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Is Merging Innovative Financial Technology with Credit Unions the Key to Banking the Unbanked in Latin America?

Credit unions play a critical role in local economies of countries throughout Latin America and the Caribbean, serving as a vital savings and credit conduit to vast numbers of people, especially those in the lower rungs of the income pyramid who are in many cases, priced out of the traditional banking system.

These organizations, created with the primary purpose of encouraging people of ordinary means to save money while offering them loans, are able to charge lower rates for loans (as well as pay higher dividends on savings) because they are nonprofit cooperatives. Rather than paying profits to stockholders, credit unions return earnings to members in the form of dividends or improved services.

With lower cost structures, they are in a better position to provide millions of unbanked Latin Americans with access to financial services that can have a transformative effect on the social and economic development of nations. This is a particularly important function in a region where the population, according to McKinsey Consulting, remains 65 percent unbanked.

Despite the benefits credit unions provide to large segments of the population, the fact remains that these not-for-profit organizations simply lack the resources necessary to significantly alleviate the exorbitantly high rate of unbanked throughout the region.

So the question becomes: what can these institutions do to increase the effectiveness, efficiency and reach of their vital products and services?

A Challenging Environment

Credit unions, and small banks for that matter, face the same issue as larger banks in that consumers of all kinds are beginning to solidify the digital user experience they expect from all of their service providers, including financial services. As platforms such as Facebook become more and more accessible to individuals in all social and economic levels of society coupled with the exploding penetration of smart phones, which is forecasted to total 219.9 million users by 2018, these users will begin to increasingly demand the same convenience and intuitive ease of use in their financial services. Fortunately, technology today allows for credit unions and small banks to deploy platforms that provide their customers with exceptional capabilities to not only meet their banking needs, but to do so in the mobile and user-friendly manner they want and expect.

Adding to the hurdles faced by credit unions in the region, governments and regulators are adding restrictions that require these institutions to only provide differentiated services to specifically defined market segments through channels not served by traditional branch banking infrastructures.

Finally, with the proliferation of cyber crime, building secure infrastructures that protect the identities of customers is of paramount importance to every single financial services stakeholder.

Technology Changing the Game

Throughout the world, a surge in venture capital investment into financial innovation has created exciting new business models that are poised to effectively and efficiently transform the financial services industry.

Last year, according to Accenture, the financial technology industry attracted over US$ 12 billion in venture capital investment in 2014, fueling the creative innovations in the uses of analytics to evaluate, approve and process financial transactions that are greatly expanding the access to once prohibitively expensive and cumbersome financial services for individuals of ordinary means and small and medium sized enterprises.

Much of the changes in the market paradigm for financial services are being driven by the proliferation of mobile phones, especially the smartphone, which is essentially providing supercomputing power to consumers all over the world. Companies such as M-Pesa, Lenddo, Abra and Konfio are just a few of the thousands of new companies transforming the financial landscape by making world-class financial services available to the masses.

However, systematically scaling and bringing these solutions to large numbers of people remains one of the most daunting challenges for even the most well funded startups.

The ability to partner and collaborate with large institutions that have established customer bases and reach into communities could be a massive “win-win” for both the startups and the credit unions.

This obviously complimentary collaboration has one wrinkle. Most credit unions operate on antiquated technology frameworks that inhibit, if not outright prevent, the onboarding of technologically agile startup solutions onto their core-banking platforms.

Adding to the challenge is the fact that as non-profits, credit unions lack the time, human resources and budgets to invest in updating their technology platforms. Until now, there had been limited options as most core-banking technology companies focused their products on larger bank infrastructures, pricing many smaller players out of the market and putting them in competitively vulnerable positions of not being able to offer state-of-the-art solutions.

Agility is Key

One of the most disruptive aspects of the innovations in fintech are the ability to provide financial services quickly and inexpensively.

The big banks, by in large, have the financial and technological ability, if not necessarily the will and desire, to compete for the unbanked population. If the credit unions and smaller banks do not prepare a strategy to engage in the competition for this huge, untapped market, they may find themselves ultimately outside looking in as their market share decreases.

The other “elephant in the room” is the coming era of millennials. Today, there are 160 million in Latin America, representing roughly 30% of the entire population of the region. These digital natives being raised on social media are a critical market segment for institutions both big and small which must be addressed through smart technology.

So what is the solution? As technology becomes faster, cheaper and more accessible, it allows for the creation of affordable state-of-the-art, digitally agile solutions that can allow credit unions and small banks to operate with the speed, security and sophistication of large, global financial institutions. This enhanced technology capability coupled with the localized understanding of under and unbanked market segments can help credit unions continue to be a critical financial link for millions of consumers.

Opinion column by Martin Naor, CEO of Bankingly

Digital Advice: Opportunity Not Threat for Traditional Advice Market in the U.S.

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According to the latest research from Cerulli Associates, “U. S Retail and Investor Advice 2015: Aligning with Investors Goals”, digital advice tools should be seen as an opportunity, not a threat for the traditional advice market in the United States.

“Many industry stakeholders assume that ongoing advances in digital advice platforms will empower investors to handle their financial affairs without the assistance of traditional financial advisors,” states Scott Smith, director at Cerulli. “We believe that while technology innovations will transform how services are delivered, there will be an ongoing, and potentially increasing, demand for personalized financial advice delivered by humans.”

The report focuses on the relationship between investors and financial services firms, and also examines how investors choose their providers, segmenting investors into those who use an advisor, and those who invest through direct providers.

Most households in the U.S. do not have the fundamental understanding of financial topics that allows them to feel comfortable making decisions solely by themselves. An increase in the availability of online tools to help these investors explore their options will drive demand for personalized advice as investors gain a greater understanding of the vast inputs affecting their long-term outcomes.

“Instead of seeing digital advice tools as threats, traditional advice providers will be better served by adopting these tools as introductory elements of their brand that allow prospective investors to better understand the variety of options they are facing,” Smith explains.

“The ubiquitous growth of digital advice platforms is exactly the catalyst needed to accelerate the development of traditional advice providers to serve their clients moving forward,” Smith continues. “Instead of perceiving the growing prominence of digital tools as a threat of disintermediation, traditional advice providers have an exceptional opportunity to encourage their advisors to fine-tune their practice model to capitalize on identified best practices and use technology to enhance their client relationships.”

A Very Brazilian House of Horrors

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With China hogging the emerging markets limelight in recent months, it has been easy to lose track of developments elsewhere. With China worries calming now, it seems a good time to review just how bad things have become in Latin America’s biggest economy. President Dilma Rousseff has suffered a series of painful setbacks since her election victory last year, and in many ways is now in political exile despite being nominally in power – approval ratings signal how rapidly the situation has deteriorated (chart 10). The corruption scandal at Petrobras and allegations over accounting irregularities in her campaign and government finances leave the president weakened even as the economy continues its tailspin. The combination of political and economic paralysis has seen a wave of growth and credit downgrades for Brazil, and it is hard to see a rapid turnaround. According to Schroders, it could be years before Brazil recovers meaningfully.

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The Petrobras scandal (commonly referred to as the Lava Jato, or ‘Car Wash’), has continued to spread, contaminating larger and larger swathes of the corporate and political sectors in Brazil. It has now reached Dilma’s current political nemesis, Eduardo Cunha, speaker of the Lower House. Unlike much of the scandal to date, this revelation presents a possible boon to Dilma. Cunha is spearheading attempts to impeach the president, and his removal from office would provide an opportunity for Dilma to rebuild relations with the lower legislature. One tentative olive branch, in the form of a cabinet reshuffle which ceded more political power to the party of vice president Temer – the PMDB – appears to have backfired by angering other smaller parties in coalition with the PMDB, which were not included in the largesse. They have now splintered from the PMDB, creating a more fractured Lower House which will be even more difficult to reconcile. The reshuffle, which removed a key ally of the president, also leaves Dilma increasingly isolated within her own government, with former president Lula steadily building control in what some have dubbed a virtual regency (though Lula holds no position of power de jure, he remains influential within the ruling party and popular in Brazil at large). There are concerns that Lula’s next step will be to push for the removal of finance minister Levy, who has bought the government what little fiscal credibility it has. Rumors of his resignation on Friday 16th October prompted downward pressure on Brazilian assets but have since been quashed – likely reflecting assurances from Dilma to Levy that the government would continue to back his fiscal consolidation efforts. This drive by Lula is also likely a result of the Lava Jato scandal, which has begun to implicate family members. Political analysts at Schroder’s Eurasia Group suggest that Lula’s only chance of avoiding prosecution would be if he could portray the investigations as an attempt to undermine the left, and that to do this he needs to reinvigorate his traditional electoral base. Attacking fiscal consolidation is one way to do this. It was mentioned above that the rumors around Levy fueled volatility in Brazilian assets. More generally, the backdrop for all of this power broking has been an increased likelihood of impeachment for Dilma, forcing the concessions discussed above. This has generated a good deal of volatility across Brazilian markets, with participants seemingly hoping for an impeachment and fresh government.

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Is this justified?

Dilma is increasingly powerless and under siege from enemies and allies alike. The corruption scandal is engulfing an ever growing share of the political class and ensuring political energies are focused upon the investigation rather than reform efforts or fiscal consolidation, while those politicians so far untainted are currently deeply unhappy with Dilma – in part because they are being egged on by the Lower House speaker, Cunha. As things stand it is difficult to see how Dilma can lead Brazil out of the mire. Even if Cunha is forced to step down due to the corruption allegations he faces, it is not certain that the new speaker will be any more amenable – there is a strong incentive for the main coalition party, PMDB, to push for impeachment. Vice president Temer, of the PMDB, would then assume the presidency. Though good for the PMDB, this would not necessarily be good for investors, given the exposure of that party to the Lava Jato scandal – so more of the same political paralysis. What would be a good outcome? One possibility is that Dilma’s re-election is declared void. The country’s highest court has authorized an investigation into the president’s re-election accounts, following revelations that kickbacks from a construction firm were paid into the campaign’s coffers. If compelling evidence is found that serious electoral violations took place and were significant enough to impact the race for the presidency, the election result could be revoked. Though obviously a disruptive event, this would clear the way for a more market friendly, and scandal free, government to be elected. They would find they had plenty to do.

The undead economy

Activity continues to flatline, with corporate investment moribund in the wake of the Lava Jato scandal, consumers crushed by their debt burdens (chart 12), and government spending squeezed by attempts at fiscal consolidation. Yet despite this, inflation has continued to climb, in hideous parody of a booming economy. The Brazilian zombie economy, lifeless and yet animated, is enough to make policymakers hide behind the sofa.

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Is there any hope for Brazil?

Certainly, the current trend is a negative one, as reflected by the recent S&P and Fitch downgrades, which take the country’s sovereign debt within a whisker of junk status, driven by concern over the fiscal consolidation process. Schroders has written many times, too, on the supply side issues plaguing the economy, contributing to the persistent inflation problem, and the ‘Dutch disease’ inflicted by the multi-year commodity boom, which drove up unit labor costs and rendered Brazilian industry uncompetitive. On the fiscal and supply side concerns, there is little hope for immediate relief. The political situation all but guarantees a lack of productive legislation until a new government comes to power, unencumbered by corruption allegations and infighting. However, market forces are beginning – if only by a war of attrition – to generate an improvement in other metrics. For example, unit labour costs (chart 13) have finally begun to decline as unemployment builds, which ought to lead to an improvement on the trade balance, as seems to be happening (chart 14).

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All in all, Brazil’s horror story is far from its final act, but perhaps a glimmer of hope is becoming apparent on the very distant horizon. There can though be no painless resolution; perhaps the best case scenario is an early exit for Dilma followed by new elections that allow a purging of the rottenness seemingly embedded at the political core and a new energy with which to pursue reforms.

“The Fundamental Background Growth Story Is Still There for EM And These Countries Will Continue to Develop”

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Sailesh Lad, Senior Portfolio Manager within AXA Investment Managers’ (AXA IM) global emerging markets fixed income team and Olga Fedotova, Head of Emerging Market Credit at AXA IM, discuss their outlook for emerging markets, including the main triggers that could create buying opportunities next year and where the opportunities currently lie for the asset class.

On the future for emerging markets (EMs) Sailesh Lad comments: “While emerging market growth is unquestionably slowing, EMs are still growing at a faster pace than developed markets (DMs). Arguably investors had come to expect growth closer to 5% over the past 20 years, and will in time acclimatise to levels of 3-4% growth. So I think that EM growth will pick up, and will continue to be stronger than DM. Similarly, EM currencies have depreciated a lot in the past year or two, but having appreciated too quickly in the past, we may now see appreciation reoccurring albeit at a slower pace. The fundamental background growth story is still there for EM, and these countries will continue to develop.

“People tend to talk about EMs as a group of very basic countries with little infrastructure, but what is now classed as emerging markets are actually very developed economies in absolute terms, that happen to retain the label.”

Olga Fedotova added: “We are also seeing broad investors become more familiar with EM corporate names now. Investors have moved from a top-down approach to more bottom-up, fundamental analysis, and will increasingly distinguish strong companies that perform well, even in the current currency climate. Ultimately, the strong names will become stronger and therefore more expensive – and weaker companies will continue to struggle.”

Looking ahead to 2016, Saliesh Lad highlighted: “Current market conditions suggest there will be three main triggers that could create buying opportunities and lure investors back to the EM market next year. This includes:

The Federal Reserve will have to provide some clarity on the rate cycle. We think this will start gradually, but with cash levels at four-year highs, ultimately the cycle just needs to start. Investors can identify potential opportunities, but lack the conviction to invest right now because of the persistent uncertainty for interest rates.
China will remain a burning issue, but investors should start to acclimatise to the reality of the economy making a structural shift from an industrial economy to a consumer led one and growth being closer to 6% than 7%. Clarity from China’s authorities on future central bank policy will also be welcomed by investors.
Commodity prices need to stabilise. Ideally we would like to see 3-6 months of stability, particularly in oil and metals, to settle the dynamics for countries with high export dependencies.”

Looking to the more immediate future, Sailesh Lad continues to see solid opportunities in EMs: “While it might be quite a consensus view, I still think that India is a strong growth story. The closed nature of its economy means it is relatively insulated from China’s growth worries. It’s an EM that is still growing, and this insulation provides safe-haven qualities while also promising the potential of attractive returns.”

Olga Fedotova added: “I like Russian and selective Brazilian credits for completely different reasons. The Russian credit story is very robust over a longer time horizon, and technical conditions for Russian corporates remain supportive because of local investors. Russian corporates are also low leveraged, natural exporters, and can comfortably serve their debt, thanks in part to sharp rouble depreciation, prudent cost cutting and more conservative financial policies. Some Brazilian companies are also attractive, but you have to be very careful, as they have underperformed DM and EM alike at the overall level. Stronger names, that are not exposed to oil and gas, with relatively low debt levels and a high proportion of export revenues (for example food, paper and pulp producers) will benefit from cheaper valuations as investor sentiment towards EM is improving.”

European ETF’s AUM Break Loosing Streak in October

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According to Detlef Glow, Head of EMEA research at Lipper, assets under management in the European exchange-traded fund (ETF) industry increased from €427.97 billion to €464.15 billion during October.

After performance drove down European ETF’s AUM in September, this increase of €36.18 billion in October has much to thank to it. The underlying markets’ performance accounted for €30.36 billion, while net sales contributed €5.8 billion to the overall growth of assets under management in the ETF segment.

In terms of asset classes, bond funds (+€3.7 billion) enjoyed by far the highest net inflows for the month, followed by equity funds (+€2.8 billion), and alternative UCITS products (+€0.1 billion).

The best selling Lipper Global Classifications in October where:

Equity US with €62.8 billion
Equity EuroZone with €47.2 billion
Equity Japan with €38.3 billion

Amongst ETF promoters, iShares with €4.1 billion (iShares accounts for 49.45% of the overall AUM with €229.5 bn), db x-trackers with €0.5 billion and Amundi ETF €0.4 billion, were the best selling ones.

The best selling ETF for October was the iShares Core EURO STOXX 50 UCITS ETF, which accounted for net inflows of €460 m or 7.90% of the overall inflows

For further details you can follow this link.

80% of Private Equity Investors See Their Co-Investments Outperform Commingled Funds 

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Preqin’s latest survey of fund managers and investors examines the increasing appetite for co-investments among both parties. It finds that 80% of limited partners (LPs) have seen their co-investments outperforming private equity funds, with 46% seeing their co-investments outperform by a margin of over 5%. This level of performance is the biggest draw for investors, with two-thirds of LPs citing better returns as the biggest benefit of co-investing alongside GPs.

Co-investment opportunities from fund managers (GPs) are also becoming more common, with 87% of them either currently offering, or considering offering, co-investment rights to their investors. Furthermore, 30% of managers included co-investment rights in 81-100% of limited partnership agreements in their most recent fund. For fund managers, Co-investments are seen as a way to improve relationships with LPs, gain access to more capital for deals, and improve the chance of a successful fundraise.

“The most common motivation among LPs for co-investing beyond their typical fund commitments is the prospect of better returns, with many anticipating notably higher returns compared to their traditional private equity fund commitments. The majority of LPs surveyed have seen significant outperformance from their co-investments, although many say that it is too early to tell how their stakes will ultimately perform.

Direct investments, including co-investments, have increasingly become part of private equity discourse. Significant interest arising from LPs has been matched by increased co-investment opportunities provided by GPs. Provided LPs have sufficient resources available, co-investment opportunities should remain attractive due to their lower fees and greater potential returns.”  Says Christopher Elvin – Head of Private Equity Products, Preqin.

KKR Appoints Marcus Ralling as Head of Asset Management for European Real Estate Portfolio

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KKR announced the appointment of Marcus Ralling as a director in KKR’s Real Estate team. In his role, Mr. Ralling will be responsible for the asset management of KKR’s European real estate portfolio.

Prior to KKR, Mr. Ralling was at Pramerica, as managing director and head of U.K. and European asset management, and joint head of asset management at Threadneedle Property Investments.

Guillaume Cassou, head of European real estate at KKR, said: “I am delighted that Marcus is joining the team based in London. As we continue to build our real estate effort in Europe and scale our real estate portfolio, Marcus’s knowledge and experience in asset management will be of great value.”

Marcus Ralling commented on his appointment: “I am excited to join an investment firm with such an outstanding global reputation. KKR’s growing presence and ambitions in real estate across Western Europe are particularly attractive.”

Since launching a dedicated real estate platform in 2011, KKR has committed over US$ 2.5 billion to 50 real estate transactions in the U.S., Europe and Asia as of September 30, 2015. The global real estate team consists of over 30 dedicated investment professionals.

“Investing in a Low-Carbon Economy”: New Mirova Publication Encourages Investors to Become Actively Involved in COP21

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Mirova, the Responsible Investment division of Natixis Asset Management, has published “Investing in a low-carbon economy”, a guide for investors to become COP21 compliant. Mirova’s study provides an in-depth analysis highlighting the challenges of climate change and presents methods for investors to effectively measure their carbon footprint. Mirova offers a unique range of investment solutions promoting energy transition across all asset classes.

COP21: mobilising private investors is a necessity

To maintain the economy in a “2 degree” trajectory, it is vital to redirect savings towards companies and projects promoting energy transition.

Philippe Zaouati, Head of Mirova explains: “The energy transition can only succeed if we manage to mobilise private investors’ savings. The success of COP21 therefore also depends on the ability of asset management firms to propose solutions in response to the climate challenge, whilst delivering the returns expected by investors”.

Accurately measuring your carbon footprint

In response to growing demands on investors to make greener investments, Mirova, in partnership with the leading carbon strategy specialist consultant Carbone 4, has developed an innovative methodology to measure the carbon footprint of an investment portfolio. This decision-making tool assesses a company’s contribution to the reduction of global greenhouse gas emissions (GGE).

Hervé Guez, Head of Mirova Responsible Investing, comments: “Measuring the overall impact of a business on the environment is an essential step towards acting against global warming. Assessing the carbon footprint is therefore a indispensable stage in the construction of portfolios contributing to energy transition”.

Low-carbon investments across all asset classes

In order to redirect capital towards investments promoting energy transition, Mirova is proposing solutions involving all asset classes:

Renewable energy infrastructures: 100% low carbon allocation. For more than 10 years now, Mirova has provided European institutions with access to investments in project companies based on renewable energy assets in France and Europe. Mirova’s renewable energies funds have generated 730 MW of new production capacity and contributed to avoiding 1.4 million of CO2 emissions.
Green bonds: a direct link between financing and projects: Mirova was one of the first asset management firms in the world to launch a green bond product. By financing tangible assets and ensuring transparency regarding the deployment of the capital raised, green bonds enable issuers to diversify their investor bases, while enabling investors to actively participate in financing the energy transition.
Listed equities: committed theme-based asset management: Mirova proposes fundamental conviction-based asset management covering European and global equities, focusing on companies providing sustainable development solutions.

Where Are the Opportunities in Commodities?

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During the past year, commodities have been the most challenged asset class. A slower global growth, lower inflation expectations and a strong dollar are some of the factors that have affected their price. Excess supply in many commodities is also contributing to the weakness. Given that most of these factors are likely to remain in place through the remainder of this year, prices may need to move even lower. Alternatively, fundamentals need to start to improve before the asset class becomes a genuine bargain. Many investors are conflicted about what their next move should be.

Amongst commodities, cyclical ones such as oil and industrial metals, have suffered the most. In the energy sector supply has played a key role in these losses. Today, the United States produces roughly 700,000 barrels per day more than one year ago. Meanwhile, following the tentative nuclear accord with Iran, many Gulf States are ramping up their own production. According to the International Energy Agency (IEA), which México has just recently requested to enter, oil inventories in developed countries have expanded to a record of almost 3 billion barrels because of massive supplies from both non-OPEC and OPEC producers. So, without a sharp reduction in production it is hard to imagine a strong rebound in the short run; however, for longer term investors, some bargains are beginning to emerge.

When looking to gain commodity exposure, one has to be very selective. Nowadays most commodity-related sectors look cheap, but in many instances the plunge in valuations merely tracks the drop in earnings and profitability. How can an investor assess if commodity companies are cheap or cheap for a reason?

Historically, valuations track profitability as measured by return-on- equity (ROE). At the energy and materials sector levels, data suggests that the fall in stock prices is generally in line with the drop in profitability. However, digging deeper at the industry level, opportunities might be appearing: while it appears storage and transport companies are still overvalued relative to the drop in equity, drillers and integrated companies look somewhat cheap (see chart below).

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Looking next at materials, there are fewer obvious industries where valuations depart significantly from profitability, but metal and mining companies are starting to show more value.

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However, one must not forget that the uncertainty surrounding market bottoms, particularly in a sector prone to volatility and abrupt changes in supply and demand, makes it hard to confirm the bottom has been reached. Furthermore, in the current scenario, low inflation expectations also make forecasting returns more difficult as many investors view commodities as a hedge against inflation.

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Although the near-term outlook for most commodities remains modest, if the futures curve is correct, at some point, arguably in the next year or so, rising demand will start to bring markets back into balance. Until then, it is still probably too early to call a bottom.

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This material is for educational purposes only and does not constitute investment advice nor an offer or solicitation to sell or a solicitation of an offer to buy any shares of any Fund (nor shall any such shares be offered or sold to any person) in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator in any Latin American and Iberian country and thus might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein.

RMB Could Very Well Join the IMF’s Special Drawing Right Basket This Year

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While the International Monetary Fund will decide later this month if the Renminbi (RMB) joins their Special Drawing Right (SDR) basket this year, Axa Investment Management’s Aidan Yao and Jason Pang think the Chinese currency stands a very high chance (80%) of being included in it, making the RMB the fifth reserve currency.

According to the analysts, “this will trigger a direct rebalancing of the SDR portfolio, but we think the seal of approval by the IMF on the RMB’s reserve currency status will also affect the investment decisions of other investors.” They estimate, subject to significant uncertainties, and contingent on the unfolding of their baseline case of economic soft-landing without large scale financial crisis, that inclusion would trigger an aggregate inflow of up to $600 billion from supranational, official and private investors over the next five years. Averaging $120 billion per year starting from 2016.

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Pang and Yao believe that the capital inflows will likely have an important impact on China’s currency, money and bond markets in the coming years. In regards to currency they anticipate that in the short run, the RMB will maintain some degree of stability in normal market conditions and that in the longer run, there is a chance the exchange rate will mutate from the semi-crawling peg to a managed float as the end-game. While when it ocmes to the Bond Market, the analysts’ base-case scenario is a constructive outlook for the bond market, driven by increased demand from the SDR inclusion, and supported by lower GDP growth and policy easing.

The IMF’s executive board will vote on inclusion on November 30.

You can read the full report in the following link.