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OPPORTUNITY (ALMOST) LOST

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OPPORTUNITY LOST

The shale revolution has created huge investment opportunities in the US, driven down energy bills and made North American businesses more competitive. Has dithering Europe already missed the boat?

By Steven Ferrigno

OPPORTUNITY LOST

OPPORTUNITY LOST

You’d have to have been hiding in a cave with a candle not to have heard something about The Shale Revolution these past 12 months. One headline calls it the future of affordable energy. Another says fracking is the embodiment of environmental evil. Battalions of activists, lobbyists and journalists have mobilised for and against.

That’s because shale gas is turning out be as disruptive as the internet, but with potentially game-changing benefits for European energy investors, businesses, or for that matter anyone with a household utility bill to pay. Look at what’s happened in North America in just three short years: natural gas prices have plummeted, coal has been pushed aside as an electricity source, a rejuvenated manufacturing sector is humming along on the back of low energy costs, and now abundant natural gas looks to make the continent a net exporter of fuel in the next 5-6 years.

If that happens, Europe could find itself awash in cheap LNG imports – dampening enthusiasm for investments in any homegrown shale production industry. But we won’t have to wait that long to see the risks in letting America extend its lead. With so much gas available, coal has been discarded for power generation andEuropean utility companies have been eagerly buying it up – even building new coal plants to take advantage of the low price. Perversely given the EU’s environmental commitments, there has even been an uptick in our carbon emissionswhilst US emissions have gone down.

On almost every level Europe is missing the boat on shale. The question is, can we ever catch up?

Steven Ferrigno Allegro

Steven Ferrigno Allegro

What we’re missing

With the invention of reliable hydraulic fracturing technologies in the 1990s, unconventional gas and light, tight oilhasutterly transformedAmerica’s energy outlook. By 2010, shale production in the US had soared to ten billion cubic feet per daywith the potential to quadruple by 2040. Gas prices have dropped dramatically whilst billions have been created in new investment and job growth.

Low estimates of the amount of shale gas technically recoverable in Europe suggest at least2.3 trillion cubic metres (tcm) compared with 13 tcm in the US. A smaller opportunity, but the potential impact on European economiesis more than tantalising:

  • Estimates from the International Association of Oil & Gas Producers suggest a domestic shale production industry could generate upwards of one million jobs in Europe, many of them in areas hard hit by the recession and Eurozone woes
  • With our current reliance on Russian gas, Europeans will also take note of shale’s geopolitical dimension. The US is reducing its imports of Middle East oil, making political relationships there less driven by energy dependency

The environmental arguments in favour of shale are actually more compelling and measurable than those against. Shifting to a higher proportion of gas use in energy production will help curb our carbon dioxide emissions. Limiting gas production or consumption, on the other hand, pushes us inevitably back to coal.

With the amount of coal-generated electricity rising in some European countries at an annualised rate of 50 percent, we are already seeing a ‘new golden age of coal’. The result? Despite decades of political and industrial effort to move the renewables agenda forward, the International Energy Agency (IEA) reckons coal will account for 25-30 percent of the global energy mix in 25 years’ time – exactly what it was 25 years ago.

Which is not to say that a European shale boom is a dead cert. Typically, shale gas and oil resources in Europe are trapped in rock layers much deeper in the ground, substantially raising the difficulties of exploration and the costs of extracting viable shale deposits when they are found. The operational reality and structure of fossil fuel production in Europe is also very different from North America’s.  Oil extraction here happens mainly offshore. Population density and differing rules about mineral rights mean that there has never been a ‘wildcatting’ exploration culture. The result is that the USA has roughly 2,000 oil rigs, compared to 72 across the whole of Europe.

Population density also means that we don’t have the wide open expanses that you find in Alberta or Texas.  By way of comparison, the Marcellus Play in the US encompasses roughly 95,000 square miles—equivalent to the size of the whole United Kingdom. Our own Bowland Shale (the largest in the UK) is 500 square miles.

Ultimately, we need to start drilling drill if we’re going to know for sure how big the opportunity is for industry, investors and society at large.

What’s holding us back

Despite recent positive signs in the UK, politics and green activism —particularly in Western Europe – may be the biggest hurdles to overcome if any of shale’s North American benefits are going to be replicated here.

Environmental worries around fracking have so dominated European debate that very little discussion about economic prospects has been able to surface. Public outcry in the Netherlands and Germany has made those governments hesitant to exploit their potential reserves, andFrance has banned fracking altogether. The overall response to shale from European industry, meanwhile, has been muted or at best ambiguous. We are only now seeing signs that it is waking up.

Has the penny finally dropped?

The UK government has just, belatedly, launched a licensing regime for shale exploration alongside tax incentives for local councils to speed up approvals. Total is the first major to jump behind that opportunity and there have been other positive signs, notably Chevron’s deal with Ukraine in November. A good start –but more needs to be done.

Shale gas has the potential to reduce European energy prices, boost employment, create investment opportunities and move us off the current path to more and more coal consumption. If we don’t act quickly, arguably with the EU in the lead, the prospect of cheap US fuel exports threatens to smother the development of any nascent European shale industry.

As an energy sector stakeholder I have a four-point proposal

  1. Prepare to manage risks in a chaotic environment. Derivatives traders, energy companies, utility companies, and energy-intensive businesses of all kinds need to treat the next 5 years as an extremely unsettled time in the market. Understanding and managing the risks of shale investments in your portfolios needs to be a top priority
  2. Unleash shale gas exploration – now. The rest of Western Europe needs to follow the UK’s lead in directly supporting shale exploration to quantify the scale of opportunity in each country
  3. Reassure European voters that shale gas points us in a greener direction, even if it isn’t a perfect solution in and of itself. An industry consensus on codes of conduct for exploration such as those outlined in the IEA’s ‘Golden Rules for a Golden Age of Gas’ would go a long way to seeding public confidence
  4. Counter junk science. The environmental concerns about fracking have been overblown and the industry must make a concerted communications effort to debunk myths where they occur with hard facts and evidence

Whether or not European shale gas production could ever replicate what’s happened in North America is simply unknown. Exploration needs to happen now if we’re going to find out.

Steven Ferrigno is Managing Director, EMEA for Allegro Development Corporation, www.allegrodev.com. He is based in London.

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

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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?

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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

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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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