By Robert Marcus, CEO of QuantumWave Capital, an investment bank for technology start-ups
The global economy continues to stagnate, with all the major Western economies reporting tepid growth or recession. In the UK, 2012 growth figures provided by the Office of National Statistics (ONS) were recently revised up from no growth to a meager 0.2%. Things are no brighter across the rest of Europe, with recent business surveys confirming that France, Spain and Italy are dragging the Eurozone into a deeper downturn.
In such a difficult macro-economic climate, with policy maker inertia adding to the general malaise, investors could be forgiven their inaction. However, the surge in technology M&A activity and investment reveal one path out of the current slump.
It is easy to see why this is the case. The mobile internet—the fifth wave of computing—is a revolution. The convergence of mobile systems with the internet has created a near-universal market of 6 billion users generating $2.5 trillion in annual economic value. Activated by third-generation mobile communications (3G) and the smartphone, the market is expected to explode with the current global rollout of fourth-generation communications (4G/LTE). In the UK alone, one report puts the 4G/LTE GDP impact at £75 billion before 2020. This includes £5.5 billion of direct private investment into the economy by 2015, creating or safeguarding 125,000 jobs.
The mobile internet combines the massive economic and social power of networking with the force accelerator of more than 6 billion personal mobile devices. Not to mention an estimated 50 billion networked machines by 2015. Its size, commercial potential, and ease of developer access is fuelling a powerful new wave of global innovation, decentralising R&D into distributed hubs around the globe.
The Connected Generation, rejecting notions of the centralisation of power and closed systems and organizations that maintain it, is democratising innovation itself, and rising up to challenge the Silicon Valley monopoly. Disenfranchised from the corporate workforce by the economic crisis, inspired by the legend of Silicon Valley and its iconic leaders, a new generation of talented and resourceful entrepreneurs is emerging. From centres as far afield as New York, Toronto, London, Berlin, Santiago, Tel Aviv, and Beijing, these entrepreneurs are proving that they can innovate as aggressively, create as ingeniously, and work just as hard as their contemporaries in California.
The mobile internet is an innovator’s dream. No one can fully envision the future applications that will emerge atop new mobile platforms. The potential is so great that this worldwide flowering of technical talent could well offer one solution to the world’s current economic crisis. The struggling economies spending billions in infrastructure improvements or attempting to prop up old industries as a way of increasing employment, could spend a fraction of that amount to seed mobile internet start-ups. This would ignite a wave of innovation that can revamp economies and produce high-paying jobs and capital growth with a phenomenal return. The impact would be particularly great among young people, who as a group suffer the highest unemployment.
This assistance could come in the form of small investments, public/private partnerships, tax incentives, and grants. As we have seen from the UK Government’s recent focus on tech start-ups and entrepreneurship, the formula clearly works. This investment has produced the booming Silicon Roundabout, attracting hundreds of start-ups and multinationals such as Cisco, Facebook, Google and Intel, creating thousands of jobs as a result. New York has the fastest growing tech sector in the US. Berlin is teeming with innovation. Israel, which has also provided numerous innovation incentives, has more start-ups than any other country in the world except for the U.S.
The programs don’t just help nascent firms get off the ground. They help create a complete ecosystem of companies and individuals with the technical, business, and investment backgrounds and capital required to create the critical mass of support from which the industry can blossom. The original start up dream was to work like crazy, bring in angel investors and venture capitalists to productise the new technology and finance growth, before exiting a sizeable company via IPO or trade sale. This traditional cycle has failed over the last decade. VCs are moving to safer, later funding rounds. IPOs have plummeted. The vast majority of start-ups struggle to find any meaningful funding.
Meanwhile the rate and pace of innovation is accelerating. A few very bright people can develop something of great value in an incredibly short period of time, but they can become irrelevant just as fast. In parallel, the sector leaders with hundreds of billions of dollars of cash on their balance sheets are under pressure to reposition their technology assets to address the mobile internet. Facebook’s fifty per cent share price collapse and Google’s disappointing earnings originate in their failure to effectively pivot to mobile. Technology is needed to affect this change, and large organizations, unable to innovate fast enough, increasingly embrace M&A as a complement to in-house R&D. Google alone spent nearly $2 billion on 79 technology and talent acquisitions in 2011.
Silicon Valley is no longer a region. It is a platform and a state of mind. Decisive action by government, in the form of targeted and modest investments and tax incentives, can activate these new platforms worldwide and set in motion a virtuous circle of technology innovation, investment and return, and emerge as a key strategic driver for worldwide economic transformation and recovery.
Cannon Wealth Solutions Discusses The Need to Rebalance Portfolios and Monitor Risk
By Robert Cannon, the CEO of Cannon Wealth Solutions.
- The world in 2021 is significantly different after a year of pandemic-related changes in how people live, work, and consume. This has a profound effect on S&P 500 companies and the performance of various asset classes.
- When you do your annual portfolio checkup, you might find that you need to rebalance. Rebalancing your portfolio – buying or selling asset classes to reimpose your portfolio to your original target allocation – is a vital step in controlling and monitoring risk.
- Buying investments in the asset class which is currently out of favor will require you to sell investments from the asset class that is performing well, and will furthermore represent an increased percentage of your portfolio’s overall value.
Robert Cannon, from Cannon Wealth Solutions, will be discussing the need to rebalance portfolios and monitor risk; and although it may seem counterintuitive, you are in fact taking profits from winning asset classes that may have reached their peak and buying other asset classes that have performance potential – in effect, you’re selling high and buying low.
Rebalancing for the Future
Determining your rebalancing strategy will ultimately result in a more consistent level of portfolio risk by buying low and selling high. The purpose of this is to create sustainable long-term value and consistency will help with setting more effective risk and return expectations – a key to maintaining patience under challenging markets. Cannon states that “it is important to rebalance your portfolio because it is essential for matching your tolerance risk as well as your sector concentration which is a form of Credit Risk Concentration”. So, if you are wondering how often you should rebalance your portfolio in order to minimize your risk, then Cannons’ advice would be to do it when your asset class is over 5% or every six months which has also been confirmed by UBS who have also “recommended a fairly simple 5% deviation rule-of-thumb for rebalancing: If the stock/bond component of your portfolio has shifted more than 5% from your target, then rebalance”.
Here are some frequently asked questions about the rebalancing of portfolios, answered by Robert Cannon:
Does portfolio rebalancing actually improve returns?
The rebalancing of portfolios can lower risk and often lower returns.
Is auto rebalancing a good idea?
Yes, auto rebalancing can help reduce risk and can potentially also enhance your returns.
How do you manage rebalancing in a recession and when conducting your simulations, do you also test your model in extreme market conditions?
During a market sell-off, it is usually not a good idea. For example, during extreme market volatility, retirement accounts and taxable investments accounts can quickly drift from the original target allocation as the value of the holdings increases or decreases sharply relative to the rest of your account. Because of this we always test each model in every market condition.
Monitoring Risk for the Future
In order to understand how your investment has performed, you should compare its results to an appropriate benchmark. Cannon reiterates that portfolio risk is measured by checking for the stock standard deviation of the variance of actual returns of the portfolio over time and will then proceed to implement a tactical asset allocation, thus avoiding portfolio volatility. Credit Suisse has also said in conjunction with Robert’s claim that “if the portfolio risk exceeds the risk ability, it can have a far-reaching impact on the assets of those beneficiaries or insured.” The report continues, saying “with a stricter rebalancing approach, investors can better estimate in advance whether their investment strategy will also enable them to survive difficult crises”.
Here are some frequently asked questions about monitoring risk, answered by Robert Cannon:
If rebalancing happens on a regular basis, do you monitor the funds’ performance in between?
Yes, all the time. By practicing a strict approach, investors can better estimate in advance whether their investment strategy will survive tough economic times. With consistent monitoring of funds and a solid rebalancing strategy, it is easier to determine the right size of a reserve or buffer for such negative events than it is using a buy-and-hold strategy. This ultimately will reduce the risk of having to make adjustments in asset allocation in unfavorable markets.
The global pandemic of 2020 has caused investors to adhere and refocus their strategies by consistently their rebalancing portfolios, which have most likely paid off. The key to being successful is by planning for the future, regardless of the fluctuating economic market. Navigating the current investment climate can be very challenging, yet the process of rebalancing is a natural opportunity to switch up your asset allocation if you have not been confident in your original strategy and it is in the hands of your investors to think a few steps ahead to ensure proper action can be taken when current conditions change.
About the contributors:
By Robert Cannon is the CEO of Cannon Wealth Solutions. He has more than a decade of experience in wealth management.
Produced in Association with
France announces loan plan to spur post-COVID business investment
By Leigh Thomas
PARIS (Reuters) – The French government on Thursday launched a new programme to relieve small and mid-sized firms’ strained balance sheets with quasi-equity debt partially guaranteed by the state.
After months of tough negotiations between the finance ministry and EU state aid regulators, firms will be able to tap up to 20 billion euros ($24 billion) in loans and subordinate bonds from early next month, Finance Minister Bruno Le Maire said.
“This will be an unprecedented raising of capital for investment in Europe and it should be a model for other European countries,” he said during a presentation of the programme.
French firms went into the COVID-19 crisis last year already with a record level of debt, and they took out an additional 130 billion euros in state-guaranteed loans from their banks as cashflow collapsed during France’s worst post-war recession.
Under the new programme, the debt will be junior to all claims other than a firm’s equity, it will have a longer maturity of eight years and must be used specifically for investment rather than refinancing existing debt.
The new debt is also more flexible, with a four-year grace period on principal repayments, but will also carry higher interest rates of 4-5.5% to cover the greater risk.
The scheme is innovative as banks will extend the loans to firms and then sell them on to institutional investors such as insurers through private investment vehicles, whose potential losses will be covered up to 30% by the state.
HELPING SMALLER FIRMS
While bigger companies have long had access to the high-yield debt markets, smaller firms in Europe have until now had to rely on shorter-term financing largely from banks, unlike in the United States where more flexible options have long existed.
France has in the past struggled to get a market off the ground for small-firm financing and hopes are high that this time the state guarantee will give an extra boost.
European firms’ heavy debt burden has fuelled concerns among economists and policymakers that they will not have the financial strength to carry out the investments needed for a strong recovery from the coronavirus crisis.
EU competition enforcers cleared the scheme on Thursday after lengthy negotiations to get the right risk-reward balance while not giving French firms an unfair advantage over their European rivals.
The onus will fall on banks to ensure through their client relationships that the loans are extended to firms strong enough to make good use of the funds.
“By taking 10% of the loans on our balance sheets without a state guarantee, that implicates us in the quality of these instruments,” said Credit Agricole Chief Executive Philippe Brassac, who also heads the French banking federation.
The state had originally planned to offer a guarantee of only 20% but had to increase that to 30% to attract institutional investors into the new market.
($1 = 0.8294 euros)
(Reporting by Leigh Thomas; additional reporting by Foo Yun Chee in Brussels, Editing by Gareth Jones)
Bond scares linger, investors look to Powell
By Tom Arnold and Hideyuki Sano
LONDON (Reuters) – Worries about lofty U.S. bond yields hit global shares on Thursday as investors waited to see if Federal Reserve Chair Jerome Powell would address concerns about a rapid rise in long-term borrowing costs.
The spectre of higher U.S. bond yields also undermined low-yielding, safe-haven assets, such as the yen, the Swiss franc and gold.
Benchmark 10-year U.S. Treasuries slipped to 1.453%. They earlier touched their highest levels since a one-year high of 1.614% set last week on bets on a strong economic recovery aided by government stimulus and progress in vaccination programmes.
“Equities and yields continue to both drive and thwart one another,” said James Athey, investment director at Aberdeen Standard Investments.
“Fed speech continues to express very little concern and certainly is not suggestive of any imminent action to curb the rise in yields. The Powell speech today is hotly anticipated, but I fear more out of hope than rational expectation.”
The Euro STOXX 600 was down 0.5% and London’s FTSE 0.6% lower.
The MSCI world equity index, which tracks shares in 49 countries, lost 0.5%, its third day running of losses.
The MSCI’s ex-Japan Asian-Pacific shares lost 1.8%, while Japan’s Nikkei fell 2.1% to its lowest since Feb. 5.
E-mini S&P futures slipped 0.2%. Futures for the Nasdaq, the leader of the post-pandemic rally, fell 0.1%, earlier hitting a two-month low.
Tech shares are vulnerable because their lofty valuation has been supported by expectations of a prolonged period of low interest rates.
But the market is focused on Powell, who is due to speak at a Wall Street Journal conference at 12:05 p.m. EST (1705 GMT), in what will be his last outing before the Fed’s policy-making committee convenes March 16-17.
Many Fed officials have downplayed the rise in Treasury yields in recent days, although Fed Governor Lael Brainard on Tuesday acknowledged that concerns over the possibility a rapid rise in yields could dampen economic activity.
In addition, anxiety is building over a pending regulatory change in a rule called the supplementary leverage ratio, or SLR, which could make it more costly for banks to hold bonds.
“The market is likely to be unstable until this regulation issue will be sorted out,” said Masahiko Loo, portfolio manager at AllianceBernstein. “There aren’t people who want to catch a falling knife when market volatility is so high.”
The market will also have to grapple with a huge increase in debt sales after rounds of stimulus to deal with a recession triggered by the pandemic.
The issue is not limited to the United States, with the 10-year UK Gilts yield on Wednesday touching 0.796%, near last week’s 11-month high of 0.836%, after the government unveiled much higher borrowing.
On Thursday, Germany’s 10-year yield was down 2 basis points to -0.31% after rising 5 basis points on Wednesday, still moving in tandem with U.S. Treasuries.
Currency investors continued to snap up dollars as they bet on the U.S. economy outperforming its peers in the developed world in coming months. [FRX/] The dollar rose to a roughly seven-month high of 107.33 yen.
“U.S. dollar/yen has been on a one-way trajectory since the start of 2021,” said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia. “The brightening outlook for the world economy is a positive for both U.S. dollar/yen and Australian dollar/yen.”
Other safe-haven currencies were weakened, with the Swiss franc dropping to a five-month low against the dollar and a 20-month trough versus the euro.
Other major currencies were little changed, with the euro flat at $1.2054.
Gold fell to a near nine-month low of $1,702.8 per ounce on Wednesday and last stood at $1,714.
Investor focus on a U.S. economic rebound was unshaken by data released overnight that showed the U.S. labour market struggling in February, when private payrolls rose less than expected.
Oil prices rose for a second straight session on Thursday, as the possibility that OPEC+ producers might decide against increasing output at a key meeting later in the day underpinned a drop in U.S. fuel inventories. [O/R]
U.S. crude rose 0.6% to $61.65 per barrel. Brent crude futures added 0.7% to $64.54 a barrel,
(Additional reporting by Koh Gui Qing in New York; editing by Sam Holmes, Richard Pullin, Simon Cameron-Moore, Larry King)
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