Despite its new government, Italy’s economy continues to struggle, having contracted for seven consecutive quarters since mid-2011. Recent promises by economy minister Fabrizio Saccomanni to cut housing and labour taxes seem to be too little and too late, with statistics office ISTAT reporting a slide from 86.3 to 85.9 in its May consumer confidence index.
The Europe-wide picture is no more positive, with the OECD again cutting growth forecasts for the Eurozone. The OECD’s twice yearly Economic Outlook publication has predicted the Eurozone will shrink by 0.6% in 2013, as member countries continue to struggle.
In Italy, consumer spending has been weak for over a decade and the Eurozone’s third largest economy seems at a loss as to how to recover its financial balance. The International Monetary Fund is predicting that the country’s gross domestic product will fall 1.5% in 2013, after the 2012 decline of 2.4%.
House prices have been tumbling alongside consumer confidence. According to statistics agency Eurostat, Italy’s house price index has been falling for almost four years. In 2012 it fell by 4.64% (-6.94% after inflation), while residential property transactions dropped by 25.8%. According to data from the FIAIP, prices have continued to fall into 2013, by as much as 11.98% in some areas.
With prices at rock bottom and Italian mortgage lending plummeting (new mortgage lending dropped by around 42% in 2012 according to CRIF and MutuiSupermarket.it), foreign investors are turning the stricken country’s situation to their advantage: the Scenari Immobiliari research institute reported that second-home sales to overseas buyers rose 14% during 2012. Foreign investors spent a total of €2.1 billion ($2.8 billion) on Italian real estate during the year, with Germans, Britons and Russians making up over 70% of the buyers.
The depressed prices and the willingness of Italian owners to drop prices during negotiations (sometimes by as much as 30% according to the Case e Ville real estate agency), are creating the ideal scenario for foreigners looking to pick up a bargain place in the sun. The Italian Federation of Professional Estate Agents has predicted a slow recovery of the property market from the second half of 2013, while the Gabetti Franchising Agency is more cautious, predicting the market will begin to improve in 2014. Either way, it seems that prices are likely to be at their lowest during the coming months, which is spurring the influx of foreign investors.
Investment advisors International Property World state that Italy is currently considered to be one of the world’s top destinations for real estate investment, with capital appreciation reaching up to 20% in some areas. Fractional ownership company Appassionata, which is headed up by Michael Hobbs (the entrepreneur who headed up Adams Childrenswear for nine years in the UK), has first-hand knowledge of the situation, having seen its owners benefit significantly from the capital appreciation of their properties during the past 18 months.
Appassionata manages two houses – Casa Giacomo and Casa Leopardi – which the company has painstakingly restored from tumbledown farm buildings purchased in 2007. Set on the five acre Estate Giacomo Leopardi in Le Marche, the houses are surrounded by olive groves, grape vines, a lavender plantation and a truffle orchard, with owners sharing the organic produce as well as having exclusive use of the house that they share ownership of for five weeks every year.
Appassionata’s luxury houses are a lifestyle investment, with around 90% of owners planning to eventually pass them on to their children as an asset. With inheritance taxes reduced from up to 60% in 2000 to a current real estate maximum of 11%, along with generous allowances, Italy is enjoying one of the lowest inheritance tax systems in Europe – a further factor behind the rise in foreign investment.
Casa Giacomo (the first of Appassionata’s houses to be completed and which has now fully sold), has seen its owners benefit from 18% capital appreciation in just over 18 months. Fractions in the five bedroom/five bathroom Casa Leopardi, with its private pool and use of the estate’s tennis and basketball courts, are selling fast at their current price of just £185,000.
London-based commodity trader and workaholic James Mason was quick to recognise the opportunity that Italian properties such as Appassionata’s were offering. Having bought his fraction as a surprise for his wife and children, he has enabled his family to spend more quality time together at the same time as benefitting from the capital appreciation and investing in an asset for his children.
With the Italian real estate market at such a low point, it seems the time is ripe for other investors to follow James’ example. Italian law firm Magaraggia has reported that real estate transactions for 2012 were at their lowest rate since 1985, with transactions totalling 448,000 homes and 430,000 homes for the respective years. They also observed a strong decline in the overall exchange value, which at an estimated €75.4 billion in 2012 was nearly €27 billion lower than in 2011. While none of this is good news for the Italian economy, it has certainly made the market more enticing for foreign investors.
Those looking to make a lifestyle investment, such as that offered by Appassionata, are being further drawn by Italy’s growing reputation as one of Europe’s most exclusive holiday destinations. Figures from the Bank of Italy show that while Italy received fewer visitors overall in 2012 than in 2011, international tourists spent almost 3% more while in the country – a positive indication that Italy is becoming the European destination of choice for wealthy holidaymakers. Despite the slight recent drop in visitor numbers, Italy remains the world’s fifth most visited country, according to the latest data from the World Bank.
All this adds up to make Italy a particularly interesting investment prospect at present. Europe’s fifth largest nation may be experiencing economic gloom internally, but from overseas the opportunity looks bright indeed.
Can Thematic Investing provide investors with growth opportunities in uncertain times?
New whitepaper from CAMRADATA explores
CAMRADATA’s latest whitepaper on Thematic Investing, considers the role this type of investing can play in asset management and explores trends that can permeate society and traverse sectors. The whitepaper includes insights from guests who attended a virtual roundtable on Thematic Investing hosted by CAMRADATA in November, including representatives from CPR Asset Management, Sarasin & Partners, Impact Investing Institute, PwC, Quilter Cheviot, Scottish Widows and Stonehage Fleming.
Sean Thompson, Managing Director, CAMRADATA said, “In these seminal times, thematic investing has the potential to shape how the future unfolds. Yet running a successful thematic fund is no easy feat – it is a bit like navigating unchartered waters trying to identify the trends and the long-term opportunities.
“Trends such as AI and biotechnology are still in their relative early days, for example, and global economies are undergoing dramatic changes. But mapping out certain trends, identifying potential sustainable returns through a unifying thread that spans multiple sectors, could help future-proof investments. “Our roundtable guests considered current key themes, which themes worked well, and which have not and how thematic investors could identify trends with the potential to offer future growth.”
The guests named themes they currently like which included artificial intelligence, China, climate change, clean energy, automation, evolving consumption, ageing, digitalisation, water, waste management, biodiversity, and board diversity.
After discussing themes that have worked or not, the guests looked at total allocation to themed funds, and whether clients might be blinded by themes to the overall risk exposure in their portfolios.
Key takeaway points were:
- Themes have a habit of coming and going. One guest recognised that automation and robotics, for example, were cyclical, which means that investors will have to think carefully about entry-points.
- It was agreed that the commodities ‘super cycle’ of the 2000s came about with the economic development of China. Many commodities-based products found their way into mainstream investing, but this is unlikely to happen again.
- One guest was surprised by some of the themes that interested their customers; with their research showing that Board Diversity was almost the lowest-ranking concern among the ESG choices they listed.
- There was correlation between environmental impact and social benefits to investing. The theme that concerns the Impact Investing Institute, which is less than two years old, is improved measurement of such relationships.
- In terms of successful themes, one clear winner due to COVID had been digitalisation.
- One theme that has not done so well is the Ageing theme focused on older people travelling and enjoying experiences abroad later in life.
- One guest said their firm used themes for ideas generation, not as a shortcut for portfolio construction. They said themes lead to good ideas, but they then spend at least three months researching a stock, so that the best themes are represented by the best investments.
- The final point was that there are sensitivities for any global investor in allocating to themes, even the biggest one of all, Climate Change.
- But on a positive note, one guest added if all stakeholders can resolve their differences on definitions such as impact and ethical investing, then more capital will be readily transferred into opportunities.
The whitepaper also features two articles from the sponsors offering valuable additional insight. These are:
- CPR Asset Management: ‘Central Banks: leading the path towards Impact Investing’
- Sarasin & Partners: ‘Theme or fad? How to invest for the long term’
To download the Thematic Investing whitepaper, click here
For more information on CAMRADATA visit www.camradata.com
Promises, Promises: Navigating the Reputational Risks of ESG Investment Pledges
By Nir Kossovsky and Denise Williamee, Steel City Re
As the trend towards ESG investment and a low-carbon economy continues, banks are being backed into a reputational corner. Law firms specializing in representing the expanding pool of litigious shareholders are salivating.
On one hand, banks understand the inherent financial risks and challenges involved with making a wholesale move towards a low-carbon economy. The transition to a greener corporate world can’t happen overnight; as long as “brown” assets continue to be profitable, those in bank leadership positions have to balance their green aspirations with their responsibility to shareholders.
On the other hand, while not renewing loans on existing coal mines or fracking sites may improve a bank’s carbon disclosures, it could have social and financial ramifications that disappoint other stakeholders—i.e., causing people to lose their jobs. Still, financial institutions are experiencing pressure from all sides—from ESG investors to social license holders – to divest the fossil fuel industry and adopt drastic “green financing” practices now.
To alleviate these pressures, banks are pledging greener financing initiatives. Almost every large global bank has made some sort of commitment. Goldman Sachs, for example, announced they would spend $750 billion on sustainable finance over the next decade. Bank of America pledged $300 billion.
Bank boards and executives likely don’t fully appreciate the reputational risks posed by the aspirational statements they’re making. They are making promises and raising expectations without the operational or governance systems in place to ensure those expectations will actually be met. Overpromising and increasing the risk of angering and disappointing stakeholders is the very definition of reputational risk.
Banks are in a unique position: integral to every aspect of our economy, well-known brands that work hard to build and retain the trust of their customers and the general public while operating in an environment of intense scrutiny by politicians and regulators at every level of government. Satisfying all the stakeholders calling for greener policies while fulfilling their responsibility to their shareholders is a demanding balancing act fraught with risk. The Business Roundtable pledge, led by JP Morgan Chase CEO Jamie Dimon, and elevating employees, communities, and the environment as stakeholders, was an attempt to strike that balance. Already, though, that pledge is being dismissed by politicians like Senator Elizabeth Warren, who characterized it as an “empty publicity stunt.”
The price of missing expectations is costly, and bank executives and board members could find themselves in a legal hot seat. Federal securities lawsuit filings alleging reputation harm from missed expectations are up 60% over last year, the third year of a rising trend.
This trend stems from SEC regulation S-K that calls for more human capital disclosures, and the Caremark decision that sets the bar for most securities litigation and makes board oversight of mission-critical corporate operations a test of the duty of loyalty. Other cases, like In Re Signet, have made ESG-like pronouncements—historically “immaterial corporate puffery”—now potentially material in the securities arena.
For example, directors’ duty of loyalty were successfully questioned in alleged failures of innovation (In Re Clovis Oncology, Inc., board failure to protect the firm’s reputation for pharmacologic innovation); safety (Marchand v. Blue Bell Creameries, board failure to protect the company’s reputation for food safety); and environmental sustainability (Inter-Marketing Group USA, Inc. v. Armstrong, board failure to protect the firm’s reputation for oil pipeline-related environmental protection).
In other words, aspirational pledges are now being considered by courts with the full weight of a material public disclosure. As wealth managers chase ESG-informed investing and capital markets chase ‘green underwriting’, the plaintiff’s bar chases boards and executives making pledges that appear to be no more than aspirational marketing.
The only way to strike a balance and mitigate these risks is through a robust Enterprise Risk Management (ERM) strategy that’s centered around understanding who your key stakeholders are, what their interests are, and ultimately, what their expectations are. Coincidentally, it is also one of the three key behaviors the world’s largest asset management firm, Blackrock, is demanding of all investee companies in 2021 thus communicating the type of authenticity to its slogan “beyond investing,” that BP failed to accomplish with similar sloganeering a decade ago.
Banks need to create a central intelligence unit with board level oversight to comb through every aspect of the organization to identify stakeholder interests, potential risks and/or exposures. Pledges and communications should be informed by a rigorous and honest self-assessment of the institution’s public filings and operational capacity. Overpromising is costly. ESG pledges must be rooted in achievable goals that a bank’s leadership are confident their institutions can reasonably execute on an operational level. Banks also need to consider transferring or financing risks using the broad range of conventional and parametric insurance products currently available.
Enterprise risk management, when executed properly, will fulfill ESG commitments, reassure stakeholder groups and give marketers, counsel, and investment as well as government relations professionals an authentic story to tell about strong corporate governance. ERM focused on reputational intelligence will provide confidence to ESG funds, institutional investors, bond raters, and government officials alike.
The popularity of ESG investment and chasing ESG ratings is not going to go away, and stakeholder pressures will continue to mount. Investors doubled the size of the ESG sector this year, putting $27.4 billion into ETFs traded in U.S. markets. According to a recent survey conducted by Bank of America relating to ‘Gen Z’—which is just entering the workforce—80% take ESG into account when making their investment decisions.
Bank leadership that is striving to attain the correct balance between stakeholders and shareholders need to lean more into the “governance” portion of the ESG equation; pledges backed by enterprise risk management are the strongest pledges you can make.
ESG – Bubble or Bandwagon?
By Josh Gregory, Founder of Sugi
Isaac Newton was a successful investor, but he lost a fortune (£15m in today’s money) in the South Sea Bubble of 1720. When asked about his misadventure, he supposedly replied that he ‘could calculate the motions of the heavenly stars, but not the madness of people’ (presumably, himself included).
The rise and fall of South Sea stock was one of the earliest and largest instances of a market bubble and crash. Three hundred years later, we’re facing another massive investing trend: sustainable investing. In the last year or so, almost every investment institution has jumped on the sustainability bandwagon.
It’s now arguably more notable to find an asset manager who hasn’t committed to sustainable, ethical, responsible, impact and/or ESG (environmental, social and governance) investing than one who has. The numbers are telling: in August 2020, assets in global ESG exchange traded funds and products topped $100 billion (£73 billion) globally.
Demand for sustainable investments has been bolstered by two main factors. Firstly, with climate change firmly on the global agenda and all eyes watching the Biden administration’s transition to power (and the subsequent climate change policy that will follow), ‘greening up’ has never been more of a priority for businesses and individuals. This includes the investment industry, with both retail and institutional investors increasingly demanding that their money has a positive impact on our planet.
Secondly, since the start of the COVID-19 pandemic reports have continually claimed that ESG funds are outperforming ‘traditional’ investments. No longer is going green cited as a ‘nice to have’; rather, these reports demonstrate the value and resilience of ESG funds to the investor community, increasing demand. Surely, this can only be a good thing? Yes, but only if investors know what they’re buying.
It’s no secret that ESG investing suffers from complexity, lack of transparency and a lack of any universal standard. Fundamentally, this is why we created Sugi – a new platform enabling retail investors to track the environmental impact of their investment portfolios using clear and objective carbon impact data.
Today, ESG terms can lawfully be used to label pretty much anything. Ultimately, this means that the ESG label is not a guarantee of good practice. In fact, an ESG rating is a financial risk metric – the scores calculate the extent to which ESG issues affect a company’s economic value. Many investors, even institutional investors, don’t know how to decipher this. The scores themselves are designed to be used in tandem with portfolio dashboards and other data to make financial decisions. This effectively means that the scores on their own without any context are not of much use to anyone.
This has led to a glut of greenwashing in the sector, where investment products are described as green, ethical or sustainable, but the description is unsubstantiated. And while the top financial performance of ESG funds seems uncontroversial, those digging a little deeper may be surprised at what they find. Many ESG funds are heavily weighted in favour of technology companies, which typically have low carbon emissions. These stocks skyrocketed in 2020 but it’s important to note the context. It was largely due to the COVID-19 lockdowns and had nothing to do with the stocks’ ESG credentials.
The EU, the UK and the US are all working on their own strict definitions of ESG. This should, in theory, go some way to clarify what investors are getting when they choose an ESG or sustainable investment product. However, this will take a while to implement and there will still not be a globally recognised definition or standard.
It would seem many people are pouring money into investments when they don’t know what they’re buying. That’s nothing new. But underneath the ESG label lies something meaningful, worthwhile and, above all, valuable for the world in which we live – environmental, social and governance best practice.
The question remains though, is it a bubble? A bubble exists if ESG investments are over-valued (i.e. over-bought). Right now, ESG funds may be in bubble territory because many of the underlying stocks that make up the funds are themselves in a bubble. But does that make ESG a bubble? If it is, when do we call it?
Historically, all bubbles –whether they be tulips, canals, railways or the internet – no-one knows. And if I knew now, I’d be sunning in the South Seas rather than writing this blog!
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