close eye on the industry over the coming months to see if it can rebalance.”
(Source: Creditsafe)
According to reports, Jordan Belfort, the American stockbroker immortalized in the blockbuster movie Wolf of Wall Street, claims Initial Coin Offerings, the IPOs for new crypto coins, have become “the biggest scam ever.”
Belfort told the Financial Times that fundraising ICOs are “far worse than anything I was ever doing,” adding that “"It's the biggest scam ever, such a huge, gigantic scam that's going to blow up in so many people's faces.”
Many see crypto currencies as a massive investment in the future of finance, while other see them as a bubble, with rising prices inciting a speculative investment spin. According to official figures from CB Insights, $2 Billion was raised in ICOs in the first nine months of 2017 alone. In 2016 the same period saw $54 Million raised. Bitcoin, the leading crypto currency has also seen a rise from circa $1,000 to up to $5,000 this year.
Cryptocurrency expert and Founder of London firm CommerceBlock disagrees and says the old guard of banking and finance are running scared. Nicholas Gregory, founder and CEO of cryptocurrency enabler CommerceBlock, said: "The old guard are being cut out by ICOs which means the banks, VCs and lawyers are losing billions. No wonder they're upset.
"It's wrong to ban them because an ICO is just a way of crowdfunding investment for technology firms who choose to do it in cryptocurrency because that is their field.
"In the old days - up to a year ago - you would go to a VC and they would decide whether to invest in your company and you would have to follow their rules. ICOs make it easier for companies to raise funds from more sources and free themselves from the straitjacket of VC interference.
"Are there scams? Of course. But there are scams in every financial system from penny stocks to fraudulent gambling sites.
"It's too easy for critics to point the finger of blame at the technology and not the criminals who exploit every loophole in every kind of commercial environment.
"Investors take a risk by buying into ICOs just as they do buying equities, even though they are not securities. But they are offered far greater transparency. There is more they can vet with ICOs because you can look at the source code of the firm you are funding. You can download the product and play with it. In the stock market all you get is a brochure.
"This is why it's more transparent and that's why VCs hate it. The VC model is all about the 1%. Only a multi-millionaire could invest in Facebook in 2009. With the ICO model, if you and I spot the next Facebook we can get in on it."
New report from national law firm Mills & Reeve highlights the defiant ambition of the mid-market despite serious challenges, and demands for sustainable growth finance.
Mid-market businesses remain ambitious and confident in their growth prospects despite an unstable economic landscape, the impact of Brexit and an unsupportive funding environment, according to new research from national law firm Mills & Reeve.
The study, ‘Defying Gravity’ - based on the opinions of 500 leaders of medium-sized businesses in the UK – reveals that 83% of mid-market businesses plan to increase turnover in this financial year (2017/2018) by an average of 22%, and two thirds of leaders aiming to grow (62%) are willing to bet their house on meeting this target. This is not unrealistic, with the new research also revealing that two thirds (66%) of medium-sized businesses grew turnover last year, at an impressive average of 20%.
However, mid-market businesses face serious challenges to growth. Three fifths (59%) of mid-market business leaders do not believe that the economy is strong and stable. Two thirds (64%) of mid-market boards are concerned that there is now a real risk of recession, and that economic uncertainty will disproportionately affect the mid-market (66%).
With single market access “critical” for three fifths (60%) of mid-market businesses, Brexit looms large on leaders’ list of concerns. Three in five (61%) mid-market leaders are concerned that the UK failing to reach an agreement with the EU would cause “significant damage” to their business, and 60% are concerned that regions outside London will be disproportionately affected by Brexit. More than half (55%) of leaders are concerned that implementation of Brexit is a serious threat to their ability to recruit both specialist and low-cost talent.
The external funding needed to supercharge growth is also found to be lacking: almost three in five mid-market leaders (58%) say that their company can’t achieve its growth potential without better long-term finance options. More than half (56%) of business leaders stated that mid-market finance is not “fit for purpose”, with two thirds (63%) believing that the UK funding environment is great for start-ups, but not for mid-market firms.
Claire Clarke, managing partner at Mills & Reeve, comments: “Despite very real challenges, it is encouraging to see mid-market leaders remaining defiantly ambitious about growth, determined to beat market conditions and to hold their position as the driving force of the British economy.
“But these businesses are being hindered in their efforts to realise their ambitions. Accessing growth finance suited to mid-market needs is a significant challenge, and the unstable economic and political landscape is causing some businesses to refrain from making the investment necessary to grow.”
The findings are released today ahead of a series of reports from Mills & Reeve championing the mid-market and exploring the current challenges faced by business leaders.
The research goes on to reveal a perceived lack of support from Government, with two thirds (65%) of medium-sized business leaders frustrated that the Government “keeps presenting obstacles to mid-market growth”. Three-quarters (74%) cite a lack of targeted policy support, with 61% concerned that Brexit will distract Government from supporting regional development and infrastructure.
Jayne Hussey, head of mid-market at Mills & Reeve, adds: “The mid-market is the unsung powerhouse of the UK economy, and we are hopeful that medium-sized businesses can continue to overcome the barriers to growth formed by uncertainty. The events of the recent past may have rocked the nation’s confidence, but the resilience, strength and ambition of mid-market business leaders appears to remain intact.”
(Source: Mills & Reeve)
Lord Alan Sugar is best known for his long tenure as host of the BBC’s hugely successful show The Apprentice.
His qualifications to sit across from hopeful candidates in the boardroom have been built up through years of diverse business experience from heading up an early computing giant (Amstrad) to more recently acquiring a lucrative property empire.
A self-made man with an innate sense of corporate strategy, Sugar rose from humble beginnings in a council flat to being appointed the UK’s Enterprise Tsar through tenacity, savvy and a tell-it-like-it-is attitude.
However, his rise from obscurity to celebrity wasn’t without its setbacks and stumbles. Here is the story of one of Britain’s most influential businessmen.
(Source: ABC FINANCE LTD)
According to a report co-authored by Yandong Jia, a researcher at the Research Bureau of the People's Bank of China, alongside Jun Nie, a senior economist at the Kansas City Fed, “analysis indicates that the momentum of Chinese growth is likely to slow in the near term."
As the world’s second largest economy, China’s GDP has seen a 6.9 YoY increase, according to China’s National Bureau of Statistics (NBS). However, the above report suggests further growth to be considered bleak. "An analysis of its underlying forces suggests this momentum may not be sustainable," it reads. "In addition, strength in policy-related variables has been waning, creating additional downside risks to near-term growth."
Finance Monthly, this week spoke to several expert sources on China’s economy and prospected continued growth. Here are Your Thoughts.
Josh Seager, Investment Analyst, EQ Investors:
Every so often, investor concern about a Chinese hard landing rises. There have been numbers of catalysts for this over the past three years, from Chinese equity market sell offs to expectation of capital outflow induced currency depreciation. Most have passed without issue and are now barely remembered
The biggest cause of concern, however, has been debt. This has led many commentators to predict a large credit crisis. We believe that such concerns are overemphasised and stem from a key misunderstanding: the Chinese economy is ultimately guided by the Communist party not market dynamics. Credit crises generally happen because heavily indebted borrowers lose access to financing. In China’s case, the communist party control both the lenders (the banks) and the problem borrowers (the heavily indebted State-Owned Enterprises (SOES). Consequently, they are in a perfect position to manage the riskier debts and avoid defaults.
The real risk to China is much less exciting. Without ‘creative destruction’ where unprofitable companies are allowed to default, resources become misallocated. This means that unprofitable and unproductive companies, many of whom should be bankrupt, hoover up capital, employees and materials that could be better used by more productive firms.
This is happening in China, SOEs are hoarding resources in spite of the fact that they have get 1/3 (capital economics) of the return on them that private companies do. The route out is through supply-side reform but is difficult. It requires bankruptcy, bank recapitalisation and would probably lead to higher unemployment and increased uncertainty.
The Chinese government is financially strong and can afford to do this now. However, reform will get more difficult and expensive as the stock of debt builds. If President Xi chooses to pursue reforms we are likely to see short term pain for long term stability. If not, we will see a continuation of the status quo for the next few years but future GDP will be lower as a result.
Jonathan Watson, Chief Market Analyst, Foreign Currency Direct:
The Chinese economy has been wobbling with concerns over the pace of economic growth, which peaked at nearly 15% in 2007 but has been languishing around 6.9% lately.
Both business and consumer debt is high, and there are wider concerns that the largely export driven growth the economy has seen in the last few decades is coming to a halt.
Previously voiced concerns over the legitimacy of Chinese economic data raises questions about the extent of the trouble the economy could be in. Overlooking those fears, what appears clear is that the Chinese economy is still improving. With the global economy predicted to grow by 3.6% this year and 3.7% next year, according to the IMF, China should have little to worry about.
As a net exporter, the global economy will continue to have an effect on China’s economic growth. Any readjustments could cause turbulence but I see the trajectory as positive. Rather than hitting a wall as many have been predicting for years, I expect the Chinese economy will be building over or through one…
Erik Lueth, Global Emerging Market Economist, LGIM:
The Chinese economy is indeed likely to slow from here, but it is unlikely to hit a wall. Growth has been above the official target of 6.5% so far this year, powered by exports and a buoyant property sector. But, both of these drivers are fading.
In response to runaway house inflation in prime cities, the government tightened prudential measures over the past year or so. This has led to weaker housing demand and prices with the latter now falling in tier-1 cities. Similarly, exports seem to have peaked with PMIs in advanced economies looking stretched and the Chinese currency no longer falling in real terms. In our base case the economy would slow from around 7% this year to 6.5% in 2018 and 6.2% in 2019.
We are concerned about high debt levels, but the Chinese economy hitting a wall is a mere tail event in our forecast. To begin with, a financial crisis doesn’t look likely (as I have argued here on our investment blog, Macro Matters). China’s debts to foreigners are negligible and the capital account remains tightly managed. Key debtors and creditors are state-owned—state-owned enterprises and banks, respectively—greatly reducing roll-over risks. And, shadow banking while risky is still too small to overwhelm the state banks.
Second, China still has ample fiscal space. If it were to increase its fiscal deficit – estimated at around 12.5% of GDP – by 2 percentage points over each of the next 5 years, government debt would rise from around 70% of GDP today to 105% of GDP in 2021. This is not negligible, but certainly manageable given high savings rates and potential growth.
If something has the potential to drive China against the wall, it would be the deflation of a property bubble. As always spotting a bubble is challenging, but on balance we discount it. According to BIS data real house prices have been flat since the global financial crisis on a nationwide basis. Moves in prime cities have been anything but sideways, but at 90% over 3 years, increases remain well below the 300% witnessed in Tokyo before its bubble burst in 1990.
Dr Ying Zhang, RSM Rotterdam School of Management, Erasmus University:
China’s economic growth from the factor-driven to an efficiency-driven in the past 3 decades has not only brought China to be the world manufacturing center in the past, but also leveraged China as one of the important “spinal joints” of the world-body for the future. The reason of its importance is consistent with the global phenomena and world economy integration, as well as the interdependence between China and the rest of the world.
China’s supply-driven and quantity-based catch-up model is very effective, particularly to bring China to the category of middle-income countries; however, once stepping into such a territory, the historical evidence already shows that the chance to be trapped in there is be very high, if without proper in-time transformation.
Due to the high-interdependence, China’s reduced economic growth rate, though not pulling China’s economy moving down, has pulled exponential impact on some countries in terms of their employment rate and economic performance. Such symptom calls for worries and blaming to China, with two different messages: one, China hits the wall; second, China is transforming and preparing for the innovation-driven economic growth model.
China’s current transformation, in terms of being inclusive and quality-based and dramatic rising evidence in domestic consumption and prosperous service sector, implies that China will not be falling into the first proposition. It is also supported by the vision and the joint effort of Chinese citizens, global participants, and Chinese government to build China as an inclusive society and sustainable economy for the sake of world integration and global sustainability. In principle, this direction is presented as a paradox where China’s transformation is empowered by massive entrepreneurship and innovation in the current technology-driven and digitalization era ,while presented with a reduced GDP growth rate. The underlying matter is our perception and the angle to view it.
China’s economy does not hit the wall. Instead, it is on drive with much more power. With corrected understanding on the relationship between what China is working on and what the statistics simply presented, there would be more space for the world to grow together, for the world economy to be more stabilizing, sustainable and integrative.
Franklin Allen, Executive Director, Brevan Howard Centre for Financial Analysis:
Academics and journalists often predict that the Chinese economy’s growth will “hit a wall” and slow down dramatically. So far this has not happened. The Chinese economy has slowed down from about 10% annual real GDP growth several years ago to the current 6.5-7.0%. My own view is that this kind of growth rate is likely to continue for the next few years at least. The Chinese government still has a large degree of control over many aspects of the economy and if growth appears to be missing this target, they can ensure enough extra activity is undertaken that it hits it. There is a significant amount of debt in the Chinese economy but much of this is local government debt. The problem is that the funding of local governments is not well structured currently. They do not have taxing powers and do not receive large block grants from the central government. At some point the Chinese government will need to solve this problem. However, in the short run debt figures in China should be interpreted in a different way than equivalent numbers in Europe or the US.
In the long run, I think the Chinese economy has the capability to grow more quickly than current rates. The problem is that the financial system does not provide productive small and medium sized enterprises with the financing they need. They are the growth engines the economy requires and has used in the past during the fast growth period. If you look at the interest rates these firms are prepared to pay in the shadow banking sector, it seems likely they can grow quickly if they could obtain finance through the formal financial system. At the moment this is geared up to provide large state-owned enterprises with finance but they do not require very much. They do not have many prospects for growth. Hopefully, reforms to the financial system that have long been discussed and that will allow flows to the firms that need then will be implemented before too long.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Sustained economic growth and the fall in the Sterling exchange rate have put record pressure on British businesses to increase the amount of money tied up in working capital, leaving them at risk if growth were to weaken in the months ahead, according to the latest report from Lloyds Bank Commercial Banking.
Firms across Britain now have around £535bn tied up in excess working capital – up seven per cent from £498bn since the last report was released in May – meaning that firms could struggle to free up cash either to grow or to weather turbulent financial conditions.
The sustained growth seen in the past 12 months – particularly in manufacturing and in the services sector – has increased the amount of cash tied up in the day-to-day running of businesses, with the impacts from the fall in Sterling, forward purchasing of inventory and a rise in input costs, being fully realised.
At the same time, one in four businesses said their customers had taken longer to pay during the past 12 months, increasing the value of firms’ outstanding invoices. This comes as businesses are continuing to rapidly build up inventory, leading to more cash being locked up in stock, which is then unable to be used for growth.
With as many as one in three firms saying they are concerned by economic uncertainty or a fall in sales during the next 12 months, these factors could spell trouble for British businesses if economic conditions declined.
Adrian Walker, managing director, head of Global Transaction Banking at Lloyds Bank, said: “Increasing pressure for British businesses to hold more working capital has to date largely been driven by economic growth fuelled by the fall in Sterling. But, if there were any economic obstacles on the horizon this could be a double-edged sword.
“By locking up cash in this way, it stops investment in other more productive areas of the business, whether that be investing in new people, creating new products or targeting new markets.
“With as many as one in three businesses telling us that their greatest concerns for the next 12 months are economic uncertainty or a fall in sales, this reliance on future growth prospects is concerning.”
The findings come from Lloyds Bank’s second Working Capital Index, a six-monthly report that uses Lloyds Bank Regional Purchasing Managers’ Index (PMI) data to calculate the pressure British businesses are under to either increase or decrease working capital.
Working capital is the amount of money that a company ties up in the day-to-day costs of doing business. Growing businesses tend to use more working capital, while pressure falls when firms realise they are facing challenges.
The current Index reading of 108.0 is an increase of almost four points, from 104.1 at the end of 2016, and is just below the highest point seen since the research started in 2000.
The Index highlights that with the UK’s domestic outlook looking weaker, businesses are increasingly going to need to rely on exports for future growth.
While the current relative weakness of Sterling makes conditions for international trade benign, the practicalities of exporting mean that it often places even greater stress on working capital through shipping times and slower payments.
Mr Walker added: “Whether businesses expect to grow through exporting, or they anticipate challenges due to weakening domestic demand, UK firms could benefit from the operational efficiency and cash flow boost that comes from working capital improvements.
“In the past, previous highs in this Index have coincided with improving financial conditions. The fact that the Index is currently climbing while financial conditions remain relatively low means businesses are taking on more and more risk.
“Our experience is that businesses that undertake a programme of working capital improvements can typically release around three to five per cent of turnover in additional cash, allowing them much more freedom to invest in growth, trade internationally, expand their product set or to give themselves a buffer to see them through more troubling times.
“But doing so successfully isn’t easy. It requires change across a number of business functions, and so the time to undertake that work should be done ahead of embarking on further growth, a new exports programme, or before any possible future storm hits.”
Manufacturing under pressure
The manufacturing sector has been a source of hope and opportunity for the British economy in recent months as the fall in Sterling made British manufactured goods more competitive overseas.
But the sector’s growth, together with rising import costs and pre-purchasing of materials in expectation of inflation, has pushed the sector’s working capital index to 126.1, which could be hampering growth amongst manufacturing businesses.
This compares with readings of just 105.0 and 104.8 in the services and construction sectors respectively.
Regional variations
The pressure to increase working capital grew in every region apart from the East of England, where the Index fell from 112.0 to 107.8. Although, the East of England still saw high pressure on businesses to hold more working capital.
Scotland, where a reading of 99.5 indicated pressure to reduce working capital six months ago, saw the biggest increase, with the Index reading rising more than five points to 105.2.
Wales remained the region with the highest pressure to increase working capital with the Index climbing from 113.7 in April to 114.3 now.
(Source: Working Capital)
