Photo: Philipp Meier
. IESE Business School Celebrates the 50th Anniversary of its MBA Program with a Prestigious Business Summit
The prestigious MBA program from IESE Business School is celebrating its 50th anniversary and the institution will hold a very special Summit in Miami, on 28th and 29th May. The event will gather companies, alumni and friends from all over the world –in particular from the Americas- in a working session named “Driving Sustained Growth:Challenges and Opportunities in the Americas”.
The Four Seasons Hotel at Miami will be the venue in which the CEO of Santander Private Banking, Álvaro Morales; Lionel Olavarría, Vice Chairman of BCI;and Teresa Foxx, General Manager Banking, Barclays, will discuss over “Sustained Growth in Banking. Challenges facing a sector poised for growth in Latam”, while Javier Estrada, Professor at IESE, will moderate.
First thing in the morning, Eric Weber, IESE Associate Dean and Professors Pedro Videla and Javier Estrada will welcome the participants. The program will be opened by world renowned cardiologist and inspiring keynote speaker Dr. Valentín Fuster, Director of Mount Sinai Heart in New York and recipient of the highest awards from the world’s major cardiovascular institutions.
To follow unique insights from top-level decision makers covering the Americas and its potential in the global business arena, including Saúl Kattan, President ETB; Karl Lippert, President SABMiller Latam; and Juan Manuel Ferrón, CEO Hispanic America Advisory Services PwC. Finally, the cross-roads of innovation, technology and entrepreneurship will allow Susan Amat, Founder Venture Hive; Pablo Slough, Head of Mobile Ad Solutions Google and Mary Spio, President and Co-Founder Vidaroo share their experiences.
Photo: Dennis Jarvis. Emerging Markets: Stay in the Car
Devan Kaloo, Head of Global Emerging Markets, Equities, at Aberdeen took on the role of a conjuror performing a magic trick with a couple of props, in a striking presentation to the investment conference. He gave a lesson to long- term investors in the importance of choosing the right time frame, with a pair of graphs that abruptly vaulted his audience from a pessimistic to an optimistic perspective on emerging market performance.
Mr. Kaloo used the first graph to acknowledge frankly that “over the past five years emerging markets have significantly underperformed developed markets – by something like 60%”.
However, as the next graph suddenly showed, “if you’ve been stuck in emerging markets for ten years, you’ve seen outperformance of about 40%”. Looking at markets on a long-term basis, he suggested that this decade-long period might be “the right time frame”.
He also pointed out that emerging markets underperformed developed markets by 8% in 2014 with a negative absolute return of 2% in U.S. dollars. But this still made emerging markets the second best performing asset class, doing better than Japan, Europe or the UK. While if you calculated returns in Euros, Yen or Sterling you made a positive absolute return.
In short perspective is important
Mr. Kaloo used his presentation to outline the potentially brighter future for emerging markets, with improvements in macroeconomic and corporate conditions likely to pay off in better stock market returns.
Core to his argument for a long-term assessment was the notion that temporary travails in emerging equities did not reflect fundamentals. “People quite often take the view that stock market performance in the short term reflects underlying issues in that market”, he said. However, “in emerging markets that clearly is not the case”.
This disconnect existed, Mr. Kaloo said, because emerging stock markets are often led by foreign investors. “Domestic institutional and retail investors are not consistent players in the market, so the guys who drive emerging markets are typically foreigners”, he explained. “This is important, because foreigners sometimes get concerned about different things from what’s actually occurring on the ground.”
For example, “what’s happening with quantitative easing, and the impact of the European Central Bank (ECB) and Bank of Japan, can have a large impact on liquidity flows into emerging markets, and a disproportionate impact on the performance of these markets”.
Moreover, because emerging stock markets are, in most cases, less liquid, it did not take much to send them up or down. “To put it in some sort of context, over the past three out of four years they’ve seen negative outflows”, he noted. “So there’s been a lot of money going out of emerging markets.” Or has there? Adding some clarity, Mr. Kaloo stated “Actually it’s not a lot of money. For 2014 we’re talking about $25bn. That’s a rounding error on the Federal Reserve’s balance sheet.”
“Although $25bn is not a huge amount of money in global macroeconomic terms, the illiquidity of emerging markets – largely because so much of the market capitalization is made up of shares that were not free-floating – meant that “it doesn’t take an awful lot of money to swing these markets around”, concluded Kaloo.
CC-BY-SA-2.0, FlickrPhoto: Nicolas. Net Assets under Management in Luxembourg Funds Continue to Grow with Record Net Sales in March
The Association of the Luxembourg Fund Industry (ALFI) has published its statistics as at 31 March 2015:
Luxembourg retains its position as the leading European domicile with EUR 3,524.79bn of net assets under management, growing 3.55% in the month ending 31 March 2015 and 13.89% so far in 2015
At EUR 49.92bn, net sales in March were the highest of all time
Net assets managed by investment funds under Luxembourg law grew by 30.10% in the past 12 months
The number of investment funds (legal entities) is 3,888 as at 31 March 2015
Germany remains the main initiator of funds domiciled in Luxembourg (2,812 in total), with Switzerland coming second (2,585 in total). However, funds initiated in the US and the UK have the most net assets under management (EUR 790,580m from the US, EUR 579,799m from the UK)
Marc Saluzzi, Chairman of ALFI, comments: “The low interest rate environment is obviously a decisive factor in the sustained growth of assets under management by the investment fund industry”.
He adds: “The exceptionally high net sales that we are registering in Luxembourg are the best proof of the continuous confidence of the international investor in the Luxembourg investment fund product. Equally, the diversified geographical origin of fund promoters in Luxembourg demonstrates that our fund centre remains the domicile of choice for the international asset management community.”
Francisco González, Chairman and CEO of BBVA, has presented the book Reinventing the Company in the Digital Age at Harvard University - Courtesy photo. Chairman of BBVA Analyzes Effects of Technological Revolution on Banking Industry at Harvard University
Francisco González has presented the book “Reinventing the Company in the Digital Age” at Harvard University. This is the seventh volume in BBVA’s annual series dedicated to analyzing the major issues of our time in which authors from around the world are participating with the goal of “helping people understand the changes that are continually reshaping our world”.
The Bank´s Chairman focused on how this technological and digital transformation has already reached the financial world. ”A new digital ecosystem is being built. One in which launching new products and services is much easier, cheaper and faster that it was a few years ago. Startups, developers, designers, large digital companies, all interact in this ecosystem, simultaneously competing and collaborating”.
In the opinion of Mr. González , “Many conventional banks are going to fall by the wayside. Those that make it will no longer be ‘banks’, but software companies, competing with the digital players and with a completely different value proposition”.
Francisco González expressed his conviction that BBVA “is now in a position to lead the process of transformation of the banking industry”, while bearing in mind that “we are leaders but we are running a race which as no discernible finish line, not even a pre-fixed route. Our strategy is to encourage change and to keep working to remove the practices and structures that stand in the way of change. This is the only way to maintain our leadership and extract value from it in the exciting new times to come”.
The transformation of banks must start with the foundation, the technological platform, said Francisco González, and this “is a long and complex process. We at BBVA know this, because we started our digital journey eight years ago” and the group’s first move was to significantly increase our IT investments to build a brand new, real-time client-centric, modular and scalable platform “not only to better satisfy our customer demands, but also to improve radically cyber security and data protection”.
At the same time, “at BBVA we have comprehensively reengineered our processes and promoted a change of culture in step with our technological overhaul”, added Francisco González, stressing that the bank has achieved very significant results over the last few years: “From December 2011 we have more than doubled our active digital customers. At the end of March 2015 we counted 12.5 million, of which 50% (more than 6 million) used mobile technologies”.
The Chairman of BBVA has also pointed out that in 2014 the Group created a Digital Banking division in order to accelerate the bank’s digital transformation across the board.
Along with Francisco González, the authors of the book, Peter Thompson, Professor at Henley Business School, and Esteban García-Canal, Professor at the Universidad de Oviedo, also participated in the presentation.
Peter Thompson remarked that in just one decade the digital revolution underway brought about more changes in the way we live than the industrial revolution did in a century.
In his opinion, societies are increasingly demanding higher–quality jobs that are smarter, more collaborative and flexible, more satisfactory and ensure a better balance between professional and personal lives. This need has spurred a revolution in work practices and management, including the use of technology to develop new physical and virtual work environments adapted to new requirements.
Esteban García-Canal has focused on the rise of emerging economies –which in just 20 years have gone from representing 15% of economic activity to 50% at present– and the companies with corporate offices in these economies. Many of these companies were small players until recently and today they are challenging the most consolidated multinationals.
In the opinion of García-Canal, these companies, created in countries with fragile institutional environments, have taken advantage of the experience acquired in their home countries to compete in complex environments. Furthermore, and although it seems paradoxical, their scant international presence has allowed them to adopt a strategy and an organizational structure that has been ideal in the current context in which emerging economies are growing very quickly.
Juan Alcaraz will be Global CEO Global at the new Pioneer Investments, and Giordano Lombardo, Global CIO. Pioneer Investments and Santander Asset Management to Join Forces Creating a Leading Global Asset Manager
UniCredit, Santander, and affiliates of Warburg Pincus and General Atlantic have signed a preliminary and exclusivity agreement to combine Pioneer Investments and Santander Asset Management to create a leading global asset manager.
Juan Alcaraz, current CEO of Santander Asset Management, will be the Global Chief Executive Officer, and Giordano Lombardo, current CEO and Group Chief Investment Officer (CIO) of Pioneer Investments, will be the Global CIO of the new company.
The combined firm, with approximately €400 billion in assets under management, will be one of the preeminent asset managers in Europe, as well as a comprehensively global firm with capabilities and client relationships around the world. The partnership between the two firms will provide for substantially enhanced economies of scale, a key advantage in the asset management industry, while also expanding the business’s diversification with respect to investment strategies, distribution channels and region. The combined firm will have robust market share based on deep client relationships in a wide range of markets including both growing and established regions, covering institutional, wholesale third party, and proprietary channels.
Building on a strong growth trajectory with total combined net inflows of over €25 billion in 2014, the combined company will have improved growth potential owing to an increasingly independent profile and a broader set of investment solutions to meet client needs across all channels worldwide.
Pioneer and SAM bring largely complementary platforms, investment capabilities, and client relationships, resulting in a more complete range of solutions and services to the benefit of all clients. Through this strategic transaction, the combined firm will be committed to maintaining the continuity and repeatability of its investment processes that have served clients well over multiple market cycles.
Furthermore, it will offer an expansive global distribution footprint, with a presence in over 30 countries and exposure to both growing and well-established regions such as Latin America, North America, Asia, as well as a leading position in Europe. In addition to Pioneer and SAM’s longstanding institutional and wholesale third-party relationships, long-term distribution agreements with UniCredit and Santander will result in unparalleled retail distribution capabilities in Europe and Latin America.
The preliminary agreement will lead to the establishment of a holding company, with the name Pioneer Investments, which will control Pioneer’s US operations along with the combination of Pioneer and SAM’s operations outside the US. UniCredit and the Private Equity Firms will each own 50% of the holding company, which will in turn own 100% of Pioneer US, and 66.7% of the combination of Pioneer and SAM’s operations outside the US, while Santander will directly own the remaining 33.3% stake. The combined firm will continue to operate as one global entity, led by a single global management team, focusing on meeting the needs of its clients worldwide.
The agreement is based on an Enterprise Value of €2.75 billion for Pioneer Investments and €2.60 billion for Santander Asset Management (including its 49.5% stake in AllFunds Bank). Furthermore, the transaction is estimated to enhance UniCredit’s capital position by approximately 25 basis points.
Following the signing of the preliminary agreement, the parties will work towards signing a definitive agreement subject to the customary regulatory and corporate approvals.
Photo: Hakon Thingstad. Has Royal Dutch Shell Overpaid?
The Royal Dutch Shell bid for BG Group (£47bn) represents the largest ever deal between two UK corporates, and the largest deal in the oil and gas sector since Exxon’s takeover of Mobil in 1998. Now that the dust is settling, the Commodities & Resources team in Investec AM shares some perspective on the deal.
“We were not surprised to see the UK’s third largest energy company, BG Group, being acquired, or to see Royal Dutch Shell making an opportunistic move”, says Tom Nelson, Head of Commodities & Resources at Investec AM.
BG Group has struggled since 2011 in its evolution from a highly successful exploration company to a senior developer and producer. Management changes, operational setbacks, and unrealistic targets had reduced investor confidence in the long-term story. The oil price crash of 2014 compounded the pain for shareholders and brought the stock price down to £8, almost 50% below the levels attained in 2011 and 2012. Despite these recent struggles, Investec felt its assets were of a materiality and quality that would be extremely attractive to a supermajor.
It was clear to the team from meetings with management that Royal Dutch Shell had a more progressive view on the oil price than some of its peers, notably Exxon Mobil and BP. They recognised that oilfield decline rates and the lack of exploration success had made reserve replacement increasingly unattainable for the Majors – and that was at prices of US$100 per barrel, with rising capex budgets.
The clearest – and cheapest – path to growth lay through acquisition. The BG deal gives Royal Dutch Shell a clear leadership in the global liquefied natural gas market (45m tonnes per year by 2018), the largest position in Brazilian deepwater oil fields apart from Petrobras, and significant growth assets in Australia and Tanzania. The combined company could outstrip Exxon Mobil by 2018 as the largest public oil and gas producer at 4.2m barrels of oil equivalent per day (boe/day) with an expected free cashflow yield of 7%. “Our analysis of costs and returns shows the Brazilian pre-salt to be the most attractive and prospective hydrocarbon basin in the Non-OPEC world”, points out Nelson.
Sceptics think that Royal Dutch Shell has overpaid. The deal valuation of BG Group’s 2P (proven and probable) barrels was US$10-US$12. The average finding and development cost for the European Majors over three years has been over US$30. “Royal Dutch Shell has increased its reserves by 28% by spending US$70bn, which equates to two years of capital expenditure at the current rate. Neither of these measures looks expensive to us. The 50% premium is not out of line with historic deals in the sector. Of course, the ultimate judge of the fair price will be the oil price over the next three years. Shell used US$67 for 2016, US$75 for 2017, and US$90 long term. We note that most of the sceptics are generalist investors who expect oil prices to stay lower for longer”.
Investec makes two final points: “we, alongside Royal Dutch Shell, believe that the oil price will recover meaningfully from current levels over the next three years and we are positioning our portfolios for that environment. We expect that this will not be the last M&A deal of this oil price depression: the three notable deals so far have been Repsol/Talisman (US$8bn), Halliburton/Baker Hughes (US$38bn) and Royal Dutch Shell/BG (US$70bn). We expect Exxon Mobil to make an acquisition(s) and would not be surprised if it was of equivalent size or larger. The Majors have tried and failed to grow organically; the market has now offered a gilt-edged chance for inorganic growth“.
It has been an extremely positive six years for asset owners: equities have experienced their strongest and longest run since the end of the Second World War and the credit bull market is not far off its best historical run. Yet a deep scepticism pervades capital markets that the recovery from the Global Financial Crisis is an illusion, with acolytes of secular stagnation seeing “lower for longer” interest rates as the new normal. Notably, private and institutional fund flows have overwhelmingly favoured bond funds since mid-2007. What if investors are wrong about their asset allocations?
An unusual cocktail
We are in the very unusual position of experiencing both liquidity support and economic recovery at the same time – and it is difficult to predict how long this overlap will last. What we do know is that the growth outlook is the best it has been since 2010, and that the recovery is broadening and deepening. A number of key factors have altered to favour continued expansion. Among them, global fiscal policy tightening as a percentage of gross domestic product (GDP) is diminishing, notably in the US and Europe. Additionally, oil prices have more than halved since mid-2014 and should be viewed as a global tax cut for consumer nations.Volatile headline inflation data masks steadier core figures – and oil’s decline should begin to wash through the former measure.
Inflationary forces
We see evidence in economic releases that conditions are improving and could, in due course, engender a rise in inflation. One key barometer is developed economies’ employment figures, as wage growth tends to accompany labour market tightening. Another area that we are following closely is the US housing market because it provides growth and jobs across multiple sectors.
A 2007 Jackson Hole paper entitled “Housing is the business cycle” posited that residential investment consistently and substantially contributes to weakness before the recessions and that, similarly, the recovery for residences begins earlier and is complete earlier in the cycle than other areas of spending investment. Looking at US housing starts, the numbers of new residential construction projects started each month are still around their 1990s lows: this suggests that the cycle has yet to fully kick in. If it does, investors could be potentially wrong-footed in their bearishness.
For the recovery to gel, however, we do need to see the stronger resumption of corporate confidence. In the wake of the financial crisis, companies turned their attention to shoring up their balance sheets and driving down costs to help their bottom lines. The upshot was increased efficiency, and higher levels of profitability, but the overhang has been businesses’ desire to hoard cash. Companies have the ability to borrow at incredibly low rates of interest, so it is puzzling that we have not seen a more substantial pick-up in mergers and acquisitions activity. We would suggest that many investors are ill prepared if (or when) ‘animal spirits’ make their comeback.
The potential for a central bank policy error and the notable rise of dissenting political voices across Europe arguably pose a threat for risk assets, but we are inclined to be more sanguine about economic growth strengthening to take the baton from stimulus as the markets’ driver. The upshot in this scenario is that equities are, for the meantime, the best place for us to be.
Bill McQuaker is Co-Head of Multi-Asset at Henderson GI.
Optimism on European equities is growing. A recent Merrill Lynch fund manager survey showed that 63% of respondents expect to be overweight Europe this year, up from only 18% a month ago, and a record in the history of the survey.
Several factors have helped to propel European equities this year. Economic data has improved, the ECB has launched sovereign QE, helping to weaken the euro, and flows into European equities have been very strong; one estimate suggests that as much as $40bn flowed into European equities in Q1 2015.
“Our belief is that much of this flow has been fairly indiscriminate, typically using passive instruments. This presents a danger for markets if, as seen in 2014, expectations for better growth and earnings are not ultimately met. We therefore believe that it is extremely important to utilise active management to gain exposure to European equities”, point out Dan Ison, Senior Portfolio Manager at Columbia Threadneedle Investments.
Moreover, an active approach allows investors to be selective and focus on the beneficiaries of QE and a weaker currency, such as dollar earners. “In our portfolios we have been emphasising areas such as aerospace, auto original equipment manufacturers and auto supply stocks, and pharmaceuticals, all of which have benefited from FX tailwinds”, said.
Looking forward, Columbia Threadneedle Investmentsexpect to see earnings and economic growth expectations firming during the year. Many economic indicators are showing healthy signs, such as purchasing managers’ indices, retail sales and car sales. Meanwhile unemployment is falling and real wages are starting to rise.
On the corporate front, European earnings revisions have just turned positive. This is first time this has happened since January 2011.
The consensus GDP forecast for the eurozone has been upgraded from 1.0% to 1.3%. While there is little room for disappointment, this could be the first year of upgrades since 2010.
Encouragingly deflation fears appear to have peaked and we are starting to see signs of structural reforms in two of the laggard countries in the eurozone, Italy and France.
Current credit growth, if annualised (€120bn) would produce a 1.2% boost to the eurozone economy. Such is the level of operational gearing in European corporates that this could quite easily take our earnings growth numbers up to 15-20%.
Attractive equity valuations
While the strong move in markets so far this year suggests a lot has already been discounted, said Ison, European equity valuations are not unattractive, particularly when they are com- pared to fixed income and cash.
The European market is still yielding more than 3%, compared with zero or negative rates for some investments, such as short-dated government bonds. Additionally, should we start to see nominal growth rates improve in the domestic economies of Europe, there will be further operating leverage which should drive European profits much higher in the next few years, against a backdrop of static or falling earnings in many other regions of the world”, believes the Threadneedle´s expert.
“The main risk to our positive outlook (apart from the possibility of higher interest rates in the US and UK) is if energy prices recover and put upward pressure on European inflation. This would begin to remove the justification for QE in Europe and so raise the spectre of policy tightening by the ECB. That would cause a rise in European bond yields and a fall in equity prices but such an outcome does not look likely any time soon”, concluded.
Heather Arnold, Templeton’s Global Equity Group Director of Research - Courtesy photo. An Investment Trip Around the World with Templeton’s Global Equity Group
Heather Arnold, Director of Research of Templeton’s Global Equity Group guides us on a journey through the world’s major equity markets. Her vision is value-oriented, in order to obtain the best ideas for a complete business cycle, which has an average life of five years. Templeton is part of the Franklin Templeton Group.
Beware. All that Glitters is not Gold
According to Heather Arnold, there is a valuation problem in the price of money. Currently, banks and governments of many countries have negative yields. She argues that we are paying for lending money to governments, which in no way reflects the risk assumed by investors, as the rates are artificially low due to QE programs. “In fact, interest rates should be much higher because the global debt has grown. What has changed is the geographical location of debt. Investors need to realize that there is something odd about fixed income markets. They are pursuing the safest option, which in reality is the most dangerous and risky, “Arnold says.
Europe: So Bad, that it’s Actually Good
This also applies to equity markets overall. The US has been regarded as the safest option, because of its better corporate earnings, and that is why it has risen so much, but for a value investor, Europe offers better opportunities. “It is true that corporate profits in Europe have not yet regained their 2007 levels, but there is enough gap for margins and valuations to recover,” said Arnold. She also raises concerns on the valuation of the US stocks. In a historical Shiller P/E ratio analysis of the US market, there are only two occasions when it has been more expensive than now, in 1929 and 2000. Additionally, since 1940, US stocks accumulate the longest relative rally to the rest of the world.According to Arnold, this data is far more disturbing than a strong dollar, which is already a problem for US companies.
In Europe, however, there is a quantitative easing program (QE) in place which will gradually help banks to wake up and give credit. Although timidly, governments may also spend a little more; but above all, the greatest tailwind pushing European stocksis a weaker euro, which is also a consequence of QE. Arnold notes that we must also add the positive effect on consumption that will result from weaker oil prices. Therefore, the foundations are laid for the expected recovery in European business profits. Since market valuation is reasonable, everything which is bad in Europe is actually “good”.
Russia and Greece: The Potential Risks in Europe
There are two breeding grounds for instability in Europe, or at least in their region, which can be the source of many problems. On one side there is Russia, which may not remain impassive in the face of deployment of NATO troops in Ukraine, and this may be a “serious problem” for Europe, especially for Germany. The other difficult country is Greece. Its situation is not good, whether it stays in the euro zone or leaves it. In the second case, its exit will be accompanied by a default on its debt, which “once again complicates European credibility.”
The Japanese Experiment is no Guarantee for Success
When speaking of the increase in global debt since 2008, Arnold refers mainly to Japan. The government is trying to get out of debt by creating inflation. “This did not work in Germany during the first half of the twentieth century, we will see if it works for Japan,” says the Templeton expert. For now, what can be seen in Japan is an asset loop, “the Bank of Japan (BoJ) is buying all the new debt issued by the government and also the debt which is held by pension funds, which, in turn, are buying equities. However, despite the depreciation of the yen, neither consumption nor exports have improved substantially”. Corporate profits have improved somewhat but in order to continue doing so, “great reforms in the corporate world are needed.”
Arnold explains that exports have not improved as much as expected after the decline of the yen, because it was so grossly overvalued that most exporters had already left to produce abroad, mainly to China, but also to the US.
Furthermore, the country’s demographic problem cannot be ignored, a problem which will be further aggravated if Japan really becomes an inflationary country, because the savings of a very aged population will tend to wane. “Another problem which inflation could bring is a decrease in productivity due to increased wages,” Arnold says. To address this issue, the country would have to open to immigration, something which is extremely unpopular in the country even though companies are now silently hiring more foreigners.
Arnold concludes that even though valuations are reasonable in relation to the ROE of Japanese companies, this profitability cannot improve much without further corporate reforms.
There Are Select Bargains in Emerging Markets
The Templeton Global Equity Group is beginning to see some value returning to emerging markets, which they have underweighted for quite some time. “A more attractive valuation is awakening some interest within the region, but as yet there are no great bargains because the money has continued to flow into these markets, mainly as foreign direct investment.”
Now that China’s economic growth has begun to slow down, the Templeton Global Equity Group notes that companies with more reasonable capital allocation and greater profitability are starting to emerge. This is positive.
As regards to companies linked to commodities, Arnold recommends waiting. “We should not get excited yet. At a P/BV of 1.5, the sector is still expensive in relation to the current point of the cycle, with the exception of companies in the energy sector”.
Energy: The Great Opportunity
The fall in oil prices has wiped out the valuations for the energy sector. Templeton’s Global Equity Group sees this as a great opportunity, both in Europe and in the US.
“The excess global oil supply can be adjusted very quickly,” says Arnold. In 1986, the excess of supply over demand for oil reached 15%, because the OPEC countries had increased their oil production to take advantage of the upturn in prices that occurred in the early eighties. “Now, this excess capacity is barely 4% and could be reduced to 2% with the current increase in demand. This oversupply could be absorbed very quickly because there are many exploration projects which have stopped and much Capex has been removed from the sector. On the demand side, more barrels are being consumed due to falling oil prices. “Arnold explains that the P/BV ratio of the sector has not been this cheap since 1986. “We’ve never seen so many bargains in this sector,” she concludes.
Photo: Gabriel Jorby. Chinese Tech Entrepreneurs Take a New Path
Since the first Internet companies from China began going public on the NASDAQ exchange about 15 years ago, investment bankers have typically been able to find comparable U.S. companies during IPO road shows in order to help investors better understand the business nature. However, these days when I visit companies in Asia or attend investor conferences, it takes a bit more time and effort to understand the basic business models for some new market entrants. These new start-ups are no longer just copycats of any U.S. counterparts, but are now more deeply rooted in unique economic fundamentals, and more evolved in their own ways. So what makes today’s technology entrepreneurs in China different from earlier pioneers?
First, new ventures need to be better aligned between technology and current lifestyles. China’s earlier Internet start-ups were mostly website portals, search engines or developers of instant messenger applications. One wired desktop was all people needed, whether they were in New York or the other side of the Pacific Ocean. Nowadays, however, things are different. Take ride-sharing companies, for example, which need to work with local taxi unions, city by city. As the Internet and technology have become well integrated into modern lives, a higher level of engagement is often needed in order for new ideas to succeed.
It took 30 years for the U.S. to grow its GDP from US$1 trillion to US$10 trillion (from 1970 to 2000). Meanwhile, China replicated this success in only 16 years, from 1998 to 2014. There, people live different lifestyles. While many don’t have landlines at home, cellphones are a “must have” to navigate the modern world, having leapfrogged the full household penetration of landlines. In addition, a much bigger proportion of Chinese household income is spent online as department stores never developed an efficient supply chain to lower costs. In terms of real estate, when Chinese buyers purchase condominiums, they tend to require additional work from construction companies to build them out as they are more like shells that need much outfitting. And, as an example, of an auto-related new business model, new firms are springing up to help China’s car shoppers verify mileage on pre-owned cars as odometers can often be tampered with in the country’s aftermarket sales.
Secondly, entrepreneurs are now more creative, and capital markets are more sophisticated these days. Earlier entrepreneurs are mostly “returnees”—people who grew up in a much less commercialized society, often obtained their bachelor degrees in China, went to the U.S. for graduate school, and secured jobs in places like Silicon Valley before returning back home to copy and implement U.S. business models. Over a decade ago in China, venture capital was still a foreign concept. When people with ideas in China wanted to start their own businesses, family and friends were often the first and only ones they could turn to for loans. Not surprisingly, many start-ups struggled with financial obligations from day one and struggled to get off the ground. Now, all one needs is simply an idea, a business proposal and a capable team. There are hundreds of experienced venture capitalists who have the money, market knowledge and most importantly, the ability to differentiate between the quality of various entrepreneurial teams.
Although China’s economy has been slowing, I am excited by the new generation of entrepreneurs that is viewing some of the country’s earlier challenges as opportunities.
Raymond Z. Deng is Research Analyst at Matthews Asia.
The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific geographic location. Investing in small- and mid-size companies is more risky than investing in large companies, as they may be more volatile and less liquid than large companies. This document has not been reviewed or approved by any regulatory body.
