Posts in category Finance and economics


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Managing financial risk on London’s massive Crossrail project

THE eastbound platform on the Elizabeth line at Farringdon Station in central London is 30 metres below ground. Its length is as striking as its depth. At more than 200 metres, it is almost twice as long as the typical platform on the Tube. When service begins in December 2018, it will increase rail capacity in central London by 10%, thanks to the longer trains. Travellers nearest to the terminal stations at Reading and Heathrow, to the west of the city, and Shenfield and Abbey Wood, to the east, have a shot at the acme of commuter luxury: a seat.

Crossrail, as the £14.8bn ($19bn) infrastructure project is known, is on track to deliver other small miracles. With 85% of the work completed, the project is on-budget and on-time, in spite of its size and complexity. The programme required ten new stations, some with passenger tunnels linking them to existing Tube lines. The Elizabeth line itself will snake through 13 miles (21km) of twinned tunnels, including a section under the Thames. Tunnelling is a risky business. You never can tell if you’ll run into a hold-up. The Crossrail dig has yielded 10,000 items of interest to archaeologists. At Farringdon the diggers found 25…Continue reading

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Digitisation shakes up corporate-bond markets

JUST a few decades ago, an asset manager wanting to trade shares, bonds or derivatives almost always had to call up the trading desk at a big investment bank. Today shares and many derivatives can be traded with a few simple clicks (or even in fully automated fashion, using algorithms). But buying and selling bonds, especially corporate bonds, is still an old-fashioned business. Over four-fifths of trading in American corporate bonds still takes place with a dealer, usually over the phone. Yet digitisation is at last beginning to change the structure of bond markets: witness the announcement on April 11th by Tradeweb, an electronic-trading platform, that it is to offer “all-to-all” trading in European corporate bonds, ie, a system in which any market participant can trade with any other.

Electronic bond-trading is not in itself new. Tradeweb’s platform, initially limited to trading of American Treasuries, was unveiled in 1998. Around half of Treasuries, and nearly 60% of European government bonds, are now traded electronically, reckons Greenwich Associates, a consultancy. But for corporate bonds, progress has been slower: only 25% of global trading volume in…Continue reading

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How and when to use private money in infrastructure projects

WHEN the Indiana Toll Road was opened in 1956, there were eight pairs of travel plazas, or rest stops, along the 156-mile (250km) stretch linking Chicago to Ohio and points eastward. As cars became faster and less thirsty, travellers had less reason to stop regularly for petrol or snacks. Three of the travel plazas closed in the 1970s. Restaurants shuttered, even if offered free rent. The remaining plazas, dwindling in number, fell into disrepair. The abiding memory some road users had of Indiana was of grubby toilets along the toll road.

Those rest-stops are at last getting a makeover. IFM, an Australian infrastructure fund, is investing $34m in the toll-road’s plazas, part of a $200m-plus upgrade. Half of the road’s length, with 57 bridges, is being resurfaced, using a treatment known as “crack-and-feed”, which lasts longer than simply patching the top. IFM, which acquired a 66-year lease on the road in a $5.8bn deal in 2015, says a private-sector operator has the right incentives to invest for the long term. Fewer tyre blowouts mean less gridlock, more road users and more revenue.

Politicians across the spectrum agree on the need to upgrade America’s…Continue reading

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The IMF nudges up its forecast for global growth

APRIL is the cruellest month, breeding lilacs out of the dead land, and, in Washington, chirpy forecasts from the IMF that often prove a bit too chirpy. On April 18th the fund released its semi-annual World Economic Outlook (WEO), raising its forecast for global growth in 2017 to 3.5%.

Growth forecasts for the emerging world have not changed. The IMF’s global optimism is based instead on hopes of increased growth in the rich world. The fund takes a rosy view of the American economy, citing both high levels of consumer confidence and Donald Trump’s plans for more government spending. In Britain the IMF now reckons GDP will grow by 2.0% in 2017, up from earlier estimates of 1.5% (issued in January) and 1.1% (last October). The IMF has also raised its forecasts for Japan and the euro area.

Snipers point out that IMF forecasts have been far from perfect. Some glitches are excusable. In the spring of 1990, it predicted that Kuwait’s economy would grow by 0.8% that year. It actually fell by 26%. The IMF’s model did not allow for an Iraqi invasion. But other errors are less easily explained: between 1990 and 2007, the IMF’s spring forecasts…Continue reading

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Markets cheer Turkey’s referendum result

THE VICTORY of Recep Tayyip Erdogan, Turkey’s president, in a referendum on April 16th is seen by many observers as a worrying step on the road to autocracy. The vote handed Mr Erdogan far-reaching new powers. But the Turkish lira, government bonds and stockmarket all gained ground as the results came in.

It was a reminder that the relationship between markets and democracy is not rock-solid. Like an errant husband, investors may proclaim their fidelity to democracy but are not averse to seeing someone else on the side.

In Turkey, investors may have feared turmoil if Mr Erdogan’s proposal had been defeated. It is an old, but fairly reliable, cliché that investors dislike uncertainty. And the early years of Mr Erdogan’s rule saw rapid economic growth; since he took office, the Istanbul market has gained 760% (see chart).

An authoritarian government can provide certainty, at least in the short term. When Mussolini took power in Italy in…Continue reading

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Europe is liberalising its sugar regime

IN A rickety warehouse on the banks of London’s Thames, sit mountains of caramel-coloured raw cane-sugar. Following a pattern of trade that is centuries old, they have been shipped across the oceans to Tate & Lyle Sugars’ dockside factory, where they will be refined into the white stuff. Cane reigns supreme worldwide, accounting for four-fifths of sugar production. In Europe, though, it accounts for only a fifth; most sugar is made instead from beet, thanks to a technique developed in the Napoleonic wars, when an English blockade halted French cane-sugar imports.

It is no surprise, then, that the sugar-beet industry was well guarded by Europe’s Common Agricultural Policy. But in recent years the EU has reformed its system of quotas and subsidies to lower food prices and enhance its farmers’ competitiveness; production quotas for milk were dismantled in 2015, for example. Now it is sugar’s turn. From October this year, the EU will abolish its minimum price and production quota for beet. Its complex restrictions on sugar imports will remain, however, as will its income support for farmers.

The beet sector has already been restructured in preparation…Continue reading

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Rescuing Myanmar’s farmers from the debt trap

Living on borrowed rice

WHEN Myo Than was a young man, his family had 12 hectares of farmland in Dala, a rural township just across the river from Yangon, Myanmar’s biggest city. His mother sold most of it after his father died. Mr Myo Than grows rice on what’s left, but water shortages mean he reaps just one harvest each year. He borrows money from the Myanmar Agricultural Development Bank (MADB)—1.5m kyats ($1,100) this year, at an annual rate of 8%—to cover planting costs. But rice is a low-return crop. To repay the bank he borrows from local moneylenders at a rate of around 4% each month. Mr Myo Than owes them $7,300. He has given his land deeds to a moneylender as security.

Mr Myo Than’s predicament is not unusual: poor crop returns and usurious loan terms have kept Myanmar’s farmers trapped in poverty and debt. Around 60% of Myanmar’s population are engaged in agriculture. Most are poor, and farm small plots of land using age-old manual techniques. Farmers scythe rice fields; water buffaloes pull wooden ploughs; hay-laden bullock-carts trundle down narrow roads.

Many farmers borrow to cover planting costs, buy equipment…Continue reading

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The EFTA countries show how hard Brexit will be for Britain

NORWAY offers much to envy. The food is tasty, public services are great and the people are impossibly good-looking. Its trade policy looks equally desirable. Though it trades heavily with the EU, Norway can also strike trade deals all over the world, either operating in concert with the three other members of the European Free Trade Association (Iceland, Liechtenstein and Switzerland) or on its own. Members of EFTA have dozens of deals, including two with China, with which the EU cannot even start negotiations.

After it leaves the EU, Britain will look much like an EFTA country: a rich economy with close links to Europe, but also seeking trade deals elsewhere. It is superficially an attractive prospect. Yet EFTA’s half-in-half-out relationship with the EU hinders its trade as much as it helps.

EFTA’s flexibility in trade stems from its odd relationship with the EU. Switzerland has a series of bilateral agreements, whereas Norway, Iceland and Liechtenstein are part of the single market through the European Economic Area (though with opt-outs for agriculture and fisheries). Crucially, however, all are outside the EU’s customs union, an agreement which regulates…Continue reading

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The boss of scandal-plagued Barclays gets into trouble himself

IN HIS first 17 months running Barclays, Jes Staley seemed scarcely to put a foot wrong. The American has narrowed the British lender’s ambitions, to focus on retail business at home, corporate and investment banking on both sides of the Atlantic, and credit cards. He is pulling Barclays out of Africa, after a century, and has sped up its retreat from other markets. He has also poached several folk from JPMorgan Chase, where he spent 34 years and ran the investment bank.

On April 10th it emerged that Mr Staley had clumsily planted a boot out of bounds. Last June Barclays’ board and an executive received anonymous letters about a “senior employee” hired earlier in 2016. These, say the bank, raised concerns “of a personal nature” about this person and Mr Staley’s role in dealing with the matter “at a previous employer” (presumably JPMorgan Chase).

Mr Staley, seeing the letters as “an unfair personal attack” on the newcomer, asked Barclays’ security team to find out who had written them, but was told that this should not be done. In July he inquired whether the matter was resolved—and formed the “honestly held, but mistaken” belief…Continue reading

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East Germany’s population is shrinking

WERE it not for the graffiti on abandoned buildings, Bitterfeld-Wolfen, two towns north of Leipzig joined as one in 2007, would seem devoid of young people. Pharmacies, physiotherapy surgeries and shops selling garden gnomes line the sleepy streets. In its heyday the place had a booming chemical industry. Today “the air is much cleaner and we can finally hang out laundry,” says an elderly local out on a morning stroll. “But many jobs were lost and so few children are left.” He points out a building that was once a school; today it is one of many care homes.

Despite an influx of 1.2m refugees over the past two years, Germany’s population faces near-irreversible decline. According to predictions from the UN in 2015, two in five Germans will be over 60 by 2050 and Europe’s oldest country will have shrunk to 75m from 82m. Since the 1970s, more Germans have been dying than are born. Fewer births and longer lives are a problem for most rich countries. But the consequences are more acute for Germany, where birth rates are lower than in Britain and France.

If Germany is a warning for others, its eastern part is a warning for its west. If it were still a country,…Continue reading

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The world’s first pot-focused exchange-traded fund

THE launch of the world’s first cannabis-focused exchange-traded fund (ETF), on the Toronto Stock Exchange on April 5th, is welcome news to aficionados of marijuana. As with any ETF, the fund spares would-be investors the need to pick out their own favourite stocks, or indeed weed out dodgy ones, as it will simply replicate and track an index, in this case the North American Medical Marijuana Index.

The fund’s home in Canada is no accident. Medical marijuana has been legal there since 2001, with growing and selling outsourced to licensed firms since 2013. (Justin Trudeau’s administration has also announced plans to legalise recreational use by 2018.) In America, despite state-level legalisation, marijuana is still illegal under federal law, making it nigh-impossible for pot firms to even access the banking system, let alone seek a proper public listing.

As a result, the index itself ends up having a strong Canadian bent. Eleven of its 16 companies are based there, and all but three are licensed suppliers of medical marijuana in Canada, though a few also have American operations. Three of the others are American, though none of them deal directly with…Continue reading

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The history of growth should be all about recessions

“THROUGHOUT history, poverty is the normal condition of man,” wrote Robert Heinlein, a science-fiction writer. Until the 18th century, global GDP per person was stuck between $725 and $1,100, around the same income level as the World Bank’s current poverty line of $1.90 a day. But global income levels per person have since accelerated, from around $1,100 in 1800 to $3,600 in 1950, and over $10,000 today.

Economists have long tried to explain this sudden surge in output. Most theories have focused on the factors driving long-term economic growth such as the quantity and productivity of labour and capital. But a new paper* takes a different tack: faster growth is not due to bigger booms, but to less shrinking in recessions. Stephen Broadberry of Oxford University and John Wallis of the University of Maryland have taken data for 18 countries in Europe and the New World, some from as far back as the 13th century. To their surprise, they found that growth during years of economic expansion has fallen in the recent era—from 3.88% between 1820 and 1870 to 3.06% since 1950—even though average growth across all years in those two periods increased from 1.4% to…Continue reading

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Payday lending is declining

IN MAY 2013 Gloria James borrowed $200 from Loan Till Payday, a lender near her home in Wilmington, Delaware. Rather than take out a one- or two-month loan for a $100 fee, as she had done several times before, she was offered a one-year loan that would set her back $1,620 in interest, equivalent to an annual rate of 838%. Ms James, a housekeeper making $12 an hour, agreed to the high-interest loan but quickly fell behind on her payments. After filing a lawsuit in federal court, a Delaware judge ruled that the loan in question was not only illegal but “unconscionable”.

Her story is remarkably common. Americans who live pay cheque to pay cheque have few places to turn when they are in financial distress. Many rely on high-interest payday loans to stay afloat. But government efforts to crack down on the $40bn industry may be having an effect.

Roughly 2.5m American households, about one in 50, use payday loans each year, according to government statistics. The typical loan is $350, lasts two weeks, and costs $15 for each $100 borrowed. Although payday loans are marketed as a source of short-term cash to be used in financial emergencies, they are often used to…Continue reading

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America’s disproportionate weight in global stockmarket indices

THE aims of a stockmarket index are threefold. First, to reflect what is actually going on in the market; second, to create a benchmark against which professional fund managers can be judged; and third, to allow investors to assemble well-diversified, low-cost portfolios. On all three counts, there are reasons to worry about the MSCI All Country World Index, one of the most widely used gauges of the global stockmarket.

That is because the American market has a weighting of 54% in the index, as high as it has ever been (it reached the same level in 2002). In other words, anyone using the index to monitor the market is seeing a picture heavily distorted by Wall Street. The relative performance of international fund managers against the index will largely depend on how much exposure to America they are willing to take on. And anyone buying a tracking fund is making a big bet on the American market. Things are even worse if investors track the MSCI World Index, which covers only developed markets. In that benchmark, America’s weight is 60.5%.

There is nothing wrong with the way that MSCI calculates its indices; the weights reflect how America dominates global…Continue reading

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Banks’ equity-research operations are in decline

EQUITY research, the business of providing analysis of companies’ financial performance, may be a stodgy industry but it is not a simple one. Regulators fret about the sector’s Byzantine payment structure: investment banks dominate the market, but do not charge for it. They dole it out free to clients in the hope of future trading business. The understandable fear is that this set-up produces conflicts. Banks may be wary of issuing reports critical of companies; fund managers may end up choosing banks because of their research rather than the efficiency of their brokerage services. New regulations will overturn this model entirely.

MiFID 2, an ambitious set of European financial rules coming into effect next January, will force asset managers to disclose how much they spend on research. So banks will have to “unbundle” their services, billing clients for research and trading separately. Although the rules are being introduced by European regulators, banks across the world will have to change their pricing practices to comply.

These rules will be hugely, and beneficially, disruptive to a grossly inefficient industry. At present, banks blast…Continue reading

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