Tag Archives: Recession

Can the Olympics Boost British Business?

Olympic Judo London 2012 (2 of 98)

London 2012  (Photo credit: Martin Hesketh)

An interesting phenomenon has hit Britain over the past 2 weeks – the traditional British reserve has been replaced with enthusiasm and a sense of national pride I’ve not seen here before. What’s more – the normally omnipresent negativity about almost everything (not just the weather!) has been quietened to a large extent.

This gives me great hope. Can we draw on this new-found upbeat attitude and start to pull the country out of its recession?

After all, markets are driven at least as much by sentiment as anything else, and a positive sentiment among the people here will inevitably lead to a strong upturn.

So, what lessons have we learnt this month?

Firstly, and very importantly for the future, that competition is healthy after all. For far too long here, and in some other countries, governments have discouraged competition on the basis that it is unfair to those less able. Hence the ludicrous situation of school children, for example, progressing through school regardless of whether they pass or fail their exams, and exam pass marks being lowered, too – the reason we have such huge numbers of school leavers who are functionally illiterate and innumerate. And then wonder why they cannot find, or keep, a job.

Secondly, celebrate success. It seems to me that the news services focus on the negative, and ignore the positive. With the Olympics they were even starting to be accused of jingoism, such was the positive tone of the UK TV services! I realise that disasters sell more newspapers and TV viewship of news channels increases, but it really is not necessary to focus on the negative / bad news about everything all the time. Hopefully, the record viewership and readership during the Olympics will show that good news also sells… And there is good news on the business front – not just bad. There are many success stories, large and small, from Jaguar-LandRover’s expansion to over 300 000 new businesses starting this year – some of which will become the market-leaders of the future (there’s an interesting correlation with market-leaders having more often than not started in periods of recession/downturn).

Thirdly, sport is good for everyone. Britain is already one of the most obese nations on earth and the costs of this in both human and monetary terms are massive. By making sports compulsory for school children – a minimum of three afternoons a week would be good – they develop habits that will stand them in good stead throughout life. It not only reduces the issues associated with obesity, but encourages both team spirit and competition – two things that are critical for overall success in life.

Fourthly, a sense of national identity and community, and pride in this, is good – look at the great work done by the army of volunteers! It really is time for the “Great” to be put back into Britain in the minds of its people. It turns out that not only is Britain third overall in the medals table, but has the best ratio of the all-important Gold medals to GDP of any country (50% better than the next closest) and one of the best ratios in terms of population size, too.

We’ve a unique opportunity to take these lessons and move forward strongly. To move away from a grey society where competition is bad, winning isn’t important and there’s no pride as a consequence. The results will be not only good for business, but a stronger, healthier and happier society, too.

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When Will Interest Rates Rise?

The Bank of England in Threadneedle Street, Lo...

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With the Bank of England having revised the growth rate down to 2.7% this year (from a previous forecast of 2.9%) and inflation rate up to peak at 5% in the fourth quarter (previously 4.5%), expectations are again growing for an interest rate rise in the near-term.

Of course, the classic economic theory is that a rise in interest rates reduces inflation as spend decreases and so demand-driven price rises are no longer a factor.

However, we’re not living in classical times. This economic slowdown – it can’t be called a recession as we’ve not had a further 2 quarters of negative growth – is persisting and there’s no real expectation of a marked change to lacklustre growth rates throughout the developed world. So it’s not demand that’s driving inflation but rather a number of external forces, including climatic conditions and wars, that have pushed up commodity prices. These won’t respond to a rise in interest rates.

So, given this, let’s understand who benefits from the current scenario and what this means for interest rates.

The main beneficiaries of the sustained low bank rate are:

  • The banks themselves – don’t confuse low bank rates with low interest rates for borrowing money. Certainly, the rates are lower than they were before the crash, but not as low as they should be, given the drop in the bank rate. In fact, looking at interest rates charged to companies and individuals for borrowings, the bank’s margins are extremely high. A margin of 3% to 3.5% (the difference between bank rate and lending rate) is normal – today it’s running somewhere between 5% and 7%, depending on your financial profile. The banks are, quite literally, “coining it” – just look at the new bonus rounds for evidence of this.
  • The government – the massive government debt attracts interest costs (they have to borrow the money). Historically, governments borrow money at, or extremely close to, the bank rate, so by keeping this low, the government reduces the amount of its budget spent on interest to service its massive debts.

Yes, homeowners can benefit to a degree, too – but the advantages tend to be a lot smaller in real terms for most people due to the structure of mortgages and the costs associated with moving between fixed and tracker rates, together with the fact that many people can’t change to take advantage of lower rates due to not having enough equity in their properties following the decline in values. And don’t forget that homeowners repaid a record additional £24 Billion on their mortgages last year – getting their mortgage values down ahead of any possible rise to cushion the impact.

So who benefits from higher inflation?

  • In a word: government. It comes back to the massive government debts that have been rung up in the past 10 years. One way to reduce the effective value of them is to allow moderate inflation into the system – simplistically, 5% inflation over 5 years reduces the effective size of the debt by 25%. Couple this with the increased tax receipts that come with inflation and you have a model to get government debt down much more quickly than would otherwise be the case.

So, given that inflation won’t respond to a rise in interest rates as this is not caused by high demand, and that the government and banks are the primary beneficiaries of having a slightly higher inflation rate and a sustained low bank rate, is it likely we’ll see an interest rate rise soon?

I think not – although I suspect the impact of a rise in bank rates may be felt less than generally expected. In fact, it might well lead to lending rates not going up at all as the banks would use this as a way to try to woo customers from each other, keeping lending rates where they were before – let’s face it, they have more than enough room in their margins to absorb a few modest rises in the bank rate.

Capitalism – What the Future Holds

Wall Street

Image by Mirka23 via Flickr

The world is in a state of flux.

With the economic downturn lingering far longer than most people expected, governments are under growing pressure to kick-start economies. However, a growing number of countries with looming debt crises and a consequent unwillingness or inability of governments to spend more money hampers this.  And, as the northern hemisphere weather warms up, we can expect to see growing numbers of demonstrations by people wanting jobs or, at least, a reduction in job cuts.

All of which leads to the question – is the capitalist system doomed?

I don’t believe for a moment that this is the case – history shows that capitalism is the most effective way for countries and people to grow their wealth – but I do think we’re going to see some far-reaching changes.

Back in September 2009, I suggested in my post, “The Perils of Quarteritis” that the short-term thinking so prevalent in recent years had contributed significantly to the crash, and that businesses would move to a longer-term, more strategic model.

The March 2011 edition of Harvard Business Review has a wonderful paper, “Capitalism for the Long Term,” by Dominic Barton, Global Managing Director of McKinsey & Company where documents his findings from 18 months of research and hundreds of meetings with business and government leaders. In this paper, Barton makes 3 points to support his conclusion that capitalism must survive, but that it needs to change, too:

  1. A return to longer-term thinking by companies, investors and politicians alike – he refers to this as “The Tyranny of Short-Termism” (my version was Quarteritis).
  2. That there is no difference between serving the interests of shareholders and of stakeholders – in spite of a more recent belief that serving stakeholders made shareholders poorer, managing for long-term value growth benefits not only stakeholders and society but shareholders, too.
  3. Company executives and boards need to act more like owners, not temporary care-takers – as by doing so they will naturally look to the long-term and so benefit the company, its shareholders, its stakeholders and society as a whole.

Basically, it all comes down to taking a longer-term view of business (as well as the economy, in the case of government) and a consequent change in leadership style, too – see my post of November 2009, “Leadership for the New Business World.”

This longer-term thinking and more inclusive leadership approach will ultimately be to the benefit of all – investors, executives, employees and society as a whole.

What do you think?

Update (31Mar11): Read the Leadership Interview with James Quigley of Deloittes, just out at N2growth.com – leadership is about trust and looking to long-term sustainability.

Can Mergers & Acquisitions be More Successful?

Board meeting room

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Why is it that although many companies, and almost all large ones, grow through mergers and acquisitions, most of these result in a decline in overall value, rather than the envisaged increase?

In the lead-up to such activity – the “engagement period” if you like – shareholders are shown clearly the benefits that the merger or acquisition will bring: lower overall costs, great (combined) market share, stronger sales teams, more experienced management in the combined entity, and so on. All of which is supposed to lead to greater overall value for the shareholders – a case of the proverbial 1+1 resulting in a good deal more than 2.

The reality is, far too often, startlingly different with 1+1 adding up to a good deal less than 2. In other words, significant shareholder value is lost in the process.

Naturally, there are many reasons for this decline in value – most commonly those resulting from a attempt to merge two very different corporate cultures and the consequent fall-out. And much of this happens in the board room.

I’ve seen many cases of incompatible cultures clashing in boardrooms, although I’m fortunate to have avoided this first-hand. Too often, the newly constituted board in an M&A situation will have directors drawn from the two companies proportionate to the value of each part in the transaction and so the acquirer will seek to dominate the acquiree, even when the reason for the acquisition (as is often the case) is that the latter has qualities the former believes is missing from its own company. The result is the departure of the very expertise being acquired and the consequent drop in overall value.

It seems to me that there is one reasonably simple way to increase the likelihood of success – and that is to increase the size of the overall board with the appointment of further Independent Non-Executive Directors (NEDs) when companies are undertaking mergers and acquisitions.

The Corporate Governance Code states “Except for smaller companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.”  But how many companies actually carry this through?

Should this strong recommendation not be even more strictly adhered to during the M&A process? Bringing a substantial body of independent, experienced NEDs to a board can reduce the level of infighting and help to ensure that the talent/expertise being acquired stays in the transaction.

As we see the global economy slowly recovering, we can expect to see a strong increase in M&A activity as companies seek to assure their future positions while values are still relatively low. This is the time for boards of companies – large and small alike – to become more independent.

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Can Twitter Really Drive Investment Decisions?

Image representing Twitter as depicted in Crun...

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A group of hedge-fund managers are launching a multi-million dollar hedge fund next month, using Twitter as its market indicator to determine sentiment and to thereby make investment decisions.

This information came from a recent article on CNBC / Yahoo Finance which quoted Derwent Capital Markets – a London-based hedge fund – as saying it had successfully marketed the new venture, officially called the Derwent Absolute Return Fund, to high net-worth clients and had attracted over £25 million in investments.

The company is confident it can achieve returns of at least 15-20% per annum by analyzing information gathered from over 100 million tweets each day, which the firm brands as “The 4th Dimension.”

On the face of it, this may sound like a risky, or even crazy, venture – but is it?

Let’s face it, the concept of rational markets has been comprehensively debunked during the last few years of economic crisis, and the global growth in wealth came to a dramatic end largely through a change in general sentiment. We’ve also seen plenty of allegations – many apparently backed by evidence – of collusion between those in research and those in investment banking to pump stock prices of certain companies at various times. In fact, based on this and my own experience, it seems that relying on the “experts” to manage your investments is no greater guarantee of success than simply using a general market-tracking fund – and often provides worse returns.

Furthermore, most people agree that we won’t see real growth return this cycle until consumer confidence picks up. Isn’t that really just about general market sentiment?

So contrary to some of the views on this fund, I would argue that this is a smart bunch of people – what they’re doing is using current technology to gauge market sentiment and make investment decisions from there.  Instead of listening to a small group of people to try to understand what “the man in the street” is saying, they’re tapping into the collective feelings of millions.

I see this as the start of a whole new way of tapping into societal collective wisdom and sentiment. What do you think?

October 2010 – Another Black October?

a tale of two lottos
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There’s an interesting phenomenon surrounding October as regards the stock market – it’s probably the single most feared month of the year, with the three biggest crashes all occurring (or starting) in October. Will October 2010 be another bad month?

The Great Depression was triggered by the sharp slides which happened in October 1929 (and kept going), although the biggest one day drop was that of 19th October, 1987, when the Dow lost nearly 23% in one day, and then kept dropping for some weeks until finding a new bottom, with losses of somewhere around $1 trillion. Most recently, October 2010 was seen as the worst month for the stock markets after the banking crisis came to light – and the economic repercussions are still being felt strongly in most parts of the world.

Although there was hope that economic recovery would continue throughout this year, there are growing concerns about whether this will happen, or if we will see a further drop – the infamous double-dip recession. Behind this are the questions of whether governments put too much money into trying to boost recovery too soon, or whether they haven’t put enough in for it to be effective; how and when countries are going to be able to afford to pay for the economic stimulation so far given, and how they can pay for any more if this is needed; and whether the idea of such government intervention has been effective at all, or whether the market needs to sort itself out.

I’m certainly not qualified to answer these questions. To be honest, I’m not sure that anyone really has the answers, especially given that we’ve seen fairly convincing proof that markets are far from rational as they had previously be held to be. Watching the daily rise and fall of the main indices like the Dow Jones it seems to me that the smallest piece of news is magnified in terms of its impact on the market overall, with billions of dollars being added to, or taken from, the value of companies on the strength of relatively insignificant items.

If this is the case and we go into the last quarter of the year without some strong positive news, will the markets over-react once more and lead us back into a “Black October.”  What do you think?

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Whither the Welfare State?

Sea wall and railway
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Or should that be “wither” as it’s clearly time to change the model dramatically – a model which was developed after the last war, in a very different world?

As Dr Adrian Rogers quite famously put it, “You cannot legislate the poor into freedom by legislating the industrious out of it. You don’t multiply wealth by dividing it. Government cannot give anything to anybody that it doesn’t first take from somebody else. Whenever somebody receives something without working for it, somebody else has to work for it without receiving. The worst thing that can happen to a nation is for half of the people to get the idea they don’t have to work because somebody else will work for them, and the other half to get the idea that it does no good to work because they don’t get to enjoy the fruits of their labour.”

Having only moved to England a few weeks ago, I find it’s interesting to listen to what people here are saying about the “welfare state” issues, particularly at the moment when it’s clear that the new government has no chance but to make some dramatic changes to the way things have been done in the past 13 years of Labour Party rule.

But it seems that it’s not just the country that Labour has brought to the edge of bankruptcy: former Deputy Prime Minister under Tony Blair, John Prescott, has told us that the Labour Party itself is in danger of bankruptcy, with debts of some £20M ($30M) through a combination of over-spending and poor accounting: ironically making the announcement on the day that Tony Blair’s new investment bank was being registered… At least the party was consistent with its approach to finance, even if the former Prime Minister seems to have profited most handsomely from his time in office.

However, I digress. The basic issue, as Dr Rogers so succinctly put it, is that Governments can’t just create money magically, but can only redistribute money from one part of society to another, and the more that people want to take, the more that others are forced to give.

Few people doubt that societies should help those within them that are unable to fend for themselves – this compassion, after all, is what is supposed to make us human – but the question today is how much help should be given and to whom. I find it astonishing, for example, that there are families in England who have not worked at all for three generations, and simply live off benefits. Others, who receive free housing, believe it should be their right to pass these houses onto other family members. Girls find that being a single parent is a profitable enterprise, and start to have babies at a very young age, then turn to the state for housing and benefits, and are able to live comfortably without working. The list of abuses to the system is endless…

Clearly this is wrong. We should protect those unable to work for reasons of frailty, but those who are healthy should have a defined maximum period – say 6 months – on “free” benefits and then should start “earning their keep.” If they can’t find a paying job within that period, the welfare authorities should have them working for the society that is housing and feeding them – there is so much that needs to be done, from infrastructure development and maintenance to helping the elderly and the sick (hospital porters, for example), and would provide benefits in return for such work. This would not only help motivate them to find more steady (and, perhaps, comfortable) work, but reduce the costs of running local authorities as much of the work could be done by those on benefits.

What do you think – should benefits be given without restriction, or should recipients who are able to do so be obliged to “earn” their benefits, and help the society that is providing them in return?

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