RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Sales in Rocket Internet’s portfolio companies rise 30%

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”. Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed. Rocket said the adjusted margin for earnings before […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Archive | November, 2016

Russian oil: Between a rock and a hard place

Posted on 29 October 2014 by

Salym Petroleum Development's Siberian Oil Fields...An employee adjusts a valve wheel at the central processing plant for oil and gas at the Salym Petroleum Development oil fields near Salym, Russia, on Tuesday, Feb. 4, 2014. Salym Petroleum Development, the venture between Shell and Gazprom Neft, has started drilling the first of five horizontal wells over the next two years that will employ multi-fracturing technology, according to a statement today. Photographer: Andrey Rudakov/Bloomberg©Bloomberg

One of Russia’s most powerful men stood on stage at New York’s St Regis Hotel with a conciliatory message for America.

“The relationship between the US and Russia has been severely hampered by historical stereotypes,” said
Igor Sechin, a former Soviet intelligence officer and now the dominant force in the Russian energy industry. “But we have long ceased to be adversaries. It is time for us to become strategic partners.”

    It was April 2012. With those words, Mr Sechin signed a wide-ranging partnership between Rosneft, Russia’s state oil company, and ExxonMobil – in the process throwing open the doors of Russia’s vast oil wealth to the western energy industry.

    Today, the partnership envisaged by Mr Sechin, Rosneft chief executive, is in tatters. Under pressure of western sanctions, Exxon has frozen all 10 of its joint ventures with Rosneft, and other western companies – from majors such as Shell and Total to smaller oil services and engineering groups – are stepping back from Russia.

    The implications are far-reaching. Mr Sechin heralded an era of co-operation that would help Russia develop new frontiers in the oil industry – a “re-industrialisation of Russia”.

    While his words were heavy with hyperbole, no one could doubt the urgency behind them: Russia’s oil industry was facing a creeping crisis of existential proportions. The enormous Siberian oilfields developed during Soviet times were ageing, and without the development of new resources – from the frozen Arctic in the far north to Siberian shale deposits – Russian oil production would soon fall dramatically.

    The impact of the sanctions threatens the transfer of cutting-edge technology and expertise to Russia

    Now, with western companies in retreat, the development of those resources will be at best delayed, if not scrapped altogether, according to numerous government officials, executives and analysts.

    The US and
    Europe have imposed a string of sanctions on the Russian oil industry in response to Moscow’s actions in Ukraine, restricting access to western financial markets and limiting exports of equipment. The consequences for Russia are stark: next year, many believe, its oil production will fall – a first drop, excluding a dip in 2008, since 1998 and the start of what many expect will be a long-term decline.

    “In the last few years production growth has stabilised,” says Leonid Fedun, vice-president of Lukoil, Russia’s largest private sector oil group. “But there will not be any more growth.”

    IHS CERA, a leading oil consultancy, has slashed its outlook for Russian oil production, predicting in a recent research report that if western sanctions are maintained, the country’s oil production could fall from 10.5m barrels a day to about 7.6m b/d in 2025.

    A fall in Russian production could reshape the country’s political future as well as world energy markets. Moscow relies on the energy industry for more than half of its revenues – Rbs7.3tn ($171bn) according to the state accounts chamber – and a fall in production, combined with the recent drop in oil prices, could threaten the Kremlin’s ability to maintain stability at home and project its power abroad.

    On a global scale, a 3m b/d drop in Russian production could offset some of the growth in supply from the US shale boom, helping to reverse the current market surplus and keep oil prices high in the medium term.

    Russia’s shale revolution

    Two and a half years after his speech in New York, Igor Sechin stood aboard a drilling rig in the icy waters of the Arctic and declared victory. After months of suspense, Rosneft revealed it had struck oil in the Kara Sea, one of the last great untapped oil reservoirs that may contain as much crude as the Gulf of Mexico. The new field, he said, would be called Pobeda – victory.

    Mr Sechin made a point of naming all the western companies that had worked on the project, down to the service companies and equipment manufacturers that usually remain behind the scenes. “This is our united victory,” he said.

    But the victory was hollow. After the US and EU in September imposed sanctions blocking the export of a wide range of goods, services and technology to three types of Russian oil project – Arctic, deepwater and shale – western participation in such projects is all but impossible, lawyers and executives say.

    Exxon has wound down its participation in the Kara Sea project, and will not be able to return until US sanctions are lifted. And it is not alone. Artur Chilingarov, a Russian senator who sits on Rosneft’s board, says that “under the circumstances of sanctions, further co-operation with international companies [in the Arctic] will be difficult”.

    Rosneft – which yesterday revealed that its third-quarter profit was all but wiped out by the fall in the rouble and lower oil prices – insists it will continue exploring in the Kara Sea, with or without Exxon. But most in the industry are sceptical. “Offshore Arctic is closed for the foreseeable future,” says Duncan Milligan, a Russian oil specialist at consultancy Wood Mackenzie.

    Exxon’s Arctic venture may be the highest profile casualty of western sanctions against Russia, but it is unlikely to be the most significant. “For all the attention given to Exxon and Rosneft, that’s the oil of a decade from now,” says Thane Gustafson, author of Wheel of Fortune, a history of the Russian oil industry. “The point of the spear, I think, is what people are now calling tight oil.”

    Tight or shale oil, known in Russian by the looser term “hard-to-recover” oil, has been the target of a major push by Moscow as the Kremlin hopes to replicate the US shale revolution in Russia.

    In theory, at least, that is not far-fetched: Russia is estimated by the US Department of Energy to have the largest reserves of shale oil on the planet at 75bn barrels, with the Bazhenov field, several times the size of the Bakken, the driver of the US shale revolution.

    But western co-operation in Russian shale oil is also foundering. Exxon’s projects with Rosneft to explore the Bazhenov have been frozen; so has a Shell joint venture with Gazprom Neft, the oil division of gas giant Gazprom; so has a tie-up between Total and Lukoil.

    Out of service

    Executives and lawyers say the sanctions effectively prohibit western oil companies from any involvement in Russian shale projects – in particular by inhibiting the service companies whose expertise is essential to carrying out the complex drilling operations that characterise shale production. “You can’t touch Bazhenov any more. That’s dead,” says a western oil executive in Moscow.

    Moscow’s hopes of 440,000 b/d of Russian shale oil production by 2020 now seem unlikely, analysts say.

    Some Russian companies believe they will be able to develop shale resources without western assistance. But Russia lacks the nimble and entrepreneurial small oil companies that have driven the US boom, says Mr Gustafson.

    “There was a very interesting experiment under way,” he says. “If the Russians don’t have small companies of the kind that did the magic in North Dakota, the bet was that big companies could come in and partner with even bigger companies and realise the same magic.”

    But the impact of the sanctions goes further still, executives say, challenging the transfer of cutting-edge technology and expertise to Russia altogether.

    Just as financial sanctions against certain companies have triggered a wider freeze in lending to Russia as a whole, so the energy sector sanctions have caused a ripple effect of “sympathy sanctions”, as western companies step back from the Russian market as a whole, regardless of the letter of the sanctions.

    “It’s not just what the sanctions say, it’s the whole atmosphere it creates around the industry,” says Mr Milligan.

    The move has the greatest potential impact in the services sector – the companies that actually drill the wells, manufacture specialist parts, and provide the expertise to analyse the result.

    These functions are overwhelmingly provided by western companies – the likes of Schlumberger, Halliburton and Baker Hughes – at Russia’s most technically challenging projects. Western companies account for about half of the technology used in hard-to-recover oil projects and more than 80 per cent of the technology used offshore, according to Russia’s energy ministry.

    While techniques such as fracking and horizontal drilling are associated with shale, they are also widely used to maximise production from more conventional oilfields, with pockets of oil held in harder-to-access rock formations. It makes a broader retreat by western service companies deeply concerning for Russia’s oil executives.

    Fragile sector

    Vagit Alekperov, chief executive of Lukoil, recently told Prime Minister Dmitry Medvedev that 25 per cent of Russian oil production involved fracking and relied on western service companies. “This is the most fragile part, that could be the first to cause damage to the oil industry,” he said.

    Even though most western service companies have publicly affirmed their commitment to Russia, competitors and clients say there are clear signs that they are stepping back.

    Some specialised pieces of equipment used for horizontal drilling and fracking, and offshore production, are now harder to come by in Russia, executives say. Among them are liner hanger systems, used to prepare wells for drilling; bottom-hole assemblies, the collection of parts around the drill bit; and high-pressure engines designed specifically for fracking.

    That has raised concerns that even oilfields already in production might run into difficulties when equipment needs to be replaced.

    “If you lose a big bottom-hole assembly then it’s hard to replace,” says a senior executive at a small Russian oil company. “So far the effect is subtle, but it’s going to get worse.”

    Vladimir Shmatovich, head of strategy at Russian pipe manufacturer TMK, says western competitors have been dropping out of the market even in areas not directly targeted by sanctions, such as the Caspian Sea. “Western pipe manufacturers’ share of the Russian market has declined significantly and they are now almost completely out,” he says.

    One western executive says his company was forced to freeze a project after the service companies withdrew.

    Mr Gustafson says: “If the service companies are not able to work their magic then that really does do
    damage to the capacity of Russian oil companies to move from conventional to unconventional.”

    In Moscow, the sense of urgency is palpable. “To maintain the current level of production, we will need to drill not 20 metres as we do now, but 30 metres,” says Mr Fedun of Lukoil. “Such a level requires an increase in the quantity of drilling teams by 60 per cent. But given the fact that western contractors are curtailing their work in Russia, such an increase is highly doubtful.”

    The Kremlin is responding: the $83bn National Wealth Fund – designed to finance the country’s state pensions – is likely to be tapped by oil companies suffering from sanctions. Rosneft alone has asked for a 2 trillion ($48bn) rouble loan, although government officials indicate it is likely to receive substantially less than that.

    Inevitably perhaps, some are beginning to look back to the Soviet oil industry with nostalgia. Mr Alekperov recalls that when he was deputy oil and minister of the Soviet Union in the late 1980s “100 per cent of the equipment was Soviet-manufactured”. Now, he warns, replacing western equipment and services will require “colossal funds”.

    Just as in Soviet times, Russia is likely to throw resources at the problem, says Valery Nesterov, senior oil analyst at Sberbank. Among the options being considered is the creation of a giant state-owned oil services company to replace western companies.

    “Russia has a tradition of focusing on priority projects and succeeding,” says Mr Nesterov, recalling the Soviet space programme. “Given the importance of the oil sector to the country, if production falls sharply all necessary measures will be taken to improve the situation.”

    Oil services: How Stalin opened the door to western groups

    It was Josef Stalin who first brought a western oil service company to Russia. In 1929, under pressure to meet the targets set out in the Soviet leader’s first five-year plan, oil managers hired Conrad and Marcel Schlumberger to use their pioneering technology to map oilfields in Chechnya and Baku.

    Seven decades later it was a Schlumberger executive who was instrumental in bringing western technology to the Russian oil industry after the Soviet Union’s collapse. Joe Mach, with a mantra of “frack every well”, joined Yukos in 1999, helping to double its production in five years.

    Today, Schlumberger accounts for a 10th of drilling and other services in the Russian oil industry, according to Dmitry Lebedev, head of Russia-focused consultancy REnergyCo. Other western peers, such as Weatherford, Baker Hughes and Halliburton, account for another 10 per cent, though that understates their importance in the most technically challenging projects.

    The companies have responded to sanctions by stepping back from Russia. Schlumberger, for example, has withdrawn a significant number of its US and European executives from Russia, according to industry executives. The company declined to comment, saying only that it “continues to take all steps necessary to ensure compliance with applicable laws”.

    Vladimir Salamatov, director of Moscow’s World Trade Centre, which
    promotes business, says the value of Russia’s imports of the oil equipment on the sanctions list has risen nearly sixfold since 2001. Countries that have imposed sanctions on Russia account for $1.2bn – 57 per cent – of those imports.

    Some of that is easily replaceable. But other equipment and technology will be slower – if not impossible – to replace, Mr Salamatov says. He singles out rotary steerable systems, used to guide horizontal drills.

    And even where Russian suppliers can replace western equipment, the quality is likely to be lower. “The Russian oil services industry is in a bad shape, it always was,” says Mr Lebedev. “It’s like having an old Russian Lada instead of a Mercedes.”

    Corporate India frets over debt levels

    Posted on 22 October 2014 by

    Bloomberg Photo Service 'Best of the Week': A man looks at a large screen showing television coverage of Narendra Modi, prime ministerial candidate of the Bharatiya Janata Party (BJP), during the Indian general election, and the latest figures for the S&P BSE Sensex and the CNX Nifty index at the lobby of the Bombay Stock Exchange (BSE) in Mumbai, India, on Friday, May 16, 2014. Indian stocks rose to all-time highs in a volatile trading session as early vote counting showed the main opposition alliance set for the biggest election win in 30 years. Photographer: Vivek Prakash/Bloomberg©Bloomberg

    Anil Ambani may be feeling a little smug. Barely two weeks after India’s election in May, the canny billionaire rushed to raise around $800m in equity for Reliance Communications, his heavily indebted mobile telecoms operation. Always a shrewd operator, he sensed that India’s post-election optimism might not last.

    Rival industrialists such as billionaire Gautam Adani also began readying fundraising plans, hoping to patch up their balance sheets, which had been damaged in the country’s recent downturn. Few, however, have yet managed to follow Mr Ambani’s lead.

      Now, with foreign investors growing nervous about the global economy, the risk is that corporate India may already have missed its chance to raise capital – and, with it, an opportunity to kick off a virtuous cycle of debt repayment and deleveraging. “The idea that capital markets are going to bail out all these overleveraged companies, that moment is probably now gone,” says the head of one global investment bank in Mumbai.

      At one level, such gloom seems odd. India’s prospects are improving. Prime Minister Narendra Modi appears to have rediscovered his zeal, following victories in regional elections last weekend. His government has unveiled new reforms in recent days, including ending diesel subsidies and raising gas prices. Business leaders are enthused. Economic data are moving in the right direction too.

      But global economic difficulties are also real enough, making fund managers less likely to take risky bets in emerging economies. India’s industrial and banking sectors remain badly undercapitalised. Major conglomerates – such as London-listed Vedanta and Mr Ambani’s wider Reliance Group – carry heavy debts. Many smaller infrastructure and power businesses are barely solvent. Indian banks are also struggling with bad loans, and must raise $200bn by 2018, according to the rating agency Fitch.

      All of this matters because India’s economic fortunes are unlikely to recover until these industrial groups increase their spending, which has collapsed over recent years. Even an optimist like Arundhati Bhattacharya, chairman of State Bank of India, says such a recovery is unlikely for at least a year. If investors get spooked, and equity markets close up, it will take longer still.


      Narendra Modi and his plan to transform India

      Generic podcast

      India’s prime minister has grabbed the headlines with high profile meetings with leaders of the US, Japan and China, and announcing a successful satellite mission to Mars. Many see him as the best hope India has had for years to transform the country into an industrial power. Victor Mallet, South Asia bureau chief, talks to Fiona Symon about Mr Modi’s ambitions and the things that stand in his way.

      Investors have reason to be wary. Those brave enough to back struggling Indian conglomerates over recent months have done badly. RCom’s stock is down by around a third since June. GMR Infrastructure and Jaiprakash Associates – two other troubled industrial groups that managed to raise funds following India’s election – have also seen sharp falls.

      Further signs of nerviness may also dent government plans to sell stakes in larger state-backed businesses, such as miner Coal India and energy explorer ONGC. Whether these move ahead now depends partly on Mr Modi’s willingness to sell at a generous discount. Even if he does, it will only complicate the task facing capital-hungry businesses by crowding out their own attempts to raise funds.

      Optimism about Mr Modi’s administration and signs of an improving economy seem unlikely to counteract wider worries about a global slowdown – or any further rise in anxiety about the state of developing economies.

      Worse, Indian companies in sectors ranging from power and steel to aluminium and mining are yet to see much of an improvement in their operating environments. Many have encountered worsening conditions in 2014 – notably those caught in the aftershocks of a supreme court ruling last month, cancelling more than 200 coal mining licences belonging to private sector businesses.

      If equity fundraising becomes less likely, however, it makes other steps to curb debts even more important. Some of these can only come from Mr Modi’s government. Others lie in the hands of bankers and industrialists – such as a willingness to write down past debts, or sell off assets at reasonable valuations.

      Either way, the path forward for Indian companies will be difficult. Hopes that a post-election market boom combined with “big bang” reforms from Mr Modi would quickly cure longstanding problems of indebtedness were always far-fetched. India’s industrialists took years to get into this hole. It will take just as long to dig themselves out.

      Uganda looks to China for investment

      Posted on 21 October 2014 by

      Yoweri Kaguta Museveni, President of Uganda, speaks during the United Nations General Assembly September 23, 2009 at UN headquarters in New York. AFP PHOTO/Stan HONDA (Photo credit should read STAN HONDA/AFP/Getty Images)©AFP

      Uganda is counting on China to provide $10bn to build much of its infrastructure backbone because Beijing offers the cheapest capital available, does not interfere in the African country’s controversy over homosexuality and has “big money” available, President Yoweri Museveni said.

      In an interview with the FT, Mr Museveni said that Uganda’s previous intention to issue a debut sovereign bond to finance infrastructure projects was now a “last resort”. He added that private investment in large hydropower plants was not being encouraged because the electricity produced may be too expensive.

        “Now the Chinese are coming and they come with a sense of solidarity and they come with big money, not small money, and they also have experience,” Mr Museveni said.

        Finance from state agencies such as the Export-Import Bank of China and the China Development Bank was preferable to that from the World Bank in at least one respect, he said.

        “I was a bit embarrassed when I was talking to (representatives from) the World Bank. They talked about a lot of things like structural adjustment, but they don’t understand the basics. How can you have structural adjustment without electricity?” Mr Museveni asked. “The Chinese understand the basics.”

        Mr Museveni, who regularly pillories the west for holding neocolonial values, has ruled the east African nation of 37m people for the past 28 years, despite once saying Africa was held back by presidents who stay on too long.

        The former bush rebel regularly styles himself as a champion for east Africa and a future leader of any integrated regional bloc. Critics say his embrace of China is a strategic effort to distance himself from western influence and claim a leading role ahead of polls due in 2016.

        Uganda is expecting Chinese state-backed capital to finance two hydropower plants – the 600MW Karuma and the 188MW Isimba dams – and a railway line connecting Kampala, the Ugandan capital, to Kenya, South Sudan and the oil-rich West Nile region that borders the Democratic Republic of Congo.

        Mr Museveni said that China’s Ex-Im Bank has signed an agreement to finance 85 per cent of the estimated $2bn cost of the Karuma power plant, with Uganda stumping up the remaining 15 per cent. The Ex-Im Bank has also agreed to fund the Isimba dam, he added, but did not give details.

        “We have already signed,” he said. “It is for them to raise the funds. If they don’t find the funds, we shall kick them out.”

        Uganda is also banking on an $8bn loan from China to build the railway, the country’s largest infrastructure project to date. This loan was likely to come from more than one source in China, perhaps from a combination of the China Development Bank and the Ex-Im Bank, Mr Museveni said.

        “It can come from China,” he said. “That is what they are saying.”

        China has become a key investor in sub-Saharan Africa, channelling funds into roads, hydro power dams, stadiums and telecoms networks. Such activity helps drive the Asian giant’s trade with the continent, which has grown from less than $10bn in 2000 to more than $200bn last year, overtaking the US and the former colonial European powers.

        How can you make peasants have middle class values? They are peasants. Many of them are pre-capitalists. How can you make them have values such as liberalism? The Chinese don’t have these. They are more practical.

        – Yoweri Museveni

        Nevertheless, if China was not forthcoming with funding for the railway – which is intended to replace the current dilapidated narrow gauge track – Uganda would build it using revenues from oil it intends to start pumping in 2017, Mr Museveni said, estimating annual oil revenues of $5bn.

        In addition, Kampala is pushing ahead with plans to build a 60,000 bpd refinery and will announce “within a few weeks” which companies have won the bid to construct it. The refinery is scheduled to be built in two stages and be 60 per cent owned by private investors and 40 per cent by five east African governments.

        Uganda’s economy is set to grow at 5.9 per cent this year, according to IMF estimates, but its currency has suffered because of war in neighbouring South Sudan, its main export market, and its agricultural output is weak.

        Uganda’s central bank governor, Emmanuel Mutebile, has previously criticised the president for embracing Marxist policies that stymie growth and development in the country.

        Mr Museveni said his main preoccupation was to build efficient infrastructure capable of providing inexpensive services to boost GDP growth to double digit levels.

        China was a desirable partner in this endeavour, he said, not only because of its funding capabilities but also because it desists from interfering in the internal affairs of other countries. Mr Museveni condemned those in the west who have criticised the country for strict anti-gay legislation, which was thrown out by Kampala’s constitutional court in August.

        “They are not serious,” the president said of such critics. “They are jokers. They are mistake makers. You can’t impose middle class values on a pre-industrial society. How can you make peasants have middle class values? They are peasants. Many of them are pre-capitalists. How can you make them have values such as liberalism? The Chinese don’t have these. They are more practical.”

        Additional reporting by Katrina Manson in Nairobi

        Morgan Stanley mulls sale of gas business

        Posted on 21 October 2014 by


        Morgan Stanley is looking at the sale of a nascent natural gas export business after the Federal Reserve raised concerns about the risks of shipping compressed gas to the Caribbean.

        The venture was an audacious attempt to start a physical commodities operation at a time when much of Wall Street has been retreating from the market under regulatory and political pressure.

          Bank commodities executives had estimated that the business – once codenamed “Project Venezuela” – would be worth at least hundreds of millions of dollars once it began exporting compressed natural gas from the US to power plants in countries including Panama and the Dominican Republic, people briefed on the matter said.

          Industry insiders say senior commodities executives might use a sale as an opportunity to leave Morgan Stanley as the bank reduces its presence in energy markets it long dominated.

          Simon Greenshields, the bank’s co-head of commodities in New York, has made contact with possible buyers.

          In July Morgan Stanley sold TransMontaigne, a petroleum distributor, to NGL Energy Partners. Morgan Stanley has also agreed to sell an oil merchant business to Russian state-owned oil group Rosneft but that deal is near collapse because of the deterioration in US-Russia relations.

          Banks face political hostility and regulatory doubts over their involvement in physical commodities. The Fed has cited the BP oil spill in the Gulf of Mexico in 2010 and other disasters as it considers new constraints on banks handling gas, oil and other bulk materials.

          Exporting compressed natural gas is unusual. The new Morgan Stanley venture, called Wentworth Gas Marketing, planned to pump gas into as many as 270 containers per day and truck the containers to vessels headed abroad, according to a regulatory filing.

          The US Department of Energy on October 7 authorised Wentworth to export 60bn cubic feet of gas per year to countries with which the US has a free-trade agreement, records show.

          A grandfather clause in US law enables Morgan Stanley to own physical commodities assets, unlike most rivals on Wall Street.

          But, as part of their supervision of Morgan Stanley, Fed officials informed the bank that the business carried risks and would face heightened scrutiny. The Fed had not sought officially to block the venture, however. Morgan Stanley and the Fed declined to comment.

          The Senate permanent subcommittee on investigations, known for harsh criticism of Wall Street, also plans to hold a hearing on purported dangers of banks’ commodities operations in mid-November.

          Morgan Stanley is considering selling the fledgling gas project as soon as it gets necessary approvals. Port Freeport, Texas, the planned location for the 50-acre compressor site, was scheduled to discuss and potentially agree a lease with Wentworth on Thursday, a port official said.

          The new venture is an example of traders’ attempts to capitalise on cheap gas flowing from the US shale drilling boom. Power plants in Caribbean countries often burn fuel oil, which costs $12 per million British thermal units, more than triple the price of gas delivered in Texas.

          S&P 500 regains 1,900 but nerves remain

          Posted on 21 October 2014 by

          Global stock markets made a mixed start to the week as participants’ nerves remained stretched following the turbulence seen in recent sessions.

          Tokyo provided a strong early platform as the Nikkei 225 leapt nearly 4 per cent – its biggest one-day gain since June 2013 – after reports that Japan’s $1.2tn public pension fund was likely to double its holding of domestic stocks.

            But the mood was more cautious in Europe, as technology stocks were hit by a profit warning from Germany’s SAP, and the energy sector suffered from a renewed slide in crude prices. The FTSE Eurofirst 300 fell 0.6 per cent.

            Wall Street had its own tech scare as IBM shares fell sharply after the company reported third-quarter earnings that fell far short of expectations.

            But the S&P 500 recovered from an early dip to close 0.9 per cent higher at 1,903 , leaving the US equity
            benchmark 5.7 per cent below a record intraday high struck a month ago. The CBOE Vix volatility index, Wall Street’s “fear gauge”, was down 14.7 per cent at 18.75 in late trade, back below its long-term average of 20.

            At one stage last week, the S&P was down 9.8 per cent from that peak – putting it on the verge of official “correction” territory – as the weight of potential headwinds to further market progress finally became too much to bear.

            “The ending of American quantitative easing, problems with European QE at a time when eurozone growth is falling, military involvement in the Middle East, Ebola, falling Chinese growth and demonstrations in Hong Kong – it could be any of the above or any combination of them,” said Jim Wood-Smith, head of research at Hawksmoor Investment Management.

            “None has been sufficient in isolation, but together the effect has been to change the markets’ mood from nonchalant indifference to deep concern.”

            Those concerns prompted a scramble for high-quality government bonds – to the extent that the 10-year US Treasury yield plunged as much as 35 basis points on Wednesday, while the two-year yield hit a seven-month low.

            The Vix briefly rose above 31 to levels not seen for three years.

            Some relief came towards the end of last week courtesy of the world’s central banks. James Bullard, president of the St Louis Federal Reserve, suggested that the US central bank should consider delaying the end of QE, while the Bank of England’s chief economist said UK interest rates might have to stay low for longer.

            Furthermore, the European Central Bank promised that the start of its
            programme of covered bond and asset-backed security purchases was imminent – a pledge that was confirmed


            But there were worries among some analysts that continued Fed accommodation could lead to further problems.

            “The possibility of a continued central bank ‘put’ in response to the latest financial turmoil has sent fast money front-running the rest of the markets to chase higher yields created by the latest sell-off as the markets’ well-rehearsed buy-the-dip reflexes kicked in,” said Lena Komileva at G+ Economics.

            “The longer Fed liquidity continues to suppress financial volatility the more painful the eventual markets hangover will be. The greater the market fallout from the end of QE, however, the more inclined the markets expect the Fed would be to underwrite markets

            The undercurrent of nervousness in the markets, particularly in Europe, meant demand for core government bonds remained in place.

            The 10-year German Bund yield – which moves inversely to its price – fell 1bp to 0.85 per cent, while the equivalent Treasury yield was 2bp lower at 2.18 per cent.

            But lingering worries about the outlook for eurozone growth and inflation kept up the pressure on sovereign yields in the region’s periphery. Greece’s
            10-year yield – which last week briefly leapt above 9 per cent – was still very elevated at levels above 8 per cent.

            Spain’s 10-year yield rose 8bp to
            2.22 per cent and Italy’s climbed 9bp to 2.58 per cent.

            The softening of US yields did little to help the dollar. The US currency
            was down 0.2 per cent against a basket of peers, as it held steady against the yen at Y106.83 and the euro rose 0.4 per cent to $1.2808.

            Gold extended last week’s rise by $8 to $1,245 an ounce – putting it on course to reach a five-week closing high.

            Industrial commodities
            remained on the back foot, with Brent oil settling 76 cents lower at $85.40 a barrel – not far away from last week’s four-year low beneath $83 – while copper fell 1.2 per cent in London to $6,560 a tonne.

            Pick fund managers with skin in the game

            Posted on 21 October 2014 by

            It is well established that the average active fund manager underperforms their benchmark, and that a manager who has put in a market-beating performance in the past is no more or less likely to beat the average in the future. Given these bald numerical facts, the continuing rise of low-cost index tracker funds is inevitable and to be welcomed.

            But what if there was a reliable way for investors to identify fund managers who could be expected to beat the market over the long run? That might throw a lifeline to the beleaguered active fund management industry. It would also bring investors a handy extra return.

              There is a flicker of a chance that an obscure line item in the regulatory filings that mutual funds have to send to their investors might contain such a clue.

              The Securities and Exchange Commission requires that funds disclose annually approximately how much money each portfolio manager has invested in the fund. A handful of studies this year have found that funds in which the manager has significant skin in the game might outperform those where the manager is not heavily invested.

              That sounds intuitive. In fact, it has become something of a guiding principle in other areas of business and finance. Equity investors like to see that the chief executives of the companies in which they invest have a decent shareholding; they like to see remuneration packages that include lots of stock compensation; and insider share sales are often seen as a red flag for impending problems.

              In hedge funds, too, investors can stomach the high fees knowing that a manager usually has most of his net wealth tied up in the fund. In a system of principals and agents, the alignment of interests is vital.

              It should not be overstated, however. Even mutual fund managers who have not put significant sums into their own funds get bonus compensation, pay rises and industry plaudits when they do well by their investors. Anyone who underperforms for very long gets fired. Interests are hardly misaligned.

              A study this month found an investor is likely to beat the average by some distance if they pick funds from an asset management firm whose portfolio managers are heavily invested in their funds.

              The source is hardly impartial in the active/passive debate. Capital Group, the company behind the historic American Funds family, has lost substantial market share to the purveyors of index funds in recent years.

              Yet Capital’s contribution is intriguing. It ranked asset management firms according to the proportion of their assets that are in funds where the portfolio manager has at least $1m of his or her own money in the fund, and then looked at how the top quarter of those firms have done over the past 20 years. On a rolling five-year or 10-year view, their funds beat their benchmark more than two-thirds of the time.

              The findings echo a study that Morningstar, the mutual fund research group, did earlier this year.

              Both concluded, in other words, that if you only pick funds from companies whose managers have the most skin in the game, you substantially improve your odds of beating the market.

              The two studies aggregate manager ownership data at the company level, not at the fund level. This might be fair. No investor should be piling large portions of their net worth into frontier markets or junk bonds, so it is not reasonable to demand the same of the managers of these niche funds. But it does undercut the logic. Many of the managers being measured will not in fact have the skin in the game we want to believe is motivating them.

              Maybe the positive effects seen at the company level suggest a strong corporate culture, perhaps including the ability to retain good managers; that is certainly what Capital Group would have us believe.

              But what of fund level data? Morningstar analyst Russel Kinnel examined its “Morningstar 500” of favoured funds – a list inaugurated in 2006 – and discovered that, of those whose managers have $1m-plus invested, 67 per cent had survived and beat the average of their peers over the past eight years. That may sound like a strong result, except that 60 per cent of the rest of the funds also outperformed.

              The best to be said at this point is that more study is needed. And more data. A manager is currently only expected to say which band their ownership falls in: zero, $1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001-$500,000, $500,001-$1m or above $1m. It would be helpful if mutual funds voluntarily disclosed – or the SEC mandated – more detail. Active managers have nothing to lose from providing more granular data, and potentially much to gain.


              ECB’s bond move whets appetite for QE

              Posted on 21 October 2014 by

              epa04240525 Dark clouds over the Euro Sculpture outside of the European Central Bank building in Frankfurt Main, Germany, 05 June 2014. The European Central Bank cuts interest rates to an historic low of 0.15 per cent to spur economic growth and bank lending. EPA/ARNE DEDERT©EPA

              News that the European Central Bank has begun its programme of buying covered bonds from banks in Spain, France and Germany will only whet the market’s appetite for full-blown quantitative easing.

              Covered bonds – considered palatable assets because they give the buyer dual recourse, to both underlying collateral and the issuing bank – are part of Mario Draghi’s recipe for lowering banks’ borrowing costs, boosting their lending, and strengthening the ECB’s own balance sheet. But, like the best amuse-bouches, Mr Draghi’s plan is being derided by some as wafer thin – in volume and substance.

                On paper, at least, the opposite seems true. The ECB president has implied that the bank intends to buy a meaty €1tn of covered bonds and other asset-backed securities.

                One ECB official has estimated that the value of outstanding eligible covered bonds was €600bn. However, because banks benefit from covered bonds’ low risk weights under the Basel III rules, they are unlikely to want to sell. According to some estimates, the ECB could potentially target about one-third of the eligible market – but it would be competing with existing investors, much to the latter’s chagrin.

                New issuance is shrinking fast: only €91.7bn-worth have been issued in the year to date – the lowest total for nearly two decades, according to Dealogic.

                Meanwhile, yields, which help to determine borrowing costs, are already on the floor. Average covered bond yields dropped below 1 per cent for the first time in June, according to Bank of America Merrill Lynch’s euro covered bond index. They currently stand at about 0.55 per cent after a record low of 0.48 per cent last week as investors made a dash for haven assets amid market turmoil.

                European bank covered bonds

                Then there is the biggest obstacle: European banks do not need the ECB’s cheap financing help. If the ECB wants to have an appreciable effect on boosting lending, critics say it needs a plan to deal with the riskier assets on banks’ balance sheets that consume capital and hinder new loans. It should also target those bonds it can buy in super-large quantities, say analysts, such as sovereign debt.

                A simple hors d’oeuvre of covered bonds will not do. The market wants a 12-course meal.


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                Banks risk losing an arm with branch cuts

                Posted on 21 October 2014 by

                When Coutts decided late last year to stop giving leather-bound diaries to all its customers, there was uproar among its traditional British customers. So much so, that the three-centuries-old private bank swiftly backed down.

                The rebellion shows how easy it is to get carried away by the hype over the digital revolution in banking. Coutts executives admit it was a “big mistake” to assume that its wealthy clients use smartphones instead of traditional desk diaries.

                  So, when Lloyds Banking Group presents its new three-year strategy next week, it will include not only cost cuts and branch closures as part of a more digital focus, but also a commitment to keep a strong high street presence.

                  Branch closures are sensitive for any bank as they typically hit remote areas and can leave people without a local lender. The UK taxpayer still owns 25 per cent of Lloyds, so pledging to keep most branches is politically savvy.

                  However, footfall in branches is falling by about 10 per cent a year, according to the British Bankers’ Association, while the number of transactions carried out on mobile applications doubled last year. In addition, bank call centres suffered a drop in volumes of more than a quarter last year, as people did more on their smartphones.

                  Lloyds has been unable to reduce its 2,250-strong branch network for three years – except for floating TSB Bank with its 631 outlets – because of a commitment it made after the takeover of HBOS, which expires in December.

                  Other UK banks have shut more than 330 branches this year and almost 200 last year, according to figures from the Campaign for Community Banking Services. So Lloyds may feel it has some catching up to do.

                  Yet these numbers look tiny when put against the forecast by research firm Autonomous that European banks will close 65,000 of their 217,000 branches in the next five to 10 years.

                  Most closures are expected to happen in Mediterranean countries, such as Spain, Italy and France, which have 50-80 bank branches per 100,000 inhabitants. Autonomous worked out the number of future branch closures by assuming that other countries will “go Nordic” – following the example of banks in Sweden, Denmark and Finland, which have only about 20 branches per 100,000 inhabitants.

                  Facing weak economic growth and pressure from regulators to hold more capital, cost-cutting is an obvious way for European banks to boost returns. The average cost of servicing a client in a branch is $4 per visit, while at a cash point it is 48 cents – and using online or mobile channels costs only 4 cents.

                  Autonomous estimates that branch cuts could save European banks €46bn, or 8 per cent of total costs. Some of this is already happening. In Italy, UniCredit this year pledged to close 500 of its 3,505 branches, and Intesa Sanpaolo said it would shut 800 of its 4,611 outlets.

                  But closures are only part of the story. Speak to most retail banking executives and they will tell you that the branch network is still a big asset, even if it isn’t quite the colossal barrier to entry it once represented.

                  Banks’ most valuable customers are usually their wealthiest and oldest clients. These are often the least comfortable with doing financial transactions on a smartphone. Leave too many high streets, bankers say, and they risk alienating these elderly, wealthy clients.

                  Small business customers often prefer to see someone from their bank face-to-face rather than relying on a call centre or digital app. New customers also typically prefer to open accounts in a branch, rather than online.

                  Therefore, Lloyds’ new strategy will focus on changing the role of branches, rather than shutting them. It will switch from relying on cashiers to carry out simple transactions to having fewer, better trained staff selling complicated services and products. Barclays led the way on this by ditching the traditional bank cashier altogether.

                  Faced with a growing challenge from technology groups targeting financial services, a bank’s branch network is a rare advantage over the likes of Apple, which on Monday launched its mobile wallet service in the US. The worst-case scenario for banks would be if customers started shifting deposits to the likes of Apple, Google and PayPal, as the Chinese have already done to Alibaba on a massive scale.

                  Lenders need to raise their game by investing in digital services. But, as shown by the Coutts’ U-turn on diaries, they risk losing what little goodwill they have left with customers if they drag them online against their will.


                  RBS takes a gamble on P2P lending

                  Posted on 21 October 2014 by

                  Peer-to-peer lending seems to be all grown up and ready to settle down. Lending Club, the world’s biggest such business, is poised to raise $500m in a listing, spurning the tech hub Nasdaq and opting instead for the New York Stock Exchange.

                  Peer-to-peer may be losing its edginess on this side of the Atlantic, too, as the traditional banks that P2Ps were supposed to be competing with cosy up to them instead. Already, Santander has done a deal with Funding Circle. Now Royal Bank of Scotland seems to be trying to shake off its staid, part-nationalised image by setting up a P2P platform of its own.

                    At the same time as looking modern, RBS may also be pleasing its biggest shareholder. Over the summer George Osborne heralded new legislation that would force big banks to help rejected loan applicants secure funding from alternative sources, such as P2P companies. Doing it all in the same place is handy – a bit like public service banking. It’s a shame that RBS has commercial shareholders, alongside the UK Treasury, and is supposed to be a commercial organisation, rather than an instrument of the state.

                    But sniping aside, undue state influence may not be the biggest risk. The P2P concept is untested in anything other than an environment of ultra-low interest rates. When rates rise, so will defaults. People investing the money to back loans potentially have a lot to lose. For your average P2P investor, that may come as a bit of a shock. Many of them, anecdotally at least, seem to view these platforms as glorified high-interest savings accounts.

                    For RBS, as for any bank that clutches this adolescent industry to its bosom, there are extra risks. Mediating the sale of a product that later backfires can have nasty financial and reputational consequences. Sound familiar?

                    Pulling a Suffolk punch

                    Greene King, Suffolk brewer of Abbot Ale, IPA and Old Speckled Hen, has more in common with Suffolk Punches than just their point of origin. The huge chestnut draughthorses that dominate Ipswich FC’s crest and have pulled many a dray, are known for their size, their endurance and their surprisingly energetic gait. But there is not much demand for their pulling power these days and few Suffolk Punches are left.

                    That also goes for big, old-school brewers such as Greene King with its 2,000 pub estate. Ale has been around as long as civilisation but in this age of drive-drinking laws and smoking bans, pubs absorb capital and the returns are, well, small beer.

                    But unlike rivals, Greene King has endured. It did not sell off its real estate or fuel up with cheap pre-crisis debt. Instead, it withstood the downturn, making judicious acquisitions here and there to keep its earnings trotting along whenever energy levels showed signs of flagging.

                    The £723m bid for Spirit Pub is just such a deal, albeit its biggest. Spirit’s 1,200 pubs would slot well into the brewer’s south and southeast bias. Barclays reckons at 109.5p, teaming up with Spirit should lift Greene King’s earnings by 6 per cent and returns on capital to 7.9 per cent against a weighted average cost of capital of 7.1 per cent. There are plenty of synergies to be had from cutting out duplicate costs. Parcelling up and selling off unwanted tenanted pubs could come afterwards. Promising 8p in cash was all the sugar needed to persuade Spirit’s board to open the books. It should also lure skittish Spirit shareholders.

                    Injecting new bloodlines into Greene King should not change its character. But driving a much bigger team could be difficult in a sector where returns are already hard to come by. The risk is that Greene King, like the Suffolk Punch, becomes a victim of its size.

                    Old Lady fumbles

                    Old story in the new cyber age: a bank updates its systems over the weekend and a technical glitch stops all cash payments on Monday. This time, though, it was the Old Lady of Threadneedle Street herself. On Monday, the Bank of England’s system for settling the gazillions transferred between banks and companies every day to cover anything from payrolls to big corporate deals crashed.

                    If it had been Royal Bank of Scotland or Lloyds Banking Group that had messed up, shares would have tanked, politicians would be declaring crimes against humanity and customers would be threatening to jump ship. The days of IT failures that hit RBS’s customers in June 2012 still hang over the bank: the oh-so-speedy Financial Conduct Authority continues to probe the affair, which cost RBS £175m in compensation.

                    In this case, probably the best that BoE customers can expect is that the Old Lady gets a drubbing from politicos at the next Treasury select committee. Vengeful bank bosses, who in the past have been on the receiving end of the Old Lady’s ire, should start drafting their letters to MPs now.

                    P2P lending

                    Greene King and Bank of England

                    London broker sets up Manchester office

                    Posted on 21 October 2014 by

                    Numis Securities has opened an office in Manchester as the London-based independent stockbroker looks to service companies in the regions.

                    Numis has hired Graeme Summers as a managing director of corporate broking to lead the northern charge. Mr Summers had previously spent around two decades at rival broker Brewin Dolphin, and was also head of corporate broking at N+1 Singer.

                      Oliver Hemsley, chief executive of Numis, said: “We think the north is underserviced. There’s lots of interesting companies based there and we want to be able to access them.”

                      Numis’s main competitor in the north of England is Zeus Capital, which has offices in Manchester and Birmingham. Zeus has raised £900m for flotations in the past 15 months or so, roughly 40 per cent of IPOs on London’s Aim. The broker often works as the sole adviser to companies.

                      This summer Zeus hired Adam Pollock, the head of corporate broking at Panmure Gordon, as the company expands its list of clients. And last month it named Sir Nigel Knowles, managing partner of law firm DLA Piper, as chairman. Sir Nigel built DLA Piper from a UK regional practice to a global law firm.

                      The opening of Numis’s new office comes amid a resurgence of corporate activity in the regions and has attracted the attention of London’s brokers, who normally focus on winning mandates in the capital.

                      “Until recently, London brokers were dusting off the map as to where Manchester was. Now they’re heading up there on the train trying to win business,” one broker said.

                      Numis has worked on several flotations of companies from the north of England this year, including the initial public offering of Doncaster-based Polypipe in April, which valued the pipe maker at £490m.

                      In May Numis floated another Yorkshire company, Clipper Logistics, which counts John Lewis and Asos among its clients. It also worked on the June IPO of Blackpool retailer B & M.

                      It also acts as corporate broker to Manchester-based car dealer Lookers and Norcros, a Cheshire bathroom fittings group.

                      Numis, which has been one of the best performers in the UK mid-market this year, reported record revenues during the six months to March 31. The buoyant market for flotations boosted 59 per cent to £51.5m, while adjusted profit before tax increased 125 per cent to £20.7m during the period.