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Isabelle Chaboud, Professor in Finance, Accounting and Law at Grenoble Ecole de Management.

On January 18th, 2016, the price of a barrel of crude oil dropped under $29 before coming back up to hover around $30. What factors suggest the price of oil will continue to drop? What geopolitical and economic stakes will be impacted by this drop?

A surplus in the supply of crude oil

Oil production in the USA has increased by 17,000 barrels per day. In many countries, stocks for crude oil distillates have never been higher. The OPEC (Organization of Petroleum Exporting Countries) refuses to reduce its production quota of 30 million barrels per day. For many, this decision is largely due to Saudi Arabia, which wishes to protect its market share and limit the development of shale gas in the USA. In addition, the breaking off of diplomatic relations with Iran has made it impossible to reach a short term agreement to reduce production quantities. Finally, cutting-edge technology has made it possible to extract more oil at a faster pace and deeper than was ever possible even a few years ago.

Chinese demand drops drastically

Demand, on the other hand, has not increased as quickly as hoped. This is in part due to the slow-down of Chinese economic growth. Most indicators concerning the country are still rather worrisome. According to Reuters: “Chinese manufacturing activities have continued to diminish in November and are now at a three year low.” In December, the country’s manufacturing sector was squeezed again for the tenth month in a row. In addition, the devaluation of the yen on January 7th has made oil all the more expensive and therefore limited demand.Fears remain about a possible Chinese stock market crash. On January 11th, the Shanghai Composite index dropped 5% to reach a 20% drop over the last two weeks and a 40% drop since June 2015.

crude oil graph

crude oil graph

Oil price chart, Jan 19 2016.

A drop in oil prices would completely modify the global economy. Due to mild winter weather in most European countries, Russia (where the temperature in Moscow was 10 °C on December 22nd) and the USA (where it was 22 °C in New York just before Christmas), oil consumption for heating has also been slow.

New geopolitical stakes

We will focus on the key example of Iran. Oil prices will probably also be forced downwards because of Iran’s return to the international oil market following the nuclear agreement signed in July of 2015. According to a report by the World Bank, the surplus of oil caused by Iranian oil could lead to a drop in the price of crude oil by $10 dollars per barrel. On January 16th, sanctions against Iran were lifted and the country was able to engage in economic exchanges with other countries. Iran confirmed on January 18th that the country’s daily oil production of 2.8 million barrels would be immediately increased by half a million and another million in March of 2016.

According to the website Les clés du Moyen-Orient: “Iran ranks second among OPEC countries, behind Saudi Arabia. The country’s crude oil reserves are estimated to be 132 billion barrels, which also puts the country in second place among OPEC countries.” In other words, Iran’s return will change the current layout. In addition, the end of diplomatic relations between Saudi Arabia and Iran following Saudi Arabia’s execution of 47 prisoners (including Nimr al-Nimr, an enemy of the Sunny state who was closely followed by the Iranians) would appear to suggest that neither country will be willing to reduce its production and might even do everything in its power to increase its market share.

A major economic impact

Oil producing and exporting countries have been hit hard by the 60% drop in oil prices since 2014. Venezuela is on the verge of bankruptcy. Russia has been greatly impacted as oil represents half of its budget and 40% of its exports. According to Reuters: “If a barrel of oil continues to sell for around $30, Russia’s cash reserves will run out within a year.”Kazakhstan, Central Asia’s largest economy, is having to deal with the fact its currency, the Kazakhstani Tenge, lost a quarter of its value in August of 2015. The Kazakhstan National Fund, which is funded by the country’s oil industry, is in charge of developing the country’s infrastructure and industrial investments. The fund’s reserves were estimated at $77 billion in August of 2014, but they are dropping rapidly. According to the Wall Street Journal, the fund only has $64 billion left as of January 2016 and could be completely depleted within six or seven years due to important cash withdrawals from the government.

Norway is also suffering from the decrease in oil prices and its real estate prices continue to drop. Statoil, a Norwegian oil and gas company, has already let go of 20,000 employees. Given that Norway’s oil industry employs one out of nine Norwegians, the country could soon see an increase in its unemployment rate. Norway is on the cutting-edge of technology, a fact the country has to capitalize on by transferring its technology to other industries or exporting it to foreign countries.

Major reforms required

Many countries are affected by the drop in oil prices and all of them should take quick action if they do not wish to face a liquidity crisis or even bankruptcy.Saudi Arabia, whose exports equal 90% of the kingdom’s income, has launched wide-scale reforms. With a deficit of $89.2 billion in 2015, the country was forced to announce a plan for austerity. The government, which greatly subsidizes its water and electricity, has already increased the price of gas by 50% (its gas prices were one of the world’s lowest at around 20 euro cents per liter) and stated that it will reduce subsidies. A VAT of 5% was implemented for non-essential goods. The finance minister is also studying a possible privatization of various companies, in particular the country’s nationalized airways and telecommunications companies.

A long term drop in oil prices completely modifies the Saudi Arabian economy. The kingdom will have to reduce the importance of its public sector while developing its private sector. Even more noteworthy, Muhammad bin Salman, a son of King Salman, mentioned in an interview with The Economist on January 7th, 2016, that Aramco (Arabian American Oil Company) might join the stock exchange. It is not yet clear whether the nationalized company would sell part of its capital or if its subsidiaries would be listed on the stock exchange. But the prince declared that a decision would be made in the following months and he was “personally enthusiastic about this step” which he believed to be in the interest of both the Saudi Arabian market and Aramco.

An Aramco public offering?

The company is considered to be the world’s leading oil and gas company even though the company does not publish its accounts. As a result, it is impossible to have access to its total revenues and reserves. For the moment, there is still a lot of speculation with astronomical value estimations. La Tribune asked for example on January 8th, 2016: “Is Saudi Aramco valued to be worth more than $3,000 billion on the stock market?” In any case, this would create an economic revolution among the super majors (Royal Dutch Shell, Exxon Mobil, BP, Chevron and Total). If an IPO were to take place, it would also inject new money into Saudi Arabia’s public finances and confirm the country’s desire for radical reform. The UAE, Kuwait and Bahrain have also reduced their gas subsidies.

The prolonged drop in oil prices is creating a profound impact with economic reforms. Yet these reforms are still primarily guided by geopolitical or even purely political motivations. Numerous experts were recently still predicting that oil reserves would run out and prices would hover around $100 a barrel. The Chinese economic slow-down, the arrival of Iran and the world’s elevated oil reserves suggest that oil reserves will remain high and oil prices will continue to hover around $30 dollars a barrel, or even drop to $20 a barrel. The result will be a reorganization of political powers.


Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations



Northern Trust: Outsourcing Accelerates Through Pandemic as Investment Managers Seek to Improve Margins, Enhance Business Resilience, and Future-Proof Operations 1

White Paper Sees Increase in Managers Outsourcing Middle and Front Office Functions to Achieve Optimal Business Structures

According to a white paper published today by Northern Trust (Nasdaq: NTRS), investment managers of all sizes and strategies have been prompted to undertake a comprehensive review of their operating models as a result of the Covid-19 pandemic which has accelerated existing trends that are compounding cost pressures. This has led increasing numbers of managers to outsource in-house dealing and other functions, such as foreign exchange and transition management, hitherto seen as core.

While cost savings remain a core driver, and indeed are one outcome of outsourcing, costs are no longer the only focus. Far from being solely a defensive reaction to increased pressure on margins, the white paper (‘From Niche to Norm’) describes outsourcing as part of the target operating model, or moving toward the ‘Optimal State’ for many investment managers, and  explains how the focus “has expanded to the variety of other potential benefits offered – enhanced capabilities, improved governance and operational resilience.”

Gary Paulin, global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “The pandemic has challenged a range of operational assumptions. Working from home has, for example, questioned the need for a portfolio manager to be in close proximity with the dealing desk. Previously considered essential, the pandemic has effectively forced firms to ‘outsource‘ their trading desks to remote working setups and the effectiveness of this process has disproved the requirement for proximity, in turn, easing the path to third-party outsourcing. Many investment managers are actively considering outsourcing to a hyper-scale, expert provider as a potential, cost efficient solution – one that maintains service quality and, hopefully, improves it whilst adding resiliency.”

Northern Trust’s white paper compares outsourced trading to software-as-a-service stating: “instead of carrying the cost and complexity of running an in-house solution, firms move to an outsourced one, free up capital to invest in strategic growth and move costs from a fixed to a variable basis in line with the direction of travel for revenues.” 

Guy Gibson, global head of Institutional Brokerage at Northern Trust Capital Markets said: “The opportunity to deploy capital to build new fund structures, develop new offerings, focus on distribution and enhance in-house research has been taken up by several of our clients to the benefit of their investment approach, and to the benefit of their investors.  Additionally, in the last two months alone, many firms have recognized that outsourcing to a well-capitalized, global platform has enabled them to take advantage of cost-contained growth opportunities in new markets.”

A further development, which has echoes of the journey the technology industry has already undertaken, is the move towards ‘whole office’ solutions, which represent the next potential wave in outsourcing.

According to Paulin; “recently we have observed a growing number of managers wanting to outsource to a single, hyper-scale professional service provider who can do everything, everywhere. This aligns with Northern Trust’s strategy to deliver platform solutions for the whole office, serving our clients’ needs across the entire investment lifecycle.”

The white paper can be downloaded here.

Integrated Trading Solutions is Northern Trust’s outsourced trading capability that combines worldwide locations and trading expertise in equities and fixed income and derivatives with access to global markets, high-quality liquidity and an integrated middle and back office service as well as other services, such as FX. It helps asset owners and asset managers to meaningfully lower costs, reduce risk, manage regulatory compliance and enhance transparency and operational efficiency.

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How are investors traversing the UK’s transition out of lockdown?



How are investors traversing the UK’s transition out of lockdown? 2

By Giles Coghlan, Chief Currency Analyst, HYCM

Just when we thought we had overcome the initial health challenges posed by COVID-19, the UK Government has once again introduced lockdown measures in certain regions to curb a rise in new cases. This is happening at a time when the government is trying to bring about the country’s post-pandemic recovery and prevent a prolonged economic downturn.

This is the reality of the “new normal” – a constant battle to both contain the spread of the virus but also avoid extended economic stagnation.

Of course, no matter how many policies are introduced to spur on investment, traders and investors are likely to act with caution for the foreseeable future. There are simply too many unknowns to content with at the moment.

To try and measure investor sentiment towards different asset classes at present, HYCM recently commissioned research to uncover which assets investors are planning to invest in over the coming 12 months. After surveying over 900 UK-based investors, our figures show just how COVID-19 has affected different investor portfolios. I have analysed the key findings below.

Cash retreat

At present, it seems that by far the most common asset class for investors is cash savings, with 78% of investors identifying as having some form of savings in a bank account. Other popular assets were stocks and shares (48%) and property (38%). While not surprising, when viewed in the context of investor’s future plans for investment, it becomes evident that security, above all else, is what investors are currently seeking.

A third of those surveyed (32%) said that they intended to put more of their wealth into their savings account, the most common strategy by far among those surveyed. This was followed by stocks and shares (21%), property (17%), and fixed interest securities (17%).

When asked about what impact COVID-19 has had on their portfolios throughout 2020, 43% stated that their portfolio had decreased in value as a consequence of the pandemic. This has evidently had an effect on investors’ mindsets, with 73% stating that they were not planning on making any major investment decisions for the rest of the year.

Looking at the road ahead

So, it seems that many investors are adopting a wait-and-see approach; hoping that the promise of a V-shaped recovery comes to fruition. The issue, however, is that this exact type of hesitancy when it comes to investing may well slow the pace of economic recovery. Financial markets need stimulus in order to help facilitate a post-pandemic economic resurgence, but if said financial stimulation only arrives once the recovery has already begun, the economy risks extended stagnation.

It seems, then, that there are two possible set outcomes on the path ahead. The first is a steady decline in COVID-19 cases, then an economic downturn as the markets correct themselves, followed by a return to relative economic stability. The second potential outcome is a second spike of COVID-19 cases which incurs a second nationwide lockdown – delaying an economic revival for the foreseeable future. At present, the former of these two scenarios is seemingly playing out with economic growth and GDP steadily increasing; but recent COVID-19 case upticks show that it’s still too soon to be certain of either scenario.

A cautious approach, therefore, will evidently remain the most common investment strategy looking ahead. But investors must remember that, even in the most uncertain times, there are always opportunities for returns on investment. Merely transforming a varied portfolio into cash savings risks a long-term decline in value.

High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. For more information please refer to HYCM’s Risk Disclosure.

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Hatton Gardens 5 top tips for investing in Diamonds



Hatton Gardens 5 top tips for investing in Diamonds 3

By Ben Stinson, Head of eCommerce at Diamonds Factory

Investing in diamonds can be extremely rewarding, but only if you know what to look for. For investors who lack experience, finding your diamond in the rough can be quite daunting.

For even the most beginner of diamond investors, the essentials are fairly obvious. For instance, you need to ask yourself will the diamond hold its value over time? What’s the overall condition of the stone and the jewellery? Is there history behind the item in question?

Although common sense plays a big part in investing, people often need insider tips and tricks to go from beginner to expert. Tony French, the in-house Diamond Consultant, at Diamonds Factory shares his professional knowledge on the 5 most important things to look for when investing in diamonds.

1: Using cut, weight and colour to determine value

Firstly, consider the shape, colour, and weight of your diamond, as this can play a pivotal role in guaranteeing growth in the value of your item. Granted, investing trends change with time, but a round cut of your diamond will almost always be the most sought after. The cut of your diamond is incredibly important, as it can influence the sparkle and therefore, the overall value. It’s a similar story for the intensity of some colours, such as Pink, Red, Blue, Green etc. Concerning weight, the heavier (bigger) stones will generally increase in value by a bigger percentage. Collectively these factors also contribute to the supply and demand aspect, which will determine their high price, and will ensure your item is re-sellable.

2: Provenance

Looking for significant value? Well, aim to own jewellery or diamonds that come from an important public figure. If you’re lucky enough to own a piece that has significant history, or was owned by a celebrity or person of interest, it’s an absolute must to have concrete evidence of this. Immediately, this proof will increase an item’s overall value, and there’s a good chance the stardom of your item might drum up interest amongst diehard fans, increasing the value even further…

Equally, it’s possible to proactively bring provenance to unique diamonds of yours. For instance, you can offer to loan bespoke, or unusual pieces for film, theatre, or TV performances – then it can be advertised as worn by xyz.

3: Find the source

Ben Stinson

Ben Stinson

Establishing your diamond’s source is one of the most important things you can do when investing in diamonds. If you’re starting out, try to purchase diamonds that have NOT been owned by too many people, as the overall value of the diamond will reflect multiple ownership. Alternatively, I’d always recommend buying from suppliers like ourselves or other suppliers and retailers, who buy directly from the people who have had them certified.

Primarily, this will allow you to have a greater degree of transparency, which is crucial when buying such a valuable item. Next, you should immediately see an increase in value of your diamonds, as identifying a source will allow traceability and therefore, market context.

4: Certification

Linked closely with my previous point, is the requirement to ensure that your diamonds are certified by a credible lab, and you have the evidence to prove so (a written document with specific grading details about your diamonds) – this will remove any doubts of impropriety.

It’s essential to remember that not all labs are the same, and many labs are better than others. Both the AGS (American Gem Society) and GIA (Gemological Institute of America) have great reputations and are world renowned. I’d recommend doing your own research into the labs, and when you’ve found the pieces that you’d like to invest in, then make an informed decision based upon your findings. Ultimately, proving certification will make your stones easier to insure, and deep down, you can have peace of mind knowing you have got what you have paid for.

Don’t forget to keep this paperwork in a safe location as well – you’d be surprised how many people we’ve met who have lost, or forget where they’ve placed it.

5:  Patience is a virtue…

If the market is strong, it might be tempting to look for an immediate sale once you’ve purchased a high value item. However, I suggest holding onto your diamonds for some time before even thinking about selling. More often than not, an item is more likely to increase in value over a few years than a few days – try and wait a little longer!

Equally, I would encourage having your diamonds, or jewellery professionally valued regularly. If you don’t have the knowledge to make a rough judgement on how much your pieces are worth, a consultant or expert can provide both a valuation, and contextualise that amount in the wider market. From there, you should be empowered with the knowledge to decide whether to keep or sell.

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