The euro rose to a record high against the dollar Friday on worries about the U.S. economy but Asian stocks steadied in holiday-thinned trading as buyers warily emerged from a six-session losing streak.
European shares are expected to open a touch firmer, although further direction will depend on U.S. markets, which will reopen for an abbreviated session after the Thanksgiving holiday.
The euro, which has risen 13 percent against the dollar this year, tested the pyschologically important $1.50 level. That kept oil within striking distance of $100 a barrel, which in turn helped lift gold towards a one-week high of $810 an ounce.
Trading was light and erratic with holidays in Japan and the United States giving investors little in the way of fresh leads.
By 0611 GMT, MSCI's measure of Asia Pacific stocks excluding Japan was little changed, steadying after falling in the past six sessions. However, it remained on track for a fourth straight week of decline.
"In the last week, the amount of shorting in the market is very, very high ... so if people just square up, that means that markets have to rise. I think there is a little bit of that going on today," said Tim Rocks, regional equity strategist at Macquarie Securities.
"It tells you that generally, you're towards the end of this period of panic. But having said that, I don't think those issues are over at the moment."
Asian stocks had been caught in a global downdraft sparked by worries about the financial sector after many major banks such as Citigroup wrote off billions of dollars in credit-related losses.
The MSCI index has lost 14 percent since hitting a record high on Nov. 1, but was still up 27 percent this year, four times the gains for MSCI's main global stock index
Worries that a deep U.S. housing slump and tight credit would hit consumers have also cast a shadow over the health of the U.S. economy, Asia's top export destination.
All eyes are on retailers the day after Thanksgiving holiday which marks the start of the major U.S. holiday shopping season, to gauge the health of U.S. consumers.
DOLLAR SAGS
Investors dumped the dollar, betting the U.S. Federal Reserve will have to cut interest rates again next month to help shore up the U.S. economy.
A report on Wednesday from the Organisation for Economic Co-operation and Development that said overall losses caused by the U.S. mortgage market crisis could feasibly hit $300 billion also weighed on the dollar.
"We're seeing another round of risk aversion and worries that we could see more financial institutions in the U.S. coming under stress," said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong.
The dollar index, which tracks the greenback against a basket of major currencies, hit an all-time low of 74.484, taking year-to-date losses to 11 percent. It also weakened against the yen slipping to a fresh 2-½ year low near 107.5 yen.
The euro rose to a record high around $1.4970 but slipped below 161 yen
The weak dollar supported oil, with London Brent crude briefly rising above $95 a barrel.
MARKETS MIXED
Among major regional stock markets, Hong Kong's Hang Seng Index gained 1.2 percent, Singapore's Straits Times and Australia's S&P/ASX 200 index were flat but South Korea's KOSPI reversed early gains to end 1.5 percent lower.
Financial stocks, hardest hit by fears that ongoing credit problems will further hurt their earnings, were mixed with investors buying laggard South Korean banks, while selling their Australian counterparts.
South Korea's top lender Kookmin Bank added 0.2 percent, Woori Finance Holdings climbed 2.1 percent, but Australia's Commonwealth Bank and Westpac Banking Group shed more than 1 percent each.
Some resource stocks were also under pressure amid expectations of further weakness in industrial metals prices with investors worried that slowing global growth may crimp demand.
Mining giant BHP Billiton dipped 0.4 percent and Hunan Nonferrous Metals shed 4.4 percent.
"Clearly, investment banks are out of favour with investors worldwide while the prospect of slower global growth has weighed on high-flying mining stocks," said Craig James, chief equities economist at CommSec in Sydney.
Editing by Lincoln Feast
Source: http://www.guardian.co.uk/feedarticle?id=7097861
Sunday, November 25, 2007
Tokyo Seeking a Top Niche in Global Finance
Years ago, Japan rose to economic prominence by taking apart American products like cars and television sets to learn how to make them better.
Now, as Japan’s focus on manufacturing wanes, economic planners here are trying to reverse engineer another source of the United States’ economic strength: Wall Street.
Japan’s Financial Services Agency, which oversees the nation’s banking and securities industries, is working on a plan, to be presented before the end of the year, aimed at transforming Tokyo into a global financial capital more on par with New York and London. Top Japanese officials have toured Wall Street and the City, London’s financial district, in search of the secrets of their vitality.
But so far, the initial drafts suggest that Japan’s economic specialists are having trouble figuring out the secret of the Western financial centers’ success.
The Japanese government is also seeking ways to maintain Tokyo as the financial capital of Asia, and to keep ahead of rivals like Hong Kong, Singapore and even Mumbai, formerly Bombay. Officials here hope that the plan will attract more foreign investors and help revive their country’s stock markets, which have underperformed other major markets, even after the turmoil in subprime lending hurt American and European financial institutions.
The plan comes as Japan’s $4.5 trillion economy is on the rebound. In the most recent quarter, it grew at a solid annual pace of 2.6 percent.
But for many years, the Japanese, rather than investing more at home, have been putting their money overseas because of the low returns from domestic stocks and bonds. Some of that flow of money abroad now appears to be slowing, a move reflected in a stronger Japanese yen. That gives resonance to the Japanese hopes of creating a financial district in Tokyo that can lure foreign investment and Western professionals.
But some of the proposals from the Financial Services Agency read more like excerpts from a real estate brochure than a manifesto for financial ascendance. There are proposals for building more spacious apartments, earthquake-resistant offices and plusher sports clubs.
One idea is to add restaurants that serve Western fare like spaghetti and stay open after midnight to accommodate the financial industry’s grueling work hours. Drafts of the plan also call for adding English-speaking hospitals and schools, more English street signs and a faster train link to Narita, the main international airport, a 90-minute trip from downtown.
Less evident are the sorts of changes that might actually draw foreign professionals and companies: lower taxes, a larger English-speaking talent pool, and greater transparency and restraint in market oversight by the agency itself.
“The agency’s plan does not solve the core issues,” said Naoko Nemoto, a banking analyst at Standard & Poor’s here, who was on an agency committee that made early recommendations for the plan. “Tokyo will lose out if it doesn’t make bigger changes.”
Critics said the lack of more substantial measures reflect bureaucratic resistance by the Financial Services Agency, which fears losing its power. An even bigger hurdle, many say, is a deep-seated aversion in Japan to finance, which is regarded here as a dirty game.
This has made many politicians and economists reluctant to promote the finance industries instead of manufacturing, which Japanese celebrate as honest work from the sweat of the brow.
Many Japanese businessmen and economists agree that such attitudes must change if Tokyo is to compete in a crowded field of current and would-be world financial centers — including the ascent of Hong Kong as financier and alternate marketplace for a fast-growing China.
Singapore has rolled out the red carpet to foreign investors, with low taxes and spare regulation. Contenders like Shanghai, Mumbai and Dubai, on the Persian Gulf, have emerged as investment centers, including the money from Middle East oil wealth.
To make a comeback, Tokyo must reverse more than a decade of decline. The Tokyo Stock Exchange has fallen from being the largest stock market in the world at 1990 market capitalization to No. 2, behind the New York Stock Exchange. During that time, the value of all shares traded on the Tokyo exchange rose less than 60 percent, to about $4.6 trillion at the end of last year.
By contrast, the value of the New York exchange increased fivefold. Hong Kong’s main exchange rose by a factor of 21, though it is still half the size of Tokyo. In London, already the global center for trading in currency, the main stock market has grown fourfold since 1990 and could soon overtake Tokyo.
In recent years, the Tokyo Stock Exchange has become even less attractive for foreign companies because of high costs and language barriers. There are now 26 foreign companies listed on the exchange, down from 127 in 1991, the market said.
And while Japan remains Asia’s largest and most advanced economy, many here are alarmed by the rise of China as an industrial powerhouse. Proponents of the financial-capital plan hope it will help Japan shift from a goods-producing nation into more of a soft power like the United States, which creates, designs and finances goods and services while doing less manufacturing itself.
“The United States and England were both economically ill for a time, but succeeded in finding new growth in their financial industries,” said Yuji Yamamoto, a former financial services minister who is a chief architect of the plan. “We need to emulate that success.”
Mr. Yamamoto visited New York, Washington and London in January, when he was still the minister. During the trip, he asked officials like Ben S. Bernanke, the Federal Reserve chairman, and Christopher Cox, the chairman of the Securities and Exchange Commission, what was wrong with Tokyo. They told him that if Japan did not open its markets, “it will just be a small Asian country,” he said.
But the most memorable moment, he said, was walking around Wall Street and seeing the offices of financial companies from around the world. London also made a deep impression because so many of the firms were from developing regions, like India, South America and the Middle East. This contrasted with Tokyo, where the vast majority of companies are Japanese.
“That is when I realized the secret of Wall Street and the City success was their ability to attract money and talent from all over the world,” Mr. Yamamoto declared.
He decided that the way to emulate such success was to turn Tokyo’s financial district, Kabutocho, into a more international environment where foreign bankers and investors could feel comfortable living and doing business.
Most outsiders agree that Tokyo has enormous potential as a hub for foreign companies, not only because of Japan’s wealth but also because the city is widely regarded as one of the safest and cleanest in Asia. But there are concerns that the plan will do little more than create a ghetto for well-heeled foreigners.
The proposals also fail to get at the complaints of foreign investors and bankers over high taxes and onerous regulations.
The biggest sore point is the Financial Services Agency itself, which is widely criticized as having enormous discretion in setting rules and enforcing them. Japanese bureaucrats have long wielded murky powers over private business. Many foreign investors and financial professionals point to the agency’s shutting down Citigroup’s Japanese private banking unit three years ago as an instance of heavy-handedness toward foreign companies.
Tokyo “is a wonderful city to live in,” said Robert Feldman, an economist in the Tokyo office of Morgan Stanley. “But unless it changes its regulatory environment, no one will come here.”
Source: http://www.nytimes.com/2007/11/16/business/worldbusiness/16capital.html?_r=1&pagewanted=2&ref=asia&oref=slogin
Will Abu Dhabi become a global financial centre?
Abu Dhabi is well positioned to be a key banking centre in the Middle East, but it faces challenges in its quest to become an international financial services hub, according to speakers at the Meed Abu Dhabi Conference 2007.
Revenues in the Middle East banking industry have been growing at unprecedented levels in recent years. In the UAE alone, the growth rate of banking has been 35 per cent higher than the growth rate of GDP.
In 10 years, revenue from banking and insurance products in the Middle East will be $20bn, double what it is today, said Dr Sven-Olaf Vathje, a partner with Boston Consulting Group.
Being a financial centre can offer significant advantages for the local economy in terms of creating jobs and revenue. In New York, for example, 500,000 people work in the financial services industry, representing 15 per cent of the local workforce.
Revenue from financial services also represents about 15 per cent of New York's GDP. These GDP numbers are consistent in other financial centres, like Singapore or Frankfurt, Vathje noted.
So what are the keys to being a financial centre? First of all, a financial centre needs to have a uniqueness about it to differentiate itself from other centres. One example would be Luxembourg, which has achieved a critical mass in the area of investment banking.
There also needs to be an environment that is conducive to doing a financial services business. That means having an adequate supply of talented workers who can serve the needs of the financial services companies. There also needs to be a market structure that is beneficial to financial services, including modern regulatory standards that are in line with international standards.
Finally, the cost of setting up a financial services operation needs to be reasonable in order to attract international businesses, and the centre itself needs to develop a favorable international reputation in order to attract the right sectors, said Vathje.
Challenges lie ahead
The UAE suffers from a perception in some circles that it has an insufficient pool of talented workers in the financial services sector. In one case, Germany's Allianz Group, one of the world's leading insurers and financial services providers, chose to launch a life insurance subsidiary in Bahrain because it believed that the UAE lacked a sufficient labour pool.
Some of the specific areas where the UAE's labour market is weakest are risk management and insurance.
The cost of living is also becoming an issue in the UAE. While the country is still largely viewed as an attractive place to live, its rising inflation is becoming a growing concern for expats thinking of relocating to the region. It is also becoming more expensive for companies to establish their operations in the emirate.
RBS Chooses Abu Dhabi
The Royal Bank of Scotland chose to centralise its regional operations in Abu Dhabi after doing an extensive study of possible locations throughout the region, according to Robert Garden, Regional Managing Director Global Banking for RBS.
One of the key factors in its decision was that project finance in Abu Dhabi has been a huge market for the bank. Also, the cost of setting up operations in the emirate was relatively cheap, partly because the bank made a favorable deal with the National Bank of Abu Dhabi to use space in of its buildings.
RBS found that the talent pool in Abu Dhabi was strong, although there is a high degree of 'CV inflation' that occurs in the emirate, Garden pointed out. However, operating costs are becoming a concern for the bank. It is planning to hire and train more local talent to replace expats who are much more expensive to employ.
Can Abu Dhabi compete with Dubai as an international financial centre? 'The important thing to consider when comparing the two centres is not how they compete with each other, but how they complement each other,' said Mahmood Al Aradi, General Manager-Financial Markets Group for the National Bank Abu Dhabi.
Each centre has its own strengths. For example, Dubai is strong in mergers and acquisitions, while Abu Dhabi is strong in project finance.
'Look at Singapore and Hong Kong. Both are huge international financial centres that are very close in proximity but are still able to thrive,' Aradi said..
Source: http://www.ameinfo.com/139312.html
Revenues in the Middle East banking industry have been growing at unprecedented levels in recent years. In the UAE alone, the growth rate of banking has been 35 per cent higher than the growth rate of GDP.
In 10 years, revenue from banking and insurance products in the Middle East will be $20bn, double what it is today, said Dr Sven-Olaf Vathje, a partner with Boston Consulting Group.
Being a financial centre can offer significant advantages for the local economy in terms of creating jobs and revenue. In New York, for example, 500,000 people work in the financial services industry, representing 15 per cent of the local workforce.
Revenue from financial services also represents about 15 per cent of New York's GDP. These GDP numbers are consistent in other financial centres, like Singapore or Frankfurt, Vathje noted.
So what are the keys to being a financial centre? First of all, a financial centre needs to have a uniqueness about it to differentiate itself from other centres. One example would be Luxembourg, which has achieved a critical mass in the area of investment banking.
There also needs to be an environment that is conducive to doing a financial services business. That means having an adequate supply of talented workers who can serve the needs of the financial services companies. There also needs to be a market structure that is beneficial to financial services, including modern regulatory standards that are in line with international standards.
Finally, the cost of setting up a financial services operation needs to be reasonable in order to attract international businesses, and the centre itself needs to develop a favorable international reputation in order to attract the right sectors, said Vathje.
Challenges lie ahead
The UAE suffers from a perception in some circles that it has an insufficient pool of talented workers in the financial services sector. In one case, Germany's Allianz Group, one of the world's leading insurers and financial services providers, chose to launch a life insurance subsidiary in Bahrain because it believed that the UAE lacked a sufficient labour pool.
Some of the specific areas where the UAE's labour market is weakest are risk management and insurance.
The cost of living is also becoming an issue in the UAE. While the country is still largely viewed as an attractive place to live, its rising inflation is becoming a growing concern for expats thinking of relocating to the region. It is also becoming more expensive for companies to establish their operations in the emirate.
RBS Chooses Abu Dhabi
The Royal Bank of Scotland chose to centralise its regional operations in Abu Dhabi after doing an extensive study of possible locations throughout the region, according to Robert Garden, Regional Managing Director Global Banking for RBS.
One of the key factors in its decision was that project finance in Abu Dhabi has been a huge market for the bank. Also, the cost of setting up operations in the emirate was relatively cheap, partly because the bank made a favorable deal with the National Bank of Abu Dhabi to use space in of its buildings.
RBS found that the talent pool in Abu Dhabi was strong, although there is a high degree of 'CV inflation' that occurs in the emirate, Garden pointed out. However, operating costs are becoming a concern for the bank. It is planning to hire and train more local talent to replace expats who are much more expensive to employ.
Can Abu Dhabi compete with Dubai as an international financial centre? 'The important thing to consider when comparing the two centres is not how they compete with each other, but how they complement each other,' said Mahmood Al Aradi, General Manager-Financial Markets Group for the National Bank Abu Dhabi.
Each centre has its own strengths. For example, Dubai is strong in mergers and acquisitions, while Abu Dhabi is strong in project finance.
'Look at Singapore and Hong Kong. Both are huge international financial centres that are very close in proximity but are still able to thrive,' Aradi said..
Source: http://www.ameinfo.com/139312.html
Korea Ministry Steps Up Financial Market Monitoring
South Korea is closely monitoring the country's financial markets to prevent market turbulence from exacerbating the nation's problems, the vice finance minister said Thursday."Due to renewed concerns about the U.S. subprime mortgage loans, domestic financial markets have been fluctuating,"
Lim Young-rok said at a weekly press briefing."We will closely monitor the market situations and move preemptively against risks."Lim's comment came a day after the domestic stock market index plunged nearly 3.5 percent due to concerns about the U.S. subprime problem and record-setting global oil prices.
Bond prices also fell Wednesday, while the won's value compared to the U.S. dollar fell to its lowest level in two months as foreign investors sold local stocks.Lim said global financial market jitters are having an adverse impact on the domestic stock markets. "Even though domestic companies performed well and exports kept rising, international financial market jitters have become a burden on the domestic stock markets,"
he said."Stability in global financial markets, China's further tightening measures and foreign investors' stock sales will continue to influence the stock markets."
Source: http://www.koreatimes.co.kr/www/news/biz/2007/11/123_14252.html
Lim Young-rok said at a weekly press briefing."We will closely monitor the market situations and move preemptively against risks."Lim's comment came a day after the domestic stock market index plunged nearly 3.5 percent due to concerns about the U.S. subprime problem and record-setting global oil prices.
Bond prices also fell Wednesday, while the won's value compared to the U.S. dollar fell to its lowest level in two months as foreign investors sold local stocks.Lim said global financial market jitters are having an adverse impact on the domestic stock markets. "Even though domestic companies performed well and exports kept rising, international financial market jitters have become a burden on the domestic stock markets,"
he said."Stability in global financial markets, China's further tightening measures and foreign investors' stock sales will continue to influence the stock markets."
Source: http://www.koreatimes.co.kr/www/news/biz/2007/11/123_14252.html
The Growth of Shariah Compliant Funds to be addressed at GAIM
Over the past year, Shariah-compliant assets have grown almost 30 percent, to more than $500.5 billion, according to analysis of the industry on a global scale, published this month by The Banker magazine. The news comes as GAIM conference is about to start on Monday, 26 November 2007 at the Jumeirah Beach Hotel, Dubai. The Middle East’s inaugural Global Alternative Investment Management Conference was launched in this region to focus on the needs of the Gulf investment community. The three day conference will deal with key issues such as the structuring of Islamic Hedge Funds, the importance of the Middle East as a part of a Global Emerging Markets portfolio and the evolution of the regional market.
The evidence from The Banker magazine is supported by another survey by financial research giants Standard & Poor’s, which estimates that the market for Islamic financial products, which include retail banking services, mortgages, equity funds, fixed income, insurance, private equity, and derivatives, is currently worth $400 billion.
Commenting upon the findings, Ziad Makkawi, Chairman and CEO of Algebra Capital said: “The demand for Shariah compliant investing will continue to grow at a rapid pace. Shariah investing is in fact ethical investing. Most people believe that Islamic Finance is about - not charging interest, in reality it is considered with a regulatory and legal environment that aims to establish social harmony, the avoidance of usury and the proper sharing of risk. When given the choice, all things being equal regarding the costs and quality of investment opportunities, Muslim investors choose the Shariah compliant product over the conventional one”.
“In fact as the sophistication and diversity of Shariah compliant products increases we already see a cross-over where non-Muslims investors will also be targeted and offered Shariah compliant products, and this is where the biggest opportunity lies for practitioners of Shariah compliant and finance.” added Makkawi.
Meanwhile, the ‘pioneer of Islamic finance’, Eric Meyer, CEO, Shariah Capital will focus on the global demand for Shariah compliant Hedge Funds in his final day address at the conference.
“Witnessing this tremendous appetite by investors for Shariah Compliant funds, we have gathered the world’s renowned investors in Islamic Finance to share their knowledge and expertise with the delegates,” said Jeremy Butcher, Co-Event Director, IIR Middle East.
The event is expected to draw international attention and the conference’s impact has been bolstered by high level sponsorship from a number of leading organizations including Algebra Capital, Baer Capital Partners, W.P. Stewart, Gulf Investment Corporation, Argent Financial Group International, National Investments Company and Path solutions, while the official event partner is Dubai International Financial Centre.
Source: http://www.albawaba.com/en/countries/UAE/219256
The evidence from The Banker magazine is supported by another survey by financial research giants Standard & Poor’s, which estimates that the market for Islamic financial products, which include retail banking services, mortgages, equity funds, fixed income, insurance, private equity, and derivatives, is currently worth $400 billion.
Commenting upon the findings, Ziad Makkawi, Chairman and CEO of Algebra Capital said: “The demand for Shariah compliant investing will continue to grow at a rapid pace. Shariah investing is in fact ethical investing. Most people believe that Islamic Finance is about - not charging interest, in reality it is considered with a regulatory and legal environment that aims to establish social harmony, the avoidance of usury and the proper sharing of risk. When given the choice, all things being equal regarding the costs and quality of investment opportunities, Muslim investors choose the Shariah compliant product over the conventional one”.
“In fact as the sophistication and diversity of Shariah compliant products increases we already see a cross-over where non-Muslims investors will also be targeted and offered Shariah compliant products, and this is where the biggest opportunity lies for practitioners of Shariah compliant and finance.” added Makkawi.
Meanwhile, the ‘pioneer of Islamic finance’, Eric Meyer, CEO, Shariah Capital will focus on the global demand for Shariah compliant Hedge Funds in his final day address at the conference.
“Witnessing this tremendous appetite by investors for Shariah Compliant funds, we have gathered the world’s renowned investors in Islamic Finance to share their knowledge and expertise with the delegates,” said Jeremy Butcher, Co-Event Director, IIR Middle East.
The event is expected to draw international attention and the conference’s impact has been bolstered by high level sponsorship from a number of leading organizations including Algebra Capital, Baer Capital Partners, W.P. Stewart, Gulf Investment Corporation, Argent Financial Group International, National Investments Company and Path solutions, while the official event partner is Dubai International Financial Centre.
Source: http://www.albawaba.com/en/countries/UAE/219256
Financial Hypocrisy
This year marks the 10th anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, and spread to Indonesia in October and to South Korea in December. Eventually, it became a global financial crisis, embroiling Russia and Latin American countries, such as Brazil, and unleashing forces that played out over the ensuing years.
Argentina in 2001 may be counted as among its victims. There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Indeed, Laos was among the countries that were affected the worst. Though every crisis eventually ends, no one knew at the time how broad, deep and long the ensuing recessions and depressions would be. It was the worst global crisis since the Great Depression.
As the World Bank's chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses. This summer and fall I revisited many of the affected countries, including Malaysia, Laos, Thailand, and Indonesia. It is heartwarming to see their recoveries. These countries are now growing at annual rates of 5 percent, 6 percent and in some cases even higher -- not quite as fast as in the days of the East Asia miracle but far more rapidly than many thought possible in the aftermath of the crisis.
Many countries changed their policies, but in directions markedly different from the reforms that the International Monetary Fund had urged. The poor were among those who bore the biggest burden of the crisis as wages plummeted and unemployment soared. As countries emerged, many placed a new emphasis on "harmony," in an effort to redress the growing divide between rich and poor, urban and rural. They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens and creating social funds to help develop local communities.
Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital-market liberalization. It is therefore ironic to see the U.S. treasury secretary once again pushing for capital-market liberalization in India -- one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.
It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital-market liberalization brings instability, but not necessarily growth. India and China have, by the same token, been the fastest-growing economies.
Of course Wall Street, whose interests the U.S. Treasury represents, profits from capital-market liberalization: It makes money as capital flows in, as it flows out and in the restructuring that occurs in the resulting havoc. In South Korea, the IMF urged the sale of the country's banks to U.S. investors, even though Koreans had managed their own economy impressively for four decades with higher growth, more stability and without the systemic scandals that have marked U.S. financial markets.
In some cases U.S. firms bought the banks, held on to them until South Korea recovered, and then they resold them, reaping billions in capital gains. In its rush to have Westerners buy the banks, the IMF forgot one detail -- to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether U.S. investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.
The contrast between the IMF and U.S. Treasury advice to East Asia and what has happened in the current subprime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25 percent, 40 percent, or higher, causing a rash of defaults. In the current crisis, the U.S. Federal Reserve and the European Central Bank cut interest rates.
The countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer's credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what. And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets, including their exploitation of uninformed borrowers, which lay at the root of the problem. Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.
Following the 1997 crisis there was a consensus that fundamental reform of the global financial architecture was needed. But, while the current system may lead to unnecessary instability and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that 10 years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies.
By Joseph E. Stiglitz, a Nobel laureate in economics and former chairman of the Council of Economic Advisers to U.S. President Bill Clinton, is professor of economics at Columbia University.
Source: http://www.themoscowtimes.com/stories/2007/11/23/006.html
(for academic purpose)
Argentina in 2001 may be counted as among its victims. There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Indeed, Laos was among the countries that were affected the worst. Though every crisis eventually ends, no one knew at the time how broad, deep and long the ensuing recessions and depressions would be. It was the worst global crisis since the Great Depression.
As the World Bank's chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses. This summer and fall I revisited many of the affected countries, including Malaysia, Laos, Thailand, and Indonesia. It is heartwarming to see their recoveries. These countries are now growing at annual rates of 5 percent, 6 percent and in some cases even higher -- not quite as fast as in the days of the East Asia miracle but far more rapidly than many thought possible in the aftermath of the crisis.
Many countries changed their policies, but in directions markedly different from the reforms that the International Monetary Fund had urged. The poor were among those who bore the biggest burden of the crisis as wages plummeted and unemployment soared. As countries emerged, many placed a new emphasis on "harmony," in an effort to redress the growing divide between rich and poor, urban and rural. They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens and creating social funds to help develop local communities.
Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital-market liberalization. It is therefore ironic to see the U.S. treasury secretary once again pushing for capital-market liberalization in India -- one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.
It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital-market liberalization brings instability, but not necessarily growth. India and China have, by the same token, been the fastest-growing economies.
Of course Wall Street, whose interests the U.S. Treasury represents, profits from capital-market liberalization: It makes money as capital flows in, as it flows out and in the restructuring that occurs in the resulting havoc. In South Korea, the IMF urged the sale of the country's banks to U.S. investors, even though Koreans had managed their own economy impressively for four decades with higher growth, more stability and without the systemic scandals that have marked U.S. financial markets.
In some cases U.S. firms bought the banks, held on to them until South Korea recovered, and then they resold them, reaping billions in capital gains. In its rush to have Westerners buy the banks, the IMF forgot one detail -- to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether U.S. investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.
The contrast between the IMF and U.S. Treasury advice to East Asia and what has happened in the current subprime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25 percent, 40 percent, or higher, causing a rash of defaults. In the current crisis, the U.S. Federal Reserve and the European Central Bank cut interest rates.
The countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer's credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what. And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets, including their exploitation of uninformed borrowers, which lay at the root of the problem. Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.
Following the 1997 crisis there was a consensus that fundamental reform of the global financial architecture was needed. But, while the current system may lead to unnecessary instability and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that 10 years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies.
By Joseph E. Stiglitz, a Nobel laureate in economics and former chairman of the Council of Economic Advisers to U.S. President Bill Clinton, is professor of economics at Columbia University.
Source: http://www.themoscowtimes.com/stories/2007/11/23/006.html
(for academic purpose)
Growth Pain in China
Just as Chinese authorities began spending millions of dollars this summer to prepare the country for the 2008 Olympic Games, which Beijing hopes will improve its international image, several US companies issued recalls for a variety of Chinese products ranging from tainted foods to toys covered in lead-based paint. News of bridge collapses, mining accidents and slave labor did not help the country’s public relations blitz. While the Chinese government unleashed a damage-control plan, such reports point to a need for changes that will have to continue long after the Olympic torch is extinguished.
Beijing established a top-level panel to oversee food and product safety issues and, in an unprecedented move for a country known for keeping tight reins on the media, invited journalists to visit affected factories and vowed to give them greater access to key officials. “We should enlist the media in any emergency plans,” Wang Quoqing, deputy minister of the State Council’s information office, said in July. Though some say the visits included scripted speeches by factory managers, they nevertheless indicated that the State Council, the country’s cabinet, was aware that the eyes of the world, which they had hoped would be set on China’s spanking new sports venues, were instead focused on some of the country’s weaknesses.
Some foreign analysts charge that the product recalls highlight China’s ongoing quality-control problems. The country’s rapid economic expansion has shifted much of its manufacturing base to small local producers throughout the country, paving the way for bribery and lax supervision in the interior. As the country tackles the problem, however, there are indications that some of its neighbors, including Vietnam, may be ready to pounce by offering cheap labor and similar quality.
Dissidents Focus On Olympics
US President George Bush urged Beijing to use the Olympics as an opportunity to bring greater openness and tolerance for religious groups and political dissidents as well. The government says it will not allow the games to be politicized in any way but may be concerned over the growing number of street protests cropping up in major cities. Dissidents, it seems, may have a public relations agenda of their own for the event.
Corruption is at the core of much of the growing disgruntlement. Just prior to the October 15 inauguration of the Chinese Communist Party’s 17th congress, the government stepped up its anti-corruption campaign, establishing the National Corruption Prevention Bureau. The new agency reports directly to the State Council. Anti-corruption measures, the government says, had already led to nearly 100,000 officials being disciplined nationwide last year. The State Council now demands that government officials’ assets be made public, though it is doubtful that the financial system has the means to provide accurate information in a standardized manner nationwide.
In two high-profile cases, Zhang Shaocang, former head of the Anhui Province Energy Group, was sentenced in September to life imprisonment for embezzling the equivalent of just over $1 million, while Wen Mengjie, an official at the Agricultural Bank of China, was sentenced to death for embezzling some $2 million. Zheng Xiaoyu, former head of the country’s food and drug administration, was also executed in July for accepting $850,000 in bribes from drug companies in exchange for fast-track approval of their medicines.
Chinese press reports claim that 8,010 cases of commercial bribery were investigated between January and October 2006. Of these, they allege, 81% led to prosecution for taking bribes, though only 17% were prosecuted for giving them. Since September 2005, anyone found guilty of taking bribes has been banned from participating in public works projects, although enforcement remains erratic.
The fact that the Chinese economy is booming has led some foreign and domestic investors to resort to such methods to gain a piece of the action. The World Bank predicts China’s GDP will grow by 11.3% in 2007 and 10.8% in 2008, with a current account surplus of around 12% of GDP, or some $378 billion, for this year. The National Bureau of Statistics in Beijing predicts the economy will grow at an average annual rate of over 8% through 2010, then slowing to an average of 7% a year through 2020.
“For the first time, we expect China to be the largest contributor to global GDP growth, measured at market exchange rates, as well as in purchasing power parity terms,” said Charles Collyns, deputy director of the IMF’s research department at a press briefing to release the April 2007 World Economic Outlook. In purchasing power parity terms, Collyns announced, China represents 15% of the global economy this year and accounts for about a third of global GDP growth.
Exports Fuel Economic Boom
Much of the boom has been fueled by record-high exports. During the first seven months of 2007, exports grew by 29% year-on-year in dollar terms, while imports grew by only 20%, producing a trade surplus of $137 billion that is 80% higher than during the same period last year. Trade boosted international reserves by $267 billion during the first-half of the year to an unprecedented $1.33 trillion. Industrial production grew by 13.6% year-on-year during the same period.
Authorities are taking action to halt an imminent overheating of the economy. The People’s Bank of China, the nation’s central bank, raised the benchmark one-year lending and deposit rate by 27 basis points in September to 7.29% and 3.87%, respectively. This was the bank’s fifth rate hike in 2007 to curb inflation and temper consumer spending. The government even cut import tariffs on electronic goods from 17% to 13% in a move to fuel imports in order to tame the trade surplus and rebalance its international payments.
Inflation is a problem. Beijing officials are concerned that recent food price hikes could spill over into wages and generalized inflation. Consumer price inflation was up 6.5% year-on-year in August, from 5.6% in July, more than double the central bank’s 3% inflation target. August’s rate was the highest in a decade. While non-fuel inflation dropped to 0.9% in July as a result of price controls on fuels and utilities, the price of eggs alone rose by an annualized 34.8% in June and another 23.6% in August. Pork prices rose more than 70% year-on-year in August.With food accounting for 37% of average total urban household spending, according to 2005 government studies, China is concerned about the economic and social implications in a country where price hikes sparked pro-democracy protests in 1989.
“Authorities are rightly aiming at avoiding excess demand and the spillover of high food prices into generalized inflation, and mopping up liquidity and raising interest rates will continue to be needed,” according to the World Bank’s China Quarterly Update for September.
The World Bank, however, notes that the environment remains appealing for foreign investment, though recommending that China optimize its use of foreign direct investment (FDI) by leveling the taxation playing field, opening up the service sector further to competition and FDI, maximizing technology transfers and improving the investment climate in the interior regions. China reportedly received some 25% of all FDI to developing countries over the past decade and is projected to welcome another 30% of the expected $250 billion in FDI flows to emerging markets in the 2006-2010 period.
Financial markets are also booming. The World Bank reports the country’s A-share index gained 95% during the first eight months of the year, on the heels of a 130% rise last year. Chinese citizens are now allowed to invest freely in the Hong Kong Stock Exchange, in a move that has boosted Hong Kong-listed shares of Chinese companies that were previously valued below their price levels on the mainland.
Companies are lining up for IPOs in Shanghai. In September the China Construction Bank raised $7.7 billion in what was then the country’s largest IPO to date. But the record was soon shattered by an IPO for Shenhua Energy, China’s second-largest coal producer, which raised almost $9 billion. To avoid speculation, the government tripled the tax on equities trading in May, hoping to stave off a market bubble.
A new draft law for the administration of pension fund insurance was announced this year, while a final draft of a new financial leasing law was recently completed. Credit cards in circulation have doubled between 2006 and 2007 to more than 40 million in a country where only 14% of eligible customers hold credit cards, compared with 81% in Hong Kong.
By year-end, authorities are expected to release new rules allowing several international investment banks to establish joint ventures with local securities firms in what is considered to be a pilot program. Under the revised rules, foreign investment banks will be able to own up to 33% of joint ventures in the securities sector. Morgan Stanley, Goldman Sachs and UBS already have joint ventures with local partners, while JPMorgan and Merrill Lynch are reportedly in talks for similar investments.
In September the government launched the China Investment Corporation, its new foreign exchange investment unit funded by the finance ministry, to invest part of the country’s foreign currency reserves. With initial capital of $200 billion, the investment fund is one of the world’s largest and will focus mainly on a portfolio of financial products. Part of Beijing’s aim is to diversify its investment portfolio away from low-yielding US treasuries and help temper the ongoing appreciation of the yuan.
“China and other emerging economies should introduce more flexibility in their exchange rate management,” EU economic commissioner Joaquin Almunia said ahead of the EU finance ministers’ monthly meeting in Luxembourg in October. China loosened the yuan’s peg to the dollar in 2005, but the currency still trades within bands against major currencies. The yuan has gained more than 9% against the US dollar over the past two years but has dropped more than 5% against the euro.
So when the Olympic fireworks have passed and the athletes return home laden with medals and souvenirs, China will still have much work to do. Some might say that, just like its growth rate, the country’s tasks ahead will reach Olympian proportions.
By Antonio Guerrero
Source: http://www.gfmag.com/index.php?idPage=655
Beijing established a top-level panel to oversee food and product safety issues and, in an unprecedented move for a country known for keeping tight reins on the media, invited journalists to visit affected factories and vowed to give them greater access to key officials. “We should enlist the media in any emergency plans,” Wang Quoqing, deputy minister of the State Council’s information office, said in July. Though some say the visits included scripted speeches by factory managers, they nevertheless indicated that the State Council, the country’s cabinet, was aware that the eyes of the world, which they had hoped would be set on China’s spanking new sports venues, were instead focused on some of the country’s weaknesses.
Some foreign analysts charge that the product recalls highlight China’s ongoing quality-control problems. The country’s rapid economic expansion has shifted much of its manufacturing base to small local producers throughout the country, paving the way for bribery and lax supervision in the interior. As the country tackles the problem, however, there are indications that some of its neighbors, including Vietnam, may be ready to pounce by offering cheap labor and similar quality.
Dissidents Focus On Olympics
US President George Bush urged Beijing to use the Olympics as an opportunity to bring greater openness and tolerance for religious groups and political dissidents as well. The government says it will not allow the games to be politicized in any way but may be concerned over the growing number of street protests cropping up in major cities. Dissidents, it seems, may have a public relations agenda of their own for the event.
Corruption is at the core of much of the growing disgruntlement. Just prior to the October 15 inauguration of the Chinese Communist Party’s 17th congress, the government stepped up its anti-corruption campaign, establishing the National Corruption Prevention Bureau. The new agency reports directly to the State Council. Anti-corruption measures, the government says, had already led to nearly 100,000 officials being disciplined nationwide last year. The State Council now demands that government officials’ assets be made public, though it is doubtful that the financial system has the means to provide accurate information in a standardized manner nationwide.
In two high-profile cases, Zhang Shaocang, former head of the Anhui Province Energy Group, was sentenced in September to life imprisonment for embezzling the equivalent of just over $1 million, while Wen Mengjie, an official at the Agricultural Bank of China, was sentenced to death for embezzling some $2 million. Zheng Xiaoyu, former head of the country’s food and drug administration, was also executed in July for accepting $850,000 in bribes from drug companies in exchange for fast-track approval of their medicines.
Chinese press reports claim that 8,010 cases of commercial bribery were investigated between January and October 2006. Of these, they allege, 81% led to prosecution for taking bribes, though only 17% were prosecuted for giving them. Since September 2005, anyone found guilty of taking bribes has been banned from participating in public works projects, although enforcement remains erratic.
The fact that the Chinese economy is booming has led some foreign and domestic investors to resort to such methods to gain a piece of the action. The World Bank predicts China’s GDP will grow by 11.3% in 2007 and 10.8% in 2008, with a current account surplus of around 12% of GDP, or some $378 billion, for this year. The National Bureau of Statistics in Beijing predicts the economy will grow at an average annual rate of over 8% through 2010, then slowing to an average of 7% a year through 2020.
“For the first time, we expect China to be the largest contributor to global GDP growth, measured at market exchange rates, as well as in purchasing power parity terms,” said Charles Collyns, deputy director of the IMF’s research department at a press briefing to release the April 2007 World Economic Outlook. In purchasing power parity terms, Collyns announced, China represents 15% of the global economy this year and accounts for about a third of global GDP growth.
Exports Fuel Economic Boom
Much of the boom has been fueled by record-high exports. During the first seven months of 2007, exports grew by 29% year-on-year in dollar terms, while imports grew by only 20%, producing a trade surplus of $137 billion that is 80% higher than during the same period last year. Trade boosted international reserves by $267 billion during the first-half of the year to an unprecedented $1.33 trillion. Industrial production grew by 13.6% year-on-year during the same period.
Authorities are taking action to halt an imminent overheating of the economy. The People’s Bank of China, the nation’s central bank, raised the benchmark one-year lending and deposit rate by 27 basis points in September to 7.29% and 3.87%, respectively. This was the bank’s fifth rate hike in 2007 to curb inflation and temper consumer spending. The government even cut import tariffs on electronic goods from 17% to 13% in a move to fuel imports in order to tame the trade surplus and rebalance its international payments.
Inflation is a problem. Beijing officials are concerned that recent food price hikes could spill over into wages and generalized inflation. Consumer price inflation was up 6.5% year-on-year in August, from 5.6% in July, more than double the central bank’s 3% inflation target. August’s rate was the highest in a decade. While non-fuel inflation dropped to 0.9% in July as a result of price controls on fuels and utilities, the price of eggs alone rose by an annualized 34.8% in June and another 23.6% in August. Pork prices rose more than 70% year-on-year in August.With food accounting for 37% of average total urban household spending, according to 2005 government studies, China is concerned about the economic and social implications in a country where price hikes sparked pro-democracy protests in 1989.
“Authorities are rightly aiming at avoiding excess demand and the spillover of high food prices into generalized inflation, and mopping up liquidity and raising interest rates will continue to be needed,” according to the World Bank’s China Quarterly Update for September.
The World Bank, however, notes that the environment remains appealing for foreign investment, though recommending that China optimize its use of foreign direct investment (FDI) by leveling the taxation playing field, opening up the service sector further to competition and FDI, maximizing technology transfers and improving the investment climate in the interior regions. China reportedly received some 25% of all FDI to developing countries over the past decade and is projected to welcome another 30% of the expected $250 billion in FDI flows to emerging markets in the 2006-2010 period.
Financial markets are also booming. The World Bank reports the country’s A-share index gained 95% during the first eight months of the year, on the heels of a 130% rise last year. Chinese citizens are now allowed to invest freely in the Hong Kong Stock Exchange, in a move that has boosted Hong Kong-listed shares of Chinese companies that were previously valued below their price levels on the mainland.
Companies are lining up for IPOs in Shanghai. In September the China Construction Bank raised $7.7 billion in what was then the country’s largest IPO to date. But the record was soon shattered by an IPO for Shenhua Energy, China’s second-largest coal producer, which raised almost $9 billion. To avoid speculation, the government tripled the tax on equities trading in May, hoping to stave off a market bubble.
A new draft law for the administration of pension fund insurance was announced this year, while a final draft of a new financial leasing law was recently completed. Credit cards in circulation have doubled between 2006 and 2007 to more than 40 million in a country where only 14% of eligible customers hold credit cards, compared with 81% in Hong Kong.
By year-end, authorities are expected to release new rules allowing several international investment banks to establish joint ventures with local securities firms in what is considered to be a pilot program. Under the revised rules, foreign investment banks will be able to own up to 33% of joint ventures in the securities sector. Morgan Stanley, Goldman Sachs and UBS already have joint ventures with local partners, while JPMorgan and Merrill Lynch are reportedly in talks for similar investments.
In September the government launched the China Investment Corporation, its new foreign exchange investment unit funded by the finance ministry, to invest part of the country’s foreign currency reserves. With initial capital of $200 billion, the investment fund is one of the world’s largest and will focus mainly on a portfolio of financial products. Part of Beijing’s aim is to diversify its investment portfolio away from low-yielding US treasuries and help temper the ongoing appreciation of the yuan.
“China and other emerging economies should introduce more flexibility in their exchange rate management,” EU economic commissioner Joaquin Almunia said ahead of the EU finance ministers’ monthly meeting in Luxembourg in October. China loosened the yuan’s peg to the dollar in 2005, but the currency still trades within bands against major currencies. The yuan has gained more than 9% against the US dollar over the past two years but has dropped more than 5% against the euro.
So when the Olympic fireworks have passed and the athletes return home laden with medals and souvenirs, China will still have much work to do. Some might say that, just like its growth rate, the country’s tasks ahead will reach Olympian proportions.
By Antonio Guerrero
Source: http://www.gfmag.com/index.php?idPage=655
SHARIAH-COMPLIANT CORPORATE FINANCE FORGES AHEAD
While the initial wave of modern Islamic banking focused on the retail side of the business, investment banks are the new trailblazers. US and European banks are bidding for Shariah-compliant tranches of major financings to repackage as investment funds. Meanwhile, the oil-rich countries of the Middle East offer a pool of liquidity that is a big draw for financiers and companies seeking to raise capital.
Dubai Ports World’s takeover of UK-based port operator P&O last year was financed in part with Islamic “bonds,” or sukuk, that were oversubscribed more than four times, receiving a total of $11.4 billion in bids. Because of investor demand, the issue was increased from $2.8 billon to $3.5 billion.
The market for sukuk, which are more akin to asset-backed securities than bonds, grew 75% in the first half of 2007 to reach $85 billion of outstanding issues. Islamic finance also is growing fast in the private equity sector. A $400 million issue of sukuk backed the $1.4 billion leveraged buyout of Egyptian Fertilizers in June.
The application of Islamic financing principles in mergers and acquisitions and LBOs are just two examples of Shariah-compliant corporate finance, a field that has emerged only in the past five years. Led by the sukuk’s popularity, new Islamic finance products have been created to meet most of the needs of a corporation, from asset financing and working capital to risk management and currency swaps.
British sports-car maker Aston Martin is being transformed into a Shariah-compliant company now that it has been acquired for $1.2 billion in an LBO by a consortium that included two Kuwaiti investment companies, Investment Dar and Adeem Investment. WestLB arranged $450 million of Islamic financing to back the purchase of the maker of James Bond’s favorite sports car, a DB5. US investment bank Jefferies acted as M&A adviser to the buyers, who were led by entrepreneur David Richards, founder of Prodrive, an automotive engineering group based outside of London.
In the largest sukuk issue to date, Dubai-based real estate developer Nakheel Group, famous for its palm-shaped islands, raised $3.52 billion early this year. Dubai Islamic Bank and Barclays Capital were the lead underwriters of the issue, which included an innovative equity-linked structure. On any future qualified public offering, or QPO, by Nakheel before the sukuk are redeemed, investors will have the right to subscribe to a certain amount of shares. If there is no QPO of sufficient size, investors will be paid a higher return or “yield” at the time of redemption. The notes were listed in both Dubai and London.
Although options and derivatives are a touchy subject or “grey area” in Islamic finance, convertible sukuk are allowed by Shariah boards and, in effect, are similar to options. New Islamic capital market instruments and rudimentary secondary markets for trading are being developed, notably in London and Dubai. The demand for sukuk has been so strong, however, that few are available for trading. Investors have been following a buy-and-hold strategy, and price discovery is not optimal.
Governments in the Gulf region have been giving a boost to the sukuk market by requiring that every project and infrastructure financing must include an Islamic financing tranche. There are now more than 300 Islamic financial institutions operating worldwide, and most major banks have become involved in this fast-growing business, which is centered in Malaysia and the Middle East, with a growing presence in the United Kingdom. Total assets of the Islamic financing industry have reached an estimated $500 billion, which is a drop in the ocean of global finance but is material from the perspective of the size of regional economies. Islamic assets stood at about $150 billion in the mid-1990s.
Standard & Poor’s Ratings Services announced in late September that it would introduce stability ratings for Islamic banks with profit-sharing investment accounts, or PSIAs. These accounts are an important source of funding for Islamic financial institutions, much like conventional banks rely on savings and checking accounts as a funding tool, says Anouar Hassoune, credit analyst at S&P, who is based in Paris. But unlike conventional time deposits, PSIAs comply with Shariah law, which forbids the payment of interest, or riba. Instead, PSIA depositors are entitled to receive a share of the bank’s profits but are also obliged to swallow any potential losses on their investment. “This profit-sharing principle is a key concept in Islamic finance, according to which investors and entrepreneurs must share the risks and rewards of a given venture,” Hassoune says.
Standard & Poor’s expects to issue its initial stability ratings for Islamic banks with PSIA accounts in the first quarter of 2008, Hassoune says. The ratings will represent the agency’s opinion about the expected stability of cash flow distributable to account holders on a scale running from SR-1, the highest rating, to SR-7, the lowest. The ratings will incorporate analyses of the financial institution’s structure and governance, as well as business risk and financial risk profiles.
“We are targeting Islamic banks as economic entities,” Hassoune says. While the stability ratings have nothing to do with sukuk issues, investors are eager to learn more about specific issuers, he says. “Looking at the Middle East region as a unified whole is misleading because of its diversity,” he adds. “Per capita income, for example, ranges from $600 in Yemen to $60,000 in Qatar. A Kuwaiti citizen earns more than someone working in Luxembourg.”
Rather than looking at the region from afar and seeing a desert, one needs to see the granular detail, Hassoune suggests. “Investors need more micro information about issuers,” he says. “They need to know about the capacity and willingness of an obligor to honor its obligations, since they are taking on the obligor’s fundamental risk,” he says.
Modern Islamic financing emerged in the mid-1970s with the founding of the first large Islamic banks: Saudi Arabia’s Islamic Development Bank, Dubai Islamic Bank and Bahrain-based Albaraka Banking. “Demand rather than supply is driving the development of Islamic products and services,” Hassoune says. Demand for Shariah-compliant investments and loans began to take off in the early 1990s against a backdrop of abundant liquidity flows from recycling petrodollars in regional economies.
Hassoune says the European banks are establishing operations in wholesale banking by recycling funds flowing out of the Gulf region into Shariah-compliant asset classes in Europe. London has a good chance of emerging as a center of such activity, although Britain’s plans to become the first Western government to issue Islamic bonds seem to have been put on the back burner with the recent departure from the UK treasury of Ed Balls, the main proponent of the sovereign sukuk offering.
While Western banks such as HSBC, Barclays Capital, Citi, Calyon, BNP Paribas, Deutsche Bank and WestLB, among others, are making inroads into Islamic financing for corporations, new Shariah-compliant investment banks are also emerging, mainly in Gulf Cooperation Council (GCC) countries. Bahrain alone has Arcapita Bank, Gulf Finance House and Unicorn Investment Bank.
Arcapita, formerly First Islamic Investment Bank, has a private equity arm based in Atlanta, Georgia, which has been buying up stakes in US companies such as Caribou Coffee, TLC Healthcare Services and Church’s Chicken. Meanwhile, East Cameron Gas, based in Houston, Texas, last year became the first US-based issuer of sukuk, with a $166 million asset-backed issue handled by Merrill Lynch and Lebanon’s Bemo Securities.
In August Merrill Lynch announced that it would list two new certificates on the structured-products platform of the Dubai International Financial Exchange. The certificates will be linked to the first index designed to track stocks listed on the Dubai Financial Market. Merrill Lynch introduced that index, the Dubai Investable Index, in November 2006. The first new certificate will track the index, while the second certificate will be the first listed reverse convertible linked to the index. It will offer a 9.5% fixed return, and the initial investment will be guaranteed as long as the index does not decline by 20% or more during the one-year life of the issue.
Malaysian issuers accounted for the leading share of the Islamic bond market last year, with volume totaling $5.6 billion, an increase of 31% from the year before, according to London-based Dealogic. CIMB Islamic, based in Kuala Lumpur, was the leading bookrunner of sukuk, with more than 22% of total volume in 2006. Malaysia’s Shariah-compliant framework includes all the major components of a financial system, including a money market, a capital market, derivatives and microfinance.
Standard Chartered Bank Malaysia signed the first-ever Islamic cross-currency swap deal in July 2006 with Bank Muamalat Malaysia, a domestic Islamic bank. Standard Chartered says it was the first international bank to offer an Islamic banking window in 1993.
While Malaysia is home to the standard-setting Islamic Financial Services Board, Bahrain is vying to create industry standards through the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
Meanwhile, Saudi Arabia, the largest economy in the Middle East, has progressively liberalized its banking system since the enactment of the Capital Markets Law in 2003. The same law liberalized the market for investment banking, brokerage and securities services. The Saudi Monetary Agency (SAMA) ordered the separation of these activities from conventional banking.
Saudi Arabia is swarming with investment bankers who are eager to bring to market the next batch of initial public offerings to deepen the Saudi stock market. There are only 78 firms listed on the Saudi exchange, the same as the number of firms the Capital Market Authority has licensed to conduct securities business in the kingdom.
One of the first licenses was issued to HSBC Saudi Arabia, a joint venture with Riyadh-based Saudi British Bank (SABB). Bahrain-based Gulf International Bank (GIB) announced in September that it recently obtained a license to establish a securities company in Saudi Arabia, which will offer corporate finance advisory services, as well as brokerage, securities dealer, underwriting, fund management and custodial services. Other offshore banks in Bahrain are also coming: Ithmaar Bank is investing $6.1 million in Ethraa Capital, an investment company jointly owned with Saudi-based Atheeb Trading and Kuwait Investment Company.
Among a wave of US-based firms, Merrill Lynch announced in June that it received a license to offer investment banking products and wealth management services in Saudi Arabia. “Riyadh has acknowledged the role it can play in developing the financial services sector of the Middle East,” says Jeffrey Culpepper, Merrill’s head of global markets and investment banking, Middle East and North Africa. Earlier this year, Morgan Stanley announced its intention to enter into a joint venture with The Capital Group, a local investment group in Saudi Arabia. The venture will operate under the name Morgan Stanley Saudi Arabia. Bear Stearns and a group of Saudi investors led by Prince Mishaal Bin Abdullah Bin Turki Al-Saud, CEO of Zad Investment, formed an asset management joint venture targeting wealthy clients. It will offer traditional investment products, including equity, fixed-income, hedge fund and private equity investments, and will develop specific offerings that comply with Shariah.
Markets in the Middle East have a low correlation with other global markets and offer investors diversification benefits, says James Gotto, London-based fund manager of Schroder ISF Middle East, a fund launched in September by Schroders to invest in 30 to 70 companies in the region. Schroders opened an office in Dubai earlier this year. “While oil is important for some countries and is boosting investment in local infrastructure, broader demand for consumer and financial products is set to rise across the region,” Gotto says.
Party on: Private Equity!
Private equity has become a significant and vital component of the global economy in the past decade. Its effect is felt at every level of the company hierarchy—from venture capital firms pump-priming small technology start-ups to consortiums of giant global private equity houses making audacious bids for some of the world’s largest household-name firms.
According to the European Private Equity and Venture Capital Association (EVCA), a record $450 billion was invested in European and North American companies by private equity in 2006—an increase of 60% on 2005. Meanwhile, private-equity-sponsored companies were responsible for 40% of all US IPOs in 2006, and buyout funding represents a huge chunk of the high-yield bond and syndicated-loan markets.
Private equity’s importance has been growing since Kohlberg Kravis Roberts bought food and tobacco conglomerate RJR Nabisco for $25 billion 18 years ago. But in the past few years, the industry has achieved such a scale—and begun to employ so many people (in the United Kingdom alone, private-equity-owned companies now employ as many as 2.8 million people, a fifth of the workforce)—it has become impossible to ignore.
Private equity inevitably has attracted government attention, notes Jonathan Blue, CEO of US middle-market private equity firm Blue Equity. “Any industry that has success on the scale of private equity over the past several years can expect to receive scrutiny,” he says. Attention has largely focused on two issues: the level of tax paid by private equity partners, and how private equity companies generate returns.
On the issue of tax, public attention has unsurprisingly honed in on salacious details. UK legislators hung their attack on the industry on the claim that private equity partners pay less tax than the people who clean their houses. Meanwhile, in the United States, Blackstone Group’s CEO, Stephen Schwarzman, was criticized for his lavish lifestyle, which involved spending $3,000 a weekend on food—with the implication that he paid too little tax.
The Schwarzman episode inspired an orgy of self-righteousness and consequent calls from US legislators for higher taxes and more control of the sector. But many responses have focused on too narrow an agenda, according to Blue. “Many of the discussions have ignored the benefits that private equity brings to underlying portfolio companies and the overall economy,” he says.
Moreover, as Frank Morgan, president and COO of Coller Capital in the US, a company that buys private equity assets in the secondary market, points out, private equity firms are taxed just like any other partnership. “It would be unfair to discriminate against one type of partnership by taxing it differently just because it has proved to be successful,” he says. Despite the noise, Morgan says it is unlikely that any moves will be made in the US in the medium term that would curb returns, although in the UK the government’s pre-budget report in October signaled the end of some forms of tax relief for the private equity industry.
The Perennial Question
The second question raised by regulators and legislators during hours of breast-beating hearings—how private equity makes its returns—is ultimately more important than levels of taxation.
Private equity is undoubtedly successful at creating value. A survey by consultancy Ernst & Young, which analyzed 200 private equity exits in the US and Europe in 2006, showed that the enterprise value of private-equity-owned companies grew at 33% a year compared to 11% for publicly listed companies. In Europe, private-equity-owned firms grew by 23% compared to 15% for public companies.
The real issue is whether private equity creates or exploits value. Does private equity produce growth from investment and improvements in operational performance, bringing long-term benefits? Or does it cut costs ruthlessly and pile on the debt, making a company briefly attractive in order to sell but destabilizing it in the long term?
The results of Ernst & Young’s survey strongly indicate the former. “There is convincing evidence that private equity creates real growth in enterprise value,” says Simon Perry, head of global private equity at Ernst & Young in London. “It is not the barbarian at the gate of legend.” The report shows that two-thirds of the growth in earnings before interest, tax, depreciation and amortization (ebitda) at private-equity-owned companies came from business expansion.
Perry says that the huge competition between private equity companies means that there is no possibility of buying a company cheap and then breaking it up for profit. Instead, as Blue of Blue Equity notes, the depth of experience, contacts and resources that a private equity buyer brings—combined with a proactive strategy for purchases and an understanding of the broader market context—leads to improved performance.
Private-equity-owned companies—by virtue of not being listed—can focus relentlessly on their objectives in a way that companies subject to the distractions of quarterly reporting cannot, according to Thomas Kubr, CEO of Capital Dynamics, one of the world’s largest private equity asset management firms. “Decision-making is tighter, and perusing strategic initiatives is easier,” he says. “And management interests are aligned with shareholder interests—not least because private equity partners invariably sit on the board.” Consequently, securing a profitable exit for its main shareholder is among the company’s top priorities.
While cost reduction is important for private equity, the focus is on efficiency rather than unsustainably cutting headcount. “Sustainable growth can’t come from cost cutting, which only benefits ebitda once,” explains Perry. With an average hold for private equity in the US of three years—or three and a half years in Europe—such a strategy wouldn’t work. Incidentally, such a hold period compares favorably to the public stocks, which are held for an average of just 10 months.
In addition to the “ability to ramp up revenues and reduce expenses potentially far more aggressively than a traditional operator” noted by Blue at Blue Equity, one of the most important elements of private equity’s return formula is the use of leverage. “Especially for large buyout firms, the cost of debt matters to returns,” says Morgan at Coller Capital.
Figures compiled by Bloomberg show that the four largest private equity firms in the world—Madison Dearborn Partners, Providence Equity, Blackstone Group and Thomas H. Lee—had leverage of more than 10 times the earnings of their target companies in the period from January 2005 to September 2007.
Evidence suggests that as deal prices have risen, private equity firms have increased leverage in order to help maintain returns. In a prophetic report in December 2006, Standard & Poor’s credit strategist, Blaise Ganguin, warned that “debt leverage in buyouts has reached record levels, surpassing the peaks of the 1990s and suggesting bubble-like conditions.” She pointed out that “the average debt payment burden on outstanding leveraged buyout deals was four times above the normal safe level” and that there was “very little margin for error. Any hiccup, whether in currencies, commodity prices, or wage settlements, could push these companies over the brink.”
That hiccup occurred in the first quarter of 2007 with the US subprime mortgage crisis. By the summer it had become a global credit crunch that not only shut down debt markets—causing banks such as UK mortgage lender Northern Rock to come close to failing—but was resulting in dramatic swings on equity markets and raising concerns about the sustainability of global economic growth.
For private equity, the effect was dramatic and immediate. “It was a rabbit-in-the-headlights situation when the credit crunch first broke,” says Morgan. Institutional investors that had been eager buyers of syndicated loans resulting from leveraged buyouts simply disappeared overnight. By some estimates as much as $300 billion of leveraged debt remained unsyndicated at the beginning of October—including a £9 billion loan to finance the £11.1 billion acquisition of UK pharmacy chain Alliance Boots by Kohlberg Kravis Roberts.
Just a Blip
With banks unable to shift debt from their balance sheets, their ability to lend further to private equity funds is currently severely restricted. But while private equity firms’ room for maneuver is currently constrained by the closure of some areas of the debt markets, no one in the industry believes that the current market turmoil is anything other than a temporary problem for private equity. “The lack of availability of debt will work itself out,” says Kubr at Capital Dynamics.
Morgan at Coller Capital says that the adaptability of the financial markets to the credit crunch has reassured the private equity market. “It’s far from an ideal situation, but it hasn’t played out as badly as many feared,” he says. “Initially, there were concerns that mega-deals such as the $29 billion acquisition of electronic-payments processor First Data by Kohlberg Kravis Roberts would have to be renegotiated or even reneged upon. But, instead, we’ve seen all the parties involved take a pragmatic approach and get the deal done.” Similarly, at the beginning of October, reports emerged that the eight banks holding the £9 billion Alliance Boots leveraged loan had agreed to continue to hold onto it until February next year.
More generally, no one questions the continuing role of leverage in private equity. While leverage may have reached high levels, the general strategy of increasing leverage at acquired companies to increase returns remains valid. “Private equity—most obviously buyout funds—increase leverage because it is in a position to do so,” notes Kubr. “That increase in leverage is offset by the fact that private-equity-owned companies are managed to maximize cashflow so that any additional debt can be sustained.” He adds: “Private equity firms also put their own money at risk, and it would be shortsighted to leverage an acquisition to unsustainable levels.”
Speaking off the record, other industry observers say that private equity firms simply took advantage of huge demand among investors for higher-yielding debt. “Private equity firms didn’t create that appetite,” says one industry veteran. “And it would have been negligent to a firm’s shareholders not to take advantage of the availability of cheap credit when it was available. But if debt does become more expensive, it doesn’t mean private equity returns disappear.”
Moreover, while some markets are currently almost closed to new deals, underlying trends indicate that when confidence returns to the market, borrowing costs could be very attractive. The 50-basis-point cut in rates by the Federal Reserve on September 18 has driven the expectation that the trajectory of interest rates in the US, Europe and possibly the UK will now be downward—likely cutting the cost of debt. And while credit spreads have widened out, they are still only at the level of 18 to 24 months ago, notes Kubr.
Long-term Growth
It is one of the paradoxes of the contemporary financial markets that amid a clamor for transparency and liquidity there is a shift among investors toward alternative assets such as private equity and hedge funds.
Private equity investments are usually extremely illiquid: Many funds have five- or 10-year investment periods, and exiting before maturity is extremely costly. Consequently, observers report next to no redemptions during the choppy summer and autumn months. However, what is more surprising is that there is no evidence that the trend of increased allocation toward private equity has stalled following the events of the summer, according to Morgan at Coller Capital.
Figures from research group Private Equity Intelligence show that a record $260 billion went into buyout funds in the first half of 2007. That scale of inflows is unlikely to be sustained into the second half of 2007, but the raising of €5.4 billion to fund acquisitions in Europe by buyout firm Carlyle Group at the beginning of September—more than the €5 billion it was aiming for—indicates that enthusiasm for the sector is far from diminished.
The reason for the continued shift of money into private equity is simple: The returns are attractive. “That trend is likely to continue regardless of market conditions because it is a straightforward reflection of the fact that returns are higher in private than public equity,” says Perry at Ernst & Young. Morgan says that the expectation of institutional investors in private equity—of roughly 500 basis points more than the S&P 500—will be achievable even in a tougher debt climate.
Moreover, even without the influx of new money, private equity is a force to be reckoned with given the huge resources it has. “The sums amassed are such that private equity will continue to be a significant component of M&A activity,” says Morgan. Makis Kaketsis, manager of the F&C UK Dynamic Fund in London, agrees that leveraged buyouts driven by private equity “are still awash with cash,” but, he cautions, “such deals will have to be done at more reasonable prices.”
The irony is that if deals are done at more reasonable prices—and assuming the debt markets return to some semblance of normality—private equity firms are best placed to benefit. As one industry observer notes, “The credit crunch may end up being a godsend for the industry. It has stalled the prospect of increased tax because legislators don’t want to upset the economy at a crucial time. And while the cost of debt has increased, that will likely be reflected in prices paid for companies. In all likelihood, private equity’s involvement in the economy will end up stronger following this episode.”
source: http://www.gfmag.com/index.php?idPage=643
According to the European Private Equity and Venture Capital Association (EVCA), a record $450 billion was invested in European and North American companies by private equity in 2006—an increase of 60% on 2005. Meanwhile, private-equity-sponsored companies were responsible for 40% of all US IPOs in 2006, and buyout funding represents a huge chunk of the high-yield bond and syndicated-loan markets.
Private equity’s importance has been growing since Kohlberg Kravis Roberts bought food and tobacco conglomerate RJR Nabisco for $25 billion 18 years ago. But in the past few years, the industry has achieved such a scale—and begun to employ so many people (in the United Kingdom alone, private-equity-owned companies now employ as many as 2.8 million people, a fifth of the workforce)—it has become impossible to ignore.
Private equity inevitably has attracted government attention, notes Jonathan Blue, CEO of US middle-market private equity firm Blue Equity. “Any industry that has success on the scale of private equity over the past several years can expect to receive scrutiny,” he says. Attention has largely focused on two issues: the level of tax paid by private equity partners, and how private equity companies generate returns.
On the issue of tax, public attention has unsurprisingly honed in on salacious details. UK legislators hung their attack on the industry on the claim that private equity partners pay less tax than the people who clean their houses. Meanwhile, in the United States, Blackstone Group’s CEO, Stephen Schwarzman, was criticized for his lavish lifestyle, which involved spending $3,000 a weekend on food—with the implication that he paid too little tax.
The Schwarzman episode inspired an orgy of self-righteousness and consequent calls from US legislators for higher taxes and more control of the sector. But many responses have focused on too narrow an agenda, according to Blue. “Many of the discussions have ignored the benefits that private equity brings to underlying portfolio companies and the overall economy,” he says.
Moreover, as Frank Morgan, president and COO of Coller Capital in the US, a company that buys private equity assets in the secondary market, points out, private equity firms are taxed just like any other partnership. “It would be unfair to discriminate against one type of partnership by taxing it differently just because it has proved to be successful,” he says. Despite the noise, Morgan says it is unlikely that any moves will be made in the US in the medium term that would curb returns, although in the UK the government’s pre-budget report in October signaled the end of some forms of tax relief for the private equity industry.
The Perennial Question
The second question raised by regulators and legislators during hours of breast-beating hearings—how private equity makes its returns—is ultimately more important than levels of taxation.
Private equity is undoubtedly successful at creating value. A survey by consultancy Ernst & Young, which analyzed 200 private equity exits in the US and Europe in 2006, showed that the enterprise value of private-equity-owned companies grew at 33% a year compared to 11% for publicly listed companies. In Europe, private-equity-owned firms grew by 23% compared to 15% for public companies.
The real issue is whether private equity creates or exploits value. Does private equity produce growth from investment and improvements in operational performance, bringing long-term benefits? Or does it cut costs ruthlessly and pile on the debt, making a company briefly attractive in order to sell but destabilizing it in the long term?
The results of Ernst & Young’s survey strongly indicate the former. “There is convincing evidence that private equity creates real growth in enterprise value,” says Simon Perry, head of global private equity at Ernst & Young in London. “It is not the barbarian at the gate of legend.” The report shows that two-thirds of the growth in earnings before interest, tax, depreciation and amortization (ebitda) at private-equity-owned companies came from business expansion.
Perry says that the huge competition between private equity companies means that there is no possibility of buying a company cheap and then breaking it up for profit. Instead, as Blue of Blue Equity notes, the depth of experience, contacts and resources that a private equity buyer brings—combined with a proactive strategy for purchases and an understanding of the broader market context—leads to improved performance.
Private-equity-owned companies—by virtue of not being listed—can focus relentlessly on their objectives in a way that companies subject to the distractions of quarterly reporting cannot, according to Thomas Kubr, CEO of Capital Dynamics, one of the world’s largest private equity asset management firms. “Decision-making is tighter, and perusing strategic initiatives is easier,” he says. “And management interests are aligned with shareholder interests—not least because private equity partners invariably sit on the board.” Consequently, securing a profitable exit for its main shareholder is among the company’s top priorities.
While cost reduction is important for private equity, the focus is on efficiency rather than unsustainably cutting headcount. “Sustainable growth can’t come from cost cutting, which only benefits ebitda once,” explains Perry. With an average hold for private equity in the US of three years—or three and a half years in Europe—such a strategy wouldn’t work. Incidentally, such a hold period compares favorably to the public stocks, which are held for an average of just 10 months.
In addition to the “ability to ramp up revenues and reduce expenses potentially far more aggressively than a traditional operator” noted by Blue at Blue Equity, one of the most important elements of private equity’s return formula is the use of leverage. “Especially for large buyout firms, the cost of debt matters to returns,” says Morgan at Coller Capital.
Figures compiled by Bloomberg show that the four largest private equity firms in the world—Madison Dearborn Partners, Providence Equity, Blackstone Group and Thomas H. Lee—had leverage of more than 10 times the earnings of their target companies in the period from January 2005 to September 2007.
Evidence suggests that as deal prices have risen, private equity firms have increased leverage in order to help maintain returns. In a prophetic report in December 2006, Standard & Poor’s credit strategist, Blaise Ganguin, warned that “debt leverage in buyouts has reached record levels, surpassing the peaks of the 1990s and suggesting bubble-like conditions.” She pointed out that “the average debt payment burden on outstanding leveraged buyout deals was four times above the normal safe level” and that there was “very little margin for error. Any hiccup, whether in currencies, commodity prices, or wage settlements, could push these companies over the brink.”
That hiccup occurred in the first quarter of 2007 with the US subprime mortgage crisis. By the summer it had become a global credit crunch that not only shut down debt markets—causing banks such as UK mortgage lender Northern Rock to come close to failing—but was resulting in dramatic swings on equity markets and raising concerns about the sustainability of global economic growth.
For private equity, the effect was dramatic and immediate. “It was a rabbit-in-the-headlights situation when the credit crunch first broke,” says Morgan. Institutional investors that had been eager buyers of syndicated loans resulting from leveraged buyouts simply disappeared overnight. By some estimates as much as $300 billion of leveraged debt remained unsyndicated at the beginning of October—including a £9 billion loan to finance the £11.1 billion acquisition of UK pharmacy chain Alliance Boots by Kohlberg Kravis Roberts.
Just a Blip
With banks unable to shift debt from their balance sheets, their ability to lend further to private equity funds is currently severely restricted. But while private equity firms’ room for maneuver is currently constrained by the closure of some areas of the debt markets, no one in the industry believes that the current market turmoil is anything other than a temporary problem for private equity. “The lack of availability of debt will work itself out,” says Kubr at Capital Dynamics.
Morgan at Coller Capital says that the adaptability of the financial markets to the credit crunch has reassured the private equity market. “It’s far from an ideal situation, but it hasn’t played out as badly as many feared,” he says. “Initially, there were concerns that mega-deals such as the $29 billion acquisition of electronic-payments processor First Data by Kohlberg Kravis Roberts would have to be renegotiated or even reneged upon. But, instead, we’ve seen all the parties involved take a pragmatic approach and get the deal done.” Similarly, at the beginning of October, reports emerged that the eight banks holding the £9 billion Alliance Boots leveraged loan had agreed to continue to hold onto it until February next year.
More generally, no one questions the continuing role of leverage in private equity. While leverage may have reached high levels, the general strategy of increasing leverage at acquired companies to increase returns remains valid. “Private equity—most obviously buyout funds—increase leverage because it is in a position to do so,” notes Kubr. “That increase in leverage is offset by the fact that private-equity-owned companies are managed to maximize cashflow so that any additional debt can be sustained.” He adds: “Private equity firms also put their own money at risk, and it would be shortsighted to leverage an acquisition to unsustainable levels.”
Speaking off the record, other industry observers say that private equity firms simply took advantage of huge demand among investors for higher-yielding debt. “Private equity firms didn’t create that appetite,” says one industry veteran. “And it would have been negligent to a firm’s shareholders not to take advantage of the availability of cheap credit when it was available. But if debt does become more expensive, it doesn’t mean private equity returns disappear.”
Moreover, while some markets are currently almost closed to new deals, underlying trends indicate that when confidence returns to the market, borrowing costs could be very attractive. The 50-basis-point cut in rates by the Federal Reserve on September 18 has driven the expectation that the trajectory of interest rates in the US, Europe and possibly the UK will now be downward—likely cutting the cost of debt. And while credit spreads have widened out, they are still only at the level of 18 to 24 months ago, notes Kubr.
Long-term Growth
It is one of the paradoxes of the contemporary financial markets that amid a clamor for transparency and liquidity there is a shift among investors toward alternative assets such as private equity and hedge funds.
Private equity investments are usually extremely illiquid: Many funds have five- or 10-year investment periods, and exiting before maturity is extremely costly. Consequently, observers report next to no redemptions during the choppy summer and autumn months. However, what is more surprising is that there is no evidence that the trend of increased allocation toward private equity has stalled following the events of the summer, according to Morgan at Coller Capital.
Figures from research group Private Equity Intelligence show that a record $260 billion went into buyout funds in the first half of 2007. That scale of inflows is unlikely to be sustained into the second half of 2007, but the raising of €5.4 billion to fund acquisitions in Europe by buyout firm Carlyle Group at the beginning of September—more than the €5 billion it was aiming for—indicates that enthusiasm for the sector is far from diminished.
The reason for the continued shift of money into private equity is simple: The returns are attractive. “That trend is likely to continue regardless of market conditions because it is a straightforward reflection of the fact that returns are higher in private than public equity,” says Perry at Ernst & Young. Morgan says that the expectation of institutional investors in private equity—of roughly 500 basis points more than the S&P 500—will be achievable even in a tougher debt climate.
Moreover, even without the influx of new money, private equity is a force to be reckoned with given the huge resources it has. “The sums amassed are such that private equity will continue to be a significant component of M&A activity,” says Morgan. Makis Kaketsis, manager of the F&C UK Dynamic Fund in London, agrees that leveraged buyouts driven by private equity “are still awash with cash,” but, he cautions, “such deals will have to be done at more reasonable prices.”
The irony is that if deals are done at more reasonable prices—and assuming the debt markets return to some semblance of normality—private equity firms are best placed to benefit. As one industry observer notes, “The credit crunch may end up being a godsend for the industry. It has stalled the prospect of increased tax because legislators don’t want to upset the economy at a crucial time. And while the cost of debt has increased, that will likely be reflected in prices paid for companies. In all likelihood, private equity’s involvement in the economy will end up stronger following this episode.”
source: http://www.gfmag.com/index.php?idPage=643
Tuesday, November 6, 2007
How to Be Successful In the Stock Market
Stock Market- a lot of speculation, a market to dream, see them shattered and still keep dreaming; a place where you fulfill your dreams or call it a gamble... what you want to view it as is really your choice!!
Today's vision is to earn as much money as possible and get as much returns with an intelligent investment plan. With the boom in the emerging markets and the advent of the Internet and computers, investment in stocks is indeed a lucrative option. And with stock trading systems such as online trading, a lot of toil and money is saved if one wants to invest in the stock market.
The market scenario is rather volatile with the emerging markets playing a significant role in them now. So, to earn the maximum amount of returns from your investment, what is absolutely essential on your part is to get a decent knowledge of the company's portfolio in which you invest. Besides this, when you do hire an online broker, remember to check the records from other clients of your broker. However, online stock brokers offer consultancy services at cheaper rates because they guide investors through a number of investing options and help them choose the best, whereby they can earn higher returns.
Online stock market trading offers an almost clear picture about the present market scenario because the unscrupulous middlemen are absent. Being your own master, you can carry out online stock market trading as your time permits. This has another advantage- while trading these stocks; you can follow the swings that the market has to offer and decide for yourself which are the weaker stocks that you want to trade away for healthy investment in the market. The advent of new trading systems along with the brokerage companies ensure to the investor that long term trading is also possible online besides day trading. A host of banking options with e-broking accounts facilitates these transactions without hassles.
In general, a financial consultant managing your funds between bonds, mutual funds and the share market, will advice you to keep your investment in stock markets for a long time- say a minimum of two years. This reduces the risks, as the effects of market volatility do not affect the price of the stocks in general. Since the trading indices always show an upward trend over a long period of time, the chances of earning a decent return is also pretty high. However, if you go for day trading, you can earn quite a bit of quick money by monitoring the market movements and trade a stock quite a few times in a day. This requires one to have a fair idea of the circumstances beyond the company's control that can affect the stock prices.
Having glorified the online trading system, it should be noted that online trading of stocks could lead to various unwanted scams that a successful stock investor should be aware of. So, try staying away from programs that promise of doubling or tripling your returns!
A successful trader is one who can balance his portfolio of risks and returns well and this of course needs a lot of research!
By Micheal James
Article Source: http://EzineArticles.com/?expert=Micheal_James
Today's vision is to earn as much money as possible and get as much returns with an intelligent investment plan. With the boom in the emerging markets and the advent of the Internet and computers, investment in stocks is indeed a lucrative option. And with stock trading systems such as online trading, a lot of toil and money is saved if one wants to invest in the stock market.
The market scenario is rather volatile with the emerging markets playing a significant role in them now. So, to earn the maximum amount of returns from your investment, what is absolutely essential on your part is to get a decent knowledge of the company's portfolio in which you invest. Besides this, when you do hire an online broker, remember to check the records from other clients of your broker. However, online stock brokers offer consultancy services at cheaper rates because they guide investors through a number of investing options and help them choose the best, whereby they can earn higher returns.
Online stock market trading offers an almost clear picture about the present market scenario because the unscrupulous middlemen are absent. Being your own master, you can carry out online stock market trading as your time permits. This has another advantage- while trading these stocks; you can follow the swings that the market has to offer and decide for yourself which are the weaker stocks that you want to trade away for healthy investment in the market. The advent of new trading systems along with the brokerage companies ensure to the investor that long term trading is also possible online besides day trading. A host of banking options with e-broking accounts facilitates these transactions without hassles.
In general, a financial consultant managing your funds between bonds, mutual funds and the share market, will advice you to keep your investment in stock markets for a long time- say a minimum of two years. This reduces the risks, as the effects of market volatility do not affect the price of the stocks in general. Since the trading indices always show an upward trend over a long period of time, the chances of earning a decent return is also pretty high. However, if you go for day trading, you can earn quite a bit of quick money by monitoring the market movements and trade a stock quite a few times in a day. This requires one to have a fair idea of the circumstances beyond the company's control that can affect the stock prices.
Having glorified the online trading system, it should be noted that online trading of stocks could lead to various unwanted scams that a successful stock investor should be aware of. So, try staying away from programs that promise of doubling or tripling your returns!
A successful trader is one who can balance his portfolio of risks and returns well and this of course needs a lot of research!
By Micheal James
Article Source: http://EzineArticles.com/?expert=Micheal_James
Sunday, November 4, 2007
Black Gold Market
Oil called 'black gold' for reason
The curious investor Fifty percent appreciation in the last year tops even the shiny return gold has been producing
At one time, I suppose you could have started a good argument over which was more likely: $100 oil or $1,000 gold. Not anymore.
While gold has been a stellar investment and trades now at almost $800 a troy ounce, oil's more than 50 percent appreciation in the last 12 months brought the price per barrel last week to within $4 of the $100 barrier. It closed Friday at $95.93 per barrel in New York trading. The numbers geeks declared the current price level the highest since 1980 when inflation is taken into account.
All eyes on Wall Street will stay on oil for a while. Its high price reflects strong fundamentals in the world economy and confidence that demand for raw materials will continue to increase. But any scare, such as recurrent news about billion-dollar writeoffs in subprime loans, could send prices falling.
Prices at the gas pump, meanwhile, have been slow to follow the bull market in crude oil. Remember last Memorial Day, when Chicago area gas prices hit their records? Crude was trading for about $65 a barrel back then, said Phil Flynn, analyst at Alaron Trading.
He said that was because of disruptions in the connection between the production field and the refineries. Pump prices here rose by about a dime over the last few days at stations I drive by, and more hikes are likely this weekend. In turn, that will put more pressure on the exploration side.
And maybe that suggests an investment opportunity even if the broader stock market doesn't do much over the next few months. Morningstar analyst Catharina Milostan, in a commentary posted in September that has taken on importance, highlighted four stocks in the oil and natural-gas exploration markets.
All of them have a "nose" for new finds and are well-diversified across the major oil and gas basins, Milostan wrote. They are EOG Resources (EOG), Southwestern Energy (SWN), Newfield Exploration (NFX) and Devon Energy (DVN).
TO HAVE OR HOLD: Paul Raman, senior auto analyst at Zacks Investment Research, downgraded Goodyear Tire & Rubber (GT) to a "hold" rating, citing weak sales volumes in the overall tire market. He has a $30 price target on the shares, which closed Friday at $30.48. But if you read his comments, you wonder about the downgrade.
Raman wrote: "Although escalating raw material costs hamper the company's profitability, tire markets have witnessed pricing improvement by 2-2.5 percent a year over the past year. This has set the stage for margin improvement for the next one to two years."
Also: "We believe the emergence of a healthier balance sheet and noticeably better sales from emerging markets will help earnings. Further, the restructuring initiatives undertaken and the savings from the new labor agreement will boost future earnings."
HOG WILD: Start pressuring your friendly grocer to cut the price on pork. Hog futures last week fell to a three-year low at the Chicago Mercantile Exchange. There's an abundance of pigs in the pens, apparently. "The amount of pork out there is just overwhelming the holiday ham buying," Troy Vetterkind, a trader at e-Hedger in Chicago, told Bloomberg News.
U.S. Agriculture Dept. data show that wholesale pork prices have fallen 20 percent in the last two months to their lowest since April 2006, while inventories have weighed in at the most since 2002.
TOSSED ON HIS SEAT: The Chicago Mercantile Exchange last week said it fined a former member, Thomas Sullivan, $150,000 for selling a seat in its Growth and Emerging Markets membership class and retaining the proceeds when he did not actually own said seat. Sullivan also was barred from CME membership or employment with any CME-related firm.
I wonder if Sullivan argued in his defense, "Hey, selling what we don't own is what we do here in the futures markets!"
CHAMBER MUSIC: Thomas Donohue, president of the U.S. Chamber of Commerce, has an article in its current magazine decrying unions for a political agenda that's sending American jobs overseas. On the cover of the magazine is a story headlined, "Fast lane to China?"
Yes, those cursed unions are forcing us, forcing us I tell you, to send jobs to the ever-fashionable low-wage haven. What's next, Uganda? But if American labor leaders would just agree to factory wages of 50 cents an hour and go easy on the OSHA complaints, maybe our companies can stay true to the homeland. CEOs show their patriotism with lapel pins, so asking more than that is just unreasonable!
CLOSING QUOTE: "If the governors of the Fed have good reason to believe that the economic expansion 'will likely slow,' their mandate is to get out in front of the slowdown by lowering interest rates aggressively. If their analysis convinces them that the expansion remains solid, their mandate is to restrain credit conditions by keeping interest rates stable or even increasing them. Instead, 'the [c]ommittee will continue to assess the effects of financial and other developments on economic prospects.' Just like everyone else." -- David Oser, senior vice president of ShoreBank, quoting from the Fed's comments on Wednesday
(Source: BY DAVID ROEDER Sun-Times Columnist) - http://www.suntimes.com/business/roeder/634182,CST-FIN-curious04.article
The curious investor Fifty percent appreciation in the last year tops even the shiny return gold has been producing
At one time, I suppose you could have started a good argument over which was more likely: $100 oil or $1,000 gold. Not anymore.
While gold has been a stellar investment and trades now at almost $800 a troy ounce, oil's more than 50 percent appreciation in the last 12 months brought the price per barrel last week to within $4 of the $100 barrier. It closed Friday at $95.93 per barrel in New York trading. The numbers geeks declared the current price level the highest since 1980 when inflation is taken into account.
All eyes on Wall Street will stay on oil for a while. Its high price reflects strong fundamentals in the world economy and confidence that demand for raw materials will continue to increase. But any scare, such as recurrent news about billion-dollar writeoffs in subprime loans, could send prices falling.
Prices at the gas pump, meanwhile, have been slow to follow the bull market in crude oil. Remember last Memorial Day, when Chicago area gas prices hit their records? Crude was trading for about $65 a barrel back then, said Phil Flynn, analyst at Alaron Trading.
He said that was because of disruptions in the connection between the production field and the refineries. Pump prices here rose by about a dime over the last few days at stations I drive by, and more hikes are likely this weekend. In turn, that will put more pressure on the exploration side.
And maybe that suggests an investment opportunity even if the broader stock market doesn't do much over the next few months. Morningstar analyst Catharina Milostan, in a commentary posted in September that has taken on importance, highlighted four stocks in the oil and natural-gas exploration markets.
All of them have a "nose" for new finds and are well-diversified across the major oil and gas basins, Milostan wrote. They are EOG Resources (EOG), Southwestern Energy (SWN), Newfield Exploration (NFX) and Devon Energy (DVN).
TO HAVE OR HOLD: Paul Raman, senior auto analyst at Zacks Investment Research, downgraded Goodyear Tire & Rubber (GT) to a "hold" rating, citing weak sales volumes in the overall tire market. He has a $30 price target on the shares, which closed Friday at $30.48. But if you read his comments, you wonder about the downgrade.
Raman wrote: "Although escalating raw material costs hamper the company's profitability, tire markets have witnessed pricing improvement by 2-2.5 percent a year over the past year. This has set the stage for margin improvement for the next one to two years."
Also: "We believe the emergence of a healthier balance sheet and noticeably better sales from emerging markets will help earnings. Further, the restructuring initiatives undertaken and the savings from the new labor agreement will boost future earnings."
HOG WILD: Start pressuring your friendly grocer to cut the price on pork. Hog futures last week fell to a three-year low at the Chicago Mercantile Exchange. There's an abundance of pigs in the pens, apparently. "The amount of pork out there is just overwhelming the holiday ham buying," Troy Vetterkind, a trader at e-Hedger in Chicago, told Bloomberg News.
U.S. Agriculture Dept. data show that wholesale pork prices have fallen 20 percent in the last two months to their lowest since April 2006, while inventories have weighed in at the most since 2002.
TOSSED ON HIS SEAT: The Chicago Mercantile Exchange last week said it fined a former member, Thomas Sullivan, $150,000 for selling a seat in its Growth and Emerging Markets membership class and retaining the proceeds when he did not actually own said seat. Sullivan also was barred from CME membership or employment with any CME-related firm.
I wonder if Sullivan argued in his defense, "Hey, selling what we don't own is what we do here in the futures markets!"
CHAMBER MUSIC: Thomas Donohue, president of the U.S. Chamber of Commerce, has an article in its current magazine decrying unions for a political agenda that's sending American jobs overseas. On the cover of the magazine is a story headlined, "Fast lane to China?"
Yes, those cursed unions are forcing us, forcing us I tell you, to send jobs to the ever-fashionable low-wage haven. What's next, Uganda? But if American labor leaders would just agree to factory wages of 50 cents an hour and go easy on the OSHA complaints, maybe our companies can stay true to the homeland. CEOs show their patriotism with lapel pins, so asking more than that is just unreasonable!
CLOSING QUOTE: "If the governors of the Fed have good reason to believe that the economic expansion 'will likely slow,' their mandate is to get out in front of the slowdown by lowering interest rates aggressively. If their analysis convinces them that the expansion remains solid, their mandate is to restrain credit conditions by keeping interest rates stable or even increasing them. Instead, 'the [c]ommittee will continue to assess the effects of financial and other developments on economic prospects.' Just like everyone else." -- David Oser, senior vice president of ShoreBank, quoting from the Fed's comments on Wednesday
(Source: BY DAVID ROEDER Sun-Times Columnist) - http://www.suntimes.com/business/roeder/634182,CST-FIN-curious04.article
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