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SUB-SAHARAN AFRICA RISING: CAPTURING THE OPPORTUNITIES

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Florian Witt

An increasing number of investment and trade opportunities are presenting themselves for foreign corporates in sub-Saharan Africa. And while there are risks associated with investing and operating in Africa that cannot be ignored – as is true of any emerging market – it should not mean that the opportunities in the region are overlooked. Florian Witt, Head of Africa at Commerzbank, looks at Africa’s growth and what it means for those looking to do business in the region

Sub-Saharan Africa has shown itself to be remarkably resilient in the face of the global economic crisis. In fact, the region has been growing sustainably for the past decade and is expected to see economic growth of 6 percent this year1. According to the African Development Bank (AfDB), Africa’s economy is growing faster than any other continent in the world.

Florian Witt

Florian Witt

Behind this positive economic growth lies improved political and economic stability in sub-Saharan Africa as a whole, which has helped the region rise up and become more resilient to external shocks, such as import and export price volatilities. Other factors helping to kick start the African economy are the recent commodities boom and the burgeoning African middle class, which is generating demand for consumer goods and services, many of which are imported.

And this increased demand for consumer goods imports brings a host of business opportunities for foreign exporters. Indeed, many have already recognised the region’s potential and have established a presence on the continent.

However, not only is there enormous trading potential, there are also opportunities for investment in productivity and manufacturing that could transform the composition of a number of African economies. Indeed, Africa is now beginning to move up the production value chain (evolving from being an extractor of raw materials to a producer of finished products) thanks in part to foreign direct investment and international trade, which is improving resource-processing and manufacturing capabilities. But in order for Africa to keep moving up the value chain, continued investment and imports of specialist equipment and machinery will be needed to develop the continent’s value-added industries.

While the opportunities for doing business in Africa are therefore clear, it is also important that companies understand the risks involved in trading with the heterogeneous region. In this respect, having a global banking partner on side that has strong relationships with the local banks and expert “on-the-ground” knowledge is essential for mitigating these risks.

Seizing the opportunities

Of course, some sub-Saharan African countries have already begun their transition from raw material exporters to producers of value-added products and this process is providing vast opportunities for foreign corporates.

In this respect, Nigeria is an interesting example. For example, the agriculture sector now accounts for around a quarter of Nigeria’s GDP following the recent rebasing of the economy. And the country has wide expanses of arable land that are rich in hydrocarbon, but in order to be able to produce food locally, value-added chains in the form of harvest, storage and transport are required.

The good news is that moves towards building these value-added chains are already underway. For example, construction of the world’s largest fertilizer plant in Nigeria is due to be completed in 2015. The planned gas-to-urea fertilizer plant will cost approximately US$1.2 billion and will be privately financed with foreign companies bidding for the contract. The plant is aimed at transforming Nigeria from a major importer to a key exporter of fertilizer, and is expected to significantly boost agricultural production in the country.

There are also emerging opportunities in Nigeria’s most lucrative sector: oil. This commodity is the driving factor in Nigeria’s economy – accounting for 96 percent of exports and 75 percent of government revenues2 – making it one of the most oil-dependent economies in Africa. However, Nigeria has very few oil refineries, meaning the country is reliant on imports of the by-products of crude oil. Therefore, in order to reduce the country’s exposure to the fluctuations in oil prices, huge investment is needed to boost the country’s refinery output, as well as for oil exploration and development projects.

There’s no doubt that sub-Saharan Africa’s potential is attracting investors who have recognised the strong and sustained economic growth displayed by the continent in recent years – particularly in the fastest-growing African countries such as Nigeria. And it is expected that further foreign direct investment in these countries will help to kick off a higher growth phase.

Understanding the risks

Of course, in sub-Saharan Africa – as with any emerging market – there are risks that go hand in hand with the opportunities. However, the key to reducing exposure to these risks is acknowledging them and taking the right approach to doing business in the country.

For example, corruption remains a large risk factor in sub-Saharan Africa. In this respect, Commerzbank has 60 years’ experience in Africa and has learnt that time can play an essential role in mitigating this risk. While investment in marketing, for example, is required to break into a mature market, such as Germany, in Africa what corporates need to invest is time in order to avoid unethical business practices.

Credit and counterparty risk is also a factor to address. Given the levels of political risk associated with many of Africa’s developing markets and the ‘unknown’ factor when it comes toforeign trade counterparties, letters of credit are still one of the safest ways to mitigate this risk. This trade finance instrument is useful when exporters cannot easily obtain reliable credit information about a foreign buyer – instead passing the risk on to their own advising or confirming bank. This bank can then leverage its local expertise based on its correspondent banking relationships.

In this respect, long-standing relationships with local African banks are important. Commerzbank, for example, works together with approximately 350 sub-Saharan African banks meaning that it has a unique risk appetite for confirming letters of credit issued in the region where other banks may have chosen to withdraw their commitments and are scaling back their correspondent-banking networks to reduce risk.

While the risks of doing business on the continent sometimes seem to be at the forefront of many corporates’ minds, simply ignoring the potential for growth is not advisable. Indeed, with the help of the right local banking partner to navigate the risks, the opportunities for foreign corporates are limitless.

1 Please see Page 3 of Commerzbank’s “Renaissance in Sub-Saharan Africa” study, published in January 2014

2 Please see Page 18 of Commerzbank’s “Renaissance in Sub-Saharan Africa” study, published in January 2014

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Stocks edge down as investors hit pause, watch bond yields

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Stocks edge down as investors hit pause, watch bond yields 1

By Suzanne Barlyn

NEW YORK (Reuters) – Global equity markets were little changed on Tuesday as Wall Street retreated and investors paused to gauge whether a bond yield jump had run its course, taking stock of gains from Monday’s surge.

The subdued performance of the three major Wall Street indices followed a flat close in Europe and slipping shares in Asia.

“It was such a strong opening to the month yesterday that investors could be short-term focused and saying, ‘Let’s take some of the profits that we saw yesterday,'” said Sam Stovall, chief investment strategist at CFRA Research in New York.

March began with a bang on Monday as global equities markets rose, the S&P 500 had its best day since June 5 and bond markets calmed after a month-long selloff.

In Tuesday late-afternoon trading, the Dow Jones Industrial Average rose 45.37 points, or 0.14%, to 31,580.88, the S&P 500 lost 3.1 points, or 0.08%, to 3,898.72 and the Nasdaq Composite dropped 106.23 points, or 0.78%, to 13,482.60.

The pan-European STOXX 600 index rose 0.19% while MSCI’s gauge of stocks across the globe %.

Emerging market stocks rose 0.05%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.16% lower, while Japan’s Nikkei lost 0.86%.

The European Central Bank should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down, ECB board member Fabio Panetta said on Tuesday, after weeks of steady increases in borrowing costs.

Australia’s central bank on Tuesday affirmed its pledge to keep interest rates at historic lows as policymakers battle to stop surging bond yields from disrupting the country’s surprisingly strong economic recovery.

After a sharp selloff last week, U.S. Treasuries have stabilized with bond market indicators and derivatives positioning pointing to near-term calm. But an improving economy could trigger another slide in their prices.

U.S. Federal Reserve Governor Lael Brainard said she was closely watching bond markets and would be concerned if a recent rise in yields continued and began to constrain economic activity.

“Some of those moves last week and the speed of the moves caught my eye,” Brainard said on Tuesday.

A Treasuries selloff last week pushed the 10-year yield to a one-year high of 1.614%. Benchmark 10-year notes last rose 11/32 in price to yield 1.4102%, from 1.446% late on Monday.

Gold prices rose, inching up from a more than eight-month low, as a retreat in the dollar and U.S. Treasury yields lifted demand for the safe-haven metal.

Spot gold added 0.8% to $1,736.02 an ounce. U.S. gold futures settled up 0.6% at $1,733.60.

The dollar index fell 0.318%, with the euro up 0.37% to $1.2092.

Earlier, the dollar was up for a fourth consecutive day after the spike in bond yields challenged the market consensus for dollar weakness in 2021. But riskier currencies rose as bond markets calmed and stocks recovered.

Bitcoin fell 2.19% to $47,808.00 after rising nearly 7% on Monday.

Shares in mainland China and Hong Kong fell overnight after a top regulatory official expressed concerns about the risk of bubbles bursting in foreign markets.

Oil prices largely shrugged off expectations that OPEC would agree to raise oil supplies at a meeting this week.

The global oil market is rebalancing after damage to demand wrought by the COVID-19 pandemic was met with curbs on output by OPEC producers, the group’s president said.

The industry is recovering from a collapse in demand triggered by the pandemic, but U.S. shale production will not recover to pre-pandemic levels, Occidental Petroleum Chief Executive Vicki Hollub said on Tuesday.

“The recovery is looking really good to us. If you look at what’s happening in India as well as the U.S., I think the oil industry is looking like things will be pretty good for us over next couple of years,” Hollub said.

U.S. crude futures settled down 89 cents at $59.75 a barrel, while Brent futures fell 99 cents to settle at $62.70 a barrel.

(Reporting by Suzanne Barlyn; Editing by Dan Grebler)

 

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Robinhood now a go-to for young investors and short sellers

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Robinhood now a go-to for young investors and short sellers 2

By John McCrank

NEW YORK (Reuters) – Robinhood, the online brokerage used by many retail traders to pile in to heavily shorted stocks like GameStop Corp, has made an ambitious push into loaning out its clients’ shares to short sellers as it expands its business.

The broker had $1.9 billion in shares loaned out as of Dec. 31, nearly three times the $674 million a year earlier, and it was permitted to lend out $4.6 billion worth of securities under margin agreements, around five times bigger than the prior year, according to an annual regulatory filing late on Monday.

The size of the jump highlights Robinhood’s rapid growth over the past year as the number of retail investors has soared in the work-from-home environment during the pandemic and as retail brokers have largely eliminated trading fees, a model Robinhood helped pioneer.

Menlo Park, California-based Robinhood is expected to go public this year with a valuation of more than $20 billion.

Securities lending is common among brokerages, which can earn income by lending shares to hedge funds and others, who then sell the shares back into the market, betting the share prices will drop so they can buy them back at a lower price when it is time to return them, pocketing the difference.

Shares that are in heavy demand from short sellers, like GameStop, which had 140% short interest in January https://www.reuters.com/article/us-retail-trading-shortselling-explainer/explainer-how-were-more-than-100-of-gamestops-shares-shorted-idUSKBN2AI2DD, command the biggest premium from the lender.

What makes Robinhood notable is that many of the stocks its users invest in are among the most sought-after by people who want to bet against them, said one senior financial executive involved with hedge funds.

It was unclear how great a benefit the securities lending was to Robinhood’s revenue and income, which it does not disclose.

Robinhood declined comment on the filing and did not immediately respond to a request for comment on the details of which stocks it loans out.

In January, retail investors coordinated through trading forums on social media in an attempt to punish hedge funds by buying up shares of GameStop and other heavily shorted names, like AMC Entertainment, driving up their prices and forcing short sellers to close out positions at big losses.

On Jan. 28, at the height of the retail trading mania, Robinhood, along with several other brokers, restricted the buying of GameStop and other so-called meme stocks due to a massive spike in collateral requirements needed to clear the trades, angering many of its customers.

The trading restrictions sparked congressional hearings, regulatory probes and have placed greater scrutiny on short selling.

In response, Vlad Tenev, Robinhood’s chief executive officer, called for shorter stock settlement times, which would reduce clearing collateral requirements.

He also said the idea that more shares of a stock can be shorted than there are available to trade, as was the case with GameStop, is a “pathology” that could destabilize the financial markets.

Robinhood positioned itself for growth in securities lending in October 2018 by launching its own clearing broker, which acts as a go-between with the clearinghouse that settles its trades, and allows it to hold its customers’ assets. The broker can then lend out securities its customers buy on margin.

At present, less than 3% of Robinhood’s funded accounts are margin-enabled, Tenev recently told Congress.

(Reporting by John McCrank in New York; Editing by Megan Davies and Matthew Lewis)

 

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Resurgent stock market evokes memories of long-gone bubble on Tokyo’s ‘Wall Street’

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Resurgent stock market evokes memories of long-gone bubble on Tokyo's 'Wall Street' 3

By Junko Fujita

TOKYO (Reuters) – At the almost empty “Wall Street” bar and restaurant in Tokyo’s Kayabacho financial district, three groups of patrons dine quietly at tables separated by partitions.

The sedate scene is a far cry from the area’s heyday 30 years ago when traders flush from big wins on the nearby Tokyo Stock Exchange routinely crowded the restaurant’s bar, downing glasses of premium whiskey.

Even though Japanese stocks are scaling giddy heights not seen since the asset inflation bubble of the late 1980s and early 1990s, bars and restaurants in the financial district aren’t along for the ride.

Kayabacho’s streets are instead eerily quiet.

“During the bubble era, people came here to drink a glass of Ballantine’s 30-year-old (whisky) for 5,500 yen ($52), even when there’s no seats available, just standing by the cash register,” “Wall Street” owner Kenichi Inoue, 62, told Reuters.

Inoue opened the European style bar and restaurant in 1989, the year the Nikkei index hit a record peak, aiming to serve drinks and food at the affordable price of around $30 per person.

Brokers and traders packed into the bar almost every evening, with tables at the back usually filled by workers from Yamaichi Securities, then the country’s fourth largest brokerage.

“It was easy to guess the size of the crowd for the evening,” said Inoue. “If the market was up, I knew it would be busy.”

Inoue’s restaurant wasn’t the only establishment to benefit during the boom. Coffee shops scattered throughout Kayabacho were filled with brokers exchanging information on the market.

The ‘Tatsumi’ restaurant was popular with superstitious traders because it served tempura, or deep fried vegetables and fish. The Japanese word for “deep-fry”, ageru, has the same sound as the word “boost”.

“Back then brokers used to come here in a group. They gave us 100,000 yen in cash in an advance,” said 62-year-old owner, Masahiko Tsuda, citing a figure equivalent to around $800 at the time. “If that was not enough, they paid the difference at the end of the week.”

The party came to an end when the stocks bubble burst in the early 1990s. Yamaichi was one of four major banks and brokerages that collapsed in 1997.

Compounding the market slide, the Tokyo Stock Exchange in 1999 completed a decade-long switch to electronic trading, closing the formerly bustling trading floor.

The number of brokerage employees almost halved from a peak of 170,000 nationwide in 1991 to 91,000 last year, according to the Japan Securities Dealers Association.

With them went much of the vibrancy of Kayabacho, a downturn that has been exacerbated by the coronavirus pandemic, which has led to trading restrictions on bars and restaurants across Tokyo.

REDEVELOPMENT PLANS

Redevelopment plans for Kayabacho, which houses many small and old buildings, have been in train for several years, with attempts to rebrand the area as a fintech hub. Heiwa Real Estate, the owner of the stock exchange building, plans to open a 15-storey office tower in the area later this year.

But the revamp lags the refurbishment of neighbouring districts like Marunouchi and Nihonbashi, where major property developers Mitsubishi Estate and Mitsui Fudosan have created hubs for global firms.

Adding to Kayabacho’s woes, the coronavirus pandemic has dealt a blow to the real estate market across Tokyo, as more people work from home and domestic economic growth slows.

“Kayabacho’s atmosphere is dark and gloomy,” said Yoko Hattori, 52, the owner of a standing bar, New Kayaba. “The economy is bad. Many buildings here are old but renovation is not easy because it costs money.”

Tsuda said he no longer sees people flashing lots of cash at his restaurant, while Inoue said “Wall Street” was facing the most critical time of its history.

Inoue has attempted to diversify his menu from the pasta, pizza and grilled meats that catered to mostly male stockbrokers, adding organic food and cold press juice for more health-conscious customers.

He is grateful that his own business never relied too heavily on the excesses of the bubble era: “If this had been an high-end restaurant, it would have been closed a long time ago.”

(Additional reporting by Mayu Sakoda and Hiroko Hamada; editing by Jane Wardell)

 

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