By Amine Chaieb, Partner, Spearvest
The September attacks on Saudi Aramco’s largest oil processing facility and its second-largest oil field sent shockwaves through commodity markets. Abqaiq, which processes up to 7 Million barrels per day of crude oil and its second-largest oil field, Khurais, which pumps up to 1 Million barrels per day were both targeted by drone attacks.
The attacks resulted in the largest jump ever in oil futures; almost 20% intra-day. The extreme market reaction to the attack underlines the new wave of uncertainty the incidents brought by significant damage to highly strategic infrastructure. The attacks knocked out more than half of Saudi Arabia’s global daily exports which accounts for between 5 to 8% of the global oil supply.The disruption due to the attack was even bigger than the one caused by the Iranian revolution or Iraq’s invasion of Kuwait in absolute terms.
The initial anxiety in oil markets was met with swift and decisive action by Saudi Aramco as the company successfully restored production capacity above 11 million barrels per day, beating its own self-imposed deadline by about a week. Moreover, the company successfully executed a meticulous communication plan to restore calm in the oil market. More importantly for the domestic economy, Finance Minister Mohammed Al Jadaan said the attacks had “zero” impact on Aramco’s revenues or the growth rate of the Saudi economy, which was further affirmed by S&P Global Ratings’ reiteration of Saudi Arabia’s stable sovereign credit outlook.
A number of attacks on regional oil assets took place over the past year, but the context has changed. Saudi equities are now part of the mainstream emerging market indices (with 3% weight in MSCI and FTSE emerging market indices) and the share of local daily trading and total ownership by foreign investors has grown tremendously. Historically, GCC markets did not suffer that much from periods of regional insecurity because the oil price spike that accompanies these periods has provided a macro hedge. However, after a year of substantial global inflows into the GCC across both equities and bonds, the spike in insecurity risk might have a more meaningful impact on local asset valuations this time.
Following the attacks, most commodity strategists and traders were bracing for at least one month of oil supply disruption, at a time when many developed and emerging market are struggling to maintain economic growth at a healthy level, especially in manufacturing. Certain industries such as automakers are already facing a perfect storm of collapsing demand, drastic changes in regulation and higher costs due to trade war disruptions and a jump in fuel prices would have been extremely detrimental. It was therefore a big relief to marketswhen Saudi Aramco announced that all production was restored sooner than expected and customer deliveries will not be impacted.This has brought calm back to the markets and stabilized oil prices around their pre-attacks levels.
Meanwhile, regional tensions remain and the risk of additional similarly damaging attacks is on investors’ minds. Should the situation escalate further, the market may have to deal with more extended periods of reduced production capacity and traders will have to price-in a certain risk-premium in future oil contracts. In such a scenario, many oil-importing emerging markets wouldcome under pressure, especially those already witnessing large current account deficits. An increase in these countries’ net oil imports bill would come at a time when their public finances are suffering due to large deficits and mounting external debts.
The 2014-2016 period when Brent oil averaged $65 at a time of global manufacturing slowdown is a good case study for what may await such vulnerable emerging markets in case of new supply disruptions. Pakistan, Sri Lanka, Jordan, Lebanon, Jamaica and Ukraine are all countries with not only substantial oil import needs but also high public debt, large fiscal deficits and fragile economies. Many of these countries also have substantial US Dollar bonds which are currently trading at distressed levels, which indicates that they have very little room to absorb a possible oil shock.
A more extreme scenario where we see more regular attacks or potentially greater infrastructure damage would certainly increase the chances of a recession across the US and Europe as both consumers and producers would feel the pinch of sustainably higher oil prices, adding to an already challenging growth outlook.While opportunistic US shale producers are likely to take advantage of such a scenario and boost production substantially in North America, European economies not only lack domestic oil resources (outside UK and Norway) but they are also more reliant on industrial exports. They stand to suffer more from further pressure on the hugely important Auto sector and related industries such as steel and chemicals, in addition to the negative impact on consumer spending at a time when many European economies are on the brink of recession.
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong
Countless technology and other companies describe themselves as innovators, disruptors or game changers, or maybe all three, and sometimes that’s true. But none have had quite the disruptive force of COVID-19 which has flipped work and life habits upside down and sucked so much oxygen out of the global economy. The impact will be lasting: many of those new habits are here to stay.
Yet, while a recalibration of lifestyles and business processes is perhaps overdue – and to be embraced given it’s happening anyway – the change presents huge challenges for startups and new businesses that were on a growth trajectory prior to the pandemic. Few would deny that opportunities exist amid the disruption, but the challenge right now is to survive the crisis intact.
The global economy this year will see its biggest contraction in decades. The World Bank projects global gross domestic product to fall by 5.2% this year, with advanced economies shrinking 7% and emerging economies 2.5%. It forecast East Asia and the Pacific to grow just 0.5% this year, down from 5.9% last year. These forecasts assume the markets will return to somewhere near normality during the second half of the year.
Despite all the economic murk and gloom, there are signs that a post-COVID bounce is likely. The World Bank predicts economic growth of 6.6% in East Asia and the Pacific in 2021.
Some business sectors fare better
Looking around, it’s reasonable to anticipate a relatively speedy recovery. In a few business sectors, such as healthcare and telemedicine, e-commerce, fintech, home delivery and food retail sectors, there are companies that have fared better. In some instances, the situation has been transformational in a positive way.
In fintech, for example, global investment actually rose year-on-year in the first half of 2020, according to Accenture, up 3.8% to US$23.1 billion from US$22.3 billion, albeit with the help of COVID-related government loans in some markets. Asia-Pacific saw a sharp rise driven by China and Australia. In the first half, China’s fintech market grew 177% year-on-year to US$2.3 billion, while Australia’s grew 189% to US$1.2 billion.
Resilience is clear to see, but businesses face huge challenges. From a startup perspective, within weeks of the COVID-19 outbreak, many companies went from being solid-growth enterprises, possibly looking to raise money, to ones simply trying to stay afloat.
Debtor books have grown massively as companies stop cash going out the door. Many well-run companies have customers who may not be cancelling, but they are also not paying as fast. For such companies, it becomes a cash issue rather than a fundamental underlying business one. The reality is that businesses are ensuring that every penny going out the door absolutely needs to – so payment terms get stretched. It’s understandable, but it’s problematic if everyone does it.
For startups seeking to work their way onto the fundraising ladder, the process typically starts with an initial pre-seed and/or seed round, which then moves on to Series A to B, C and onwards as needed. The funds usually come from angel investors, accelerators or venture capital firms, in return for an equity stake. Even at the best of times, pitching to get on the first rung of the ladder is perhaps the greatest challenge.
Bar for investment higher as company valuations drop
Advice for many prospects looking at fundraising, certainly during the first wave of COVID-19, was to do nothing except focus on survival. For investors, a business that weaves and navigates its way through the crisis, or even take advantage of the pandemic environment to flourish, is likely to resonate.
Even for those companies that have fared better in recent months, barring an utterly compelling reason to raise funds, now may not be the ideal time. It’s clear that the bar for investment has gone up and company valuations have come down, neither of which is a surprise given higher risk profiles at present.
For companies that are well known to investors, such as Grab, Lu.com, Airwallex or WeLab, fundraising is more manageable. And for slightly smaller but relatively new companies, there are plenty of examples of recent success attracting fresh investment, often through existing investors.
But for smaller, newer companies, not being able to do face-to-face pitches creates much more of a challenge – after all, most funds like a boots-on-the-ground physical interaction before putting money in, particularly if the sums are large.
Despite all that, for new businesses planning to seek funds down the line, there is no harm warming up investors. Having the right conversations now makes sense and would help a startup to hit the ground running when the pandemic abates. The conversations should include ones with government funding organisations. For an investor, matching government funding is attractive because of the higher startup success rate.
Pandemic drives consumers and businesses online
Thanks to the pandemic, people are now far more willing to go online for all manner of transactions. Working remotely from the office is now commonplace, with work hours more flexible.
This trend among consumers, healthcare professionals and office workers has become more entrenched – more retailers are going online, while companies rethink their office space needs. This extends to investors, many of whom initially sat on their hands expecting COVID-19 to quickly pass by. They quickly adapted when it became clear coronavirus was going nowhere fast.
Quantitative easing and low interest rate policies by central banks, along with a boom driven by the lockdown – appetite for online entertainment, financial services, communications, healthcare, shopping, etc. – spurred fresh demand for tech products, pushing share prices rising to record highs. This created an attractive environment for investors to seek fresh investment opportunities.
A consequence of widespread digitalisation is that software, e-commerce and, more broadly, digital startups have an advantage in the competition for funding. An ability to do business both face-to-face and remotely makes such businesses less vulnerable to other trade pitfalls and therefore more attractive for investors.
Conversely, it’s harder for hardware startups at a time when global trade is weakening. They have to consider whether production costs and the markets they promote will be affected by such issues as tariffs or people flow. This type of startup is likely to have access to fewer financing opportunities.
It may seem obvious, but it’s of paramount importance for startups seeking funding to be clear about what they are looking for from investors. Are they simply injecting capital as a passive investment hoping for a return, or are they looking to create synergies to help develop the business? Startups should consider what resources investors can bring to the business besides capital.
These are testing times. However, founders of startups need to stay positive and true to their mission and vision, and why they started the companies in the first place. After all, that’s their value proposition.
COVID-19 and PCL property – a market on the rise?
By Alpa Bhakta, CEO of Butterfield Mortgages Limited
Over the last five years, demand for prime central London (PCL) property has been fairly inconsistent. Sudden peaks in interest from buyers could be followed by periods of stagnate price growth. Nonetheless, the advantages of PCL property investment, particularly by international investors, has remained well known.
Well-funded development and neighbourhood re-generation schemes, alongside an influx of overseas investment, has resulted in a vibrant market with a diverse range of opportunities for prospective buyers.
Nonetheless, the PCL market has not been immune to the impact of the COVID-19 pandemic. During the first half of the year, the lockdown meant physical valuations and onsite inspections could not take place. People in the UK were also discouraged from moving properties unless they found themselves in extreme circumstances.
However, as we now enter the final weeks of 2020, I believe there’re plenty of reasons to be optimistic about the future prospects of the PCL property market. Buyer demand has resulted in a new wave of activity, and this is resulting in significant house price growth. Indeed, it was recently revealed by Halifax that the average rate of house price growth in November was at a four-year high.
Obviously, there are multiple factors that have helped sustain this strong level of house price growth. Most notably, the Stamp Duty Land Tax (SDLT) holiday has succeeded in coaxing buyers back to the property market––be they seasoned buy-to-let (BTL) investors or first-time buyers––by offering up to £15,000 in tax savings on any given property purchase.
However, it’s worth considering the other factors underway in London’s property market. With the UK in a second national lockdown, many investors will be keen on hedging against future COVID-imbued market uncertainty through acquiring safe-haven assets like British property. As you’ll read below, this is having a positive impact on the PCL market.
Investors are flocking to PCL opportunities
The PCL property market has managed to be one of the most active areas of the UK’s real estate market during the whole of 2020. When discussing why this is so, we must first begin by understanding the behaviours of overseas buyers.
Given that international investors represented over half (55%) of all the PCL property purchases recorded in the second half of 2019, anything to further incentivise or dissuade such foreign actors would hugely impact PCL property transaction figures.
Earlier in the year, alongside the announcement of the aforementioned SDLT holiday, UK Chancellor Rishi Sunak indeed announced that he would be implementing 2% SDLT surcharge for non-UK based buyers of British property from April 2021 onwards.
So, for those seeking properties worth over £5 million in the UK capital, a 2% additional cost may represent a substantial amount of wealth. To avoid this, many overseas buyers who may have been contemplating a PCL property acquisition have rushed to buy such properties before this surcharge is applicable. This trend will undoubtedly continue until 1 April, 2021.
Remote working and PCL
On the topic of the PCL market’s future, many property speculators were concerned earlier this year that London’s property market would potentially collapse entirely as a result of remote working. With homeworking set to remain the norm for the foreseeable future, commentators predicted that professionals would escape the capital en-masse in favour of roomier, cheaper properties farther from their London employer’s offices.
While there have been some signs of shifting demand from urban London neighbourhoods to suburban ones, according to Rightmove statistics, there has been no recordable effect on the UK’s property market as a result.
Conversely, property specialists Savills have actually discovered that over half of all transactions including properties worth more than £5 million in the UK this year were all located in just five central London postcodes.
A busy few months
Given the performance of the PCL property sector in 2020, I only foresee this market growing stronger and stronger in the years ahead. Recent developments in the production of COVID-19 vaccine have many hoping that we may return to normality by Spring 2021, which would represent fantastic news for those involved in bricks and mortar, should it transpire.
In the coming months, I anticipate a surge in activity across the PCL market as buyers look to take advantage of the tax breaks on offer. As such, it will be important that these buyers have access to the financing needed to complete these transactions quickly. If not, there is a risk any purchase they attempt might be concluded in April 2021 when the current tax breaks in place are removed.
Overall, I cannot help but be impressed by the performance of the property market more generally during the pandemic. Having experienced slow growth in the years following the EU referendum in June 2016, it is clear that buyers are eager to take advantage of the opportunities on offer. This is particularly true when it comes to PCL property.
An outlook on equities and bonds
By Rupert Thompson, Chief Investment Officer at Kingswood
The equity market rally paused last week with global equities little changed in local currency terms. Even so, this still leaves markets up a hefty 10% so far this month with UK equities gaining as much as 14%.
The November rally started with the US election results but gathered momentum with the recent very encouraging vaccine news. This continued today with the AstraZeneca/Oxford vaccine proving to be up to 90% effective in preventing Covid infections. This is slightly below the 95% efficacy of the Pfizer and Moderna vaccines already reported but this one has the advantage of not needing to be stored at ultra-cold temperatures. One or more of these vaccines now looks very likely to start being rolled out within a few weeks.
Of course, these vaccines will do little to halt the current surge in infections. Cases may now be starting to moderate in the UK and some countries in Europe but the trend remains sharply upwards in the US. The damage lockdowns are doing to the recovery was highlighted today with the news that business confidence in the UK and Europe fell back into recessionary territory in November.
Markets, however, are likely to continue to look through this weakness to the prospect of a strong global recovery next year. While equities may have little additional upside near term, they should see further significant gains next year. Their current high valuations should be supported by the very low level of interest rates, leaving a rebound in earnings to drive markets higher.
Prospective returns over the coming year look markedly higher for equities than for bonds, where return prospects are very limited. As for the downside risks for equities, they appear much reduced with the recent vaccine news and central banks making it clear they are still intent on doing all they can to support growth.
Both factors mean we have taken the decision to increase our equity exposure. While our portfolios already have significant allocations to equities and have benefited from the rally in recent months, we are now moving our allocations into line with the levels we would expect to hold over the long term.
Our new equity allocations will be focused on the ‘value’ areas of the market. The last few weeks have seen a significant rotation out of expensive high ‘growth’ sectors such as technology into cheaper and more cyclical areas such as financials, materials and industrials. Similarly, countries and regions, such as the UK which look particularly cheap, have fared well just recently.
We think this rotation has further to run and will be adding to our UK exposure. This does not mean we have suddenly become converts to Boris’s rose-tinted post-Brexit view of the UK’s economic prospects. Instead, this more favourable backdrop for cheap markets is likely to favour the UK.
We will also be adding to US equities. Again, this does not represent a change in our longstanding caution on the US market overall due to its high valuation. Rather, we will be investing in the cheaper areas of the US which have significant catch-up potential.
We are also making a change to our Asia ex Japan equity holdings. We will be focusing some of this exposure on China which we believe deserves a specific allocation due to the strong performance of late of that economy and the sheer size of the Chinese equity market.
On the fixed income side, we will be reducing our allocation to short maturity high quality UK corporate bonds, where return prospects look particularly limited. We are also taking the opportunity to add an allocation to inflation-linked bonds in our lower risk, fixed income heavy, portfolios. These have little protection against a rise in inflation unlike our higher risk portfolios, which are protected through their equity holdings.
The Coming AI Revolution
By H.P Bunaes, CEO and founder of AI Powered Banking. There is a revolution in AI coming and it’s going...
Q&A with Joe Steele, Head of Workplace Technology at Starling Bank
In just under a year, many businesses had no choice but to go online and with digital transformation on the rise...
How financial services organisations are using data to underpin future growth
By John O’Keeffe, Director of Looker EMEA at Google Cloud In addition to the turmoil caused by the COVID-19 pandemic, a...
Three questions the financial services industry must answer in 2021
Xformative, a Mastercard Start Path recipient, shares what these questions mean for fintech partners and their innovations This year, fintechs...
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown A quarter (27%) of banking customers noted an...
Is Digital Transformation the Key to Business Survival in the New World?
After a turbulent year, enterprises are returning to the prospect of a new world following an unprecedented pandemic. Around the...
Virtual communications: How to handle difficult workplace conversations online
Have potentially difficult conversation at work, like discussing a pay rise, explaining deadline delays or going through performance reviews are...
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday Mollie, one of the fastest-growing payment service providers,...
Brand guidelines: the antidote to your business’ identity crisis
By Andrew Johnson, Creative Director and Co-Founder. How well do you really know your business? Do you know which derivative of your...
COVID-19 creates long and winding road for startups seeking investment
By Jayne Chan, Head of StartmeupHK, Invest Hong Kong Countless technology and other companies describe themselves as innovators, disruptors or...