Britain swept away 50 years of foreign policy, turning its back on the EU, in a moment of extraordinary political upheaval that deposed its prime minister, sank its currency and reopened the possibility of Scottish independence.
After a lengthy and bad-tempered referendum campaign, Britons voted by 51.9 per cent to sever the country’s 43-year membership of the EU, sending tremors across Europe and triggering financial market turmoil across the globe.
Markets were caught completely off-guard as the first results landed. In a frantic day of trading, the pound dived to a 30-year low, setting a record intraday swing of more than 10 per cent between its high and low points; the FTSE 100 slumped 8.7 per cent on opening before trimming losses to 4.3 per cent. Bank stocks took a hammering, with Lloyds down 22 per cent, Royal Bank of Scotland down 18 per cent and Deutsche Bank falling 17 per cent.
The Euro Stoxx bank index fell 17 per cent, back to levels last seen at the depths of the eurozone debt crisis in August 2012.
US stocks finished a bruising trading session with the benchmark S&P 500 sliding 3.6 per cent to 2,037, the steepest one-day decline since last August. The US dollar posted one of its biggest rallies on record, and gold prices shot higher. The yield on the 10-year US Treasury dropped 18bps to 1.57 per cent.
An emotional Mr Cameron said he would remain in office for the next few months to “steady the ship” while the Conservative party chose a new leader but that Britain needed “fresh leadership” to take it in the new direction chosen by voters.
The vote dismayed Britain’s allies and pitched the country into a period of deep political and economic uncertainty. It also poses an existential challenge to the EU after nearly six decades of integration. “It’s an explosive shock. At stake is the break up pure and simple of the union,” Manuel Valls, the French prime minister, said. Chancellor Angela Merkel of Germany called it a “turning point for Europe”.
The ramifications of the decision were laid bare when Nicola Sturgeon, first minister of Scotland, which voted to stay in the EU, said a second vote on independence was “highly likely” two years after the last plebiscite.
London also ran into immediate resistance from the rest of the bloc, where there is growing impatience with the British. EU leaders, who will meet without Mr Cameron on Wednesday, said there would be no renegotiation of Britain’s membership terms and demanded that the UK swiftly engage in exit talks and invoke article 50 of the EU treaties, which sets a two-year deadline. EU officials said their warning was not aimed at Mr Cameron but at his successor, who is expected to take over by October.
George Osborne, chancellor, is expected to stay in his job until the autumn to help stabilise the economic situation. His allies said that “cabinet will continue” and that they did not expect him to move from the Treasury in the near future.
Mr Cameron had gambled his political future on the referendum but his hopes of securing a Remain vote evaporated as voters in Labour heartlands turned out in huge numbers to deliver a stunning rebuke to the establishment and the status quo.
The result revealed deep divisions across Britain, with prosperous London and Scotland voting by large margins to stay in, and working-class towns, seaside resorts and rural England heavily backing Leave.
The Brexit vote stunned the political establishment. Even though the outcome was expected to be close, the final opinion polls had pointed to a narrow victory for remain. Nigel Farage, the UK Independence party leader, who did more than anyone to bring the referendum about, had all but conceded defeat just after polls close.
But as the first results came in from the north-east of England, it soon became clear that Leave voters had turned out in greater numbers. The vote reflected a roar of rage from those who felt alienated from London and left behind by globalisation.
“I do think that yesterday’s vote speaks to the ongoing changes and challenges that are raised by globalisation,” US President Barack Obama said. “But while the UK’s relationship with the EU will change, one thing that will not change is the special relationship that exists between our two nations.”
Boris Johnson, who spearheaded the Leave campaign and is now favourite to take over as prime minister, paid tribute to Mr Cameron as a “brave and principled man” but insisted holding the referendum was “right and inevitable”.
Looking subdued and lacking his usual ebullience, he said: “The EU was a noble idea for its time. It is no longer right for this country.
Even though European leaders were pressing for a speedy start to exit talks, Mr Johnson said there was “no need for haste” and indicated he would wait until Mr Cameron’s successor is in office before triggering the formal process.
Mark Carney, governor of the Bank of England, said it “will not hesitate to take additional measures as required as markets adjust”, insisting that the BoE was “well prepared” for volatility after extensive contingency planning and that the financial system was more resilient than at the time of the financial crisis.
The US Federal Reserve and the European Central Bank said they were standing by to inject extra liquidity.
Central bankers will discuss the turmoil in Basel over the weekend at a pre-scheduled meeting at the Bank of International Settlements.
The market mayhem revived concerns about stresses in the eurozone’s periphery. Southern markets suffered their worst trading day in history. Spain’s Ibex index tumbled 12.35 per cent, its largest decline since launching in 1992. The main Milan index fell 12.5 per cent while Italy’s 10-year debt spiked by 30bp to 1.53 per cent.
The vote to leave could have immediate consequences for UK businesses beyond the City of London. Shares in airlines, travel companies and media groups were particularly hard hit.
An early casualty could be London Stock Exchange group’s planned $20bn merger with Deutsche Börse. Executives on both sides of the deal voiced fears the vote would put pressure on German watchdogs to block the tie-up because the merged entity would be based in London.
It could damage the chances of Tata Steel, Britain’s biggest steel producer, maintaining its operations in the UK, according to a person close to the company.
In addition, Moody’s Investors Service has said that it may cut the UK’s credit rating, reducing its outlook to “negative” from “stable” and saying that the vote to exit the EU may herald a “prolonged period of uncertainty”“.
“During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth,” the rating agency said. Moody’s rates the UK at Aa1, having stripped it of its top-notch Aaa rating in 2013.
Europeans leaders will spend the weekend calibrating their response to what is the biggest setback in the EU’s history. The French, German and Italian leaders will meet on Monday to reaffirm their commitment to integration and to shore up confidence in the eurozone. But one senior official said there were no plans for a “great leap forward”.
Barack Obama and Angela Merkel spoke on the phone over Brexit. Both the US president and the German chancellor said they regretted the decision but respected the will of the British people.
Eurosceptic parties were quick to draw inspiration from Britain. “I think that the UK has initiated a movement that will not stop,” said Marine Le Pen, France’s far-right leader.
The Eurosceptic PVV party in the Netherlands also called for a referendum. “Great Britain has shown Europe the road to the future and liberation,” it said.
President Vladimir Putin of Russia ascribed the Brexit vote to “arrogance and a superficial approach from the British leadership”.
Speaking in Scotland, Donald Trump, the Republican presidential candidate, praised the judgment of the British people. “They took their country back . . . people around the world are angry.”
Mr Obama, who warned the UK during the referendum campaign, that it would be at the back of the queue for any trade deal with the US post-Brexit, said Britain would remain an “indispensable partner”. John Kirby, spokesman for the US State Department, said the administration was “evaluating” the impact of the Brexit vote on its approach to trade talks.
Companies doing business in Mexico, heavily exposed to global trade, or reliant upon US regulation were judged the big losers under a Donald Trump presidency by international stock market investors on Wednesday.
Markets’ reaction to Mr Trump’s election victory softened as the day unfolded, but shareholders immediately marked out those businesses potentially hit by his policies, as well as many clear winners, most notably in pharmaceuticals and biotech, oil and gas, and defence.
Shares in Vestas, the Danish wind turbine manufacturer, were among the biggest fallers as investors worried about the future of renewable energy.
Fears over Mr Trump’s rhetoric against trade and Mexicans led to the biggest one-day fall ever in the peso and hurt many global businesses with big operations there.
BBVA, the Spanish bank that makes about half its profits in Mexico, and Tate & Lyle, which has about 10 per cent of its earnings in pesos, lost 6 per cent and 12 per cent of their market value respectively. Carmakers that have a big manufacturing presence in Mexico, such as Daimler, BMW and Fiat Chrysler, all saw their shares fall by more than 3 per cent initially before staging a recovery.
But it was not all doom and gloom. Fresnillo, the precious metals producer that incurs most of its costs in pesos, was one of the day’s big winners as its shares rose 7 per cent.
Similarly, drugmakers, which had been worried about a crackdown on product prices if Hillary Clinton had become president, rallied in relief, with shares in Novo Nordisk, the Danish drugmaker battered this year over the hostile environment in the US, gaining 4 per cent.
Overseas companies selling into the US warned of possible slowdown in trade. Oliver Bäte, chief executive of Allianz, the German insurer, said: “I expect an expansionary fiscal policy but also a tendency towards a protectionist trade policy with far-reaching negative consequences for the global economy.”
He added that he expected Mr Trump to stop TTIP, the proposed trade deal between the US and Europe. That, added to Mr Trump’s frequent criticism of existing deals such as the North American Free Trade Agreement, caused investors to initially shun companies exposed to global commerce, such as AP Moller-Maersk, the Danish conglomerate that owns the world’s largest container shipping business, and Deutsche Post, the German logistics group.
European business leaders also urged Mr Trump to eschew some of his more outspoken anti-corporate comments. “The 45th president of the US is an entrepreneur,” said Emma Marcegaglia, head of BusinessEurope, the lobby group. “We hope that his decisions will be driven by political and economic reason.”
In the US, chief executives from more than 1,100 companies wrote an open letter to Mr Trump warning of “an urgent need to restore faith in our vital economic and government institutions” after the election.
Here, FT reporters assess the impact on individual sectors.
© FT Graphic / Getty
Mr Trump’s US election win gave most large pharmaceutical stocks a boost on Wednesday, as investors predicted that his administration would take a more lenient approach to drug pricing than a Democratic White House, writes David Crow in New York.
Shares in Pfizer, the world’s largest pure-play drugmaker by market value, jumped 10 per cent in early-morning trading in New York, while those in Allergan and Merck were up 10 per cent and 6 per cent, respectively.
Both Mrs Clinton and Mr Trump had outlined plans to deal with the soaring price of prescription drugs, but Mr Trump’s promises were more vague and caused less consternation among investors.
Conversely, Mrs Clinton published a plethora of detailed policy proposals that convinced investors that she would crack down on the cost of medicines and therefore crimp industry profits. Ian Read, chief executive of Pfizer, had warned that her plans would amount to the kind of drug “rationing” seen in some European countries, such as the UK.
Mrs Clinton had warned that she would crack down on “outrageous price gouging”, if elected, after Martin Shkreli, a pharmaceuticals entrepreneur, prompted global outrage by raising the price of a life-saving Aids drug from $13.50 to $750 per pill.
Mr Trump’s plan, entitled “Healthcare reform to make America great again”, was centred on a pledge to repeal the Affordable Healthcare Act, known as “Obamacare” — and made little reference to the price of drugs.
His main proposal involves letting consumers import cheaper versions of drugs from overseas, but executives believe it will gain little traction because the medicines would not be manufactured to US safety standards.
Citi analyst Andrew Baum said that he expected “near-term sector outperformance driven by a relief rally given the likely inability of the Democrats to attain the presidency, the House or Congress”. In the longer term, however, “we see significant continued legislative risk” he said regarding pricing.
But the share price performance of large healthcare groups was more mixed. Humana and Aetna gained 1 per cent and 2 per cent, respectively, as investors wagered that a Trump administration might look more kindly on their planned merger, which has been blocked regulators.
However, shares in UnitedHealth, Cigna and Anthem all fell in early-morning trading. Although few companies made much profit from plans sold under the Affordable Care Act, some believe it widened the pool of potential customers covered under more lucrative policies.
Mr Trump has said he would seek to make the US “energy independent”, and has proposed opening new areas of the country to oil and gas development in pursuit of that goal, writes Ed Crooks in New York.
He has also pledged to “cancel” the Paris climate accord, agreed by almost 200 countries including the US at the end of last year, and to scrap President Barack Obama’s proposed curbs on greenhouse gas emissions from power plants.
These policies are likely to support coal-fired power generation. However, any revival in coal will be limited by competition from cheap shale gas.
Energy companies that could be particular beneficiaries of a Trump administration include US exploration and production groups that might want to drill on federal land that he has pledged to make available for oil and gas production.
Harold Hamm, the billionaire chief executive and majority owner of Continental Resources, one of the leading US shale oil producers, has been one of Mr Trump’s top advisers on the sector and has been tipped as a possible energy secretary.
Another company that stands to gain is TransCanada, the company that sought to build the Keystone XL oil pipeline from Canada to the US, which was rejected by Mr Obama in 2015. Mr Trump has said he would invite TransCanada to resubmit an application for the project.
His administration could also curb global oil supply. Mr Trump has strongly criticised the deal between major powers and Iran last year over its nuclear programme that has allowed the country to increase its oil exports.
Carmakers face significant uncertainty as the election of Mr Trump raises new questions over the health of the US automobile market, as well as potential consequences for companies that manufacture in Mexico, write Peter Campbell in Lisbon and Kana Inagaki in Tokyo.
After several years of strong sales, car purchases are falling in the US, but carmakers face the prospect of an accelerating decline if Mr Trump’s victory leads to an economic slowdown.General Motorson Wednesday announced plans to lay off 2,000 workers at two US plants, blaming fluctuating consumer demand.
Many carmakers have factories in Mexico, where labour costs are lower than in the US, and companies with operations there also benefit from the country’s extensive free-trade agreements. But the role of these is in doubt, as Mr Trump’s campaign announcements have included building a wall along the US-Mexican border, and renegotiating or withdrawing from the North American Free Trade Agreement between the US, Mexico and Canada.
A senior GM executive on Wednesday defended the company’s use of Mexican plants, suggesting it would not yield to pressure to relocate manufacturing jobs to the US.
Johan de Nysschen, president of Cadillac, a GM unit, said the company had done “contingency planning” in case Mr Trump won, but suggested moving work to the US would be uncompetitive.
Mr Trump has already criticised Ford for promising to move production of its small cars from the US to Mexico over the next three years.
However, Japanese carmakers are expected to be among the hardest hit by the Trump victory as US currency headwinds will make it virtually impossible for them to offset the strong yen impact with cost cuts.
Stuart Pearson, auto analyst at Exane BNP Paribas, said: “At this stage we think the main fundamental impact [for carmakers] for the coming months will be pricing in changes to foreign exchange rates.
© FT Graphic / Getty
Wind power is “so expensive” and it “kills all your birds”, while the payback for solar power is too long, Mr Trump said on the campaign trail, writes Richard Milne, Nordic Correspondent.
This anti-renewables rhetoric from the president-elect, combined with his hostility to the Paris accord to tackle climate change, led to big share price falls among wind and solar companies on Wednesday.
Shares in Vestas, the Danish company that is the world’s second-largest wind turbine maker, fell an additional 10 per cent after they had dropped 4 per cent the day before because of worries about its US business.
Marika Fredriksson, Vestas’s finance director, told the Financial Times on Tuesday that the company was reassured by a five-year extension to wind subsidies in the US but conceded that Mr Trump’s comments had been negative.
Other companies were hit, too, with Gamesa of Spain down 4 per cent. Germany’s Siemens, which is planning to merge its wind turbine business with Gamesa, closed up almost 2 per cent.
The fallout even affected companies with little business in the US, such as Dong Energy, the Danish group that is the world’s leading operator of offshore wind farms, mostly in the North Sea. Its shares fell by 2.5 per cent.
Mr Trump’s statements on solar have been kinder — he even said “I love solar” recently — but he has questioned the economic sense of something with a payback of more than a decade.
Shares in US solar companies fell. First Solar and SolarCity, the group chaired by Tesla chief executive Elon Musk, were both down by at least 5 per cent in late Wednesday morning trading in New York, while the stock of SunPower, a listed subsidiary of French energy company Total, plunged 15 per cent.
Suppliers to the construction industry will be hoping that Mr Trump’s pledge to renew creaking US infrastructure translates into orders, write Michael Pooler and Henry Sanderson in London.
“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” the president-elect said in his acceptance speech.
Although analysts said that Mr Trump’s plans, which involve granting $137bn of tax credits to construction companies to leverage $1tn of investment, have been short on detail, some companies’ shares rose in anticipation of a spending boom.
Shares in Glencore and Antofagasta, which both mine copper for use in the construction industry, increased by almost 7 and 9 per cent, respectively, on Wednesday.
“Infrastructure investment in the US is likely to increase, which bodes well for copper and other mined commodities,” said Christopher LaFemina, mining analyst at Jefferies.
Germany’s HeidelbergCement said that it saw benefits in the medium term from Mr Trump’s infrastructure pledges after a period of uncertainty that would delay investment decisions.
Meanwhile, shares in CRH, the Irish buildings materials group that produces concrete and asphalt and has significant sales in the US, rose more than 8 per cent.
Shares in Ashtead, the UK company that rents out construction equipment, and which derives about 90 per cent of its operating profit through its US arm, increased 12 per cent.
The possibility of protectionist trade measures under Mr Trump is also likely to lift investor sentiment towards US steelmakers, which have been struggling amid a global supply glut partly blamed on excess production by Chinese competitors.
Sir Tim Clark, chief executive of Emirates Airline, the fast-growing Dubai-based airline, on Monday spoke for many in the international transport industry when he expressed the hope that Mr Trump’s election rhetoric would prove to be largely “bluster”, writes Robert Wright in London.
However, Sir Tim went on to outline a series of dangers facing global travel and trade that will be taken far more seriously after Mr Trump’s victory.
For airlines, they include the risk that the liberalisation of aviation through inter-governmental Open Skies agreements, which has underpinned growth in long-haul flying, could go into reverse.
Mr Trump may listen more than President Obama to a complaint by US airlines about alleged unfair competition from Emirates and the Gulf’s other two big state-controlled carriers, Qatar Airways and Etihad Airways.
Delta Air Lines, United Airlines and American Airlines last year urged the US authorities to rescind or renegotiate aspects of the open skies agreements that the country has with the United Arab Emirates and Qatar.
Meanwhile, in shipping, Mr Trump’s victory could hit trading conditions for container lines that are already the most severe in the sector’s 60-year history.
Erik Stavseth, analyst at Arctic Securities, highlighted how 15 per cent of exports from Asian countries excluding Japan were destined for the US. Those look likely to suffer if Mr Trump, as he has promised, raises tariffs on imports. “Container liners will inevitably see a diminishing development in trade,” he said.
Shares in European and Japanese container lines, including AP Moller Maersk and NYK Line, fell on Wednesday.
Mr Trump’s presidency should be a boon for the defence sector if he carries out his promise to end years of political stalemate over a long-term defence budget and boost military spending on a new fleet of warships and squadrons of fighter aircraft, writes Peggy Hollinger in London.
After serial spending caps while US lawmakers argued over where budget cuts should fall under the Obama administration, Mr Trump has promised that defence programmes will be adequately funded and older equipment replaced.
This will be good news for the likes of Boeing, Raytheon, Lockheed Martin and Northrop Grumman, key contractors on big US programmes.
“We might see the US defence budget take on a normal appearance, with what is really core being in the base budget,” said Sandy Morris, defence analyst at Jefferies. “That would be a big step forward in allowing the Department of Defense plan for the long term, something it has long called for.”
With the Republicans in control of Congress, there was a “realistic prospect” of legislation that would end the spending caps, he added. “All in all, a better backdrop for all defence suppliers appears likely.”
However, other analysts suggested that Mr Trump’s emphasis on using US industry to create more US jobs could threaten some key international partnerships.
BAE Systems, the UK defence company, is the largest supplier to the new generation joint strike fighter, the F-35. “Will Trump ‘renege’ on defence co-operation, for example on the [joint strike fighter], to bring jobs home?” asked Francis Tusa, editor of Defence Analysis.
Financials were initially one of the hardest hit sectors of the market when news of Mr Trump’s likely election victory started to appear on traders’ screens early on Wednesday. But within hours, investors’ anxiety faded about the sector’s immediate prospects under a Trump presidency and many bank shares made it into positive territory.
Shares in Credit Suisse,Barclays, Deutsche and BNPall rose more than 3 per cent. Even Italy’s UniCredit, which is widely seen as needing to raise capital, was up slightly.
The performance of the big US banks was even stronger as hopes emerged of lighter touch regulation in future. Bank of America, JPMorgan Chase, Morgan Stanley, Goldman Sachsand Wells Fargoall rose between 3 and 5 per cent.
But not all banks benefited from the rally. Natixis, the French bank, said that it expected the Trump victory to hit investment banking revenues in the short term, as transactions are likely to be postponed. But it added that the volatility caused by the election result should attract more money into actively managed funds. Natixis shares fell more than 3 per cent.
The biggest loser among big European banks was Spain’s BBVA, as analysts identified its reliance on Mexico for about half its profits as a significant vulnerability after Mr Trump’s anti-Mexican rhetoric featured prominently in the campaign.
After the Mexican peso fell as much as 12 per cent against the US dollar, Citigroup analysts downgraded BBVA to a sell rating. Shares in BBVAwere down 5.7 per cent in late trading, wiping €2.4bn off its market capitalisation. Shares in Spain’s Banco Santander, which also has a large Mexican operation, were down only slightly.
Analysts at Berenberg said predictions that global economic growth would be hit, postponing an expected rise in US interest rates, were bad news for the banks. They said the heavily leveraged banks would face most downward pressure on share prices, listing Credit Suisse, Deutsche Bank and French banks in particular.
However, some bank bosses were more upbeat. Carlo Messina, chief executive of Italy’s Intesa Sanpaolo, told the Financial Times that his country could benefit from improved trade with Russia if Mr Trump achieves his goal of improving relations with Russian president Vladimir Putin. “We could move to a more pragmatic relationship with Putin and Italy has a very large export relationship with Russia,” he said.
Analysts at Bernstein noted that Mr Trump’s victory could trigger a hit to the US economy, which would have an impact on European banks with domestic US businesses and would also hit investment banks. “This will also likely take a rate rise off the table for December or anytime soon (HSBC and Standard Chartered to be hit the most),” the analysts added. “Then come asset markets and a risk off trade — that will hurt the private banks (UBS and Credit Suisse) the most.”
“We would anticipate that currency moves in the coming days will be a significant focus for the market,” an analyst from Barclays wrote. “This is most likely to impact banks with a sizeable dollar earnings and banks with exposure to Mexico.” They named HSBC, Société Générale, UBS, Deutsche Bank, Credit Suisse and BNP Paribas as banks with large US exposures. Barclays itself also has a big US investment bank.
Rising bond yields and hopes of a less onerous regulatory regime also pushed up shares in US life insurers, write Alistair Gray in New York and Oliver Ralph in London.
Analysts highlighted that a crackdown on fees and commissions on retirement products planned by the Obama administration may now be delayed, watered down or even scrapped.
Insurers, as well as brokers and asset managers, had lobbied against the changes, which President Obama battled to push through before he left office. The reforms would subject the pensions industry to a new “ fiduciary standard”, designed to remove hidden charges and conflicts of interest. The new rule, from the Department of Labor, was due to take effect in April next year.
“Following the election results, there is a good chance, in our view, that the rule would not go into effect in April 2017,” wrote Randy Binner, analyst at FBR Capital Markets, in a note.
He also highlighted that the authorities may take a more relaxed line on regulations that govern non-bank systemically important financial institutions (Sifi).
By midday in New York, MetLife, which is fighting its Sifi designation in the courts, was up 6.7 per cent and Prudential Financial 5.2 per cent.
The markets backdrop may also improve for insurers. Share prices in the sector are strongly correlated to long-term interest rates. Valuations have been dented since the financial crisis as low bond yields have hurt the industry’s fixed-income dominated investment portfolios.
The election has raised doubts about the Fed’s ultra-loose monetary policy. Expectations rose on Wednesday that the President would apply more protectionist trade measures, weakening the dollar and leading to stronger inflation. The yield on the 10-year US Treasury note touched the highest level since March in response.
Companies that operate private prisons have received a boost from Mr Trump’s success, with shares in GEO Group and Corrections Corp of America making double digit gains on Wednesday morning, writes Jessica Dye in New York.
Both companies suffered share price falls in August after the US Department of Justice announced that it would begin to phase out the use of private contractors to operate federal prisoners. At their peak in 2013, private prisons housed approximately 15 per cent of the US’s federal prison population, or nearly 30,000 out of 22,000.
But, as US prison populations began to decline, the DOJ said that it hoped to shift away from, and ultimately end, its use of private populations and instead focus resources on improving the safety and quality of rehabilitative services at its own prisons.
Whether or not that policy will be carried forward by the next president remains to be seen. Mr Trump said during a town-hall meeting hosted by MSNBC’s Chris Matthews in March, before the DOJ policy was announced, that “I do think we can do a lot of privatisation and private prisons. It seems to work a lot better.”
With the White House changing hands, investors appear to sense that Mr Trump could roll back the policy. Shares in GEO Group were up 20 per cent in early trading in Wednesday, while Corrections Corp of America shares soared 45 per cent.
Concerns have increased over the future of AT&T’s $85bn bid for Time Warner, given the president-elect’s commitment to block the deal last month, writes Nic Fildes in London.
European telecoms companies with US exposure may also be exposed to the dollar exchange rate, including Altice, Inmarsat and Deutsche Telekom, which owns T-Mobile USA. In addition, Telefónica's large Latin American footprint, including 2 per cent operating income exposure to Mexico, pushed its shares down 1.3 per cent given Mr Trump’s anti-Mexico stance.
However, the outlook for other European telcos’ shares is better. Citi analysts argued that the “defensive virtues” of the likes of Orange, Swisscom and KPN should come to the fore as healthy dividend yields prove attractive. But it added that BT’s pension fund remained at risk to a possible tightening of government bond yields.
US telecoms stocks fared better. Sprint’s shares rose almost 12 per cent and T-Mobile climbed more than 3 per cent on hopes of lighter regulation.
Investors in consumer groups have been reacting to the potential impact of Mr Trump’s policies on their costs, trade agreements and supply chain, write Scheherazade Daneshkhu in London and Lindsay Whipp in Chicago.
In Europe, ingredients maker Tate & Lyle’s reliance on Mexico for 10 per cent of its earnings and on the dollar for another 80 per cent, led to a 12 per cent fall in its share price on news of Mr Trump’s win. It has a large US-based business making corn fructose sweeteners for soft drinks.
If Mr Trump scraps the North American Free Trade Agreement it “could destroy the cross-border trade between the US and Mexico in high fructose corn syrup, which represents 12 per cent of US HFCS production”, a Jefferies analyst said.
Mr Trump’s win is also likely to prompt uncertainty for many consumer groups in the US, just as shoppers prepare to splash out for the holiday season.
While any tax cuts at home could help some households, anti-immigration and trade policies could have a bigger and more damaging impact, according to analysts.
Neil Saunders, an analyst at Conlumino, said: “Trump’s policies could be quite far-reaching for retail, especially in terms of the labour market becoming more restricted and products becoming more expensive if import taxes are introduced. The latter is a major issue given how interconnected supply chains are.”
Mr Trump has already criticised Mondelez International, which makes Oreos, for shifting some of its production to Mexico.
Research provider Euromonitor predicted that a Trump presidency could create an economic slowdown that would hurt retail sales of discretionary items, such as confectionery and men’s shaving products. It also warned that the $1.4tn travel and tourism industry could be hurt if fewer Mexicans and Muslims visit.
PepsiCo’s shares were down 2.2 per cent in mid-morning trading to $106.33, while Procter & Gamble’s fell 1.8 per cent to $88.90. Mondelez International shares declined 3.3 per cent to $44.5.
For every complex problem, there is an answer that is clear, simple and wrong.” HL Mencken could have been thinking of today’s politics. The western world undoubtedly confronts complex problems, notably, the dissatisfaction of so many citizens. Equally, aspirants to power, such as Donald Trump in the US and Marine Le Pen in France, offer clear, simple and wrong solutions — notably, nationalism, nativism and protectionism.
The remedies they offer are bogus. But the illnesses are real. If governing elites continue to fail to offer convincing cures, they might soon be swept away and, with them, the effort to marry democratic self-government with an open and co-operative world order.
What is the explanation for this backlash? A large part of the answer must be economic. Rising prosperity is a good in itself. But it also creates the possibility of positive-sum politics. This underpins democracy because it is then feasible for everybody to become better off at the same time. Rising prosperity reconciles people to economic and social disruption. Its absence foments rage.
The McKinsey Global Institute sheds powerful light on what has been happening in a report entitled, tellingly, Poorer than their Parents?, which demonstrates how many households have been suffering from stagnant or falling real incomes. On average between 65 and 70 per cent of households in 25 high-income economies experienced this between 2005 and 2014. In the period between 1993 and 2005, however, only 2 per cent of households suffered stagnant or declining real incomes. This applies to market income. Because of fiscal redistribution, the proportion suffering from stagnant real disposable incomes was between 20 and 25 per cent. (See charts.)
McKinsey has examined personal satisfaction through a survey of 6,000 French, British and Americans. The consultants found that satisfaction depended more on whether people were advancing relative to others like them in the past than whether they were improving relative to those better off than themselves today. Thus people preferred becoming better off, even if they were not catching up with contemporaries better off still. Stagnant incomes bother people more than rising inequality.
The main explanation for the prolonged stagnation in real incomes is the financial crises and subsequent weak recovery. These experiences have destroyed popular confidence in the competence and probity of business, administrative and political elites. But other shifts have also been adverse. Among these are ageing (particularly important in Italy) and declining shares of wages in national income (particularly important in the US, UK and Netherlands).
Real income stagnation over a far longer period than any since the second world war is a fundamental political fact. But it cannot be the only driver of discontent. For many of those in the middle of the income distribution, cultural changes also appear threatening. So, too, does immigration — globalisation made flesh. Citizenship of their nations is the most valuable asset owned by most people in wealthy countries. They will resent sharing this with outsiders. Britain’s vote to leave the EU was a warning.
So what is to be done? If Mr Trump were to become president of the US, it might already be too late. But suppose that this does not happen or, if it does, that the result is not as dire as I fear. What then might be done?
First, understand that we depend on one another for our prosperity. It is essential to balance assertions of sovereignty with the requirements of global co-operation. Global governance, while essential, must be oriented towards doing things countries cannot do for themselves. It must focus on providing the essential global public goods. Today this means climate change is a higher priority than further opening of world trade or capital flows.
Second, reform capitalism. The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives. The interests of shareholders are given excessive weight over those of other stakeholders in corporations.
Third, focus international co-operation where it will help governments achieve significant domestic objectives. Perhaps the most important is taxation. Wealth owners, who depend on the security created by legitimate democracies, should not escape taxation.
Fourth, accelerate economic growth and improve opportunities. Part of the answer is stronger support for aggregate demand, particularly in the eurozone. But it is also essential to promote investment and innovation. It may be impossible to transform economic prospects. But higher minimum wages and generous tax credits for working people are effective tools for raising incomes at the bottom of the distribution.
Fifth, fight the quacks. It is impossible to resist pressure to control flows of unskilled workers into advanced economies. But this will not transform wages. Equally, protection against imports is costly and will also fail to raise the share of manufacturing in employment significantly. True, that share is far higher in Germany than in the US or UK. But Germany runs a huge trade surplus and has a strong comparative advantage in manufactures. This is not a generalisable state of affairs. (See chart.)
Above all, recognise the challenge. Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. The candidacy of Mr Trump is a result. Those who reject the chauvinist response must come forward with imaginative and ambitious ideas aimed at re-establishing that balance. It is not going to be easy. But failure must not be accepted. Our civilisation itself is at stake.
The Brics are dead. Long live the Ticks.
The Brics concept, based on the belief that the quartet of Brazil, Russia, India and China would power an unstoppable wave of emerging markets-led economic growth, gripped the firmament for more than a decade after it was conjured into existence by Jim O’Neill, then chief economist at Goldman Sachs, in 2001.
But the deepening recessions in Brazil and Russia have now dealt such a blow to faith in the Bric hypothesis that, late last year, even Goldman closed its Bric fund after assets dwindled to $100m, from a peak of more than $800m at the end of 2010.
In its place, emerging market fund managers appear to have stumbled on its potential replacement — the Ticks, with tech-heavy Taiwan and (South) Korea elbowing aside commodity-centric Brazil and Russia.
Aside from a catchy acronym, the realignment tells us much about the changing nature of emerging markets — and the world in general — with services, particularly technology, to the fore and trade in physical goods, especially commodities, in retreat.
“Bric is not the engine of emerging market growth it was. There is a new order of things,” says Steven Holden, founder of Copley Fund Research, which tracks 120 EM equity funds with combined assets of $230bn.
“Tech is just rampant and the consumer is what you are investing in EMs now. I don’t think many people are aware of the new EM story as much as they should be. They think of Brazil, Russia, materials, big energy companies. That has changed hugely.”
Richard Sneller, head of emerging market equities at Baillie Gifford, whose EM Growth and EM Leading Companies funds invest 45-50 per cent of their $10bn-$15bn of assets in technology companies, adds: “In many emerging markets the speed with which young consumers are adapting to technological change, in areas such as ecommerce and online shopping, is much faster than in the US.
“Trends that we hoped would emerge 15-20 years ago have come to generate significant cash flows.”
Luke Richdale, chief client portfolio manager, emerging markets at JPMorgan Asset Management, which manages $70bn in EM and Asia-Pacific equities, says: “We are seeing leapfrogging [of technology] going on in China. There are models in the west, bricks and mortar etc, that simply won’t happen there.”
According to Copley’s data, the average emerging market equity fund now has a near-54 per cent weighting to the Ticks, up from 40 per cent in April 2013, while the weighting to Brics has remained in the low 40s, despite a sharp rise in China’s index weighting, as the first chart shows.
As of December, 63 per cent of funds had at least 50 per cent of their assets invested in the Ticks, while only 10 per cent had such high exposure to the Brics.
Houses such as JPMorgan, Nordea and Swedbank have a weighting of at least 35 per cent to Taiwan and Korea alone in at least some of their funds, while vehicles managed by Carmignac, Fidelity and Baillie Gifford have exposure of 3 per cent or less to Brazil and Russia.
The average EM equity fund now has as much exposure to China’s IT industry as it does to the country’s financial sector, as the second chart shows — despite the index weighting of financials being 4 percentage points higher — following a sharp rise in tech holdings in the past three years.
The trend was turbocharged late last year when MSCI widened its EM index to include companies listed overseas, adding the likes of New York-listed Alibaba, Baidu and Netease to the index alongside existing heavyweights such as Tencent.
Wider afield, the two stocks most commonly owned by the 120 funds monitored by Copley are Taiwanese chipmaker TSMC and Korea’s Samsung Electronics.
“These are global companies that are either leaders or significantly well positioned in oligopolistic industries,” says Mr Sneller, who also holds Taiwan’s Hon Hai Precision Industry (also known as Foxconn), partly in the hope that Apple, its largest customer, will start to source automobile parts from it if the US tech group makes a strong push into vehicles.
To some extent, funds’ buying of Ticks and tech stocks reflects their rising weightings in the MSCI index, particularly with many basic materials and energy companies suffering sharp falls in market capitalisation amid the commodity rout. The four Ticks now have a combined weighting of 62.4 per cent.
But Mr Holden says many managers have been making active choices. “Managers are definitely ramping up their technology exposure. The numbers buying and overweight [the index] have gone up. For some funds, the index means nothing.”
Almost a third of funds are now overweight Taiwan, up from just 8 per cent in September 2013, Mr Holden says.
One unanswered question is whether this trend reflects an underlying structural change or whether it is purely cyclical, with sectors such as IT and consumer stocks naturally seeing their weightings rise as commodity-related companies go backwards.
Taiwan was the largest country weighting in the MSCI EM index during the dotcom boom of the early 2000s, before the start of the commodity supercycle. Brazil, which led that phenomenon, has subsequently seen its weighting fall from a peak of 17.6 per cent in June 2008 to just 5.2 per cent.
JPMAM’s Mr Richdale believes it is a bit of both. “There is an underlying structural story but at the same time equity markets in emerging markets are quite cyclical in nature,” he says.
Mr Sneller accepts there is a cyclical element, with some of the consumer-oriented “toothpaste and tractors” stocks he also likes having previously been in vogue in the 1990s, before the Asian financial crises.
However, he believes structural factors are also at play with, for instance, online shopping likely to become far more dominant in China than, say, the US.
“The established incumbent legacy [shop] network is not there [in China],” he says. “You go to a third tier city in China and you don’t have swanky malls.
“[Chinese people] value their time extremely highly. Why would you want to waste your time walking around second-grade shopping malls when you can do it online in a fraction of the time?”
Analysis by Michael Power, strategist at Investec Asset Management, suggests the trend may be cyclical. All the Ticks (barring India which has a small current account deficit) are in the same quadrant of a matrix he uses to distinguish emerging market countries — that comprising manufactured goods exporters with an external account surplus.
As the fortunes of these quadrants tend to ebb and flow in line with global liquidity and commodity demand, they tend to perform in a cynical manner.
Yet even here there could be a structural factor. Mr Power says the quadrant inhabited by most of the Ticks “always does best”, in risk-adjusted terms, over an economic cycle, suggesting it should increase its weight over time.
Whatever the truth of that, the rotation of the MSCI index away from primary industries and towards technology does raise a question as to why emerging market equities are still so driven by sentiment towards commodities.
The bureau’s estimated valuation of at least $40bn makes it the largest business group in Thailand on an equity basis. This is more than double the market capitalisation of PTT, the state-owned oil and gas group and Thailand’s largest publicly listed company, and greater than the combined market capitalisation of the country’s four largest banks.
Land accounts for the majority of the bureau’s holdings: it owns vast amounts of prime real estate in Bangkok, including huge sections of the Siam, Chit Lom and Wireless Road central business and shopping districts. The best available estimate valued the bureau’s land at THB1tn ($29bn) as of 2014.
The bureau also retains large stakes in Siam Commercial Bank(SCB) and Siam Cement(SCC), two of Thailand’s largest companies (see chart). Other significant assets are held through subsidiary CPB Equity, including additional shares in both of these companies.
At the close of 2014, these primary bureau holdings were, combined, worth approximately THB1.4tn, according to a report by Dr Porphant Ouyyanont, a Thai academic who was granted unprecedented access to the agency’s finances. That amounted to about $44bn at the time, or due to the now weaker baht, $38.6bn at the present exchange rate.
Factoring in potential changes in value in 2015, we estimate that a probable 5 per cent rise in land value roughly offsets a drop in the value of the bureau’s stake in SCB to leave its overall value almost unchanged (see chart).
Importantly, these figures do not include smaller holdings in other companies, such as majority ownership of KempinskiAG, the German hotel group. In 2008, an adviser to the bureau estimated that its stakes in other companies were worth $665m. Given the upward trajectory of nearly all markets since that time, this has probably increased to $1bn or more today, assuming no significant disposals. With the inclusion of these additional assets, total bureau holdings would reach $40bn.
Further assets controlled by the Office of the Royal Privy Purse are not included in the totals above; these include an additional 1.3% of SCC worth THB7.1bn. Nor does the bureau manage the personal holdings of royal family members. To cite a single example, Siam Piwat, which manages the highly successful Siam malls, is reportedly 25 per cent owned by Princess Srindhorn, the second daughter of King Bhumibol.
The bureau matters to the Thai economy in several respects.
First, and most obvious, is its size: as noted above, on an equity basis it dwarfs all listed companies in the country. Based on the above estimations, assets were equivalent to 11 per cent of GDP in 2014. Any entity of this scale will affect the trajectory of the economy.
Dr Porphant said that much of Thailand’s economic growth stems from the monopoly of influential Thai corporates connected to the bureau, which creates barriers to entry for new businesses, stymieing economic development.
Second, the bureau pays no tax and is not subject to corporate or non-profit disclosure requirements. To be fair, the agency has directed large sums toward charitable and less than commercially viable projects for development purposes. Nonetheless, any large organisation that operates in such an opaque manner has the potential to have a negative impact an economy. In addition, were the bureau to pay some meaningful form of income tax, government revenue would increase significantly.
The king appoints six members of the bureau’s governing board, with the seventh the sitting finance minister. When King Bhumibol’s son Crown Prince Vajiralongkorn, the heir apparent, assumes the throne, questions will arise about his intentions for the direction of the bureau.
Third, the privatisation of a large proportion of the bureau’s assets would significantly alter the composition of privately held assets in Thailand. We have heard credible rumours of closed-door talks looking at some form of privatisation during the 2008-11 administration of Abhisit Vejjajiva, the former prime minister, who leads the Democrat party, but no public discussion took place.
In any case, in light of the political instability that has paralysed the country in recent years we doubt such privatisation would occur in the near or medium term under any government — particularly any future administration linked to Thaksin Shinawatra, the populist former prime minister, but it remains a possibility over the long term.
The existence of an opaque, quasi state-controlled $40bn investment fund cannot be ignored when assessing the political risk of a deeply divided country at a time of unprecedented transition. A number of analysts have suggested that the bureau’s assets may be a factor with regard to concern over the royal succession. The hypothetical control or seizure of the bureau’s wealth by a future government opposed to the monarchy would provide that administration with untold financial influence. This may be an additional reason behind the ruling military junta’s apparent attempts to postpone elections until it has overseen a smooth royal succession.
The bureau also matters to companies in which it is a major shareholder, most notably SCB and SCC, and to the other shareholders in these companies. The bankruptcy of Sahaviriya Steel Industries provides an unusually public and overt example.
Sahaviriya Steel purchased the UK’s second-largest steelmaker in 2011 in an aggressive global expansion at a time of booming commodity markets. However, the company soon fell victim to the commodity price collapse and the reduction in steel demand from China, global trends exacerbated by the relatively high cost of operating in the UK. The company was forced to default on loans and declared bankruptcy in mid-2015.
The bureau was a primary lender for Sahaviriya Steel’s UK acquisition, along with Krung Thai Bank (KTB) and Tisco Bank. Together the banks had provided Sahaviriya Steel with about THB44bn, at least THB11bn of that from SCB (see chart).
Facing a large unexpected loss, SCB decided to liquidate its 0.76 per cent stake in SCC in September to raise cash. The bureau, already the company’s largest shareholder, stepped up to buy the stake.
Although the shares of both companies rose the day the sale was announced, the situation raises two questions:
On both counts we can only speculate. Nevertheless, it appears that at the very least, at the company level SCB and SCC benefit significantly from having such a deep-pocketed shareholder willing to step in during times of trouble. In this regard, other shareholders in the two banks also benefit from the bureau’s presence.
At the same time, a one-off deal of this sort made behind closed doors might not maximise value for these other shareholders. How did SCB determine that the sale of its SCC stake was the best way to raise cash, if indeed this was necessary?
Even without a connection to the royal family, a $40bn secretive investment fund has a lot of weight to throw around, which is why investors in Thailand would be advised to stay abreast of the actions and development of the bureau in the years ahead.
Global electric vehicle sales are at an inflection point where exponential growth beckons, similar to the adoption of solar panels a few years ago. And it is an emerging market, China, that is leading the way.
According to estimates compiled by Medley Global Advisors, a macro research service owned by the FT, there will be more than 2m EVs on the road by the end of this year, up 60 per cent on 2015. On the current trajectory that will increase tenfold to 20m globally by 2020 and, according to the International Energy Agency, could reach 150m by 2040, if the most ambitious targets for containing global warming are met (see chart).
China is by far the largest market for EVs, with more than 300,000 expected to be sold this year — an annual growth rate of 120 per cent — and an official target of 5m EVs on the road by 2020. And while Tesla hogs the headlines, at least in the west, China already has 25 companies building 51 models of electric cars.
One reason mass adoption is coming closer is the rapid decline in production costs as economies of scale increase. Battery costs, the critical component, are already down from over $1,000 per kilowatt hour in 2010 to $268 today and expected to drop to $100/kWh by 2020.
Capacity is ramping up, with Tesla’s Gigafactory expected to produce 35 gigawatt hours within three years, while LG Chem in Korea is more than doubling its Li-on battery output to 20 GWh and two Chinese facilities — Lishen and CATL — are upgrading from below 5 GWh to 20 GWh and 25 GWh, respectively.
New EV models already cost less than $40,000 and within a decade they could become cheaper than conventional cars, with an average price of about $20,000.
Running costs are another reason for optimism, since EVs are inherently more efficient. A traditional internal combustion engine only converts 30 per cent of its fuel input into motion, with the rest lost to heat, sound and energy. EVs, meanwhile, have an efficiency rate of 80 per cent, so charging one costs about $500 a year in the US compared with the $1,400 spent on gasoline every year — despite America’s subsidised gasoline prices.
At the same time, range is improving with the latest Tesla Model 3 and the GM Bolt able to travel 200 miles between charges and a new Mercedes-Benz SUV promised for 2019 having a range of 300 miles. The necessary infrastructure is also being put in place. China already has 85,000 public charging stations, with the US and several European countries each having between 10,000 and 20,000.
Even so, EV sales still depend heavily on government incentives, especially since auto manufacturers are currently losing money on every unit sold. Some 90 per cent of new EV sales this year have taken place in eight markets — China, the US, the Netherlands, Norway, the UK, Japan, Germany and France — which all have generous provisions for EV sales.
But while several European nations are planning to phase out such payments in the next five years and US policy is up in the air given the election of Donald Trump, China (and Japan) are likely to continue with their subsidy schemes. Several other EMs, notably India, may soon introduce them to reduce pollution.
This is because EVs are simply and demonstrably cleaner. Even if only coal is used to generate the electricity to charge an EV, the emissions are 20-30 per cent lower than those of a comparable petroleum vehicle. With the transportation sector accounting for a third of all greenhouse gas emissions and government regulations tightening, this will force the auto industry to adapt and adopt.
As far as energy investors are concerned, however, the circle does not quite close — at least not yet. Yes, if there are 20m EVs on the road by the end of 2020 that will reduce the growth in gasoline demand. But Medley reckons there will be no outright reduction in oil consumption until at least 2030.
The reason for that is simply down to numbers. Against those 20m EVs, there are 1.1bn conventional passenger cars in existence and this number is also still growing, probably reaching 1.3bn in 2020. At that point, EVs will be just 1.5 per cent of the global fleet. Moreover, they are concentrated on the lighter end, where mileage is lower. Most heavy trucks and buses — 7 per cent of the vehicle fleet but a quarter of fuel consumption — still burn petrol.
Even under the IEA’s optimistic scenario, EV adoption will replace just 1.3m barrels/day of oil consumption in 2030. This is very modest given that oil demand is growing at 1m b/d annually.
As EV costs come down and adoption picks up, they can be paired with distributed solar generation capacity in developing nations, thus skipping the cost and time needed to develop traditional grid infrastructure. This does provide an exceedingly bullish outlook for EV growth. Yet starting from the current low base, it will take over a decade to have an impact on a mammoth global passenger car fleet that will continue to guzzle gas.
An experimental Alzheimer’s medicine has flunked a large clinical trial, wiping more than $10bn off the market value of its developer Eli Lilly and dealing a significant setback to the hunt for a drug to delay the fatal disease.
Investors and analysts had tipped the medicine, known as Solanezumab, or Sola, to be the first drug that could delay dementia in Alzheimer’s patients, after earlier studies appeared to show it slowed the rate of cognitive decline in patients with mild forms of the disease.
The failure of Sola is also a blow to the most widely accepted theory of what causes Alzheimer’s: the so-called amyloid hypothesis, which holds that the brain stops functioning properly because it becomes covered in a sticky plaque known as amyloid.
In recent decades scientists have focused their efforts on drugs that reduce amyloid, and drugmakers have spent billions of dollars developing new medicines designed to remove the plaques — even after a succession of high-profile failures.
Eli Lilly is testing several other drugs aimed at clearing amyloid from the brain while rival medicines are being used in late-stage studies by a clutch of competing drugmakers including Biogen, Roche, Johnson & Johnson and Merck in the US.
“This result will no doubt cast a shadow over Lilly’s Alzheimer’s pipeline portfolio, which is heavily based on the amyloid hypothesis,” said Seamus Fernandez, an analyst at Leerink.
He added: “Other competitors’ programs based on this hypothesis will probably continue, but this will likely have negative read-through on these results in the short term.”
The feeling of gloom among pharmaceuticals investors was compounded by the news that trials of another closely watched treatment had to be halted following the death of several patients on the study.
More than $1bn was wiped from the market value of Juno after the biotech company revealed it had suspended a clinical trial of its experimental cancer therapy for the second time in five months following the death of two further patients, bringing the total number of fatalities to six.
In an interview before the Sola data were published, Dr Martin Farlow, a leading neurologist, said an outright failure would be damaging for the field and could deter investors from backing other medicines designed to reduce amyloid.
“It’s a very well-organised test of the amyloid hypothesis with a convincing number of patients, so in that sense I think it would be received very badly,” said Dr Farlow, who was one of the doctors investigating Sola.
Eli Lilly said the results from the trial of 2,000 participants, “directionally favoured the drug, [but] the magnitudes of difference were small”. It said it had no plans to seek regulatory approval for the medicine.
Dave Ricks, who will take over as Eli Lilly chief executive in January, said: “Obviously the people closest to the programme are really disappointed. This is not going to be a disease-modifying therapy, and that is heartbreaking.”
Shares in Lilly lost 12 per cent in early trading in New York, wiping more than $10bn from the group’s market capitalisation.
Biogen, which is developing a rival medicine, fell 6 per cent, even as some analysts argued, somewhat implausibly, that the failure of Sola was good news for the biotech group.
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Merryn Somerset Webb is the editor in chief of MoneyWeek.
After gaining a first class degree in history & economics at Cambridge, Merryn became a Daiwa scholar and spent a year studying Japanese at London University. In 1992, she moved to Japan to continue her Japanese studies and to produce business programmes for NHK, Japan’s public TV station.
In 1993, she became an institutional broker for SBC Warburg, where she stayed for 5 years. Returning to the UK in 1998, Merryn became a financial writer for The Week. Two years later, in 2000, MoneyWeek was launched and Merryn took the job of editor.
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Gideon Rachman became chief foreign affairs columnist for the Financial Times in July 2006. He joined the FT after a 15-year career at The Economist, which included spells as a foreign correspondent in Brussels, Washington and Bangkok.
He also edited The Economist’s business and Asia sections. His particular interests include American foreign policy, the European Union and globalisation.
‘Brilliant author, economist. Must-read for central bankers’
Martin Wolf is chief economics commentator at the Financial Times, London. He was awarded the CBE (Commander of the British Empire) in 2000 “for services to financial journalism”. Mr Wolf is an honorary fellow of Nuffield College, Oxford, honorary fellow of Corpus Christi College, Oxford University, an honorary fellow of the Oxford Institute for Economic Policy (Oxonia) and an honorary professor at the University of Nottingham.
He has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999 and a member of its International Media Council since 2006. He was made a Doctor of Letters, honoris causa, by Nottingham University in July 2006. He was made a Doctor of Science (Economics) of London University, honoris causa, by the London School of Economics in December 2006. He was a member of the UK government's Independent Commission on Banking in 2010-2011. Martin's most recent publications are Why Globalization Works and Fixing Global Finance.
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Gillian Tett serves as US managing editor. She writes weekly columns for the Financial Times, covering a range of economic, financial, political and social issues.
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Tett’s past roles at the FT have included US managing editor (2010-2012), assistant editor, capital markets editor, deputy editor of the Lex column, Tokyo bureau chief, and a reporter in Russia and Brussels. Her upcoming book, to be published by Simon & Schuster in 2015, will look at the global economy and financial system through the lens of cultural anthropology.
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He has worked for the FT since 1987, covering labour relations, banking and the media. In 1991-92, he was a Harkness fellow of the Commonwealth Fund of New York, and studied US education and training at the Wharton School of the University of Pennsylvania.
Has the tide of globalisation turned? This is a vitally important question. The answer is closely connected to the state of the world economy and the west’s politics.
Migration raises quite specific issues. The era of globalisation was not accompanied by a general commitment to liberalising flows of people. So I will focus here on trade and capital flows. The evidence in these areas seems quite clear. Globalisation has reached a plateau and, in some areas, is in reverse.
An analysis from the Peterson Institute for International Economics argues that ratios of world trade to output have been flat since 2008, making this the longest period of such stagnation since the second world war. According to Global Trade Alert, even the volume of world trade stagnated between January 2015 and March 2016, though the world economy continued to grow. The stock of cross-border financial assets peaked at 57 per cent of global output in 2007, falling to 36 per cent by 2015. Finally, inflows of foreign direct investment have remained well below the 3.3 per cent of world output attained in 2007, though the stock continues to rise, albeit slowly, relative to output.
Thus, the impetus towards further economic integration has stalled and in some respects gone into reverse. Globalisation is no longer driving world growth. If this process is indeed coming to an end, or even going into reverse, it would not be the first time since the industrial revolution, in the early 19th century. Another period of globalisation, in an era of empires, occurred in the late 19th century. The first world war ended this and the Great Depression destroyed it. A principal focus of US economic and foreign policy after 1945 was to recreate the global economy, but this time among sovereign states and guided by international economic institutions. If Donald Trump, who has embraced protectionism and denigrated global institutions, were to be elected president in November, it would be a repudiation of a central thrust of postwar US policy.
Given the historical record and the current politics of trade, notably in the US, it is natural to ask whether the same could happen to the more recent era of globalisation. That requires us to understand the drivers.
Part of the reason for the slowdown is that many opportunities are, if not exhausted, radically diminished. When, for example, the production of essentially all labour-intensive manufactures has moved out of the rich countries, the growth of trade in such products must fall. Similarly, when the biggest investment boom in the history of the world, that in China, slows, so too must the demand for many commodities. That will affect both their prices and their quantities. Again, the end of once-in-a-lifetime global credit boom is sure to lead to a decline in the cross-border holdings of financial assets. Finally, after decades of FDI, a host of companies with something to gain from it will have taken their opportunity and succeeded or, in important cases, failed.
Yet this is not all there is to this story. Trade liberalisation has stalled and one can see a steady rise in protectionist measures. The financial crisis brought with it regulatory measures, many of which are bound to slow cross-border financial flows. The rise of xenophobic sentiment and the slowdown in trade are both likely to reduce the growth of FDI. In brief, policy is less supportive.
The politics are becoming even less so. Again, the US is the central part of the story. Mr Trump is much the most protectionist candidate for US president since the 1930s. But, revealingly, Hillary Clinton, an architect of the US “pivot to Asia” has turned against the Trans-Pacific Partnership of which she was once a keen supporter. The Transatlantic Trade and Investment Partnership, being negotiated between the US and the EU, is now in deep trouble. TheDoha round of multilateral trade negotiations is moribund. Above all, important segments of the western public no longer believe increased trade benefits them. Evidence on relative real incomes and adjustment to rising imports provides some support for such scepticism.
Globalisation has at best stalled. Could it even go into reverse? Yes. It requires peace among the great powers. Some would also argue it requires a hegemonic power: the UK before 1914 and the US after 1945. At a time of poor economic performance in leading high-income countries, rising inequality and big shifts in the balance of global power, another collapse must be a possibility. Consider the impact of any fighting between the US and China over the South China Sea, though such a calamity would be terrifying for far more than its narrow economic effects.
Does globalisation’s stalling matter? Yes. The era of globalisation has seen the first fall in global inequality of household incomes since the early 19th century. Between 1980 and 2015, average global real income rose by 120 per cent. The opportunities afforded by globalisation are vital. Our future cannot lie in closing ourselves off from one another.
The failure — a profound one — lies in not ensuring that gains were more equally shared, notably within high-income economies. Equally dismal was the failure to cushion those adversely affected. But we cannot stop economic change. Moreover, the impact on jobs and wages of rising productivity and new technologies has far exceeded that of rising imports. Globalisation must not be made a scapegoat for all our ills.
Yet it has now stalled, as have the policies driving it. It might reverse. Yet even a stalling would slow economic progress and reduce opportunities for the world’s poor. Pushing globalisation forward requires different domestic and external policies from those of the past. Globalisation’s future depends on better management. Will that happen? Alas, I am not optimistic.
It has been called the most important chart to understand Brexit, Donald Trump, and most of contemporary politics in rich countries.
The “elephant chart”, devised by economists Branko Milanovic and Christoph Lakner, went viral this year. It ranks income groups globally, charting the change in their income between 1988 and 2008, and shows huge increases for the global middle and the very top, but stagnation around 20 per cent from the top, a level usually identified with the poorest of rich-country inhabitants. In other words, those left-behind people who support populist politicians.
The Resolution Foundation, a British charity founded to support the interests of those on low to middle incomes, has done sterling work by dissecting the elephant chart and asking whether it really substantiates that story about rich-country losers.
Resolution’s research points out that the data cover different countries in 1988 and 2008 and that, because poor countries have faster population growth than richer ones, each rank in the global income distribution is made up of people in different countries in the two years.
As with all iconoclasm, however, one should beware the hype. While the analysis from the Resolution Foundation allows us to understand the elephant graph better, it is not clear that it overturns the lessons it teaches, if those have been properly understood in the first place.
One reaction to the foundation’s dissection has been to say that it disproves the claim that globalisation left behind the lower halves of rich-country populations. But the original chart never said anything about economic globalisation; it was simply a measurement exercise, an attempt to state what had happened to incomes.
And in terms of what happened, the foundation’s work rather confirms the original findings. Comparing like-for-like, their revised chart looks remarkably similar to the original, except that there is no outright stagnation in a literal sense. Even the worst-off groups saw their incomes increase by some 25 per cent over the two decades, rather than zero.
But this hardly changes the story in a politically significant sense. If anything, Resolution’s adjustment makes for an even more dramatic difference between the fortunes of “bottom of the top” and the “global middle”, whose incomes grew by 175 per cent (rather than 75). To a working-class voter being told that his once-great country is being beaten by foreigners, that 150 per cent lag feels like stagnation all right.
A year from now, I will not be at my desk at the Financial Times writing mocking columns about the madness of corporate life. I will be standing in front of a classroom of teenagers in an inner London school teaching them the basic rules of trigonometry.
There are various things about this change of career that are irregular. One is that I’m doing it rather late — I’ll be 58 when I start. Another is that I am making this announcement rather early. I’m not actually off until July.
The reason I’m giving so much notice is I want to persuade you to jack in whatever you are doing and come with me. Or rather I want to persuade you if you are a) of a certain age b) doggedly determined c) based in London and d) fancy the idea of teaching maths, science or languages, where the shortage of teachers is worst.
During the past few months, in cahoots with people who know what they are doing, I’ve been setting up an organisation to encourage bankers, lawyers and accountants to spend the rest of their careers in the classroom. Our outfit is called Now Teach, and aims to do a version of what Teach First has done so brilliantly — convincing the brightest graduates that teaching is a cool and noble thing to do before trotting off to work for McKinsey/PwC/Goldman — only the other way round. We want to convince people who have spent a career at McKinsey or wherever that teaching is a cool and noble thing to do afterwards.
Not everyone thinks this is a great idea. When I told my fellow columnist Gideon Rachman about it he looked at me in befuddlement. “Let me see if I’ve understood,” he said, brow furrowed. “You are leaving a job you are good at, where you get money, praise, freedom, glamour and flexibility. You are swapping it for something that is less well paid, difficult, has no freedom, no glamour, is intensely stressful and you may be rubbish at it. Or am I missing something?”
The answer, Gideon, is yes you are. Nobody can go on doing the same thing forever. In most jobs two decades is plenty. I’ve stuck at mine for 31 years because my job is the nicest in the world. But even so, it has been long enough. With jobs, as with parties, it is best to leave when you are still having a good time.
For me, the thought of starting over, learning something that is new and terrifyingly hard, is part of the point. So is the thought of being in a staffroom with colleagues who are my children’s age. But the biggest thing, which readers may find hard to swallow given my entire career has been based on ridiculing others, is that, for my next act, I want to be useful. Yes, I know sticking pins in pompous chief executives is useful in a meta kind of way but that’s not the kind of useful I have in mind.
A few months ago I wrote a column pointing out that there were hardly any 50-somethings left in banking, corporate law or most managerial jobs. Underneath, a prescient FT reader wrote: time for Teach Last? It is time. Schools need teachers. My generation has mostly paid off mortgages; we have pensions and can afford a pay cut. We will live until we are 100, and will work into our 70s. If Leonard Cohen could do world tours until he was 80, I can surely find the energy needed to be in a classroom all day, teaching kids my favourite subject.
Various people have protested that it won’t work as my generation will be hopeless at controlling unruly teenagers. But I’m not dumping myself and fellow Now Teach recruits in schools unsupported. We are in partnership with Ark, the educational charity, which knows how to train teachers. I’ve sat in on some of its sessions and have learnt how to stand, and what to do with my voice to make kids behave. I’ve practised in front of the mirror: I almost managed to scare myself.
For now I’m banning all FT readers from emailing me to say goodbye as I’m not off yet. I’m staying until the summer and, even then, will not be making a clean break. I will go on writing for the FT, whenever I have a spare minute from all that trigonometry.
Instead, I want only to hear from people who have a view on Now Teach.
Better still, I want to hear from anyone who is ready to chuck in the corporate life and come with me.
Lucy Kellaway has been writing for the FT for 30 years, gaining a wealth of experience as energy correspondent, Brussels correspondent, a Lex writer, and an interviewer of business people and celebrities for the Lunch with the FT series.
For the last 15 years, her acclaimed weekly column has poked fun at management fads and jargon and celebrated the ups and downs of office life.
Kellaway’s astute journalism and wit have been recognised with various prizes including the Industrial Society WorkWord Award (twice) and the Wincott Young Financial Journalist Award. She was named columnist of the year at the 2006 British Press Awards.
In recent years online retail has followed the same formula — prettier websites, smoother checkout and easier access to credit card info. But this holiday shopping season a growing number of retailers are deploying a new tactic to help boost sales: artificial intelligence.
As AI has become more sophisticated, it can help online shoppers in three main ways: personalised recommendations based on their tastes [and browsing or purchase history], chatbots to help navigate online and physical stores, and websites that draw on customer behaviour to make them more appealing.
This technology is maturing right at the moment when traditional retailers are struggling to remain relevant and many ecommerce companies are striving to find a winning formula. A number of high-profile failures this year among Silicon Valley’s hottest online start-ups, including Fab and One Kings Lane, has left retailers wondering afresh how they can entice customers to buy online.
As competition from Amazon grows ever tougher, more retailers are pinning their hopes on intelligent apps and websites as a key differentiator. From discount chain Target to apparel brands The North Face and Skechers, companies are hoping that AI can become an effective weapon in the battle for sales.
“Ecommerce has not really evolved for the last decade and conversion rates have stagnated,” says Andy Narayanan, vice-president of commerce at Sentient, an artificial intelligence start-up that sells software to retailers. “We let the AI pull [up] the product that the shoppers want, and if we do that it is a level of personalisation we have not seen for a very long time.”
One example of how this works is at Cosabella, an Italian lingerie company. Working with Sentient, the company uses evolutionary algorithms powered by AI to rapidly test alternative options for its website design — a process that would have been time-consuming using traditional A/B testing. Courtney Connell, marketing director at Cosabella, says it immediately resulted in a 35 per cent boost in sales.
Ms Connell says the company is now planning to use AI in other aspects of its website and marketing campaigns. “A lot of people view AI as this cold and almost too robotic future. For me, I see it as the exact opposite — I see it as the consumer experience becoming almost magical,” she says. The algorithms save her team a lot of time, she adds, allowing them to focus more on the creative side of marketing.
Two of the most common uses of AI are around visual search, offering shoppers items that are similar to a picture they like and have uploaded, and for personalised recommendations. Ultimately, retailers and tech developers hope that AI engines will be able to server consumers just like an experienced shop assistant would — by subtly deducing which features are important to customers, and which are not.
At Skechers.com, for instance, shoppers can click on a product they like, and AI-powered engines by Sentient will analyse the catalogue in real time to identify and serve up similar styles. “This helps to make the shopping experience more enjoyable and stress-free,” says Lara Diab, spokeswoman for Skechers.
Visual search, which allows users to paste images instead of keywords into a search box, is also becoming more popular as retailers try to make the browsing process easier. While search engines such as Google have been working to improve visual search for years, the technology has only recently started to have commercial applications in retail.
At Nieman Marcus, the department store, customers can take pictures of anything they like, such as a friend’s shoes, and the store’s app will display similar items from the Neiman Marcus inventory. “In five years, we are all going to take for granted that whenever we find a product that we like, all we need is a picture of it,” says Matt Bencke, chief executive of Spare5, a start-up that uses humans to train artificial intelligence engines.
In other areas, however, AI has been rather slow to deliver the experiences that were hoped for. Intelligent chatbots, long touted as one of the next big uses for AI, have not developed as quickly as expected and their usefulness in retail is still limited.
Technologists say this will change — and eventually AI chatbots will become useful not only in websites, but even in physical stores.
Tim Tuttle, founder of MindMeld, acknowledges that the era of the “intelligent assistant” for retailers and other industries is relatively new, with interest emerging only in the past six months in part thanks to recent advances in artificial intelligence. MindMeld, which is based in San Francisco, provides AI-powered conversational tools for companies including retailers including Uniqlo, the Japanese fashion brand.
“Just about every major retailer is beginning to investigate and invest in the technology,” Mr Tuttle says. “It will [become] fairly standard to walk into a retail store, pull out your phone and ask it any question,” he says.
In future, a shopper could walk into Uniqlo and use their iPhone to ask Siri whether, for example, whether a certain down jacket was in stock in light blue — rather than talking to a human store assistant. An intelligent chatbot or digital assistant could make the in-store experience not only more efficient, but possibly provide more in-depth answers than a human with limited training. As a result, AI has the potential to reduce the need for human shop assistants, reducing overall labour costs for retailers.
In online shopping, tech companies expect dialogue-based searches to become the norm. “Over time, more and more sites will have dialogue as the primary way [for consumers to find products], rather than parametric search,” says Tom Nawara, digital strategist at IBM, which developed the question-answering system Watson and is heavily investing in the area and bought retail AI service platform Expert Personal Shopper this month for an undisclosed sum.
There is also a hope there are other ways AI will be able to draw consumers back into brick-and-mortar stores. Michael Klein, head of industry strategy for Adobe Marketing Cloud, for instance, says “merchandising needs to become entertainment”, pointing to digitally enabled experiences such as virtual makeovers or home furnishing demos.
Retailers are also investigating applications of AI that are not yet fully developed. This year, Adobe Digital showcased a digital mirror that photographs and records a customer’s body size and shape, recommends clothes that are suited to his or her form and then matches them with existing inventory.
The more willing a customer is to provide and record data about their shopping experiences, the more specific the recommendations become as history builds up. The product is not yet in stores, but hints at one more way that artificial intelligence is becoming more like your personal shopper.
The British pound suffered a sudden fall of more than 6 per cent against the US dollar early on Friday before recovering most of its losses, amid mounting concerns over the UK’s exit from the EU.
Shortly after currency markets opened in Asia on Friday, the pound lost as much as 6.1 per cent to $1.1841 in two minutes. The shortlived drop sparked speculation that it could have been triggered by a mistaken “fat finger” trade or a rogue automated algorithm, exacerbated by thinner liquidity during early Asian hours.
It was the currency’s lowest level since May 1985 and the biggest intraday drop against the dollar since its 11.1 per cent plunge on June 24 in the wake of the UK’s vote to leave the EU.
Although sterling quickly bounced back, it was still trading down 1.8 per cent at $1.2381 in London afternoon trading, well below the $1.26 levels it was holding at before the plunge. Against the euro, the pound was 2.1 per cent weaker, with £0.9018 required to buy a unit of the single currency.
The weaker pound also intensified this week’s selling of UK government debt. The yield on 10-year gilts rose above 1 per cent for the first time since late June, and the benchmark has climbed from 0.73 per cent on Monday. Foreign investors own about one-quarter of outstanding gilts and their holdings lose value as the pound weakens.
“I’ve been trading sterling since 1978 through every crisis it has seen, and I’ve not seen anything like this,” says Ian Johnson, FX strategist at 4CAST-RGE, the consultancy.
Friday’s fall added to a torrid week for the British currency, which has slipped 4.6 per cent since comments at the weekend from Theresa May, UK prime minister, that the formal proceedings to take the UK out of the EU would begin no later than March next year.
Traders said the tough stance taken over Brexit negotiations by François Hollande, French president, reported by the Financial Times, could have triggered the move. Many algorithmic traders include tracking news websites in their systems. The FT story was first published the same minute as the move lower began.
“The UK has decided to do a Brexit, I believe even a hard Brexit. Well, then we must go all the way through the UK’s willingness to leave the EU,” Mr Hollande said.
The pound’s drop occurred at the weakest moment in the trading day, after New York traders had left their desks and as Australian and Japanese markets were getting under way. The US jobs report due later on Friday — a risk event for markets globally — has also lowered trading appetite, thinning volumes further.
Rodrigo Catril, a strategist at National Australia Bank, attributed sterling’s drop to an “algo trade that needed to be filled, combined with a lack of liquidity and someone hitting the stop — or exit — level”.
Financial markets have become increasingly driven by automated trading in recent years, and glitches can occasionally cause sudden, hyper-fast crashes and rallies. Notable examples include the 2010 “flash crash” in the US stock market and a violent rise in Treasury bond prices in 2014.
Mitul Kotecha, head of Asia currency and rates strategy at Barclays, said: “It was the point of thinnest liquidity for this to happen, for sure. But there were real trades done at some of these weak points, so people were clearly prepared to believe in sterling’s new weaker levels.”
Establishing the actual low for the pound during the frenetic two minutes of trading remained problematic, given that currencies are traded on dozens of different platforms and the levels each shows reflect the trades that are conducted on those systems. Normally this not a problem as prices tend to be the same across different platforms. For holders of options and other currency contracts, big differences in the recognised low price across platforms may prove costly as they seek to settle their positions with banks or other traders.
Michael Every, the head of Asia-Pacific financial markets research at Rabobank, said: “We all expect market volatility on a payrolls Friday . . . what we don’t usually get is a flash crash in [the pound], which plunged from an already-weak 1.2610 to an ‘I-can’t-believe-what-I’m-seeing’ 1.1841.”
“Officially, the excuse is failing algos, which is the new, high-tech version of fat fingers.” At its worst on Friday, the pound fell as much as 7.3 per cent against the Japanese yen, and as much as 3.4 per cent against the euro.
However, JPMorgan strategists questioned whether algorithmic traders were behind the crash.
“Many investors it seems were awaiting clarity from the government about what type of Brexit it would prioritise, and many presumably were hoping for a softer Brexit that minimised the longer-term economic damage,” said analyst Paul Meggyesi. “But such hopes were dashed at the Conservative party conference last weekend, and it’s not unreasonable to attribute the subsequent 4 per cent drop in the pound to some of these investors starting to reassess their positions.”
David Bloom, chief currencies analyst at HSBC, said he was happy to stick with his prediction that sterling would trade at around $1.20 at the end of the year, and then $1.10 by the end of 2017, with the pound at parity to the euro.
“Sterling used to be a relatively simple currency that used to trade on cyclical events and data, but now it has become a political and structural currency. This is a recipe for weakness given its twin deficits. The currency is now the de facto official opposition to the government’s policies,” he said.
“The FX market is exhibiting an uncanny resemblance to the five stages of grief. First, following the Brexit vote came the denial — theories circulated whether a second referendum would have to take place. Second was anger — claims the vote was unfair. Third was the bargaining — arguments maybe it wouldn’t be that bad, what if the UK followed the Norwegian or Switzerland model. Now the fourth — a gloom is prevailing over sterling.”
Reporting by Peter Wells and Jennifer Hughes in Hong Kong, Katie Martin in London and Robin Wigglesworth in New York
European banks look jealously at their American cousins. Recent drama about arcane Basel rules helps explain why. Europeans are trying to avoid the most onerous consequences of a post-crisis regulatory regime that exposes them to leverage rules long standard in the US.
Risk weights are at the heart of this conundrum. Weighting assets by risk allows banks to hold less capital against “safer” assets; loans against property, for instance, count as less risky than loans to businesses. Holdings of government bonds are treated as risk-free.
Leverage ratios are not risk-weighted, and simply measure assets in relation to capital. So, in the past, European banks not subject to leverage restrictions could boost returns on equity simply by hoarding low-risk, low-return assets. Their US counterparts had to seek out higher-return assets instead — hence their higher returns on equity.
The proposed rule change could reverse that. To understand why, consider the extra equity needed to add assets to the balance sheet. A European bank with a low average risk weight (simplistically, risk-weighted assets divided by the unweighted balance sheet) cannot easily add more low-risk assets without falling foul of the leverage rules. By contrast US banks are constrained by risk weights, not leverage. Adding safe assets such as Treasuries would increase their leverage but — thanks to the zero risk-weight ascribed to such bonds — not their risk-weighted capital. Where European banks do enjoy an advantage is in adding high-risk weight assets. This is not the confluence of incentives regulators or politicians were aiming for. In several European countries, they are already grappling with higher-risk loans that have soured.
But the idea that US banks will henceforth find it much easier to expand balance sheets and take market share has, predictably, not gone down well in Brussels. There will be heated debates in the corridors of Basel. But do not expect the returns on EU lobbying to be any better than the financial returns from Europe’s banks.
Factual, concise content is what you get [from the FT]. But you also have the option of deeper analysis – not just the what, but the why too.
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