i USgroupsstepin to supportsharesDatahaveshown buybackswere20 percent higherin thefirstthreemonthsof 2016versusthe fourthquarter,and 31 percent above theyear-agoperiod.Biggroupsinvolved includeAppleand GE. — PAGE 11
i Fed officialraises June rate rise prospectAtlanta FedchiefDennisLockhart haswarnedthatfinancialmarketsare being overlypessimisticabouttheUS outlookand mayunderestimate thechancesofan interest-rateincreaseas soonas June. — PAGE 2
i Jetpacks about to takeoff An ex-RAF fighterpilot isclose toturningsciencefictionintorealitybymassproducinga personaljetpack thatcan reachheightsof 900mandhit74kmh.Itis aimedat theemergencyservices. — PAGE 12
i Hollande threatens executivepay lawFrance’s Socialistpresidenthas threatened tobringin a lawmakingshareholdervoteson paybinding,emergingas an investorchampion amida fight overCarlos Ghosn’s €7.3mpackageat Renault. — PAGE 3
i IMFtellsTehranhow toease isolationTheIMF hastold Iranthat it mustimplementmacroeconomicand structural reforms,andcombat money laundering andterrorist-financingif it isto reintegrate intotheglobal economy. — PAGE 4
i Brazillooksto business bignamesTheinterimgovernment hasstartedto rallytopbusinessnames tohead thecountry’s institutionsasacting presidentMichelTemer seeksto winback thetrustof global investorsand voters. — PAGE 4
Destructive forceThe danger of a Trump presidency is
hard to exaggerate— MARTIN WOLF, PAGE 7
WEDNESDAY 18 MAY 2016 WORLD BUSINESSNEWSPAPER EUROPE
World Markets
STOCK MARKETS
May 17 prev %chgS&P 500 2062.49 2066.66 -0.20Nasdaq C omposite 4767.96 4775.46 -0.16Dow Jones Ind 17670.06 17710.71 -0.23FTSEurofirst 300 1315.00 1315.39 -0.03Euro Stoxx 50 2932.66 2951.39 -0.63FTSE 100 6167.77 6151.40 0.27FTSE All-Share 3390.29 3377.83 0.37CAC 40 4297.57 4312.28 -0.34
Xetra Dax 9890.19 9952.90 -0.63Nikkei 16652.80 16466.40 1.13Hang Seng 20118.80 19883.95 1.18FTSE All World $ 261.82 261.82 0.00
CURRENCIES
May 17 prev$ per € 1.134 1.133$ per £ 1.447 1.440£ per € 0.784 0.787 ¥ per $ 108.950 108.825 ¥ per £ 157.618 156.725€ in de x 8 8. 339 8 8. 26 6SF r per € 1.106 1.107
May 17 prev€ per $ 0.882 0.883£ per $ 0.691 0.694€ per £ 1.276 1.271 ¥ per € 123.505 123.310£ i nd ex 8 5. 74 1 8 5. 59 3$ i nd ex 9 9. 90 4 1 00 .1 86SFr per £ 1.412 1.406
price yield chgUS Gov 10 yr 98.83 1.76 -0.01UK Gov 10 yr 100.01 1.50 -0.02Ger Gov 10 yr 103.61 0.13 -0.02Jpn Gov 10 yr 102.14 -0.11 0.00US Gov 30 yr 98.42 2.58 -0.02Ger Gov 2 yr 102.98 -0.51 0.00
price prev chgFed Funds Eff 0.37 0.36 0.01
US 3m Bills 0.29 0.27 0.02Euro Libor 3m -0.28 -0.28 0.00UK 3m 0.59 0.59 0.00Prices are la test for edi tion Data prov ided by Morn ings ta r
ROBERT COOKSON — LONDON
An Islamistextremistaccused of fund-ingthe2009 Jakartasuicidebombingshas been selling advertising space onhis website to international brandsincludingCitigroup,IBM andMicrosoftusinga serviceprovidedby Google.
Muhammad Jibril Abdul Rahman,knownas Princeof Jihad,is designatedasa terroriston thesanctionslistsof theUS,theEUand theUN— andsubjecttoan asset freeze, travel ban and armsembargo.He isa prominentmemberof Jemaah Islamiyah, a militant Islamist groupbased in SoutheastAsia withtiestoal-Qaeda.
But his Jihadi propaganda website,Arrahmah.com,has beenmakingthou-sands of dollars by showing its visitorsadverts from global companies. Itattracts about 600,000 visits a month,
according to SimilarWeb, an internetdataprovider.
Theadswere deliveredtothe website,which includes images of beheadingsand hanged men, by intermediariesincludingGoogle’s AdSense,the world’sbiggest onlinead network,whichtake acutof therevenues.
Thereis nosuggestion thattheadver-tisersor Googleknowinglyfundeda des-ignated terrorist, a criminal offence inthe US that carries a penalty of up to20yearsinprisonora$1mfine.
After being contacted by the Finan-cial Times, Google cancelled Arrah-mah.com’s account and theadvertisersaskedto beremovedfrom thesite. Citi- group,IBMand Microsoftsaidtheyweretaking steps to ensure there was norecurrence.
The ease with which Arrahmah.comtapped the $160bn online ad market
raises questions about whether adver-tisers and intermediaries are properlyscrutinisingthe siteswithwhichtheydobusiness. Placement of ads is highlyautomatedand theyoftenpass throughacomplexchainwithlittleoversight.
Google said: “This site violates ourterms so we’ve taken action to termi-nate the account and reimburseaffectedadvertisers.”
Large technology groups, includingGoogle, Twitter and Facebook, havecomeinfor criticismfromsecurityserv-icesinrecentyearsfornot doingenoughtokeep extremistsoff theirplatforms.
In2010,Mr Abdul Rahmanwas sen-tenced tofiveyearsin anIndonesianjailfor concealing information related totheterrorist attacksat theJW Marriottand Ritz-Carlton hotels in Jakarta,whichkilledsevenandinjuredabout50.Analysis page13
Google service books IBM, Citigroupand Microsoft ads to jihadi’s website
Printed in London, Liverpool, Glasgow, Dublin,Frankfurt, Brussels, Milan, Madrid, New York,Chicago, San Francisco, Washington DC, Orlando,Tokyo, Hong Kong, Singapore, Seoul, Dubai
Report i PAGE 2
Beijingseeks to headoffnostalgia for revolution
9 7 7 0 1 7 4 7 3 6 1 3 5
2 0
Austri a € 3.60 Macedoni a Den220Bahrain Din1.7 Malta €3.50Belgium €3.60 Morocco Dh43B ul gar ia L ev 7. 50 N et he rl an ds € 3. 60Croatia Kn27. 50 N igeri a Naira715Cyprus €3.50 Norway NKr34Czech Rep Kc100 Oman OR1.50De nm ar k D Kr 32 P aki st an Ru pe e28 0Egypt E£20 Poland Zl 18Finland €4.10 Portugal €3.50France €3.60 Qatar QR15Germany €3.60 Romania Ron17Gibraltar £2.70 Russia €5.00Greece €3.50 Saudi Arabia Rls15Hungary Ft990 Serbia NewD420India Rup195 Slovak Rep €3.60Italy €3.50 Slovenia €3.50Kazakhstan US$5. 50 Spain €3. 50Kenya Kshs300 Sweden SKr37Ku wa it K WD 1. 50 S wi tz er la nd SF r5.9 0Latvia €6.99 Tunisia Din7.50Lebanon LBP7500 Turkey TL10Lithuania €4.30 UAE Dh15.00L ux em bo ur g € 3. 60
There is a starkgeographic dividein self-madeversus inheritedwealth across theworld, a report hasrevealed. In 2014,more than half ofEuropeanbillionairesinherited theirwealth comparedto just a third inthe US
Self-made vs born rich
Source: Peterson Institute for International Economics
Distribution of billionairesby source of wealth (2014, %)
China
US
Russia
Europe
UKMiddle East/North Africa
Se lf -ma de I nh er it ed
LIONEL BARBER AND TOBIAS BUCKMADRID
Spain’s Mariano Rajoy is promising afreshround oftax cutsifhe isre-electedprime minister next month, risking ashowdownwith Brussels overMadrid’schronic budget deficits as he courtsvoters eager to shrug off a long era of austerity.
“We raised taxes at the start of ourterm in office and we lowered bothincome andcorporatetaxin 2015.If taxrevenues continue to rise, as they aredoingnow,we canplananothertaxcut,”MrRajoytoldtheFinancialTimesinaninterview. Spain’s leader added he wasonce again eyeing a cut to both corpo-rateandincometax.
The promise is intended to whip upenthusiasm for Mr Rajoy’s campaign,with a June ballotapproachingafteraninconclusive December election inwhich his Popular party finished firstbutlostso manyseatsthatit wasunabletocobble togethera majority.
However, the pledge will raise con-cerns in Brussels, where the EuropeanCommission will today weigh whether
Mr Rajoy said his governmentremained committed to bringing itsdeficit into line, insisting a tax cut wascompatiblewithhittingtheEUtarget.
“Last year wecutincome taxandtaxrevenuesstill wentup,”he said, addingthat hehad madeprogressin reducingthe deficit, which stood at an EU high10.4 percentin 2012.“Welowered thedeficitby 4.3percentagepoints infouryears, even though we spent two yearsinrecession . . . Noonecan saySpain isnot willing to comply with the rules of thegameanddothingswell.”
Spain goes to the polls on June 26,six months after an election that sawboth Mr Rajoy’s PP and the oppositionSocialists lose millions of votes topolitical newcomerson thefar left andinthecentre.
MrRajoysaidEuropehad “somebadexperiences with referendums” andthathepersonallywas infavourofusingplebiscitessparingly.“Wehave a repre-sentative democracy and that meansthat people elect those who should
govern and those who govern take thedecisions . . . Sometimes calling a refer-endummeanspassingon responsibilitytoeveryoneelse.”
MrRajoysaid Madrid would adopt a“constructive” approach in any post-Brexit negotiations between LondonandtheEUbutinsistedthatit wouldbewrong to expect an easy transition.
“This would be a dramatic rupture. Itwon’tbeeasy.”
MrRajoyhas hada tenserelationshipwith Alexis Tsipras, the far-left Greek premier who has close ties to Spain’sPodemos. Asked whether Mr Tsiprashad made progress, Mr Rajoy replied:“Hehasan arduoustaskaheadof him.”
Additional reporting by Alex Barker in Brussels
Rajoy tax cut pledge risks clashwith Brussels over budget hole3 Spain premier woos voters tired of austerity 3 Confidence over win in next month’s poll
‘Spain has overcome thethreat of bankruptcy. It is growing. I feel good. I feelmotivated. And I haveexperience . . . Spain needsexperience at this moment’
For much of this year, Mariano Rajoyhas been the Invisible Man of Spanishpolitics,watchingand waiting whilehisrivals have worked to oust him frompower. He lookedon whileotherpartyleadersstruggled, andultimatelyfailed,toforma governmentin thewakeoflastyear’s inconclusive general election.Now, with a repeat ballot looming in June,he isreadytobreakcover.
InaninterviewwiththeFTathisresi-dence outside Madrid, Spain’s actingprime minister lays out his plans foranother four-year term, promising 2mnewjobsas wellas taxcutsandanover-haulofthepublicsector.
He brushes aside the challenge fromSpain’s political newcomers, includingthe anti-establishment Podemos party.Voters,he argues,will choosehis “expe-rience”and “moderation”overpoliticalrupture.He hasno intentionof makingwayfora youngerleader.
“Myjob,”hesays,“isonlyhalfdone.”When Mr Rajoy took office in late
2011 he inherited a country deep inrecession,witha public deficitof 9.3percent and a simmering banking crisisthat would explode only six monthslater. Today, structural problemsremain — not least an unemploymentrateof21 percent— butMrRajoytrum-pets his government’s economicachievements:joblessnumbersare fall-ingand theeconomycontinuesto growat a brisk pace, despite the politicaluncertainty.
“Spain has overcome the threat of bankruptcy. It is growing and creating jobs. Now we have to consolidate therecovery. I feel good. I feel motivated.AndI haveexperience . . . IthinkSpainneedsexperience atthis moment.”
Thelatestpolls predict thatMr Rajoyand his centre-right Popular party willemergeas thebiggestblocin parliamentonce again and could even win moreseatsthanin December.But anabsolutemajority seems outof reach.How thentobreaktheimpasse?
MrRajoywoulddearlylikeaGerman-stylegrandcoalitionwiththecentre-leftSocialists, even though the Socialistshave spurned him. “A grand coalitionwould be the best thing for Spain,” hesays. “We would be many. We wouldhavea majority. Wecouldpushthroughreforms.And wecouldwork togetherattheEuropean level.”
He dismisses new parties “springingup everywhere” — from Beppe Grillo’sFive Star movement in Italy to the UKIndependence party. He reserves spe-cial scorn for Podemos, a supposedpractitioner of new politics that MrRajoyrejects as“a 19th-centuryparty”.
Another Spanish upstart, thecentristand pro-business Ciudadanos party, iswidely regarded as a natural coalitionpartner forthe PP. Thehitchis thatCiu-dadanos says it will not back a PP-led governmentwhileMrRajoyis incharge.Wouldhe,for thesakeof politicalstabil-ity, stepaside? His answeris unequivo-cal.“Whatisin thenationalinterestistorespect the wish of the people. It israthercuriousthata partywith40 seatsinparliament[Ciudadanos]tellsa partywith 123 seats [the PP] to get rid of itsleader.”Besides,“I wonthe election.”
Whatever the shape of the next gov-ernment, his plans for a second termcome with a surprisingly Americantwang — and a story about a recent
INTERNATIONAL
My job is only half done, declaresSpanish PM who refuses to go awayInvisible Man of politics sets out plans for another four-year term ahead of elections next month
encounter with a successful Spanishentrepreneur. “Hestartedhis speech bysaying: ‘Ladies and gentlemen, I havebeenbankruptthree times.’ Thatwas astupendousmessage.Don’tgive up anddon’t wait for the state or the govern-mentto solveeverythingfor you.”
MrRajoyinsistsit is“notthestatethatcreates jobs and wealth”. He wants toinject “more freedom into the econ-omy”.Low-keyandlackingincharisma,heneverthelesssounds,with suchmes-sages, a little like Ronald Reagan, theformer US president. “I don’t havemuchin commonwithRonaldReagan,”he replies, deadpan. “But he was notexactlya badpresident.”
Noteveryonein SpainagreeswithMrRajoy’s assessment of the economy, let
alonehis prescriptions torestoreit. Yethisgreatestpoliticalweaknessis apopu-larrevulsion atthe corruptionthathasnourished parties such as Ciudadanosand Podemos. Since early 2013, whenthe PP was rocked by revelations of aslush fund, corruption scandals haveprompted resignations and arrests, aswell as the public disgrace of high-profilepartyfigures. As PPleaderdur-ingtheperiod,MrRajoyhasdrawncriti-cismfromallsides.
Spain’s primeminister,however,doesnot do repentance. “My party is not acorrupt party. Therewere somepeople[inside the party] who did what theyshouldn’t have done. But they have allbeenforced outalready.”
Mr Rajoyfacesanothervexing politi-
calchallengein Catalonia.The prosper-ous north-eastern region has experi-enced a sharp rise in separatist senti-mentin recentyears andis governedbya cabinet openly committed to inde-pendence. That demand has metimplacable opposition from Madrid.“Wecantalkabouteverything[withtheCatalan leadership] — except thenationalunityofSpain,”saysMr Rajoy.
OnCatalonia,as onother matters,hehasbeenaccusedof inaction.Somerefertohimas“ el hombreque siempre espera ”— theman whoalways waits forsome-thingtoturnup.
But his wait-and-see tactics haveoftenpaid off.“Ifyougovernyouhavetobe clear about two things: the first isyour priorities, to distinguish betweenwhatis importantand whatis not. Theother is to manage time.” In his case,“managing time” clearly means know-ing when to act and when not to act,when to leave the field to his rivals,when tostep up— andfinally, whentostep aside. The moment of his depar-ture,heinsists,hasnotarrivedyet.
In fact, Mr Rajoy says he has startedrejuvenating his party, appointing astring of younger leaders to importantposts. Forthe moment, though, thereisno one to take his place. Written off athousand times, he seems pleased toprove the obituary writers wrong. “Idon’t havea naturalsuccessor,” hesayswith a broadsmile.“AndI will tellyousomething else: sometimes it is no badthingnottohavea naturalsuccessor.”
MICHAEL STOTHARD ANDANNE-SYLVAINE CHASSANY — PARIS
French socialist president FrançoisHollande has emerged as a championof shareholder rights, threatening toimpose legislation that would allowinvestors to overturn executive paypackages.
“Ifthereis nodrasticaction[from com-panies], all decisions on pay by share-holderswill bebindingand theboardof directorswillnotbe abletoundo them,”hetoldEurope1radioyesterday.
The comments come amid a fightbetween shareholders and directors atcarmaker Renaultover thepayof chief executiveCarlosGhosn.
Shareholders this month votedagainstMr Ghosn’s€7.3mpay package.The vote was merely consultative andthe Renault board ultimately opted toleavethe packageunchanged.
This prompted theire ofthe govern-ment,whichhastwo seatsonthe board:thestate slammedRenault’sgovernanceas“dysfunctional”.
Yesterday, Mr Hollandesaid thatthe government couldintroducelegislationto make companies heed shareholdervotes,mirroringmoves madeby theUKandSwiss governmentsinrecent years.
The government was close to intro-ducingformallegislationon payin2013,but instead allowed executives simplyto pass a new set of corporate govern-ancerules,introducing forthefirst timea“sayon pay”forshareholders.
But for many investors, the Renaultincident shows that more concreteaction isneeded.“The ‘sayonpay’ ruleshavetobebindingandnotjustconsulta-tive,” saidOlivier De Guerre, chairmanofPhiTrust ActiveInvestors.
“It could be binding every year oreverytwo orthreeyears.Whatisimpor-tant is that the shareholders get a realsay,”hesaid.
It is not often that Mr Hollande andshareholders find themselves fightingonthesameside.
The French leader’s interests havebecome aligned withinvestors onexec-utive pay as he attempts to win back leftwingvoterswhofeel betrayedby hispro-business U-turn ahead of anexpectedrunforpresidentnextyear.
Itcomesin a seasonof annual meet-ings inEurope, whereunrest ismount-ing over what investors see as egre- giouslyhighremunerationpackages.
Lastmonth, BPwashitby thebiggestinvestor rebellion among FTSE 100 groupsin fouryears whenchief execu-tive Bob Dudley’s pay for 2015 wasrejectedinan advisoryvote.
In France, there was unrest over thepay package of Peugeotchief executiveCarlos Tavares,who sawtotalremuner-ation nearlydouble in2015 to€5.24m,upfrom €2.75mthepreviousyear.
Laurent Berger, head of the CFDTunion,said thatat atime whenthecom-panywas reducing its headcount,“thistype of pay package is bad for socialcohesion”.He calledfor “decency”.
Michel Sapin, the French financeminister, said the government woulduseits14percentstakein thecompanyto vote against the package and urgeothers to do the same. But, in the end,only23.5per centofshareholdersvotedagainstMr Tavares’spackage— perhapsmindfulthat Peugeot’s shareshave risen63percentsinceearly2014.
ALEX BARKER AND JIM BRUNSDENBRUSSELSJAMES POLITI — ROME
Brussels has granted Italy “unprece-dented”flexibilityin meetingEU debtreductiontargets,using itspoliticallee-way to the full as it cautiously policestheeurozone’sfiscalrulebook.
Italy hasemergedas a bigwinner fromthe European Commission’s latestreview of national budget policies inwhich it is set to pull back from — orpostpone— painfulcorrective measuresithadthepowertoimpose.
The decisions have sparked anintense debate within the commissionoverwhatcriticsseeas itsrecordof tol-erating fiscallapsesof countriessuchasFrance, Italy and Spain. Some officialswere yesterdayurging thatparts ofthe
packagebe delayedto avoidpunishingSpainand Portugal before Spain’s elec-tiononJune26.
The need for the debate on timingshows the commission under Jean-Claude Juncker has acted as a self-de-scribedpoliticalbody,evenat theriskof underminingthe credibilityof theeuro-
MatteoRenzi,theItalianpremier,Romesecuredmost ofthe “budgetaryflexibil-ity” it sought, helping it to avoid so-called“excessivedeficit procedures”forfailingtobringdownitsdebtlevels fastenough.
Italy would be allowed extra fiscalroomequivalentto 0.85per centofgrossdomestic product — or about €14bn —thisyearcomparedwiththetargetman-dated under EU budget rules. Such“flexibility”approachesthe 0.9percentof GDP Italy demanded in drawn outnegotiationswithBrussels.
Valdis Dombrovskis and Pierre Mos-covici, the two European commission-ers responsible for eurozone budgetissues,saidin a letterto Rome that“noother member state has requested nor
said “if the rules were taken literally”Italy wouldbe placed under theexces-sive deficit procedure. Overall the EUfiscal rules “have very low credibility”,headded.“Manycountriesare violating
the rules almost constantly from oneyeartothenext.”
Mr Renzi’s government is not com-pletely in the clear, however. Inexchangefor theflexibility,the commis-sion demanded a “clear and crediblecommitment” thatItaly willrespect itsbudget targets in 2017 to reduce thecountry’shighdebt-to-GDP ratio,which
stoodat 132.7 percentof GDPlastyear.In its letter, the EU said Italy should
implement deficit reduction measuresworth at least 0.5 per cent in 2017 and
The commission had less wriggleroominassessmentsofSpainandPortu- gal.Economistsfoundbothtookinsuffi-cient action and missed deficit targets,failings that putthemoncoursefor thefirstfiscalpolicy-relatedfines sincecre-ationof thesingle currency.
ButMr Junckerin particularhas beenalive to Madrid’s concerns. As well asunease over penalising countries thatrecentlyemerged fromcondition-heavybailout programmes, commission offi-cials feared unveiling sanctions nowwouldbackfireinSpain,disrupttheJulyelection campaign and give a leg-up toanti-austerityparties.
Portugalis inthe commission’scross-hairs for failing to control its deficit in2015. Its headline deficit was 4.4 percent last year, 1.7 percentage pointshigherthanitstarget.
PETER WISE — LISBON
Portugal should emulate Italy by set-tingup a so-calledbadbank to relieveits fragile financial sector of a heavyburden of bad loans and problemassets,the country’scentral bankgov-ernor saidyesterday.
Carlos Costa said a “systemic solution”was required to ease an estimated€33bnload of non-performing loansaswell as other non-productive assets,including property,weighingon Portu- gueselenders.
Portuguese and Italian banks facedsimilarproblems, hetolda Lisboncon-ference, sayingItaly’sprivatelybacked€4.25bnAtlantefundforrescuingailinglenders couldserveas a “prototype” forPortugal. This would require the EUwaivingrulesonstateaid, MrCostasaid,
“Itis fundamentalthat banks areableto offload these [non-productive]assets,”Mr Costasaid. A“bankby bank”approach wasnotviablebecauseof EU
restrictions on state aid and the diffi-culty of finding investors to supportindividuallenders, hesaid.
Fitch Ratings estimates the stock of non-performing loans held by Portu- guese banks at the end of 2015 to be€33.7bn, equivalent to 12 per cent of totalloans. TheInternationalMonetaryFundcautionedin Aprilthat Portugal’sbanking system was “hobbled by lowprofitabilityand poorasset quality”.
Differentsolutionsfor tackling prob-lem bank assets are being adoptedacross Europe. Ireland andSpain setup government-funded vehicles in thewake of the global financial crisis.Schemes in Italyand Hungary receivedCommissionapprovalin February.
InItaly, thecountry’sstrongest banks,insurers and asset managers have cre-ated a backstopfundto bailoutweaker
lendersby buyingup sharesthat remainunsold in capital increases demandedbyEUregulators.
Fitch described Portugal’s ability tofunda “badbank”as “limited”, givenitshigh level of public debt, estimated atmore than 128percentof national out-put,andthescaleof itsbankproblems.
EmploymentPledge tocreate 2m new jobs over thenext four yearsif re-elected
Brazil’s interim government is rallyingsome ofthe topnamesin businessandfinance to head the country’s institu-tionsas actingpresidentMichel Temerseeks to win back the trust of globalinvestorsand thecountry’svoters.
Henrique Meirelles, the new financeminister, picked Ilan Goldfajn, chief economist of Brazil’s largest non-statebank, Itaú Unibanco, yesterday toreplace Alexandre Tombini as centralbank president and named other
respectedfigurestobe partofhisteam.Israeli-born Mr Goldfajn, who has a
PhDfromtheMassachusettsInstituteof Technology (MIT), was a central bank director between 2000 and 2003 and
has worked as a consultant for theWorld Bank, the International Mone-taryFundandtheUN.
Theannouncementcomesthe morn-ingafterMr TemerappointedMariaSil-via Bastos Marques, a respected steelexecutive, tolead Brazil’sstatedevelop-mentbankBNDES.Brazil’sGlobonews-paperalso reported thatPedroParente,a former chief executive of Bunge inBrazil, will replace Aldemir Bendine, astaunch ally of the leftist Workers’party, ashead ofPetrobras,the scandal-hitstate oilcompany.
AlbertoRamosat GoldmanSachssaidthe government’s new “dream team”signalleda reversalfrom theheterodoxpolicies of thepreviousPT administra-tion thatanalysts hadblamed forturn-
ingtheformeremergingmarketdarlingintoabasketcase.“Today’s appointments bring to the
Temer administration a team of respected, well-trained technocratswithvery richand valuable experiencein boththe privateand publicsectors,”saidMr Ramos,adding they wouldstillneedcongressionalsupport tosucceed.
President Dilma Rousseff was sus-pendedfromofficelastweekpendinganimpeachment trial — ostensibly forbreaking budget laws, but in realitybecauseof popularoutrageoveralleged
corruptionand the economy — leavingBrazil in the hands of her vice-presi-dent,Mr Temer.
support Ms Rousseff’s impeachment,they also show only 1 per cent wouldelectMrTemeraspresident.
Largely unknownby manyBraziliansuntillast week,Mr Temerhas facedcrit-icismoverhisdecisiontoappointan all-male,all-whitecabinetfor thefirsttimesince thecountry’s dictatorship,includ-ing ministers who have been linked tothePetrobrascorruptionscandal.
However,he is betting thathis abilitytopullBraziloutof itsworstrecessioninmore than a century and tackle 10 percent unemployment will lend him
enough support to lead the countryuntilthe presidentialelectionsof 2018,inwhichhehas promisednottorun.
Followingthe nominationof MrGold-fajn, whose appointment must still be
ratified bythe senate, MrMeirellesalsoproposed yesterday a constitutionalamendment to grant the central bank formalautonomy.
Brazil’s central bankisoneof thefewin the world that is not independentfrom thegovernment, a statusthathasleftit opentopoliticalinterference suchasattemptsby MsRoussefftoartificiallylower interest rates in 2012. While theconstitutional amendment would not grant the central bank full independ-ence, it would give its directors moreprotectionthan theyenjoynow.
NAJMEH BOZORGMEHR ANDMONAVAR KHALAJ — TEHRAN
Iran must implementmacroeconomicand structural reforms and combatmoneylaunderingand terroristfinanc-ingif itis toreintegrateintothe globaleconomy, the International MonetaryFundsaid yesterday.
“The first and most basic requirementfor access to international markets ismaintaininggood macroeconomicpoli-cies so you are viewed as a goodcredit . . . and creatingan environmentin which the economy has a better growth prospect,” David Lipton, theIMF’s first deputy managing director,toldtheFinancialTimesinTehran.
HeaddedthatIrancouldrelyon IMFsupport to develop a “suitablesupervi-sory structurethatis upto theinterna-tional standards for preventing moneylaunderingand thefinancingof terror-ism”.
MrLipton isthe first seniorIMFoffi-cial to visit the republic since the 1979Islamic Revolution. It comes at a diffi-culttimefor thecentristgovernmentof HassanRouhani, whichhas beenstrug- gling to attract foreign investment,despite the lifting of sanctions whenTehran’s nuclear agreement with theinternational community came intoforceearlier thisyear.
While the accord led to the liftingofsanctionson oneofthe world’slargestuntapped markets, there has been nosignificant foreign investment in Iran.Major western banks refuse to processIraniantransactionsandremainwaryof doing business with the countrybecauseof remainingUS sanctions.
Hardline political elements haveexploited the president’s inability to
attract investment, and accuse him of agreeingto anaccordthat doesnotben-efit Iran’s economy, which has been inrecession since 2011 and has a youthunemploymentrateof26 percent.
Iranian businessmen hope the IMFvisit willboost confidencein thecoun-try.
“We hopethevisitby MrLiptonwillput the US administration under pres-sure to resolve the banking dilemmaand also pressure those parts of Iran’sestablishment which resist economicreforms,” said a senior Iranian banker.“Thisisa verysignificantvisit.”
Parliament this year passed a law tocombat terrorism financing, whichcouldhelp removeoneof theobstaclesto re-establishing contacts betweenIranianand internationalbanks.
But Mr Rouhani has repeatedlywarned that political and economicreforms are a prerequisite for foreigninvestment. His government has triedwithvarying degrees of success to fightcorruption but faces powerful militaryandreligiousinstitutionsthat runbusi-ness empires without any regulatoryoversight.
Their impunity deters manyforeign investors who fear they couldinadvertently do business with groups such as the elite RevolutionaryGuards, which remain under US sanc-tions.
Thecentralbankhastriedto containthesegroupsby stabilisingthecurrencymarket andreformingthe banking sec-tor. It has also brought inflation downfromaround40 percentto about11percent in three years — an accomplish-ment that Mr Lipton described as“impressive”.
Construction has officially begun onan important link in the so-calledSouthern Gas Corridor, a $45bnmega-project to supply natural gasfromtheCaspianSeato Europe— andto reduce the region’s reliance onimportsfrom Russia.
Alexis Tsipras, the Greek premier, andMaros Sefcovic, vice-president of theEuropean Commission, were amongseniorofficialswhogatheredin Thessal-oniki, northern Greece, yesterday forthe groundbreaking ceremony for theTransAdriatic Pipeline.
The 870km Tap will carry gas fromthe Turkish-Greek border acrossGreece, Albania and the Adriatic Sea,comingashore insouthern Italy.
Itwillconnectwiththe Trans Anato-lian Pipeline, Tanap, which will bring
gas fromAzerbaijan’sgiant ShahDenizIIfieldin theCaspian.Other links to Tap, including the
planned Interconnector Greece-Bul- garia, will distribute gas across south-eastEurope.
The Southern Corridor is central tothe EU’s efforts to diversify its energysupply andbring gasfrom newregions.Thestartofworkon Tapfollowsyearsof efforts to find a commercially viableprojectto bringgas acrosstheCaucasusandTurkey, afteran earlier plan,calledNabucco,foundered.
“Ifyoulookat theSouthernGasCorri-doryou aretalkingabouttrue diversifi-cation,” Mr Sefcovic told the FinancialTimes ahead of yesterday’s ceremony.“It’s a new source, new supplier, newroute,and reallynewmoleculesof gas.”
“It’sa projectwhichis builtina super-strategic area, very rich in hydrocar-bons, verycloseto Turkmenistan,Iran,northernIraq,”said MrSefcovic.
“I am sure that the guys who aredeveloping Israeli, Egyptian or Cyprus gasfields arealso looking at thispipe asa . . . potential[delivery] route.”
The first gas is expected to arrive inTurkeyin2019andtheEUin2020.
The European Bank for Reconstruc-tion and Development is considering a€1.5bn financing package for the Tapproject. That would include €500mofthe EBRD’s ownmoney — itsbiggestsingleloan todate —with arrangementsfor a further €1bn syndicated loan,
The European Investment Bank,which is owned by EU members, isappraisinga€2bnloantoTap.
With equity financing from the Tappartners, including BP, Azerbaijan’sSocar, Italy’s Snam and export creditagencies,Mr Pulitisaidhe expected theprojecttobefullyfunded.
Russia hasnot givenupplans tobringits gas into south-east Europe, despite
cancelling its South Stream project viaBulgaria in late 2014. Its replacementforSouthStream,TurkStream viaTur-key, thenfaltered asMoscow’s relationswithAnkara soured.
But last year Russia and Greeceagreed to build the South EuropeanPipeline,intendedto bringGazpromgastoEuropefrom2018.
Mr Tsipras’s attendance at the cere-monyunderlineda broadeningof policybyhis leftwingSyriza government afterlast year’s pipeline deal with Russia,whichis Greece’smainsupplier.
“The Tap project will make Greeceinto a regional gas hub and alsostrengthenour tieswithAlbania,”a gov-ernmentspokesmansaid.
Greece still also backs the so-calledSouth European Pipeline as part of its“multi-faceted” foreign policy, accord-ing to government officials. That pipe-line would carry gas through northernGreeceand acrosstheIonianSeasouthofthe Taproute,also comingashore insouthernItaly.
In FebruaryGreece’sstate gas utility,Depa,and Italy’s Edisongroup signeda
memorandum of understanding withGazpromtodeveloptheproject.It isduetobe discussed duringa visit toGreeceby Vladimir Putin, the Russian presi-dent,this month.
Moscow has also been strongly pro-moting Nord Stream 2. However, MrSefcovic warnedthat unlike theSouth-ernCorridor, theproposedsecondRus-sian Baltic pipeline could reduce thenumber of supply routes to Europe,after repeated statements from Russiathat it wanted to close the Soviet-eratransitroute acrossUkraine.
“With Nord Stream 2, the majorproblem is the capacity, the routeand also the politics involved in it,” hesaid.“Wemightend up,insteadofthreetransit pipelines [from Russia] toEurope,with one.”
MrSefcovicaddedthatthe 4,200kmYamal-Europe pipeline from westernSiberia could be seriously affected byRussia’splan. “Because youcan bypassUkraine, youcanclosedownthatpipe-line,youwouldbe ina possibilityto seri-ously limit the supply — even closedownYamal.”
‘Dream team’
Brazil’s Temer looks to regain investor trust Interim government namesrespected figuresto head institutions
Energy
EU breaks ground with link to diversify gas supply
End of sanctions
Iran must reformtopullin finance,sayssenior
IMFofficial
DEMETRI SEVASTOPULO — WAUSAU
Speakingto thousandsoffans crammedintoa high-schoolauditoriumin centralWisconsin last month, Donald Trumpdelivered his usual pitch about eco-nomicwoes:“Weare losingour jobs to Japan,to China,to Mexico.”
But as he wooed Midwestern votes,
the property mogul also revealed thathe was a customer of a company 100mileseast in Wausau,the mostmiddle-classcityinAmerica.
“I buy Wausau Windows,” he said toloud cheers. “They charge me a lot ofmoneyfor theirwindows,butthat’sOK.Inthe meantime,theydon’tleak.”
Mr Trump and Bernie Sanders, theDemocratic rival to Hillary Clinton,have attracted huge crowds with theirstump speeches about bringing jobsback for the middle class. One reasontheirmessageshaveresonatedwith vot-ersfromIndianatoWestVirginiaisthat,according to research by think-tank Pew, household incomes have fallen inmore than80 percentofUS citiessincethestartofthiscentury.
ButincentralWisconsintheeconomyfacesa differentproblem:there arenotenoughworkers.“Thereis hugediscon-nect when I listen to these candidates
talk about . . . trying to bring more jobs,” saysAaronKapellusch, whountilrecentlywas headofthe WausauCham-berof Commerce.
The state has about 70,000 unfilled jobs,he says.“Wedon’tphysicallyhaveenough people here to fill all the pro- jectedjobsas boomers retire. Itis a real
dilemma. We need to attract people.”Wausau is part of Marathon County,
where Ted Cruz narrowly beat MrTrump in the Republican primary andwhere Mr Sanders easily defeated MrsClinton. While the area has a strongindustrial base — with a focus on themetals manufacturing — it also boastsseveralchainsof healthcareproviders,asignificant insurance industry and a growing IT sector that provides back-officeservices tofinancial groups.
According to Pew, 67 per cent of adults in the area lived in middle-income householdsin 2014,thehighest
shareof the229metroareasit studied.Three other Wisconsin cities made thetop 10. Wausau has the fifth-highestaverage creditscoresin theUS, accord-ingtoExperian.
Manufacturing accounts for 20 percent of the jobs in the area. While MrTrumpfrequentlyhighlights theissue of
jobs moving to China, the region hasbeenmoreimmunethanmany becauseofthe nature ofits industrialbase. Met-alsmanufacturersthatare closetotheircustomershavea bigcostadvantage.
“The perception that everything is going to China is driven by consumerproducts,” saysKevinKraft, chiefexec-utiveof JarpIndustries,whichmanufac-
tures hydraulic cylinders. “The thingsthatarelefthereareprettycomplicated,prettyhard tomake, prettytechnical.”
Chris Schock, head of economicdevelopment in the Wausau govern-ment, says the area has full employ-ment.Aftera post-crisispeak of11.6percent in early 2010, unemployment hasfallenback tothe pre-recessionlevelof 4.6percent.
To entice more young people intomanufacturing,Jarp and othercompa-
nieshaveteamedup withofficialsand atechnical college to take students on a“Heavy Metal Bus Tour”of high-techfactories.
“They get a different perception of whatmanufacturingis about,”saysLoriWeyers, president of the college, whosayseffortsto boostthe numberof high-
school students opting for a career inmanufacturing have been “very, verysuccessful”.
While Wausau has been more eco-nomically resilient than other parts of the US, the area has not escaped somenational trends revealed by Pew.Median household income fell from$80,000 to $75,000 between 1999 and2014, and the region lost 3,200 manu-facturingjobsbetween2000and 2014.
But private sector employmentrecorded a netgainof about 1,000 jobsoverthat period— a significantboostforacityofitssize.
“Companies now have to investmoney toadvertisepositions,” saysRobSeils, national salesmanagerfor South-ernStretchFabrication,whichopenedaplantin 2014 tomakecurved metalforWausauWindowsamong othergroups.“How many cities do you go to whereyousee jobadvertisements?”
US demographics. Worker shortage
Wisconsin’s middle-class strongholdbucks national trend
T U R K E Y
BULGARIA
MACEDONIA
ALBANIA
G R E E C E
ITALY
TransAdriaticPipeline
(Tap)
Tanappipeline
Thessaloniki
km
Sections of theTransAdriaticPipeline areunloaded inAlbania. Thelinkispartofa
Officials inTokyo seea hugeearthquake in the industrialheartland, costingas muchas 40percentof GDPanddisruptingsupplychains, as inevitable.Understanding therisk andreducingdamage is critical.
ByRobin HardingandSteve Bernard
The nightmare for YoshiakiKawatawould start atmid-night with a huge earth-quake under the waters of SurugaBay.Most peoplein
the coastal cities of Fuji, Shizuoka andHamamatsu in Japan’s Tokai regionwould beat homeasleepas theirhomesbegin to shake from tremors farstronger than those that struck theTohoku region in 2011. Five minuteslater,a 10mtsunamiarrives.
“Peopleinhouseswillbe hurtby[the]shaking and then a tsunami coming,”says MrKawata,an earthquakeexpertandprofessorof safetyscienceat KansaiUniversity. Hundreds of thousands of peoplecould die.
Thisisnot analarmistmessagefromauniversity professor but the Japanese government’s official worst case sce-nario for a disaster it considers highlylikely tooccurwithin thenext 30years:an earthquake of between 8.0 and 9.0magnitudein thetectonicplate bound-arycalledtheNankaiTrough.Whiletheworst case is not the probable one, the government publicised the scenario in
2013,with ShinzoAbe, primeminister,calling on the Japanese people to be“calmlyand appropriatelyafraid”.
Therecentmagnitude7.3earthquakeonthesouthernislandof Kyushu,whichkilledat least 49peopleand destroyedthousandsof homes,is a reminder that Japanremainsexposedto frequentnat-ural disasters. But a big earthquake inthe Nankai Trough, or directly belowTokyo,wouldbe aneconomicshockof global significance. It would cost asmuch as 40 per cent of Japan’s grossdomestic product and disrupt world-wide supply chains at companies suchasToyota, withrepercussionsfor every-thing from the yen to national defenceandthe country’spublicdebt.
“If we have a disaster on this scalenow, the country will go under,” saysKimiro Meguro, professor of earth-quake mitigation engineering at theUniversityof Tokyo.“There are plentyofexamplesof thisinworldhistory.”
Understandingtherisks andpotentialconsequences of a disaster, such as aNankaiTrough earthquake,is thereforecrucial to understandingJapan’s future—andpreparingforit.
A precarioustrough
The country’s precarious seismology issimple to understand. It sits at theboundary of four tectonic plates, shotthrough with faults like crazy paving.Those plate boundaries give rise to“megathrust” earthquakes in the seasoffJapan’sPacificcoastsuchas themag-nitude9.0Tohokuearthquakein March2011. In the western part of Japan, theplate boundary ismarked byan under-watertrenchcalledthe NankaiTrough.The Sagami Trough runs further east,facingTokyo.
A large earthquake has struck theNankaiTrough every100 to150 years.Thetroughis split into threemain sec-tions, known,from eastto west,as Nan-kai,Tonankaiand Tokai;quakeshit thetwoeasterlysectionsin themid-1940s,butthe Tokai section hasbeen quietfor158years.
That long and ominous silence hasmade a Tokai earthquake the mostfeared and anticipated in Japan. “Theworst case is that Tokai, Tonankai andNankai earthquakes occur simultane-ously,” says Mr Kawata. “That wouldhavea magnitudeof 9.0. Independently,aTokaiearthquakecould be8.0.”
The government’s figures put the
odds of a magnitude 8.0-plus NankaiTrough earthquakeat50 percent inthenext20 years,70percentinthenext30years and 90 per cent in the next half century.
These official numbers have somecritics. Robert Geller, a seismologist attheUniversityofTokyo, hasarguedthatsuchpreciseforecastsarespurious,urg-ingJapanto prepare forthe unpredicta-ble. The Kyushu earthquake, likeTohokuandthe 1995Kobedisaster,wasmerelythelatesttooccurinan areathe governmentclassedaslowrisk.
Whatever the precise odds, a Tokaiquakeis themoststudiedand modelled,making it a useful guide on the eco-nomic and social consequences of alargequakein acoreindustrialarea.
DeepimpactA Tokai earthquakecouldbe moredev-astatingthan Tohoku, which left18,800people dead or missing, thousandshomeless and crippled the FukushimaDaaichi nuclear facility. It is a denselypopulated area and the potential epi-centreisclosetoshore.
The Tohoku quake took at least 25minutesto reachlandandstruckduringdaylight when the population wasawakeand abletoreact.
“But in Shizuoka prefecture [in cen-tralJapan,about200kmwestofTokyo],a tsunami more than 10m high couldstrikewithinfive minutes,” Mr Kawatasays. “That makes it very difficult toevacuate.”
Theestimates ofcasualtiesarefright-ening:in theworstcase,thegovernmentexpects 323,000 deaths. Of these230,000 would bedue tothe impactof thetsunami,82,000fromthecollapseof housesand10,000due tofire.Asmanyas2.4mhouseswouldbe destroyed.
Rail and road links connecting east-ern and western Japan would be cut.Mosthousesintheregionwouldinitiallybe without water and electricity. Theregion’s only nuclear plant is moth-balled — as is every Japanese nuclearplant bar one — but a disaster on thisscale could have unpredictableknock-oneffects.
Breaking
thechainTheglobal impactof theTohokuearth-quakesurprisedmany.Car plantsas farafieldas LouisianaandOhiohadto haltproduction for a lack of parts, frommicrocontrollers topaint.
YetTohokuis onthe periphery. Tokaiis a manufacturingheartland,a linkinsomeoftheworld’smostimportantsup-plychains.
Fanuc, the world’s leading maker of industrial robots, is based near Fuji.About half the world’s musical instru-ments, manufactured by Yamaha andRoland, come from Hamamatsu. One-thirdoftheworld’sNandFlashmemory,built into every smartphone, comesfromaToshibafactorysouthofNagoya.
But even in this region, two supplychains stand out: it is home to Toyota,the world’s biggest carmaker, and tomost of Boeing’s Japanese suppliers.Toyota makes about 1.6m vehicles a
Much ofthe wing andfuselageof theBoeing777 and787 ismanufacturedat aclusterof plantsonNagoyaBay,belong-ing to Mitsubishi, Kawasaki and Fuji
centofJapan’s GDP, equaltothe marketcapitalisationof Apple,Microsoft, Berk-shireHathaway, ExxonMobiland Face-bookcombined. Aroundthree-quartersof that is property damage, most of itprivatelyowned,andthe restis losteco-nomicactivity.
“I think central government wouldneed to pay about ¥100tn [$917bn],”saysMr Kawata. “Inour committee,welistedabout30 kindsof socialand eco-nomic damage, but we could directlyestimateonly10.”
A shock on that scale would likelycauseaglobalrecession.It coulddisrupt Japan’s long deflation — supply wouldfall sharplyrelativeto demand— andisoneofthefew plausibletriggersfora cri-sis over its gross public debt, whichstandsat 240percentof GDP.
Such risks are seldom factored intostudies of Japan’s economy. Analystsfromthe InternationalMonetaryFundto the financial markets assume asmoothpath forJapan’spublic debt.
“We don’tthinkaboutearthquakesinany formal way,” says AndrewColquhoun, head of Asia-Pacific sover-
eign ratings at Fitch. “We make ourbaseline projection and look at risksaroundit.” Buta bigearthquake wouldbeparticularly hardto manage becauseGDPwouldfall atthesametime asthereconstructionbillarrived.
Onebufferis insurance,butthesever-ity of earthquakes in Japan makes ithard tobuycover ata reasonableprice;insurers paid $40bn towards the$210bncostof theTohokudisaster. Forhousing, a public reinsurance schemecan pay out a maximum of ¥7tn,although its current reserves stand at¥1.2tn.Participationintheschemeisupto29per centof households,from9percent20yearsago.
ReducingthedamageThepotentialscaleof casualtiesfromaNankai earthquake means the priorityis saving lives. “How to survive a tsu-namiis thefirst priority.Howto reduceeconomic damage is the second,” saysMrKawata.
According to the government, theworstcase casualty number of 323,000could be lowered to 61,000 through acombination of swift evacuation andensuring that all buildings are earth-quake resistant, compared with 79 percentofthemnow.It wouldnot onlysavemorelivesbut couldhalvethe economicdamage.
The 18,800 casualties in Tohoku,manyof whomdied despitetheprotec-tion of seawalls, prompted a backlashagainst tsunamiengineering.Undertheslogan “fromdisaster preventionto dis-asterreduction”,someexperts arguethefocus should be on surviving and thenrebuilding.
Mr Meguro argues that is short-sighted,saying:“Adisaster thatcosts40or60 percentof GDP— there’sno recov-ering from that if you wait until after-wards.” He says well constructed sea-wallsmakeabig difference.
The worst fatality rates in Tohokutownswereabout10 percent,whereashistoricrecordssuggestfatalityrates of half or two-thirds for unprepared fish-ing villages after a similar tsunami in
1896. In total, 97 per cent of people intheTohokuinundationarea survived.Thatreflects thebenefits ofengineer-
ing, early warning and evacuation. Japanknows thatoneday anotherterri-bleearthquakewillarrive—andifitistomitigate against the impact of such adisaster,the timetoactis now.
Is Japanready forthe ‘big one’?
7.34.2 JMA seismic intensity scale*
Key structures by industryAutomotive Power stations Aerospace
Hamamatsu
Shizuoka
Fuji
Chubuairport
Hamaoka nuclearpower station
Shinkansen
Suruga Bay
Ise Bay
km
Nagoya
The industrial heartland
S i zu o
Suruga
Toyota Boeing
Nagoya
Graphic: Steven Bernard Sources: FT research; Japan Meteorological Agency; Nasa/Visible Earth; Disaster Management Bureau
* Measures intensity of shaking
Nankai
Large earthquakes in the Nankai Trough since 1600
1605
1707
1854
1944
1946
2016
Tonankai TokaiKeikyo (mag )
Houei (mag )
Ansei Nankai (mag )
Nankai (mag )
Tonankai (mag )
Ansei Tokai (mag )
years
years
years
hours later
years later
years years years
Tsunami wave height
Ise Bay
Nagoya
17m
Chubuairport
Hamamatsu
Hamaoka nuclearpower station
19m
9mTsunami reaches land in lessthan five minutes in some areas …
… and reaches up to 30m in height
LAND SIDE CASE*
Damage to assets (¥tn)
Loss of life – worst case
Buildings119.1
Buildings67.5
Assets16.1
Assets29.3
Lifeline**4.1
Other12.2
Transport4.7
Transport3.2
Lifeline2.6
Other8.3
Total: ¥169.4tn
BASIC CASE
Total: ¥97.7tn
Destructive scenarios
Total: 323,000
Tsunami230,000
Tremor82,000
Fire10,000
Landslide600
* Where epicentre is close to shore** Utility supplies
H o n s h u
K y u s h u
Hiroshima
Nagoya
Osaka
km
N a n k a i
T o n a n k a i
T o k a i
Revised tsunami source area (2012)
Nankai Trough
Additonal source rupture and tsunami area (2012)
S h i k o k u
The Nankai Trough
Tokyo
Suruga Bay
S a g a m i T r o u g h
J A P
A
N
JAPAN
Hamamatsu
Chubu
¥220tnEstimated losses in the first yearafter a Nankai Trough earthquake
70%Chance of a magnitude 8.0+ quake inthe Nankai Trough in the next 30 years
323,000Lives lost in Japan’s worst case scenarioof an earthquake in the Nankai Trough
HeavyIndustries.Mitsubishiand Kawa-saki declined to comment on earth-quakepreparedness.Toyotaofferedaninterview but cancelled it after theKyushu quake, saying the responsibleexecutivewas toobusy.
Japanese business learnt a lot fromthe Tohoku disaster. “Our big compa-nieschangedtheirsupplychainsystemsto increase redundancy,” says MrKawata, meaning alternative sources
forcrucial components. Thebig manu-facturers have extensive continuityplans.
However,even if Toyota’s ownplantsmanaged torestartquickly, itis only asresilient as its weakest subcontractorand it relieson regional infrastructure.Car exports go mainly via piers in
Nagoya Bay;Boeing’s partsare flowntotheUSfromChubuairport,builton arti-ficialland inthe samebay. Allcouldbeexposedto theriskoftsunamis.
Mr Meguro raises another issue.“Electricity used to come from a dis-tance, butwiththe shutdownof nuclearplantsafter Tohoku,Tokyo’s electricitycomesfrom combustionplants aroundTokyoBay,”he says.Similarly,Nagoya’selectricityisgeneratedlocally.
Countingthecost
In the worst case of a magnitude 9.0quake,closeto land, Tokyoputslossesat¥220tn($2tn)forthe firstyearalone.Theamount ishard toimagine:40 per
The aftermath of a 2001 quake
The tsunami devastation of 2011
Kobe after the 1995 earthquake
Online
Tokyo weighsthe risks of a bigquake in theNankai trough
6 ★ F I N A N C I A L T I M E S Wednesday 18 May 2016
N Koreapolicy hasbeenpredictable for 60 yearsSir, Philip Stephens, in hisinformativearticle(Comment, May13), performsthevaluablefunctionof explaininghowcentralthe Koreanquestionis topeacein theeastAsianregion,and,byextension, inthe worldas a whole.Where heunfortunately allows thestandardphraseologyto seepback intohisarticle,however,is indescribingNorthKoreanleaderKimJongUn asan“unpredictablycombustiblepersonality”, comparinghimunfavourablywithDonald Trump inthisrespect. Actually, therecordshowshowsingularlyinappropriatethestandardjibe of“unpredictability”is inthecase ofKorea’s leadership.
Formorethan 60 years, Pyongyang’sleaders haveneverwavered fromadvancingthe sameset ofpolicies:forthearmisticeagreementconcludingthe Korean wartobe converted into apeacetreaty, thusendingoutsideinvolvementin thedividedcountry’saffairs,and fornationalreconciliationbetweennorth andsouthand theestablishmentof an independentpoliticalsystemthat allows peacefulconvergencebetween thetwo differentsocial systemsexistingin thecountry.
Thatthis setof policieshas remainedunalteredfor morethan60 yearsissurelyno caseof “unpredictability”.Indeed, particularlywhen seenagainstthetwistsand turnsof internationalpoliticsduringthat time, it mustsurely,onthe contrary, establisha world
record for predictability.DrHugh Goodacre Department of Economics,UniversityCollege London, LondonWC1, UK
Diets wouldn’tbe the samewithout companydittiesSir, Takingexception toLucyKellaway’s blanketadvice that“companies mustneverturn tosong”(May16),wherewouldUS dietsbewithoutsong titles andlines suchas“I’d LikeToBuy TheWorldA Coke”,“Campbell’s Soupis MmmMmmGood”, “ChockFull O’NutsIs ThatHeavenlyCoffee”,“Double YourPleasure,DoubleYourFun,WithDoublemintDoublemint DoublemintGum”,and whenthe indigestion hits,reachingfor an Alka-Seltzer tothesoothingstrainsof “Plop, Plop, Fizz,Fizz,Oh What A ReliefItIs”?If recordcompanieshad never turned tosong,there would havebeenno Sinatra 78snor, in prescientanticipationof thiscolumn,wouldhe havehad thehugehitin theTommyDorseyyearsonRCA’sBluebird label melodicallyadvisingus allthat: “I onlyknowthereain’t nolove at all.Withouta song.” JonathanP Kahn Beechhurst, NY, US
Let’s not confuselecturing with teaching Sir, Having visited numerousuniversitiesover thepast twoyearsI found your article “Tuitionfees faceteachingstandardslink”(May 16)thought-provoking.The article informsusthat universitieswill beallowedtoraisetuition feesif teachingis deemedtobe ofa high enoughquality.
Interesting, but,do universitiesteach? Atschoolyou aretaughtbyteachers.At university youare“taught”by lecturers:thatis, youattend a lecture,are given a readinglist,and left togeton withit. Whenvisitinguniversities, it struck mehowlittle teaching/lecturingtime studentswereallocated eachweekand howmuchthe universitiesspokeof theirresearchprogrammes.
I amleftwiththeviewthatuniversitiesare essentiallyresearchbodies masqueradingas teachingestablishments. Their primeinterestisresearch,but themoneylies withstate-backed lecturing.It looks likelecturingwillbecomeevenmore lucrative, butletus notconfuse it withteaching.Martin Hewes Hewes& Associates, Haslemere,Surrey,UK
Accounting rules that put capital protection in perilSir, Capital markets aremore stablewhentheyare underpinned byrulesthatprotectsavers’ capital.And yet,
oursystemof capital protection — andthusfinancial stability— hasbeen putat riskby internationalaccountingrulesknown asIFRS.Thisisthe stark conclusion ofa report releasedonMay3 bythe EuropeanParliament’seconomicand monetaryaffairscommittee.
As investors andproviders ofrisk capital,we welcomethe MEPs’ report.Wehavelong argued thatprudentaccountsare mandatedin Europetoensurethat profit andcapitalare notoverstated.This is vitalto constrainexcessivelyrisky behaviour,which hasthepotential (especially in thecase of banks) todestabilise thesystem.
Theproblem isthatIFRS— alsomandatedfor useintheEU —failstomeet these requirements.
Thecommissionshouldrespondswiftly. Theapproval of newstandards,suchas IFRS9, which is beingconsidered bythe EuropeanParliament, should be puton holduntiltheycan beshown tosafeguardthepublic good. Forits part,the UK’s
Financial ReportingCouncil shouldexploreadditional companydisclosures thatfulfilcapitalprotectionrequirementsuntil accountingstandardscan be revised.Natasha Landell-Mills Headof Stewardship,Sarasin & Partners, LondonEC4, UK Fulllist of signatories:www.ft.com/letters
Poperisks controversyover female deaconsSir, Likehundreds ofother Churchof England clergy,I resignedmy beneficeandconverted toRome because of thecreationof women “priests”. Thenews that PopeFrancisis settingup a
commission toconsiderthe ordinationof female deacons is therefore a causeforseriousconcern. TheSacrament of HolyOrderis onesacrament, notthree— foundin itsplenitudein theorderof bishop, butalso presentin theordersof deacon andpriest.The CatholicChurchhasalways confinedthis Sacramenttomen.Some women weredescribed as“diakonoi” in theEarly Church,but thecanons of theFirst Councilof Niceamakeclearthat theywerenot regardedas membersof theclergy.
ManyAnglo-Catholicssupported thisstance, only tofind— totheir horror —that,oncethe principlehad beenbreached,the pressurefor women tobeordained priests andconsecratedbishops wasunstoppable.This wasbecausethe CofE’s positionhadbecome inconsistentand illogical.PopeFrancis is playingwith fire.Francis Bown LondonE3, UK
Release the ‘garlic belt’to ensure EU prosperitySir, Martin Wolf’sarticle“Germanyistheeurozone’s biggest problem”(May11)ignoresa number ofimportantfactors.It iseasyto blameGermanyfortheeurozone’s travails,but Mr Wolf should rememberthat Germanyneverwanted thesinglecurrency. It wantedtoretainthe DeutscheMark andreluctantly agreed tothe singlecurrencyonlybecauseFrancedemandedit asthepriceforthereunificationof Germany in 1990.
Germanysaid, however, that,if therewere tobe a singlecurrency, itmustbestrong, likethe DM.Other eurozoneeconomies agreed toreformthemselves tocompetewith Germanyin theeurozone.To helpthem,the DMevenentered theeurozone at toohigh arate in1999, givingtheothersa headstartin their effortsto becomecompetitive.The peripheryfailedtodeliver nearly enoughstructuralreform,so it cannot competeand theeurozoneis a basket case.
Germanyis simply asking theperipheryto deliver onthe dealthatwasagreed.The realityis thatthiswill neverhappen.If theEUwantstoprosperand perhaps evensurvive, theobvioussolution is to releasethe “garlicbelt” fromthe eurozone. Thiswouldnotjust revivetheEUat a stroke,itwould alsostrengthenthe worldeconomy. Therewouldbe theaddedbenefitof promptingBrexiteersin theUK,like me,to reconsider ourviews on
EU membership.Gregory Shenkman LondonW8, UK
Property registermovewould please taxmanSir, Withregardto yourarticleonpropertyregisters (May13), itmight bethatif legislation is implementedwithoutdelay, companiesthatownsuchUK propertiesare alwayscompelledto reveal details oftheirultimateowners/shareholders,withoutwhich thetransactioncannotbelegitimatelycompleted. UKsolicitors/conveyancers will also beobligedto comply. A timelimitshouldbeset forall anonymous owners toreveal themselves, followingwhichtheyforfeit theirpropertiesif theydonotrespondwithfull disclosure.
Thegovernment, therefore, willhavefullremedyagainstsuchultimateowners inthesensethat, ifthefullidentitiesof shareholdersare notrevealedby a stipulatedtimeperiodfollowing purchase,a “caveat” canbeautomaticallyappliedwith theLandRegistry. A usefulsourceof incomesurely, whichHM Revenue& Customswill appreciate.DavidS Baber Amersham,Bucks, UK
Include daytime telephone number and full addressCorrections: [email protected]
State intervention in private sectorpricingis invogueintheUK.
Eighteen months ago, the paydaylending industry was slapped with acap on interest charges equivalent to0.8 percentper dayof anyloan.Morerecently, thegovernmentintroduced anew“livingwage”,substantiallyabovetheprevious minimum,to theconster-nationofmanyinthebusinessworld.
And yet, amid these interventionistpolicies,the Competition and MarketsAuthority has ducked the chance tocrackdownon thebankingsector andsomeof itsexorbitant charges.
In its latest 400-page report on thecompetitiveness of the retail bankingmarket,theCMA saysitconsideredthedraconian option of breaking up thebanks,given concentrationconcerns.Itdismissed the idea, however, becauseof insufficient evidence that suchupheavalwould improvethe function-ingofthemarket.TheCMA,whichfallsundertheambit ofthe DepartmentforBusiness, Innovation and Skills, doesnotmentionthepoliticaldisincentives— the clash with the government’ssoftened stance towards the banks orthedamagea break-upwoulddo tothevalue of its stakes in Royal Bank of Scotlandand Lloyds.
Alternatively, the CMA might haveoutlawedthe traditionof freebanking,which gives customers who remain incredit a range of services, from with-drawals to direct debits, withoutcharge. An obligatory minimumcharge would stop banks subsidising“good customers” by overchargingthosewhoareoftenoverdrawn.
The CMA does not spell out why italso opted against this, though thepolitical arguments are clear again —nogovernmentwould wantto be asso-ciatedwithforcingbankstoend a freeserviceandimposeapaid-forone.
A radical overhaul of the marketmay indeed be unwarranted. Only
3 percentof currentaccountcustom-ersswapbankseveryyear,despitea fareasier processfor doing so,and a newseven-dayswitchingpromise.
On theother hand,complaintshaverocketed.The latestannual datafromthe Financial Ombudsman Serviceshow there were 35,000 complaintsaboutcurrentaccountsin 2014-15,up78per cent.Two-thirdsofthoserelatedto “packaged accounts” — productsthatbundlecurrentaccountsandotherservices suchas savings, mortgagesorinsurance. These are often unclearaboutchargesandare seenby someasa mis-sellingscandalthathasyetto beunearthed. Absurdly, the CMA reportdoes not even mention packagedaccounts.
Thereportdoes accuratelyhighlightthatformany retail andsmallbusinesscustomers, current account chargingstructures, particularly in relation tooverdrafts, are complicated andunclear. So the CMA’s plan to forcebanks to be more transparent aboutterms and conditions is welcome. Butin opting not to impose a ceiling onoverdraftcharges,similar tothe inter-estcap appliedto paydaylenders,theCMAlooks ineffectual.
WheretheCMAhas fallenshort,theFinancial Conduct Authority has theopportunity to excel. The FCA, thebody that imposed the interestcap on payday lenders, has beenrudderlessforsometime.Lastweekitwas criticised by the public accountscommitteeoverlax monitoring ofmis-selling.
But when Andrew Bailey, the
respecteddeputygovernorof theBank of England, takes over as chief execu-tive of the FCA in the summer, he iswidelyexpected toreset theauthority’sreputation as a tough but fair watch-dog.If thatextendsto pickingup someof the work the CMA has shunned, somuchthe better.
Whatever else one thinks of RecepTayyip Erdogan, onehas toadmire hisaudacity. Turkey’s autocratic leadercameto powerin 2002ona promisetobreakthe gripofthe country’s secularestablishment and create a model of democracy for the Muslim world.Fourteen years on, he has indeedtamedthe country’s meddlesomegen-eralsand judges.He hasalso stifledthemedia, suppressed street protests,eliminated rivals and purged institu-tions of overly independent techno-crats. For many Turks, the ruling Jus-tice and Development party (AKP) isallbutsynonymouswiththestate.
Yet for Mr Erdogan, this extraordi-nary concentration of power is notenough: his overriding priority is thecreation of an executivepresidencytolegitimise his one-man rule. To thatend, he has forced out even AhmetDavutoglu, a loyalist he installed asprimeministerand AKPchiefwhenhewaselectedpresident in2014. MrDav-utoglu, whodared toshowa modicumofindependence,willbe replaced byamore compliantcipherat a party con- gressthisweekend.
ThismayhelpMr Erdogantweaktheconstitution to reflect the way healready operates in practice. To pressaheadwitha fullexecutivepresidency,
though, heneedsa biggerAKP major-ity. Hence this week’s parliamentaryvote ona proposalto strip deputies of their immunity from prosecution. If themeasurepasses,itwillopenthewayforcourtcasesto removedeputieswhoopposehisaims— inparticular, Kurd-ishMPswhocould face jail underTur-key’s repressiveantiterrorismlaws.
The damaging effects of MrErdogan’s dominance are alreadyapparent. Thepresidenthas sacrificeda chance of reconciliation in the trou-bled Kurdish south east for electoral gain.When therise of a Kurdish partybrieflydeniedthe AKPits majoritylast
summer, he appealed to nationalistsentiment, allowing the smoulderingconflictto reignite.Some southerncit-ies have since descended into urbanwarfare. Devastating terrorist attackshave become a regular occurrence.Kurds once saw constitutional changeasa chancetowingreaterpoliticalandculturalautonomy;iftheyarenowshutout of the process, they will see littlealternativeto violence.
Turkey’s economy is also at risk.Constantelectioneeringhas putstruc-tural reforms on hold. Mr Erdogan,who holds bizarre views on monetarypolicy, looks likely to remove the lastrepresentativeof economicorthodoxyfrom the cabinet in an imminentreshuffle.A newcentralbankgovernorwillcomeunderpressuretocutrates.
Yetat present, thereis littletocheck MrErdogan.Despitehisflagrantdisre- gard of European values, EU govern-mentsfeelthey mustdeal withTurkeytocontainthe migrant crisis. Washing-tontooacceptsthatAnkaraisan essen-tial, if unreliable, ally on Syria. Eveninvestorsdo notseeminclinedto dumpTurkishassetsonanyscale.
Thisacquiescence is dangerous.TheEU has a huge stake in Turkey’s long-termsocialandeconomicstability;anditsleadersmust makeit clearthatthey
will not accommodate Mr Erdogan’sautocratic whims indefinitely. Theycannot afford to tear up the tenuousmigrationdealbut theycanand shouldmake it clear that its terms cannot bereopened, and that Mr Erdogan’sbehaviouris notcompatiblewitha bidforEUaccession.
Mr Erdogan meanwhile would dowell to think of his legacy. In his firstyearsas primeminister,he wasinstru-mentalin extricatingTurkeyfrom thelost decade of the 1990s, a period of conflicts and economic crises. Now,subordinatingall else tohis pursuitof power,herisksturningbacktheclock.
TheEU hasa hugestake in Turkey’ssocialand economic stability
Thephenomenonwouldnot be soalarmingif itwere confinedto fanaticsonthe fringes ofsociety. Butin SouthAsiatoday, governments— includingthatof India, theworld’s largestdemocracy— havealso succumbed tobouts oftruthiness.
India’shomeministryhas proposeda draconiannew securitylaw withseven-year jailterms anda $15mfineforanyone whodares topublisha“wrong” mapofthecountry— onethatfailsto showdisputed territoryaspart ofIndia,for example —evenif they doso outside Indiaand evenif themap accurately shows thesituationon theground.
Under thegeospatial informationregulation bill,mapmakers suchasGoogle would needapproval froma“security vettingauthority”to guidedrivers alongIndia’s notoriously ill-signed roads.
Theseverest punishments maynotmake itintolaw— evennow, anyonepublishing a mapofIndia“notin
conformity”with theofficialonescanbejailed forsixmonths— butparts of thegoverningBharatiya Janata partyhavenot stoppedat geographyand arehavinga goat history aswell.
In thelatestattemptby theHindurightto rewritehistory,the BJP-run
government ofRajasthanhas deletedcrucial references toJawaharlalNehru— wholed Indiato independencefromBritain andbecame thefirstprimeminister— fromseveral schooltextbooks. Nehru, afterall, hadthetemerityto leadthe Congresspartyatthetime when a memberoftheRashtriya SwayamsevakSangh,spiritualparentof theBJP,wasassassinatingMahatmaGandhi.
Thereis even a bizarreHindunationalist campaignon Twitter toerase300 yearsof history byabolishingthe Mughals(they gaveIndiathe TajMahal,the capital Delhiandmuchelse,butthethingistheywereMuslim), under thehashtag#RemoveMughalsFromBooks.
Over the borderin Bangladesh —ademocracynowin name only— theauthorities aretamperingwithadifferentperiodof historyand havedrafted a billwith theOrwellian titleof Bangladeshliberationwar (denial,distortion,opposition) crime law.
South Asia’sattempts tofreezediscussionon history andgeography,however, go muchfurther thananythingin westernEuropeand arepartof a wideningcrackdown byelected governmentson dissent.
Acrossthe region, officialshavesoughtto restrictthe operations of non-government groupsandsometimesthe media, jingoisticallyportraying NGOinterventions onenvironmental policy or human rightsas foreign-funded conspiraciestoweakenthe motherland.
InIndia, atleast, itis nottoolatetostopthe slidetowardsbigotry andintolerance.One canonly hopethatthe country’s heterogeneous political,religiousand social traditions and
irrepressibleenthusiasmfor freespeech — themost popular televisiondebates aremore likeshoutingmatchesthan discussions — willkeepthemenaceof truthiness at bay.
Wednesday 18 May 2016 ★ F I N A N C I A L T I M E S 7
Comment
Myhunchis thattheconstructionofasynthetic human genome is inevitable.Biotechnology has become a play- groundfor entrepreneurs, whocan pur-sue their dreams relatively unscruti-nised.And itis noteventhat expensive:DrEndy estimatesthatthecost ofcreat-ing a synthetic human genome couldapproach$100,000 within20 years. Foran ambitious biotech multimillionairelikeDrVenter,thatisloosechange.
Perhaps a better question to ask is if scientistsaregoingto takethisepic stepforhumanity, shouldtheycopyone per-son’sgenome,or createa composite?If theformer,then whosegenomeshouldbeso honoured?An Einsteinor a sym-
boliceveryman?Itso happensthatDr Venteris partof an international effort to sequence the genome of that great Renaissance gen-iusLeonardodaVinci.Theworldisfullofhappy coincidences.
Thewriteris asciencecommentator
bilityof a syntheticgenomedevelopinginto a person lingers: the faux genomecould be inserted into an emptiedhuman embryo, and the modifiedembryoimplantedintoa womb.
That spectre worries many. DrewEndy, an influential syntheticbiologist,refused to attend the invitation-onlymeeting becauseof its secretivenature(nopublic,nomediaandnotweeting).
Inan essayfora popularsciencemag-azine, he questioned the usefulness of such aprojectand forecastthatit couldunintentionallydrag humanitytowardsa dystopian future in which genomesynthesis technology is misused andhuman life commodified: “Would it be
OK,forexample,to sequence andthensynthesiseEinstein’sgenome?If sohowmanyEinsteingenomesshouldbemade. . . and whowouldgettomakethem?”
Professor Church defended theclosed-door policy, arguing that pub-licitly would have jeopardised publica-tionofanforthcomingscientificpaper.
to mint a completely fresh genome.HeseesitasasuccessortotheHuman
Genome Project: while that effort readthe human genome, the leaps in syn-thetic biology mean scientists are in aposition to write one. In 2010, the bio-techentrepreneurCraig Ventermade achemical copy of a bacterium genome
and demonstrated that, when insertedinto a host cell, this genomic dop-pelgängerfunctionedlike thereal thing.
held at Harvard Medical School lastweek to discuss building a synthetichumangenomecauseda furore. Thereis something disquietingly reductiveabout constructing something as com-plicatedas a personusingjusta compu-ter, bottles of chemicals and DNA syn-thesismachines.
To be fair, the biologist GeorgeChurch, the prime mover behind lastweek’s gathering, was not proposingthat scientists build an actual person.Instead, he mooted a decade-longproject to build a synthetic human genome(eachcellin yourbodycontainsa copyofyourgenome, thesetof geneticinstructionsrequiredto buildyou).
Professor Church’s vision goes waybeyondgene-editingtechniquessuchasCrispr, whichallowscientiststo cutandpaste tiny fragments of a genome.Rather thantinkeringunderthegeneticbonnet, this would entail building anewchassis;stitchingtogether allthreebillion chemical letters, or base-pairs,
The chemistry involved inbeing human is simultane-ouslyordinaryand extraor-dinary. First, the hum-drum: we are mere assem-
blages ofmostlyoxygen,carbon,hydro- gen and nitrogen atoms, along with asmattering of other elements such ascalcium and phosphorus, which are
strungtogetheras watermolecules, pro-teins and other substances that enableustofunctionaslivingorganisms.
But look at the wonders that springfromsuchelementalordinariness:con-sciousness, love, art, science, philoso-phy, religion,politicsand morebesides.So,it wasnotsurprisingthata meeting
ilicon Valley’s stereotypicalapproach to solving publicproblems isto invest in socialentrepreneurship. Bypasslumbering government
bureaucracy to find innovative solu-tionsthat harness economic incentivestocreatesocialvalue.In placeofgovern-ment-run schools, find corporations tofundcharterschools.Insteadof foreignaid, fund Kiva, a platform that allowsindividuals withcapital,howeversmall,to lend directly to development entre-preneurswhoneedit.
The tech titan perhaps most identi-fied with the concept and practice of socialenterpriseis JeffSkoll,firstpresi-dent of eBay, whose eponymous foun-dation has invested directly in socialentrepreneursaroundthe world,as well
as establishing the Skoll Centre forSocial Entrepreneurship at the SaïdBusinessSchool,Oxforduniversity, andtheannualSkollWorldForumonSocial
Entrepreneurship.The growing class of social entrepre-neursthat Skoll andothers fundstandsbetweenthe privateand publicsectors,applying new tools and approaches tothe workgovernment has traditionallydone.Butin anew book, GettingBeyond Better : How Social Entreprene urshipWorks, SkollFoundation chiefexecutiveSallyOsberg and RogerMartin, formerdeanof theRotman Schoolof Manage-ment, present a model of social enter-prisethat directly engages governmentina numberof criticalways.
They offer a helpful definition of social entrepreneurs, as distinct fromdirectsocialserviceprovidersandsocialadvocates. Social entrepreneurs, theywrite, “seekto shifta stablebut subopti-malequilibriumin a waythatis neitherentirely mandated norentirelymarketdriven. Theycreate newapproachestooldand perniciousproblems.”
Social entrepreneurswho fitthisdefi-
nition include Muhammad Yunus, thepioneer of “microfinance”, or MollyMelching, the founder of Tostan, whofounda wayto convinceAfrican villag-
ers to reject female genital mutilationontheirownterms.It is interesting, and significant, that
socialentrepreneurshave foundways towork with government rather thanaround it. They increase “the willing-
ness or ability of the government toinvest”in aparticulargovernmentserv-ice “by reframing the way its value isarticulated”. Madhav Chavan, forinstance, found a way to measure theefforts of Indian teachers in terms of actual student learning, creating anincentive for the government to investnotin inputs(thenumbers ofteachers
in the field), but in outcomes — thenumbers of literate students. As PaulFarmer, the founder of Partners inHealth, puts it: “Nongovernmental
organisat ions can and shouldstrengthenthefaltering publicsector.”Thepublicsector,howeverweak,pro-
videsvastscale.And,forallitsflaws,itisa sourceof legitimacy. What ismore,itturns out that private entrepreneurscan do more public good when theyteam up with government. The ride-sharing companyLyft,for instance,haspartnered with government planningagencies in California on data-sharingprojectsto helpprovidea moredetailedpicture of how it fits into the regionaltransport network. It has also shareddata about how many customers callLyfttobe pickedupordroppedoffneartrain, bus, or subway stations, raisingthe possibility of an integrated public-privatetransit system.
For its part, the American PublicTransportation Association has pub-lisheda reporton“SharedMobilityandtheTransformationof PublicTransit.”
There are similar examples in other
industries. Airbnb has agreed with thecities of Portland and San Francisco tohelp streamline disaster response byidentifyinghostswhowill takein needy
citizensin theeventofan earthquakeorotheremergencyandsharingthatinfor-mation with city planners. Uber haslaunched a pilot project with MacombCounty in Michigan to offer free ridesforjurors andhas beguna programmein several citiesto increase thenumberofUber driverswith wheelchair-accessi-blevehicles.
The larger point here is the emer- genceof an ecosystem for publicprob-lem-solvingin whichgovernment is nolongerthe only orevennecessarilytheprimary actor. It includes universities,publicpolicyorganisations,direct serv-ice and advocacy groups, social enter-priseandfar-sightedprivateenterprise.All must learn to work together moreclosely. If they do, the result will be anew model of effective, engaged andconnecteddemocracy.
The writer is president of New America, athink-tank,andan FTcontributingeditor
OPINION
Anne-Marie
Slaughter
The stereotypical SiliconValley approachto solving
public problems is to bypass bureaucracy
The uses and abuses ofhuman genomesynthesis
OPINION
Anjana Ahuja
Onescientist hasforecasta dystopian
future in whichlife is commodified
The t e rm “hel i co p te rmoney” is derived from avivid image created by theUSeconomistMiltonFried-man in which a central
bankershowersnotesona gratefulpop-ulace. More recently, the notion hasbeen promoted by Adair Turner, theformer chairman of the UK financialregulator, inhis book, BetweenDebt andthe Devil. It has also won some favourfrombondkingBillGrossand evenrealcentralbankerssuch as Ben Bernanke,formerly chairman of the US FederalReserve,and MarioDraghi, presidentof theEuropean CentralBank.
No one really envisages that moneywould be dropped from a helicopter.What they have in mind is that in arecession government would increaseexpenditure in a manner that woulddirectlystimulateprivatesectorspend-ing.Theideal formatin whichtounder-take the borrowing required is bank notes, which pay no interest and needneverbe repaid.Thatiswhy theideaof dropping currency from a helicopterhasappeal.
But,ofcourse,eveniftheluckyrecipi-entsofthe helicopterdrop wentstraightdown tothepubto celebratetheir goodfortune, thepublican wouldreturn thecashtothebankingsystembytheend of the day, and the notes would end upback in the vaults of the central bank.
The helicopter drop does not givehouseholds reason to hold additionalnotes in their wallets, shops to keepmorecashin theirtills, orbanksto holdmorecurrency intheir branches.
Proponentsofhelicoptermoneyseemtothink government borrowingunder-takeninthiswaydoesnotreallycount—
whetherbecauseit isirredeemable,andnotreally anyone’s liability; or becauseit is channelled through the centralbank. The so-called Maastricht figurefor EU government indebtedness, col-lated by the European Commission,doesnot consolidatethe balance sheetsofthe zone’scentralbanks.
By contrast, the official figure foroverall UK government debt doesinclude the assets and liabilities of theBank of England (as well as the assetpurchase scheme, which holds the£375bnof UKgovernmentdebtthat theBoE has purchased in the name of “quantitativeeasing”).
Ifyouare notalreadybewildered,youwill be if you want an explanation of how the various negative and positivebalancesthat central banksin theeuro-zone havewiththeECB fitintothispic-ture —or ifyouwant anexplanation of howlossestheECBwill eventuallyincuronthedoubtfulcollateralit hastakenontoitsbookswillfinallybeaccountedfor.
Themystery ofall thisarisesfromthebelief that central banks can never beinsolventbecause theycanalwaysprintmoney and that bank notes are notexchangeable for anythingbut anotherbank note. But in fact you can redeemthem byusingthem topay your taxes;andif thecentralbank printsenough of themtheylosetheirvalue.
When thesmoke andmirrors aresetaside,the reality isagain clear:helicop-termoneyis deficitfinancingfunded byshort-termborrowing.
Personally,I donot thinkthispolicyabadidea, althoughGeorgeOsborne,theUK chancellor of the exchequer, andGermany’s chancellor Angela Merkeltake a different view. But this empha-sisesthat an objectof thescheme’s pro-ponents is to persuade politicians andthepublictoendorsea planthey wouldnotapproveifitwerepresentedinasim-pler fashion.Unconventional monetarypolicyis in; Keynesianfiscal expansionisout.Evenif theyarethesamething.
A better idea still would be deficitfinancingfundedby long-termborrow-ing.Whenreal interestrateson 50-yearmaturities for sovereign bonds are
roughly zero, there is little reason toworryaboutthefreshdebt thisimposeson our children. I am sure they wouldrather havehouses tolivein andbe ableto cross bridges that will outlive theirparents.
have no interest in the limited statebelovedof conservatives. Theirdesireisratherthe restorationof losteconomic,racialand sexualstatus. Hisresponseisto promise massive tax cuts, sustainedspending and reduced debt.Buthe doesnotneed logical consistency. Thatis forthedespised “lamestreammedia”.
Hillary Clinton is a weak candidate,tainted by her husband’s failings andher position in the establishment, andshort on political talent. She ought towinbutmightnot.Butevenifshe weretowin,thatwouldnotendthisstory.
MrTrumphas calledforthnewpoliti-calpossibilities.Butit isnot mainlyanexcess of democracy that has broughttheUStothispass.It isfarmorethefail-ings of short-sighted elites. Some of what has happened was right and soshould not have been avoided. Butmuch ofit couldhavebeen.Elites,par-ticularly Republican elites, stoked thisfire.Itwillbe hardtoputoutthe blaze.
latter believe that those who run theeconomyand polityimpoverish, exploitanddespisethem.
Even Republican elites have becometheirenemyandMr Trump hasbecometheir saviour.Itis nosurprisethatheis abillionaire.Caesar,aristocraticleaderof the popular party, brought forth “Cae-sarism”, the rule of the charismaticstrongmanthatMr Trumpwantsto be.
A healthy republic does not requireequality,far fromit.Butit doesrequireadegree of mutual sympathy. Suddenwealth from new activities — conquestin ancient Rome, banking in medievalFlorence— cancorrodesocial bonds.If civic virtue vanishes, a republicbecomesripe fordestruction.
Economic, social and politicalchanges have brought the US to thepoint at which a significant part of thepopulation seeks a strongman. It mustbe sobering to Republican elites thattheir base chose Mr Trump over TedCruz andMr Cruz over everybodyelse.The party elite played populist games,notablyin their adamantrefusal toco-operatewiththepresident.Thosebetter
donors most desired: low taxes, weak regulation, freetrade andliberal immi- gration. To make these causes goals of theRepublicanparty, eliteshad toturnthe government into the enemy. Theyalso had to entice culturally conserva-tivesupporterswithpromisesof changethatwereneverlikelytobe met.
In addition, elites on both sides pro-moted economicchanges thatendedup
destroying trust in their competenceandprobity. Inthis,the financial crisisandconsequentbailoutswere decisive.
Yet by then the middle classes hadsuffereddecades ofreal income stagna-tion and relative income decline. Glo-balisationhas brought hugebenefitstomanyoftheworld’spoor.Butthereweresignificant domestic losers. Today, the
MrSullivancallsonPlato,thegreatestofanti-democraticphilosophers, inaid.Plato, he reminds us, believed that themore equal a society becamethe less itwould accept authority. In its placewouldcome thedemagoguewho offerssimpleremedies forcomplex problems.
Mr Trump is the pied piper of theenragedand theresentful.He hasrisen,arguesMrSullivan,as theman whowill“take on the increasingly despisedelites”.Moreover,the mediarevolutionhas facilitated this rise by erasing“almostany elitemoderationor controlofour democraticdiscourse”.
Demagoguery is an Achilles heel of democracy. Yet the Athenian democ-racy, in which Plato lived, did not givewayto a domestictyrannybutwas bornfrom one. It was the Macedonian kingwhoendeditin 338BC.
Aboveall, MrSullivanunderstatestherole of elites. In the case of the US, hearguesthat wealthis unableto buythepresidency. Mr Obama defeated MrRomney,for example. Butmoney buysinfluence at lower levels of politics.Moreimportant,elites shapethe econ-omyandsociety.If a swathofthepeopleis enraged,elites bearresponsibility.
The righteous attachment of theDemocrats totherightsof womenand,still more, the cause of minorities,defined by race,sexual orientationandidentity, transferred the allegiance of thewhite,male middleclasses, particu-larly in the old South, to the Republi-cans. The racial element in “Obamaderangementsyndrome”is quiteclear.
ThenRepublicanstreated thesesup-porters to a “bait and switch”. Theyneeded these votes for what their
Donald Trump will be theRepublican candidate forpresident. He might evenbecomepresidentofthe US.It is hard to exaggerate the
significance anddangerof thisdevelop-ment. TheUS wasthebastionof democ-racyand freedomin the20thcentury. If itelectedMr Trump,a manwithfascis-tic attitudes to people and power, theworldwould betransformed.
MrTrumpisamisogynist,aracistandaxenophobe.He gloriesin hisownigno-ranceand inconsistency. Truthis what-ever he finds convenient. His policyideas areludicrous,wheretheyare nothorrifying. Yet his attitudes and ideasarelessdisturbingthanhischaracter:heisa narcissist,bullyand spreaderof con-spiracytheories.It isfrighteningto con-sider how such a man would use thepowersat thedisposalof thepresident.
Andrew Sullivan, the conservativecommentator, recentlywrote: “In termsof our liberal democracy and constitu-tional order, Trump is an extinction-levelevent.”He isright.
It might prove surprisingly easy forPresident Trumpto findpeople willingtoexecutetyrannicalordersor tocom-pelthe unwillingto doso. Byexaggerat-ingcrises orcreatingthem,a would-bedespot canpervertjudicialandpoliticalsystems. The presidents of Russia andTurkey are skilful exemplars. The UShasan entrenched constitutionalorder.
An elite at themercy of its
own creation
Today the Republicanestablishment is theenemyof whitemiddle-classvotersandTrumpis their saviour
The wide-openspacesofBoulder, onthe edgeoftheRockymountain range,have longattractedthoselookingto challengeconvention and escapetherat race ofsalariedwork.Inthe 1960sit washippies.Today itisambitious tech start-upentrepreneurs. Theproximity to natureprovides a welcomeescapefor thoseliving herefrom theintensity ofbuildingbusinesses.Founders, lawyersandinvestors havemadetheirhomein Boulderin recentyears.This isa bearmarketonlyin thesense that thelarge,furry animalsoccasionally roamintotown.
Thecase for: Boulder hasboth brains (human) andbeauty (that of mothernature). The University ofColorado’s Boulder campusis considered one of the bestplaces to study for a PhD inentrepreneurship. Boulder isalso home to offices forthree national laboratories,the National Center forAtmospheric Research,National Institute of
Standards and Technologyand National Oceanic andAtmospheric Administration.
Thecase against: Successhas created some seriouscapacity challenges.Demand for offices andhomes has pushed upproperty prices. Congestionhas also become a problemas more workers, unable toafford a home in Boulder,opt to commute by car fromneighbouring towns.Founders complain that thecity government does littleto help them.
Localheroes: Techstars is aglobal tech start-upaccelerator, founded inBoulder in 2006. It operates
more than 20 programmesin the US, Europe, theMiddle East and Africa,helping more than 500companies collectively raisemore than $1.3bn to date. Itsfounders, David Cohen, BradFeld, David Brown and JaredPolis, have helped Boulderset up its start-up“ecosystem”.
Boulder-based Zayo,which provides high-speedbroadband infrastructure,started in 2007 and gained aNew York listing in 2014. Itoperates in more than 300regions in Europe and theUS.
Showme themoney:Several Silicon Valleyventure capital firms haveopened offices in Boulderbut the city also boastshomegrown early and laterstage investors. Key playersinclude Foundry Group,Access Venture Partners,Boulder Ventures andGrotech Ventures.
Whatthe localssay: AliciaRobb, a Boulder resident andsenior fellow at the EwingMarion KauffmanFoundation, a research andgrant-making body
promoting entrepreneurship:“While the angel communityis growing and gettingstronger by the year, laterstage VC financing is morelimited than the costs andyou may need to work a lotharder to get that follow-oncapital.”
David Brown, managingpartner of Techstars:“Boulder is not the cheapestplace to live and thosefounders lucky enough to bethere need to rememberthat there are greatecosystems in other parts ofColorado too, includingDenver, Colorado Springsand Fort Collins, amongothers.”
JonathanMoules
Let’s launch in . . .
Boulder, Colorado
Population : 105,101 (2014)
Medianage :29.9years(USmedianage,37.7years)
Average householdincome: $62,797 (US:$53,657)
Anyone walking thesometimes mazelikepassages in LondonUnderground stations willappreciate the challengefaced by the blind orpartially sighted.
However, a step towardseasing the navigation oflarge built environmentssuch as public transport andshopping malls will be takenthis week.
After trials withTransport for London andSydney Metro, a not-for-profit organisation calledWayfindr is making public aset of rules, known as anopen standard, for theconsistent use ofsmartphone-basednavigation for the vision-impaired.
In underground stations,Bluetooth beacons placedaround the walkways,
escalators and platformssend a reference point to auser’s smartphone about,say, a set of steps orentrances. This translatesinto an audio message.Using a global open
standard, metro managerswould know that bestpractice is to place a beacon2m before an escalator andan app developer knowsthat the appropriatelanguage when a userpasses it is: “You areapproaching the escalator.”
Wayfindr is a jointventure between the RoyalLondon Society for BlindPeople and ustwo, aShoreditch design studio. InDecember, Google’scharitable arm, Google.org,gave $1m to fund trials byWayfindr.
Enabling developers ofthe physical world — suchas those who build shoppingmalls — and developers ofthe digital world to adhereto a common protocol fortechnology, language andphysical siting of beaconsbenefits everyone, says
Umesh Pandya, chiefexecutive and co-founder ofWayfindr. He says it will cutcosts and uncertainty fordevelopers and enable auniform experience forusers.
Innovation to watch
Digital navigation for the blindRICHARD NEWTON
BUSINESS LIFE
car maker, whosefounderElon Musk’sambitionsincludewantingto setup col-onies on Mars, may seem far-fetched.ButMrVlessinghasa touchofthesamechutzpah,thoughhischosenindustry isa slowerburn thancars,involving yearsof negotiation with planners and localauthorities.
Walking into a Pocket block, yousense the many small ways in which itbreaks the London mould: bike shedsinstead of parking spaces; unheatedcommunal areas; showers, not baths;underfloor heating; compact apart-ments with large doors and windows.The impression is less claustrophobiathan pared-back style well-suited tobike-riding, HBO-watching Europeanurban-dwellers.
Born in Arnhem in the Netherlands,MrVlessing—alsoa jazzsaxophonist—
grew up in Amsterdam, Brussels andLondon, speakingfour languages.Afterstudyingin theUK,he becamea corpo-
Onelessonfrombankingwastheim-portance of capital structures. “Youcould have thebestmanagement teamand the best ideas and the best opera-tionsinthe world, butif youdidn’t alignthat intelligently to the right capitalstructure . . . you could be mortallywounded.” Heand MrHarbard resistedpartingwithtoomuchof Pocket’sequitytooearly, retaining90 percentuntil theRelatedsale.
Mr Vlessing set up his own manage-ment consultancy, Media Finance, in1991 and six years later was hired toheadtheentertainment armof Chester-field Properties and turn round ailingpartsofthedivision.Thatincludedrevi-talisingprogrammingat WestEnd thea-tres; under his leadership YasminaReza’s Art wasahit.
Enduring lessons from this time inc-luded the importance of cultivatingministers.“I observed [filmproducers]SirDavidPuttnam andSir RichardAt-tenborough working on government,andI learnta huge amountfromthose
guys in terms of how you position anindustry so that government wants tohelp it.” At Pocket, contacts with localand central government are “the life-bloodof ourbusiness”, saysthe urbaneMrVlessing.
When Chesterfield was sold in 1999,Mr Vlessing’s priorities for what to donext included “working with largeamounts ofmoney” andthe builtenvi-
Pockettooktimeto gaintraction, andvictories along the way linger in hismemory:one wasventurecapitalfund-
ing from a subsidiary of the US food group Cargill. Later, in 2013, Pocketsecured a £21.7mloanfacilityfromtheGreater London Authority, the author-ity’s first to a profitmaking house-builder.The following yearit secured a£30m revolving debt facility fromLloyds.ButMr Vlessingadmitsthecom-panywas “runningout ofabilityto con-tinue toraise capital”at thetimeof itsRelateddeal.
Pocket’s current pipeline includes600one-bedroomapartments,butwithaddedfirepowerfromRelated, it hopesto expand into two-bedroomed flats,privatelyrentedhomesand buildingonlandboughtfrom publicbodiessuch asTransportfor London.
Are Pocket’s apartments, at an aver-ageof38 sqm, toosmall?Micro-housinghas its critics — the Royal Institute of BritishArchitectshascalledfornationalspacestandards. Butsize doesnot seemto be a worry for potential buyers of Pocketflats, whofar outnumberavaila-ble homes. Typical buyers are 32 andearning £40,000 a year. But some aremuch older; the price of the homeremainsdiscounted in perpetuity evenwhenit issoldon.Mr Vlessingsupportsspace standards, but “what works forthe[whole]country doesn’tnecessarilywork for London”, he says, citing NewYork, where space standards “hadutterlydistorted themarketand peoplewerebeing pricedout”.
ley,chairmanof BerkeleyGroup andaleading figure in UK housebuilding, as“an incredible support and mate”. Buthe continues to relish his outsider sta-tus.“TonysaidtometheotherdaythatIsucceeded withPocketbecause I askednone of the right questions, because Iknewnothing.”
Entrepreneurs. Marc Vlessing, Pocket
Big in small housing
The Londonmicro-homes builder says that he hassucceeded by negotiatingthrough the regulations,writesJudith Evans
Mydeskat theFinancialTimes ismostlyvery dull.
Thereis a computeranda phone,surrounded bya pile ofguffI keepmeaning toreadand,becauseI amtheFT’senvironment correspondent,awildlifecalendarsomeone sentme thatthis monthshows a photoof a largetoadgettingreadyto spawn.
Butdown onthefloor bymy right,there is something muchmoreinteresting, an object sorare andendangered I amnotevensureitis
On creativity: “This country has a veryVictorian sense that creatives sit on theleft and business suits sit on the rightand never the twain shall meet. I have asmuch regard for a good accountant or agood cost consultant as I have for agreat architect or designer.”
On banking: “I didn’t want to go backinto the City . . . I realised when I was ayoung banker I had disproportionateamounts of power but no responsibility.”
On keyworkers: “I never understood [inthe 1990s] why the government was sofocused on nurses and firemen andpolicemen and the whole key-workerconcept . . . If you were the librarian ofGoldman Sachs you were just as worthy,to my mind, of support in housing.”
Creativityand keyworkers
As Marc Vlessing cycledaround London more thana decade ago, he noticedsomething odd going on.Developers were building
on small infill sites in the UK capital,helping to fulfil a dire need for morehousing. But every scheme seemed toconsistofexactly14homes.
“They were all made up of 14 over-sizedthree-bedroomflats.So I spoketoaplanningconsultantandI said,‘Whyisitall 14?’ Andhe said, ‘Youreallyknownothing’,”saysMr Vlessing,investmentbanker-turned-founder of specialisthousebuilderPocket.
Itturned outthat developments of15or more apartments are obliged toinclude a quota of affordable or socialhousing,or paya penalty.Hencethe14-apartmentlimithad become anunwrit-tenrule. ItwasonethatMr Vlessingsetabout disrupting with Pocket, whichspecialisesin micro-housing.
He negotiated with local authorityplannerstobuildblocksof morethan14apartmentsthatwouldbe soldto own-er-occupiersat 20 percentbelowmar-ket rates: these were not technically“affordable” homes under the govern-mentdefinition , butintermediate hous-ingsorely neededby young profession-als in the UK capital. In exchange, hewouldofferno social housingand wouldbuild flats that would be smaller thanexistingspace standards.
A decadelater, Pockethas builtabout250suchhomesoutsidecentralLondonand plansto increase itsoutput steeplyaftersellinga 50per centstakein Febru-ary to the Related Companies groupmajority owned by US billionaireStephen Ross, in a deal that valuedPocket at £25m. It expects turnover of £38m,andto makeitsfirstprofit,in theyeartoOctober2016.
Pocket commands influence beyondits size: the UK government has bor-rowedits phrase“starterhomes”and its20per cent discount ideafora flagshipscheme of the same name aimed atmaking properties affordable to first-timebuyers.
Mr Vlessing had no housing experi-encewhenhesetupPocketin2005withPaulHarbard,a former financedirectorof the housing association PeabodyTrust.Instead,he arrived witha patch-workCVofbankingandmediaroles.
“It’sa bitliketheTeslastory, isn’tit? If
youstarted fromthe legacybusinessof bashingoutpetrolenginesyouwouldn’t get to Tesla,” he says, speaki ng atPocket’sCoventGardenofficein centralLondon. “It’s very hard to disrupt anexistingbusiness.Youhaveto doit fromoutside.”
It has been raining Ratmanskys inNew York this season. Miami CityBallet delivered one piece, New York City Ballet reprised another, andnow American Ballet Theatre, wherethe 47-year-old Russian émigré hasserved as resident choreographer since2009, is devoting four of its nine pro- grammesto hisballets,all butonemadeforthe company.
As if to return the favour, his latestwork takeson thewordin thetroupe’sname to which he has paid the leastattention: American. With Serenade After Plato’s ‘Symposium’ , to LeonardBernstein’s eponymous1954 score,Rat-manskyhasnot only chosenan Ameri-can composer, but has also delineatedan American type, as that other greatRussian choreographer, Balanchine,likedtodo whenthemusicbroadcastitsnationalorigin.
Ratmansky’s Americanis soft-spokenyet eloquent in the arms, puckish inthe feet, propulsive in the legs andbendy in the torso. He is winninglyun-selfconscious, inadvertently intro-spective, quick to adapt, erratically
idealistic and, above all, individual.Serenade , like its music, is organised
around thisindividualism. Eachmove-mentlimns a different striking charac-ter (in all, seven men and one muse).Herman Cornejo personified thescherzo— inthe Plato,the doctor Eryxi-machus’stheoryof harmony asthe bal-ance of opposites. Arms feathery andforce ballistic, he bounded into spacewith one impossible step and reverseddirection mid-flight with another.Calvin Royal III’s beautifully elongatedarms seemed to paint the air with thelyricalache ofBernstein’sadagio. DandyBlaine Hoven tried on the Charlestonhere, a 1930s showgirl flounce there.
Whenthemensharedmoves,theystag- geredthetiming sothat eachstoodout.They stretched convention (such as,only ballerinas do bourrées) to meettheirexpressiveneeds.
In Plato’s Symposium , theparticipantsrevealthemselvesin theirdefinitionsof love.In Ratmansky’s Serenade ,thequal-ityof theirstrivingmakesthemen dis-tinct.Withthepas dedeux,theredoubt-ableMarceloGomeswasnot romancingDevonTeuscher —the usualdeal— butracing to keep up with her, who washeadlong like sudden thought and aselusiveas truth.
Fewsoundscapturethesenseof hangingon in the face of an existential crisis ascompletelyas a MilesDavisballad.Nor-wegian trumpeterArve Henriksencap-tures a similar plaintive, tensile moodwith a few simple phrases, a battery of effectsandawraithliketone.
Atthisgig, titledPlacesof Worship,hepresentedthree densely textured med-leys of compositions inspired by reli- gious buildingsand ruins. Overall,Hen-
riksen’s trumpetwas a smallbutpower-ful component in a complex and con-stantly evolving soundscape thatinvolved field recordings, EivindAarset’s synthesisedguitarand livesam-plingbyJanBang.
The single-set performance beganwith a pre-recorded swirl of wind and
Henriksen evoking all that’s blue andbreathlessin impressionisttrumpet.Asthe samples and sequencers kicked in,thetrumpetaddeda humantouchto amusical landscape whose bleak emo-tionaltugwas emphasisedby visualsofamist-wreathedpine forest.
Thepiece unfoldedthroughscattersof flutelike phrases that were sampled,sequencedand bouncedaround.At onepoint they mimicked Asian sacred
music, and here Henriksen, who singsbeautifully,delivereda hightenor incan-tation.Later,he sangina falsettoaspureandstrongas a trebleinChristianliturgy.
The second piece delivered malevo-lence and shock as it roared, shriekedand fragmented into free jazz abstrac-tion, though even here there weremoments of calm. The long finaleopened with the wheeze of an antiqueharmoniumthat investedSt Luke’swiththesolitudeof a smallisolatedcommu-nity. Butas Aarsetadded subtly shadedtextures, staccato clicks and the occa-sional single note, and the impressiveBang live-sampled and mixed in key-boards, it too changed direction withhints ofthe chants andbellsof monasticritualfollowedbyburstsof improv.
Eachimprovisedpiecewasa captivat-
ingstudyoftextureinspiredby thespir-its of sacred places. Intense, authenticandforeboding,it deservedits encore,aplay on the deconstructed syllables of Fri-day-the-thir-teenth. “Take carecrossingthestreet,”Henriksenwarned.
arvehenriksen.com, barbican.org.uk
JAZZ
ArveHenriksenBarbicanSt Luke’s,Londonaaaae
Mesmerising:RichardAshcroftat theRoundhouse.Belowright:RupertEverettin‘The Judas Kiss’C. Brandon/Redferns;Richard Termine
C L A S S I C A L M U S I C
Stravinsky: Myths andRitualsRoyal Festival Hall,Londonaaaae
Richard Fairman
Therhythm ofthe dance runsthroughsomuch ofStravinsky’smusic.Tapintothat and its spirit soars. It is not often,though, thatperformances of hisballetscores in the concert hall come withdancing, the extra element that madethisconcertoutofthe ordinary.
Each year the Philharmonia Orches-trapresents a themedmini-festival.Thisyear the subject is “Stravinsky: Mythsand Rituals”. There are five main con-certs, witha rangeof supportingevents(throughto September). Itis surprisingthatithas takenEsa-PekkaSalonen,thePhilharmonia’s principal conductor, solong to settle on Stravinsky as the sea-son’sfocus.The verticalcutof hismusic,itsinsistenceon clarity andbrilliance—all are features of Salonen’s own music
andattherootof hisconductingstyle.The performances at this openingconcert were clear-cut, crisp, potent.After a brief fanfare, the programme
opened with the Symphonies of Wind Instruments , the 1920 score (revised in1947) thatsumsup thepithand preci-sionof theneoclassicalStravinsky.
Thencame Agon, oneof Stravinsky’slater collaborationswith choreographerGeorgeBalanchine. Therestricted spacebehind theorchestraheremeantKaroleArmitage’schoreographyhadto berela-tively limited. There were six dancers,rather than Balanchine’s 12, but in hermoremodern styleshe introducedele-mentsof a sportscontest, the“Agon” of theGreektitle.Theproblemwasthelay-out of the orchestra. In order to makethedancers visible, theplayerswere allon a level and the sound of wind andbrassatthebackwas dulled.
Throughout his conducting career,Salonen has given a cracking perform-anceof TheRiteof Spring .Thisonewasnodifferent— thoughsadly withoutdanc-ers,whichwouldhave beenoptimisticinthespaceavailable.The Philharmo-niaplayed withmostlysharpensem-bleand muchenergy. Theorchestrawasraisedupagainnow,thoughwiththeorgan doorsclosedbehindit the
sound remained unpleasingly hardandtwo-dimensional.
philharmonia.co.uk
Ludovic Hunter-Tilney
Richard Ashcroft still has it, the spark that separates the top tier of frontmenfrom the journeymen toilers. At theRoundhouse the former Verve leadermadeformesmerisingviewing,project-ing a mix of arrogant disdain and pas-sionatecommitment,one momenteye-ballingthe audience frombehind rock-star sunglasses, the next punching theairin fullrabble-rousingmode.
Duringonesongtherewereno fewerthan seven spotlights trained on him.Helookedleanand intense,as muchsoat 44 as he did in his Britpop heyday.“Upforit,” inthelingoofthatvanishedera.Meanwhile, hisbackingmusicians,who went unintroduced, stood in theshadows. “Well played, boys,” Ashcroftsaid attheendof“MusicIsPower” inamomentof magnanimity.
Yes,Ashcroftstillhas it.But whathedoesnothaveare thesongstomatchtheswagger. Or rather he did, almost 20yearsago: butnomore.
This week he releases These People,his first solo album in a decade. Thetracks debuted at the Roundhousewereunderwhelming.
“Out of My Body”, sung by Ashcroft
with a gas mask dangling around hisneck, was unmemorable techno-rock aboutstatesurveillance,at onceurgentand dull. “This Is How It Feels” had anicesenseof stadium rockbombastbuttook an age to erect its slow-buildingverse-chorus-versescaffolding.
String arrangements (played on asynthesiser) echoed The Verve’s 1997album Urban Hymns . But his former
group’s volatile chemistry has provedimpossible to replicate. “They Don’tOwn Me” belied its message of inde-pendence by sounding like an Urban Hymn s clone, a defiant singalongdoomednotbe sungalongto.
At least Ashcroft was in good voice:his statuesque transatlantic drawlbestrode the music like a colossus.“BreaktheNight withColour”,fromhis2006album Keysto theWorld ,markedapartial breakthrough, ending with thesingerplayinga wildelectricguitarsoloandbellowing“Yeah!”
But the longed-for release of energyonly came when he revisited his Vervesongs, climaxingin a majesticrenditionof “Bitter Sweet Symphony”. Although
unable to scale new heights, Ashcroftcanstillreachtheoldones.
richardashcroft.com
Songsstruggletomatchthe swagger
PO P
Richard AshcroftRoundhouse,Londonaaaee
MaxMcGuinness
According to OscarWilde, life imitatesartfar morethanart imitateslife. Whatthenare weto make ofRupert Everett?Alegendarilydecadentyouth,in middle
age the English actor now leads anapparentlydomesticatedexistence. Yetdespiteabandoning Wildean excess,hisphysical resemblanceto theIrish play-wrighthasdeepened.
The broad forehead, the equine pro-file andthegentlemanner. It’s alltheredowntoWilde’s MonaLisa-esquesmile.Andthroughout ActOne ofthis revivalofDavid Hare’s 1998play TheJudasKiss,Everettdelivers a convincingportrayalofWilde duringhis public disgrace thatcaptures theauthor’swit, vanity, kind-nessand self-destructiveness.
Alas,there’s notmuchelse tocompli-menthere. UnderNeil Armfield’sbrisk direction,theotheractors— principallyCharlie Rowe as Wilde’s lover LordAlfred“Bosie” Douglas andCal MacAn-inch as friend (and ex-lover) RobertRoss— alldoa decentjob.ButtheyaretrappedbyHare’scartoonishtext.
Bosie was certainly a piece of work.ButforHare toportray himas nothingbut a talentless shit (he actually wrotesome fine poetry) and the chief archi-tectofWilde’sdownfalldoesadisservicetobothhistoryanddrama. Here itis animpetuous Bosie who prevails uponWildeto rejectflightto Franceandfacecertain imprisonment after the failureofhis libel actionagainst theMarquessofQueensberry.But thereis noevidenceBosiedid anything ofthe kind.Accord-ingto W.B. Yeats,it wasin factWilde’sfiercely nationalistic mother who toldher son she would never speak to himagain if he fled (and thereby evaded
martyrdominanEnglishjail).Hare’s inventions and omissions
thus reduce Bosie to a one-dimen-sionalvillainwhile eliminatingthesaga’s political subtleties. And inActTwo,set inNaplesafter Wilde’srelease,even Everett’smaskslips ashe conveys little sense of having just undergone two years’ hard
labour. His art, in other words,failstokeepupwithWilde’slife.
ToJune12, bam.org
THEATRE
The Judas KissBAMHarveyTheater, NewYorkaaeee
Plaintive:Arve Henriksen
THE LIFE OFA SONG
‘Every Rose Has Its Thorn’became a hit in 1988 for the‘hair metal’ band Poison.
Ludovic Hunter-Tilney revealsthe story behind this broodingpower ballad
10 ★ F I N A N C I A L T I M E S Wednesday 18 May 2016
WearenotIkea. This isthekeymessageof Maisons duMonde.We area “creator ofinspirationallifestyleuniverses”,not a purveyorof chipboardflat-packto themasses.We donot livein bigyellowshedsbeside motorways.Wesell moreonline.Andwhileweareprivatelyownednow,we willnot be formuchlonger. TheFrenchhomefurnishingsgroup is currentlytoutingitswares around Europe’s fundmanagersahead ofa Parislisting.
Beneaththe gushinglifestyle PR liesa decent growth story.Since2001,Maisonsdu Monde hasincreasedsalesat a compound21 percent, expandingto262 stores across Europe. About 17percent of salescomefrom onlinechannels,higherthan at rivals.Anotherquartercome fromshops, butareof products(mostlyfurniture)notactuallyon display inthe stores,whicharebiased towardssmalleritems andsoftfurnishings. By 2020, it aimstohavedoubled sales, witha quartercoming fromonlinechannels andhalf fromoutside France.
Whatpricethis narrative?At thebottomof theIPO pricerange,Maisonsdu Monde would havean enterprisevalueof roughly€1bn. Thatequatesto10 times its2015 earningsbeforeinterest,tax, depreciationandamortisation; themultiple risesto 12timesat thetopoftherange. Upto 40percentofnetincome will bepaidoutas dividends. Dunelm,a UK-quoted softfurnishingsretailerthat hasalso grownsteadily,tradesat 13 times itsebitda.
Butthecompany isfar from alonein
plottingexpansion intoa fragmentedmarket.Conforama, a similarlysizedFrenchrival owned bySteinhoff, is alsoplanningto grow, hence itsrecentbidforDarty. Ikeaitselfwantsto doublesalesby 2020and is experimentingwithsmallerstoresand citycentrecollectionpoints. Andlike allits peers,Maisonsdu Monde willbe affectedbyconsumerspending ina continentcurrentlystaving offdeflation and
homeland.Evenin thismaturemarket,Vodafone is expandingits dataandvideoofferthrough an agreementwithelectricityutility Enel.
Along withlocalmobileoperatorWind,the group willuse Enel’scountrywidereach tocreatean opticalfibrebroadbandbackbone,avoidingrelianceon incumbent TelecomItalia.
A prospectof acceleratinggrowthwithless capexhas warmed the
Vodafone:seasoned
market’s attitudetowardVodafone.Itsshares haveoutpaced Europeanrivalsthisyear.Overthree years, though,theshares havegonesideways. Changingthatwill requiremore thanjust
coveringthe dividend.
CROSSWORDNo. 15,243 Set by FLIMSY
JOTTER PAD
ACROSS 1 Malicious Head of State
examines checks that couldassess how much benefit onereceives (5,5)
7 Right time to grieve (4) 9 Talk about a long story! (4)10 Twix and KitKat? Mars banned,
unfortunately (5,5)11 Cheer very quietly, leaving
location (6)12 They put clothes on chests of
drawers (8)13 One leaves string of invectives
with rotten type of compromise(5-3)
15 Italian novelist grabbing hardcopy (4)
17 Work over, returning to drink (4)19 Something for writers involved
with end of book to put up with(8)
22 Model rubs hair and gets spray(8)
23 Adore purchasing a good saladplant (6)
25 At Territorial Army in time tocapture soldiers, showing talent(10)
26 Slap following second argument(4)
27 Starts to test rules? Our dad puthis foot down! (4)
28 Incoming water – desiring it atsea? (6,4)
DOWN 2 European chap upset by our
charm (7)
3 Antelope set to be raised inNorth America (5)
4 Servant able to polish concealedpart of furniture (5,3)
5 Unhappily sniff assent withdosh being withdrawn (15)
6 Creeps after small flies (6) 7 Passing shot at tennis
captivating Queen (9) 8 Discover uranium on new planet
(7)14 Wild animal died after smash
against car’s instrument panel(9)
16 Doctor lost knee bones! (8)18 Professional lacking heart to
bury dog (7)20 Yank with alcohol keeled over –
one’s tight (7)21 Something attached to a
sledge? Bolt, perhaps (6)24 See – tv is rubbish without
electric current (5)
Solution 15,242
W i n d s e e d s i n P H
I
LOW
LOW
W
1 0 2 0
1 0 2 0
1 0 1 0
1 0 1 01 0 1 0
1 0 1 0
1 0 1 0
1 0 1 0
Malta Sun 23Ma ni la T hu nd er 35Mia mi Thunder 29Milan Fair 21M on tr ea l C lo ud y 15Mo sc ow S howe r 18Mumba i Fa ir 34Munich Sun 19
Naples Fair 21N ew Yo rk Fa ir 18Nice Fair 19Nicos ia Sun 29Oslo Cloudy 16Paris Shower 16Pr agu e C lo ud y 17Reykjav ik C loudy 7Riga Cloudy 16Rio Rain 24Rome Fair 21San Francisco Sun 22S ingapore Shower 33S tockho lm Fa i r 16Strasbourg Fair 21Sydney Sun 21Tokyo Sun 25To ro nt o C lo ud y 14Vancouver C loudy 18Vienna Sun 18Wa rsaw Fa ir 15Washington Cloudy 17Zagreb Sun 22Zurich Fair 20
A bu D ha bi S un 42Amsterdam Shower 17A nka ra S ho we r 17At he ns S ho we r 23Bahrain Sun 37B ar ce lo na S un 21Beij ing Fair 29Belfa st Ra in 15
B el gr ade S un 19Berlin Fair 19B ru ss el s S ho we r 18B ud ap es t Fa ir 18Cairo Sun 31C ar di ff S ho we r 16C hi ca go Fa ir 17C ol og ne C lo ud y 19Copenhagen Cloudy 14Delhi Sun 44Dubai Sun 41Dublin Shower 14Edinburgh Rain 15Fr an kf ur t Fa ir 20Geneva Fair 21H am bu rg Fa ir 18Hel sinki Sun 17Hong Kong Fai r 27I st an bu l Fa ir 20Lisbon Sun 21Lo ndo n S ho we r 15LosAnge les Fai r 23Luxembourg Shower 17Madrid Sun 27
Today’s temperatures
Forecasts byWind speed
in KPH
8
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12
21 27
22
23
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7
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1614
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Lex on the webFor notes on today’s breakingstories go to www.ft.com/lex
Shouldn’t a highlyconsolidatedindustrythat serves customerspoorly be rewardingshareholdershandsomely? UKbankingis evidenceagainst.Of thebig fourhighstreetlenders,only Lloyds BankingGrouphasbeatentheFTSE100 indexsince2012(RoyalBank ofScotland,HSBCandBarclays lagbehindby30 percent to50 percent).YettheCompetitionand MarketsAuthorityclaims tohave multiplegrounds fortheumpteenth bankingprobeof recent years — marketconcentration,customerneglect, badservice.
There areplentyof reasons whyprofit andcompetitivenessmaydecouple.A lackof competitioncanbreed inefficiency, so shareholdersnever seethe profits.Middlemen
(such as overpaidstaff) canscoop thebenefitsinstead. Externallyimposedconstraints,such as capitalrequirementsor morecompliancespending,can sapreturns.
Aboveall, there is theeconomiccycle.UKbanksmaybe ata nadirintheir fortunes, stillsloughingoff thebaddebts andmisconduct fines fromthelastboom andyettoenjoy asustainedupliftin business. A diligentcompetitionauthority worries insteadabout howprofitability willlookwhenthefundamentalsturnupwards.
There are concerns that a boom inorders for passenger jets is coming toan end, raising questions about howlong the flagship commercial-aircraftdivisions at Boeing and rival Airbuscan sustain a trend of rising revenuesthat goes back to 2010.Analysis i PAGE 15
Passenger-jet slowdownraisesrevenue questions
ERIC PLATT — NEW YORK
Yield-starved investors piled into adebt issue from Dell yesterday as theUScomputergroupracedto completethefourth-largestbondsale onrecord.
The sale, which has been closelywatchedsinceDell announcedits$63bntakeoverofEMC,drewsizeabledemandasorder books closed, allowingbankersleading the transaction to increase thesize of the deal by $4bn to $20bn, twopeoplefamiliarwiththemattersaid.
Underwriters countedroughly$85bnof investor orders,rivallingthe $110bnstumped up for an Anheuser-BuschInBevbond thisyear.
The strong demand, which included$20bn ofordersfrominvestorsin Asia
and Europe, underscored the enthusi-asmwithwhichfundmanagersare will-ingto bidon corporatebondsas yieldsonotherassetclassestumble.
“Themarketis starvedfor yieldandiswilling to entertain this deal,” saidMatthewBrill,a portfoliomanagerwithInvesco. “We continue to see interna-tional inflows, with global yields nega-tiveinsomanyplaces.”
The deal will rank behind Verizon’s$49bn debt sale in 2013, as well as theoffering from AB InBev and a $21bnissuance from Actavis, Dealogic datasay. Thesaleincludednotesmaturinginthree, five, seven, 10, 20 and 30 yearsand precedes a sale of roughly $4bn of junkratednotesas soonasnextweek.
Dell structured the issue to win
investment-grade ratings from thethree main credit rating agencies,despitethecompanycarryingan overall“junk”status.
The $20bn of debt has been securedby some of Dell’s assets and has beenranked above other bonds in the com-pany’scapital structure.
Thegroupalsoagreedto assetsalestoreduce its leverage, enticing buyersfromboththehigh-gradeandhigh-yieldworlds.
The computer maker was nonethe-lessforcedto payup toissueitslongestdated bonds, with the yield on the30-year paper expected to price at8.33percent— morethanthe8per centyieldsecuredby Argentinawhen itsoldsimilardatedpaperinApril.
Delldebtofferingdraws $85bn inorders from yield-starved investors
DanMcCrum
Cnooc
3%HK$9.23
Sony Financial
4.9%¥1,262
IAG
1.5%518.5p
Sterling/dollar
0.6%$1.4477
WTI crude
0.9%$48.16
Two-yearUS Treasury
2bp0.80%
Xetra Dax
0.6%9,890.19
Gold
$2$1,275
ShortView
Most analysts donot expectVodafone to makeprofits in the nextthree years thatmatch its 11.5pence per sharepayout for 2016
Vodafone, thelossmakingprovider ofmobile-phoneserv-ices, yesterday reported falling revenues in all the Euro-pean countries where it connects calls and discloses thesize of its business. Revenues from “other countries” onthecontinentshrankas well,in ayearwhensalesin emerg-ingmarketsfailedtooffsetthedecline.
However,one announcement in theresultsbucked thedownwardtrendand gaveVodafoneentryto a selectclub:itbecamethe26thmemberoftheFTSE100indextohaveincreaseditsannualdividendforat least10yearsina row.
Nevermindthatmostanalystsdonotexpectthegrouptomakeprofitsin anyofthe nextthreeyearsthatmatchits11.5pencepersharepayoutfor2016.It isallaboutthesig-nal thatdividend growth sends:“We are confidentaboutthefuture,andyoucan rely onus todo therightthingbyshareholders.”
Joining thisclub of longstandingdividendgrowersalsoattractstheattentionoffundsand investorsonthelookoutforsuchsigns ofcorporate“quality”— even ifthelogicof doingsomaybebackwards.
Share prices for the select 26 have, on average, morethan tripled in the past decade — in the case of PaddyPowerBetfairprovidinga tenfoldwindfall. Incomparison,thebroadUKindexhasrisenjust9percent,givingareturnof about 40 per cent with dividends reinvested, ratherthanspentasincome.
In2006,pickingthosewinnerswouldhavemeantantici-pating which tobaccoand softwaregroups,aswell asmak-ersof textbooksor tanks,wouldgrowtheirprofitsin theyearsahead. Nowadays,though,investingon thebasis of futuredividendgrowthis amoreprecariousenterprise.
Globally,dividendshavebeenrisingevenas profitsover-allhavedeclined,pushingthe proportionpaid outtoinves-torstolevelsthatmay beunsustainable. Inthe UK,SociétéGénéralehas examineddividendsas a proportionofover-
Private affair China’s waningenthusiasm for public marketsINSIDE ASIA, PAGE 12
2014and$157.8bnin thesecondquarterof2007.
Still, some have warned that buy-backs could soon taper off. “Corporatebuybacks represent the single largestsource ofequity demandbutmay waneduring coming months,” analysts atGoldmanSachswrotein a recentreport.
Goldman said that most groups hadreportedfirst-quarterearningsby earlyMay, resuming discretionary buybacksandprovidingnear-termsupportforthemarket.
Maytypicallyaccountsfor 10per centof annual spending on repurchasingshares, which then decelerates in Juneand July when 7 per cent of buybacksoccur.
reducing their share count than previ-ously,” said Howard Silverblatt, seniorindexanalystatS&P DowJonesIndices.
Almost27 percentof thecompaniesinthe indexhavealready reduced theiryear-over-year share count by at least4per cent,increasingearningspersharebythesameamount.
ThatcomesasUS companiesreporteda 7 per cent drop in first-quarter earn-ings, the fourth consecutive quarter of year-on-yeardeclines.
With final figures on repurchases inthequarter pending,the buyback tallyfor the first quarter is running at$142.5bn, compared with the all-timehigh of $172bn in the third quarter of 2007, $159.3bn in the first quarter of
hitthe energyindustry.Companieshavebeen big buyers of their own stock inrecentyears, againsta backdropof lowinterestrates.Thathashelpedtoboostearnings per share even as revenue growth remains sluggish, while alsoappeasing activist investors who havepushedfor betterreturns.
The market sell-off early in the yearmeantthatcompanieswere ableto buymoreshares fortheir money. Theaver-agepriceinthe firstquarter wasnearly5 per cent lower than in the previousquarter. The S&P 500 was down morethan10 percentfortheyear atitsnadirinmid-February.
US companies stepped in to supporttheir shares during the market tumultatthe startof theyear,potentiallymak-ing the first quarter one of the biggesteverfor sharebuybacks.
Based on preliminary data, sharerepurchases are 20 per cent higher inthefirstthreemonthsofthe yearversusthefourthquarterand31 percentabovethe year-ago period, according to S&PDowJonesIndices.
Among the biggest buyers of theirown shares were Apple, General Elec-tric,McDonald’sand Boeing,whileExx-onMobilhas significantlycutbackon itssharerepurchases afterfalling oilprices
US groups step up share buybacks3 Repurchases 31% above year-ago period 3 Companies support stocks amid volatility
WhenWangJianlintook WandaCommercialProperties public in Hong Kong in 2014,the$3.7bnflotation marked somethingof acomingoutforthetycoon.
Knownon themainlandfor hisWandaPlaza developments, he was starting to gain an interna-tionalreputationas adealmaker,buyingcinemasandeye-ing US film studios. But it was only after the debut of Wanda Commercialthat Mr Wangestablished himself asChina’s richestman.
Sincethen, hisdealmakinghas continuedapace. How-ever, investor appreciation for Wanda Commercial, thecore of his empire, has not. In fact, just 15 months after
Ithasbeenwidelyassumedthat—likea hostofUS-listedChinese companies currently being taken private —WandamighteventuallyseektorelistinShanghaior Shen-zhen, where valuations are usually higher. In the mean-time,though, theproposed movehighlightsanother trend:
growing Chinese dissatisfaction with the equity marketoptionsavailable totheir companies.
TakeHongKong, thenaturalhome forChinesegroups.Mainland companies make up more than half the city’sHangSengindex butare valuedwellbelowlocal stocks aswellas mainland-listedcompatriots:the HangSengtradeson 11 times expected earnings; the blue-chip mainlandCSI300tradeson 13times,butthe HangSengChinaEnter-prises Index, made up exclusively of mainland-based
groups,tradesona multipleofjust7.NewYorkdoes notoffer a particularlyattractivealter-
Small wonder $38bn of US-listed Chinese “take-pri-vates”wereannounced lastyear, anda further $7bnthisyear,accordingto Dealogic.
But even going home and seeking a relisting is notentirelyappealing. Thereareseveral hundred companiesinthe queuefor initialpublicofferings, and the timetableis controlled by officials.Root-and-branchreformstothe clunky process, prom-ised after last year’s main-land boom and bust, are alongwayoff.
Ifthatwerenotenough,thismonth,theChinaSecuritiesRegulatoryCommissionsaid itwas examiningthe effectthatreturningtake-privatescouldhaveon mainlandmar-kets — a study that includes reverse mergers into shellcompaniesas wellas IPOs.Onefearis thatrestrictionswillbe imposed. Shares in US-listed target companiespromptly fell.Hong Kong,too, has voiced concern aboutbackdoor listings on its markets. Most of these are fromthemainland.
Asa result,many Chinesegroupsrelyon privatemoneyand, for tech groups, this is readily available. Lufax, theonline platform known for peer-to-peer lending, raised$1bn in a January round that valued it at $18.5bn. AntFinancial, thefinancialaffiliateof Alibaba, raised$4.5bnlastmonthfora $60bnvaluation.Just lastweek,Appleput$1bnintoDidiChuxing,China’sdominantonlinetaxi-hail-inggroup.
“Fora Chinese companywitha good story, raisingpri-vateequityisn’tdifficult,” saysKeithPogson,seniorpart-nerinEY’sAsiafinancialservicespractice.
“Investors are tired of the volatility of public marketsandwatchingan investment goup anddown,particularlyinChina.Theyjust want toseehowit pans out overthelongterm.”
Private Chinese groups can also move morequickly. Anbang Insurance, which launched $20bnof hotel bids within two days in March, demonstratedthe benefits and limits of that. Not having to seek shareholderapprovalremoved onehurdlefor a dealthat,like all Chinese transactions, also needed regulatoryapproval.However,the grouplaterran intocriticismovera lack of transparency in its structure and funding. Itslarger proposed deal— a $14bn bidfor Starwood — ulti-matelyfailed.
‘Investorsaretiredof the volatilityof publicmarkets’
LINDSAY WHIPP — CHICAGO
Home Depot and branded clothingretailer TJX raised their profit esti-mates for the full year thanks to arobustfirstquarter, buckinga trendof dismaldepartmentstore earningsthatwere depressed by lacklustre productofferings.
The world’s biggest home improve-ments group said it expected full-yearsalesto rise6.3percentcompared witha previous estimate of 5.1-6 per cent,while same-store-sales are forecast torise4.9per cent compared with 3.7-4.5per cent. It said earnings per sharewould increasemore thaninitially fore-
TJX raiseditsguidancein lightofa 7per cent increase in comparable storesalesanda10percentriseinnetsalesto$7.5bn. It expects full-year EPS of between $3.35-$3.42 compared withearlier estimates of $3.29-$3.38. TJXsharesrose0.8percentto$75.81.
US consumerspendinghas risen,butshoppershavebecomechoosyas wellaspurchasing moreonline, forcing retail-ersto rethinktheirbusinessmodelsandimprove their product line-ups. Con-sumersalso spendless onitems, optinginstead for experiences. Home Depothas benefited from an increase in resi-
dentialsalestransactions,whichin turnboosts demand for home improve-ments.Its mobileappsand itsmoveintothe professional business has alsohelped profits. The shares reached anall-time high earlierthisyear butweredown1.8percentto $132.97yesterday.
ina $550bnmarket . . . andweown lessthan 20 per cent of that so we think there’slots ofopportunity togrow.”
Forthefirst quarter, salesrose9 percent to $22.8bn with comparable storesales rising 6.5 per cent, the companysaid. This helpedearningsjump19 percentto$1.44ashare.
Retail
HomeDepot and TJX buckearnings trendOLIVER RALPH
INSURANCE CORRESPONDENT
Bank of England governor Mark Car-neyhas joineda who’swho ofinsuranceexecutivesin a driveto helpdevelopingmarketsdeal withnaturaldisasters.
As members of theInsuranceDevelop-ment Forum, which is backed by
the UN and the World Bank, they areaiming to bridge the gap between theinsurance industry and developmentagencies.Whentheforumwaslaunchedat theParis climate change summitlastyear, it said there appeared to be a“shared bewilderment” between thetwo groups. Mr Carney, in his role as
chair of the Financial Stability Board,hastakena positionon theIDF steering group, along with Lloyd’s of Londonchief executive Inga Beale, Munich Rechairman Nikolaus von Bomhard andincoming Swiss Re chief ChristianMumenthaler.
chiefexecutives of brokers WillisTow-ersWatsonandAon.Some of the most vulnerable coun-
triessuffer froma lackofinsurancecov-eragefornaturaldisasters.AccordingtoSwiss Re, the biggest disaster of 2015was the Nepal earthquake, in which9,000 people died. However, the event
did not appear on a list of the top sixinsuredcatastrophelosses ofthe year.
StephenCatlin ofXL Catlin,who co-chairstheIDF —alongwith former NewZealand prime minister Helen Clark and Joaquim Lev of the World Bank —said it was the first time that so many global insurance executives had beeninvolvedina singlegroup.
“It’s about giving more cover foremerging nations, especially for ele-mental perils which are on theincrease,” he said, adding that “solu-tions range from microinsurance rightup to governments, regulators andbanksseeingthe benefitof having assetprotectionsagainstcatastrophe.”
Insurance
Carney joins push to boost disaster coverage
ROBERT COOKSON — LONDON
Elsevier,the scientificpublisher ownedby RELX Group, has bought the SocialScience Research Network — a websiteon whichacademicsshare draftpapersthat have not yet been published in apeer-reviewedjournal.
Yesterday, thecompany announcedithad acquired SSRN — which has morethan2m users, andranksas one oftheworld’s most popular repositories of research in economics, law and socialsciences—for anundisclosedsum.
However,newsof thedealmetwithan
angry reaction from some academics,whoexpressedconcern thatthe world’slargestjournalpublishermightrestrictaccesstopapers.
Elseviergeneratesthebulk ofitsreve-
nues from selling subscriptions to uni-versity libraries. Its critics arguethat ithasusedits scaletoimpedethefreeflowof academic researchthroughso-called“openaccess”servicessuchasSSRN.
Hossein Kazemi, professorof financeat the Isenberg School of Managementat the University of Massachusetts,tweeted: “Terrible news. Good luck findingworkingpapers of articles pub-lished by Elsevier. Faculty should boy-cott.” Similarfearswere voiced byMattBlaze,associate professor of Computerand InformationScienceat theUniver-sityof Pennsylvania, who wrote: “Seri-
ously, thisis a hugestep backwards.It’sprecisely predatory behaviour by thelikesof ElsevierthatmakesSSRNso val-uable.”
But executives at Elsevier and SSRN
soughtto reassureresearchersthat theirinterests would be well served undernewownership.
Gregg Gordon, chief executive of SSRN, whowill remainat thecompany,said: “Our goal is to further enhanceengagementwithinand arounda SSRNmember’s academic work, while stillproviding the same core services thatour members value and expect. Mostimportantly, we will continue our coremission of providing researchers withfreesubmissionsand freedownloads.”
SSRN will be developed alongsideMendeley, the scholarly collaboration
tool that Elsevier acquired in 2013.Throughthese twoacquisitionsandoth-ers, Elsevier is aiming to develop thecapability to help researchers managethe entire publication process: from
workingdrafts topublished papers. Jan Reichelt, managing director of Mendeley, said:“Weintendto scaleandmaximise SSRN in ways that benefitauthors, institutions and theentire sci-entificecosystem.”
Founded in 1994, SSRN is based inRochester, New York. Along with itschiefexecutive, itschairman and otheremployeeswill remainat thecompany,andit willretaina“freemiummodel”,inwhich content is free to submit anddownload.SSRN makesitsmoney fromrelated premium services, such as joblistingsand subscriptions.
Media
Elsevier buys research sharing websiteSSRNacquisitionangerssomeacademicswhosay group may restrict access
JAMIE SMYTH — CHRISTCHURCH
Peter Coker spenthisearlycareerflyingfighter jets for the Royal Air Force. At60he iscloseto turningsciencefictionintoreality, bymass producingwhat hesaysis theworld’s firstcommercialper-sonaljetpack.
Next month Australia-listed Martin Jetpack will begin manufacturing theP-14, a carbonfibre, petrol-poweredjet-pack that can reach heights of 3,000ftandspeedsof upto74kmh— fora pricetagof between$200,000and $250,000.
“We are at the start of the journey,”saysMr Coker,chiefexecutive.“Wewillbegin deliveries to customers by theendof theyear.”
Theplanisforthejetpacksto beusedby emergency services such as fire,police and border security. Dubai CivilDefenceand Avwatch,a USaerialrecon-naissancecompany,have signedmemo-randums ofunderstanding,whichMar-tin Jetpack hopes to translate intoorders.
Itwas 35years agothat GlennMartin,the group’s founder, began working toimprovethe Bellrocketbelt, whichhadinspired many when it featured in the James Bond film Thunderball , beforebeingdiscontinued.
“The problem was that to fly it youhad to weigh less than 65kg, and Ihaven’t weighed less than that sinceIwas12yearsold,”saysMrMartin.
“Itcouldonlyflyfor 26seconds,andthe fuel was volatile and dangerous.
I wanted to fly for half an hour andtocarry 120kg.”
Until recently Martin Jetpack’s solu-tion involved a two-stroke V4 petrolengine, withtwo ductedfans providingairflow to keep a human airborne forupto45minutes.
The new P14 and P15 models willincorporate a more powerful rotaryengine. Eachjetpackis fitted witha bal-listicparachute.
“Whyusea jetpack? Firstlywe don’thave rotors, which means we can getinto confined spaces, be it the top of buildings or between buildings,” saysMrCoker.
“Itis very easy tofly andverysafe.Itisalso a lotmorefun andcheaper thanahelicopter.”
Thecompanyhasgrownrapidlysince
Mr Coker, a former executive at Lock-heed Martin, was appointed in 2013.Martin Jetpack has added more than70 staff and listed on the AustralianSecuritiesExchange.
The group’s expansion is being sup-ported by Kuang-Chi Science, a HongKong-listed company, which investedA$21m ($15.4m) in the initial publicofferingin February2015 anda furtherA$23mthrough a convertiblenote thisFebruary.
Martin Jetpack and Kuang-Chi areforminga jointventureto sell jetpacksin China, and they plan to establish afactory on the mainland that will pro-duce1,000unitsa year.
But the focus on emergency servicesrather than the leisure market hasprompted a split with Mr Martin, whoresignedfromtheboardlast Junesayingthecompany’svision haddeparted fromhisown.
Mr Coker says a stage often comeswhen commercial realities outgrow anentrepreneur’s dreams. But he insiststhat he is not ditching the ambition of sellingjetpacksto therichandfamous.
“A lotof peopleexpressed interestinus after we presented at last month’sMonaco car show, where we talkedabout how you could put jetpacks onsuperyachts,”hesays.
Commercial jetpack set for lift-off Aiminghigh:thefounderof MartinJetpacksetouttoimprovetheBellrocketbeltusedinthe 1965 James Bond film‘Thunderball’Allstar/United Artists
DANIEL THOMAS
TELECOMS CORRESPONDENT
Vodafonehas markedits first fullyearofgrowth inservice revenues andcoreearnings since 2008 as its £19bn“Project Spring” investment in net-worksshowssignsofpayingoff.
More customers are taking higherpriced data-heavy 4G contracts as thecompany extends its next generationmobile networks across Europe, withbetter economicconditions alsounder-pinningthe recoveryin sales.
Thegroupwillmaintainits UKinvest-
ment programme, with plans to spendanother £2bn inthenextthreeyears toimprove its network and services afterresultslaggedbehindothercountries.
ThecompanyhasstruggledwithrisingUKcustomercomplaintsowingtoa newbilling system, with service revenuesfalling about0.8percent.It added only1,000customersin thefourthquarter.
In the UK, Vodafone has graduallyrolled out a broadband service andpromisedto launch a long-awaited tele-visionplatform thisyear.
Performance athome took theshineoffan otherwisegood year, as growth inrevenuesledto higherearningsowingtothe debt on its balance sheet, but alsothanksto group-widecost-cutting.
VittorioColao,chiefexecutive,hailedVodafone’s move into fixed-line serv-ices.“Weare thefastestgrowing fixed-line provider in Europe,” he said, withmorethana fifthof revenuesgeneratedfromfixedbroadbandand TVservices.
HesaidVodafonewas “alwaysopentodiscussions”about deals, butwouldnotbe drawn on whether it would need toacquirea fixed-lineproviderin theUKshouldrivalO2 —withwhichit partnersoncoverage—beacquired.
MrColaosaidregulatorOfcomneededto take “decisive” action on separatingBTfromitsnetworkcontrolledbyOpen-reachto letVodafonebettercompeteinthe fixed-line market. If not, therewouldbelessinvestmentintheUK.
Organic earningsbeforeinterest,tax,depreciation and amortisation rose 2.7percentto £11.6bnin thefullyear,whilerevenuesrose2.3percentto£41bnwhenstrippingoutcurrencymovements.
Thecompanymade a pre-tax lossof £449m, however, compared with aprofit of over £1bn the year beforeowing to a writedown of its Romanianunitand foreignexchangemovements.
Wednesday 18 May 2016 ★ F I N A N C I A L T I M E S 13
COMPANIES
ROBERT COOKSONDIGITAL MEDIA CORRESPONDENT
In2010,an Islamistextremistknown asPrince of Jihad was sentenced to fiveyearsin an Indonesianjailfor conceal-inginformationrelatedtodeadlybomb-ingsatluxuryhotelsinJakarta.
Six years later, Muhammad JibrilAbdul Rahman remains subject tofinancialsanctionsby theUS,whichhasaccused him of obtaining funding forterroristattacks.
But even so, his jihadi propagandawebsite,Arrahmah.com,has beenmak-ing money from brands including Citi- group,MicrosoftandIBM.
Itmanaged todo sousingintermedi-aries such as Google’s AdSense, theworld’sbiggestonline adnetwork.
There isno suggestionthatthe adver-tisersor Googleknowinglyfundeda des-ignated terrorist and after being con-tactedby theFinancialTimes,theinter-net group cancelled Arrahman.com’saccount.All threecompaniesalsoaskedfor their ads to be removed and saidthey were takingstepsto prevent theirmarketingmessagesfromappearingonsuchsitesin future.
Butthefactthata designatedterroristcan sell ad space to big brands is anexample of how the media market hasbeen transformedby theinternet.Thevast numberof websitesand theemer- genceof acomplexonlineadindustrytoservethemhas caused manymarketerstolose sight ofeveryplacewheretheiradsappear.
Howdo advertisersbuy spotson web-sites?Ad spots are increasingly bought andsoldvia real-timeauctions— muchlikethetradingof financialinstrumentsonastock exchange. Marketers or theiradvertising agencies often bid for tar- geted ad placements through centralmarketplaces known as ad exchanges.These are in turn connecting to hun-
dredsof websitesas wellas adnetworkssuch as Google’s AdSense, and thoseownedby AOLandYahoo.
Using data such as the location andbrowsing history of an internet user,marketerscan targetspecificaudienceswherevertheyareontheweb.
Whilehumansset theparametersforthe trading, it is carried out bymachines.Complextrading algorithmsadjusteach advertiser’sbiddingstrategyin real-time to maximise the effective-nessofthecampaign.
Whatroledoes Googleplay?Googlegenerated$52bnlastyear fromitsownsitessuchas Search,GmailandYouTube.It alsomade$15bnas themid-dleman between advertisers and morethan1mthird-partysitesandapps.
Howdo websitesjoinAdSense?TostartmakingmoneyfromAdSense,apublisher simply needs to fill in anonlineformandaddsomecodeto theirwebsite. Google checks that the site
complies with its policies and startsdeliveringads shortlyafterwards.
How does Google keep out unsuitablesites?Google’sterms and conditionsfor web-sitesprohibitcontentthat is adult,vio-lentor illegal. Thecompanysaid thatin2015alone,it rejected1.4mapplicationsfrom sites wanting to join AdSense. Itemploys more than 1,000peopletovetthe advertisers and websites in its net-
work. Yet thecompanyfacesa constantbattle as websites have a big financialincentiveto plugintothedigitalad mar-ket, which grew 14 per cent to $160bnlast year, according to eMarketer, theresearchgroup.
What aretherisks andhowcan brandsreducethem?Thefast-growingindustry is stillsome-thingof a wild west.Brandsthatrunadcampaigns across tens of thousands of sitessometimesfind themappearing inundesirableplaces,suchassitesofferingpornographyor illegalservices.
Unwary advertisers have also fallenvictimto criminals whocreate fraudu-lent websites and then use computerprograms known as “bots” to fake theappearance of human users viewingads. The US’s Association of NationalAdvertisers estimates that fraud willthisyearcostbrandsmorethan$7bn.
Brands seeking to reduce risks oftenturntocompaniessuch asDoubleVerifyand Integral Ad Science. They offer“blacklists”of badsitesand “whitelists”ofgoodones.The mosteffectivewayforadvertisersto avoid badsitesis todealonly withthosewithwhichtheyhavearelationshipand havecarefullyvetted.
Extremist’s website traps unwary advertisersihadi propagandist’s sale of space through intermediaries shines spotlight on risks faced by brands and marketers
Site to behold
Indonesia is the largest country witha Muslim majority and MuhammadJibril Abdul Rahman runs what wasonce its biggest jihadi website.
He is a senior member of JemaahIslamiyah, an al-Qaeda-sponsoredgroup that was behind the 2009attacks in Jakarta and the 2002 Balibombings, which killed 200 people.
The US government says Mr AbdulRahman, 31, who was born in Lombok,led a Jemaah Islamiyah cell in Pakistan,where he participated in militarytraining, and was dispatched toKashmir in 2001.
In 2008 he founded the ArrahmahMedia Network, which published thewritings of three men behind the Balibombings after they were executed.
It has gone on to publish jihadivideos and a glossy magazine.According to Sidney Jones, director ofthe Institute for Policy Analysis ofConflict, a Jakarta think-tank, the jihadi’s vision was always to expandinto a publishing empire.
Mr Abdul Rahman was arrested in2009 for trying to help those behindthe Jakarta bombings, and sentencedto five years in jail. Donations to themedia network fell rapidly.
Today the once popularArrahmah.com ranks as Indonesia’s1,028th most visited website. It isamong a clutch of media outlets in thecountry that publish criticism of Isis,much of which centres around thekilling of fellow Muslims.
Released early for good behaviour,
Mr Abdul Rahman has a businessselling clothing decorated withpictures of Osama bin Laden. Avantika Chilkoti
Man who wouldbe kingof a publishing empire
PATRICK MCGEE — AMSTERDAM
The Hudson’s Bay Company is toexpandinEurope,in apushthatwouldmake it the largest department storechain in the Netherlands within twoyears.
North America’s oldest private com-pany, whichwasfoundedas a furtraderin1670,saidyesterdayit wouldlaunchin a third European country with theopeningof upto 20 departmentstoresacrossthe Netherlandsfromnext year.
Thepushfollowsa multibilliondollaracquisition spree by HBC that hashelped it grow into a global companywithmorethan460outletsandwhichisexpected to generate in excess of C$15bn($11.6bn) inrevenues thisyear.
HBC— a household namein Canadawhere it has 90 department stores —wastakenoverby RichardA. Baker in2008. The US private equity investortransformed the business by purchas-
ing, and then expanding, US chainsLord & Taylor and Saks Fifth Avenue.MrBaker’sstrategyhas beento acquirehigh-endbrands,thencombinethemasa“storewithina store”concept.
HBCmadeits first foray into Europelastyear, paying€2.3bnto buyGaleriaKaufhof, the oldest department store
chainin Germany.The acquisitiongaveit a prominentpresencein nearlyeverylargecityin thecountryfrom Frankfurtto Berlin, along with 16 Inno stores inBelgium. HBCis openingupto 40SaksOFF 5th stores — the luxury off-pricedivisionofSaks—inGermany.
Its expansion comes after a numberofNorthAmerican retailers have triedbut failed to penetrate the Europeanmarket. Walmart acquired discountstores Wertkauf and Interspar in 1997,butafter nine yearsit concededdefeat,
manand governor, saidlast monththatHBC’s transformation in Canada was amodelfor howtoexpandelsewhere.
Key to success in Canada had beenweakcompetition, a traitMr Bakersaidyesterday he had also identified in theNetherlands. He added that there was just one luxury-speciality retailer, DeBijenkorf,butno directcompetition.
Mr Baker said he had been studyingthe Dutch market for the past decadebut the opportunity to expand onlyarose when Vroom & Dreesman, thecountry’s largest department store group, declared bankruptcy late lastyearandclosedmorethan60stores.
HBChad consideredbuying V&D, butMr Baker had deemed it “not fixable”after “too manyyears” ofdecline. “Wewentinadifferentdirection,”hesaid.
TheDutchstoreswill bethefirstHud-son’s Bay-branded outlets outside of
Canada.“This is yetanotherexampleof HBCproactively addressing opportunity,”said Patricia Baker, analyst at Scotia-bank. “With the leading chain in themarket, V&D, bankrupt, HBC struck a great deal with the landlords for goodhighstreet locations.”
Retail
Hudson’s Bay starts Netherlands push
Global digital ad spend
Source: eMarketer
$bn
Forecast
‘Thisis another exampleof HBCproactivelyaddressingopportunity’Patricia Baker, Scotiabank
AstraZeneca ison coursefora head-to-headbattle withGlaxoSmithKlineovera new generation of asthma drugs thatareinjectedratherthaninhaled.
GSKtooktheleadlastyearin theracefor share of what is expected to be amultibillion-dollar market for biologi-calrespiratorydrugswhen itwon regu-latoryapprovalfor itsNucala drug.But
AstraZeneca said yesterday that it wason track to file its rival benralizumabmedicinewithUS andEuropeanregula-tors inthe secondhalfof this year afterpublishingdatathat itsaid showedthe
productwas potentiallybest-in-class.Thecompetingproductshaveopeneda new front in the longtime rivalrybetween the UK groups in respiratorydrugs as they each scramble for newsources of growth to offset decline inolderbrands.
Tom Keith-Roach, head of Astra-Zeneca’srespiratory business,said thatthearrivalof injectablebiologicalmedi-cinessuch as benralizumabrepresenteda revolution inthe treatmentof severe
asthma. “Older products treated thesymptoms of the disease, whereas thenewones treatthe underlyingbiology,”hesaid.
AstraZeneca said benralizumab had
succeeded in significantly reducingasthma attacks compared withplacebointwopivotallate-stagetrials—thefinalstepbefore seekingregulatoryapproval.Moredetailedresults will be publishedlaterintheyear.
As well as GSK’s Nucala, benralizu-mabis alsotrailing Teva’sCinqair, whichwasapproved bytheUS Foodand DrugAdministration in March. However,BingYao,headof respiratorymedicinesat MedImmune, AstraZeneca’s biologi-
cal drugs unit, said that benralizumabhad potential advantages because itworked more directly than othersagainst thecellsin thebodyresponsibleforinflammationofthe airway.
Yesterday’s positiveda ta representeda much-needed fillip to AstraZeneca’sefforts to refill its drugs pipeline aftertheloss ofpatentprotection thismonthon Crestor, its best-selling product forhighcholesterol.
Investors are staking their greatesthopes onseveral cancermedicinesbutMr Keith-Roach said benralizumab’sprogressshowed thatrespiratory drugscouldalsobeapillarofrenewedgrowth.
Whilemakingitscasefor therejection
of a $100bn takeover offer from Pfizertwo years ago, AstraZeneca said thatbenralizumab could contribute $2bntowards its wider target of a three-quartersincreasein revenuesto $45bn
MarkBelsey, analystat UBS,said thatheexpectedpeakannualsalestoreach$1bn, noting the “substantial marketopportunity” among the 7 per cent of adultsand 9 percentof childrenin theUSwithasthma —as many asa fifthof whom have severe or uncontrolledformsofthedisease.
Pharmaceuticals
AstraZeneca set for asthma fight with GSKUK drugmakers on coursefor head-to-headbattleoverinjectable treatments
RICHARD MILNENORDIC CORRESPONDENT
Carlsberg’s chairman has launched apassionate defence of the company’sindependence, even as a mega-mergerofitstwolargestrivalspushesthemar-ketshareof theDanishbrewer furtherbackintothirdplace.
Althoughthependingtie-upbetweenAnheuser-Busch InBev and SABMillerwill create a beer industry behemoth,Flemming Besenbacher has told theFinancial Times he is not concernedabout thecompetition— andwill evenconsider shrinking the business if ithelpsto restoreits fortunes.
Ina rareinterview,Mr Besenbacher—
whoalsoheadsthe foundationthatcon-trols the group, with 76 per cent of shareholder votes — attributes the group’sresilienceto itsownershipstruc-ture.
“Without the foundation, Carlsbergwouldprobablynotbe what itis today:anindependentbrewery,”hesays. “Oneofthe purposesof thefoundationis thatwearenotfor sale,period,”he stresses.
Ownershipbyfoundationsisa featureof many of Denmark’s biggest compa-nies,fromAP Møller-Maerskand Legoto Novo Nordisk and Lundbeck in thepharmaceuticalssector.
Although sometimes criticised byother shareholders for holding back companies, Danish groups argue thatthe foundations not only protect themfrom takeover but allow them to planforthelongterm.
“Had we not had these foundationsthen many of the Danish companieswould not have been what they aretoday,” Mr Besenbacher argues, point-ing to the difference between Den-mark’s flourishing biotechindustryandneighbouring Sweden’s, wheremany of the biggest companies have beenboughtby foreigngroupssuch asPfizer.
Carlsberg’s chairman underscoresthis long-term approach by saying heand the rest of the brewer’s board arefocusedon restoringit tohealth,even if thatmeans gettingsmaller.
Carlsberg’ssharepricehas droppedinrecentyearsafter bigproblemsin Rus-sia — the company’s biggest market —whichoncerepresentedcloseto half of allsalesandprofits.
Analystshave suggestedthat someof
theassetssold byABI-SAB,such as Per-oniand Grolsch,wouldhavebeen a per-fectfit for Carlsberghaditnotbeensointernallyfocused.
But Mr Besenbacher says: “M&A[mergers andacquisitions] is notreallyontopof theagendarightnow. What ison the agenda is focusing on fixing thecompany, gettingthe sharepriceupandmaking a more profitable company. Itmight be that it’s even a smallerCarlsberg.”
He adds that Carlsberg does not feelthreatenedby theABI-SABtie-up,eventhough its operating profits would beabout a tenth of the merged group. “If you are worried, you should not be inbusiness,” heclaims.“We realise wearea smaller company than ABI-SAB-Miller.”
Mr Besenbacher argues that thefinancial crisis and its aftermath haveshown the wisdom of the foundation’s
approach. “In many companies world-wide, we have gone through a periodwhere things have been very muchfocused on short-term profit optimisa-tion and it’s becoming more and moreclear,to meat least,that isnot thewaytomanage companies,”he says.
“Sothemandate from ourfounderisthis balance between what is good forCarlsberg in the short term and alsowhat is good for Carlsberg in the longterm.”
His comments come as Carlsbergcelebrates 140 years of its researchlaboratory today — an anniversaryit will mark by recreating a beer fromthe19th century.
Itsscientistsfoundan oldbottleinthe basement and were able toextractthelivingyeastfromit.
Then, using a recipe from thebrewer’sarchives and equipmentfrom that period, they made
what Mr Besenbacher calls “probablythebestbeerin theworld”.
MrBesenbacher— whoischairmanof theboardoftrusteesof thelaboratoryaswell as renowned professor of nano-science— predictsthatCarlsberg’sfocusonhigh-classresearch willbear fruit,asthelabpursuesbetteruse ofrawmateri-alsandnew ingredientsin beer.
“Thebrewerwho hasthe bestknowl-edge about biology and chemistry — Iwould probably add proteonomics,nanoscience and biotechnology — willbeone oftheleadingbrewersinthenextcentury,” he believes. “People arerequesting new flavours, new types of barleyor hops.”
Mr Besenbacher says breweries use“essentially the same technology” asthey did in the 1960s, providing con-siderable potential for new technolo- gies, such as robotics, to help reducewaterusageandCO 2 footprints.
Interview. Flemming Besenbacher
Carlsbergdefends its independent spirit Chairman confidentgroupcan withstandcompetition
Shareholder votesbelonging to thefoundation thatcontrols Carlsberg
140Number of yearsthat the brewerhas run its researchlaboratory
ADAM THOMSON — PARIS
Uberhas founditselfthetargetof fur-therlegalchallengesin Franceaftertheofficial body that collects social secu-rity contributions moved to force thecompany to reclassify its drivers asemployees.
The Urssaf for Paris and surroundingareas has launched two separate chal-lengesto theCalifornia-based company,arguingthatit hasavoidedpayingmil-lions of euros in employee-relatedcharges because ithas notregistereditsdriversasemployees.
Jean-M arie Guerr a, direc tor of enforcement at Acoss, partof thesocialsecurity network, said that Uber owed“several million euros” to the socialsecurity system, according to com-mentsto AFP,the newsagency.
He added that the Urssaf had takenthecase tothe socialsecurity affairstri-bunal tohavethe companyreclassifyitsdrivers as employees — a move thatwould force Uber to pay millions inemployercontributions.
MrGuerra saidUrssafhad alsobeguncriminal proceedings with the Parisprosecutor against the company foralleged abuseof status.Yesterday,Uberacknowledged the proceedings, whichwerelaunchedattheendoflastyear.
Insisting that the overwhelmingmajority of drivers in France opt tobecome self-employed “precisely to beableto workindependently”, Ubersaid:“We are therefore strongly challengingtheaccuracyandvalidityoftheseproce-dures, but we shall leave it up to thecourtsto decide.”
The company added that a decisionagainstit wouldhave far-reachingcon-sequences for the entire ride-hailing
sector given that the majority of taxidriversare classifiedas independent.Ubersaid thatin several recent cases,
France’s leading courts of appeal haverefused to reclassify independent taxidriversasemployees.
The latest legal challenges, whichcouldtakemorethan fiveyearsto work their way through the country’s legalsystem, add to Uber’s significant prob-lems in France, its biggest market intermsof revenuesoutsidetheUS.
Thibaud Simphal, who heads Uber’soperations in France, and Pierre-Dim-itri Gore-Coty,headof Uber inwesternEurope, stood trial in February oncharges of “misleading commercialpractices”and “complicityin theillegalexercise of the taxi profession”. A ver-dictisexpectedonJune9.
InJanuary, thecompanywas orderedto pay €1.2m to the National Union of Taxisforfailingtoenforcean aspectofa2014law governingminicabservices.
The payment came after complaintsthat drivers using the app were notreturning to theirbases between rides,as required by law. Uber has appealedagainstthefine.
Thecompanyhaslonginsistedthatitsdrivers, regardless of jurisdiction, areindependent contractors, not employ-ees. But that view has been challengedincourt, andUberreacheda combined$100m settlement in class-action law-suitsin Californiaand Massachusetts.
The agreement maintained the driv-ers were independent contractors but gave them the right to organise intoassociations that will be able to meetwithUber management.
Technology
French socialsecurity bodytoruleonreclassifying
Uberdrivers
SIMON MUNDY — MUMBAI
Apple chief executive TimCook isduetovisitIndiathisweekas theUS grouptrains its sights on a new source of growth am id fla gging sales in C hinaanddevelopedmarkets.
ApplesaidiPhonesalesin Indiagrewby56per centfromayearbeforeinthe firstthree months of 2016, as the companyreported itsfirst revenue decline for 13years.“I viewIndiaas whereChinawasmaybesevento 10yearsago,” MrCook told analysts last month. “There’s areallygreat opportunitythere.”
Mr Cook is expected to meet Prime
MinisterNarendraModi,accordingtoaperson with knowledge of the plans.Anticipation ofthat meetinghas fuelledspeculation that the government willmark Mr Cook’s visit by approvingApple’s recent application to openbranded stores in India, granting anexception to tough restrictions on for-eign-ownedretail outlets.
Opening its stores would help Appletarget its products more strongly towealthy urbanconsumersin a countrywhere its market share remains wellbelowtheglobalaverage. ResearchfirmIDC put Apple’s smartphone marketshareinthecountry’s30 biggestcitiesat
Sales of iPhones are also skewedtowards older, lower-priced devices,saidTarun Pathak,an analystat Coun-terpointResearch.
While India’s smartphone growthremains stronger than in most othercountries, it has been slowing: ship-ments in the first quarter of this year grew5 per centfrom a yearbefore, butwere 8.2 per cent lower than the finalquarterof2015, IDCestimated.
Nonetheless, Mr Cook last monthexpressedconfidencethatthe rolloutof new4G networksin India wouldboostsales. “We’ll begin to see some really goodnetworkscomingonin India.Thatwillunleashthepowerand capabilityof theiPhone,”he said.
RelianceIndustries, thecountry’ssec-
ond-biggest listed group, has investedabout $16bn in what it says will be thecountry’s leading mobile dataprovider,settobeginoperationslaterthisyear.
“There’s huge potential for Apple if theycan digdeeperbeyondthetieronecities, and reduce prices,” Mr Pathak said.
Technology
Apple chief tovisit India insearch for growthRICHARD WATERS — SAN FRANCISCO
Anautomated businessrun oncompu-tercode withno humaninputbeyonditsanonymousbackers, hasraisedtheequivalent of $120m in digital cur-rency.
Financialsupportfor thevehicle, calledThe DAO, makes it the most advancedembodiment yetofan ideathathas longcaptivated idealists: automatic compa-nies that operate without managers orboards of directors, making them thepurestform ofshareholder governance.
TheDAO—an acronymof decentral-ised autonomous organisation, thename givento such entities— hasbeenset up to invest in other businesses,making it a form of investor-directedventurecapital fund.
“Thereare no humanscontrolling it,
it’sjust thecode,” saidSimonJentzsch,aGerman software developer who wasone of the people behind the idea.“There is no one who will take moneyforfavouringone orothercontract.Youwillhavethewisdomof thecrowds.”
By Monday, The DAO had raised10.7munitsof a digitalcurrencycalled
Eth,saidto beworth$120m.Its inves-tors will vote on what to do with themoneyafterfundraisingendsonMay 28and after choosing between proposalssubmittedto itswebsite.
Theorganisation isgovernedbya setofso-calledsmart contractsthat runonthe Ethereum blockchain, a publicledger designed to make its operationstransparent and enforceable. The con-
tractsare designed to guarantee thingssuch as the “deliverables, responsibili-ties and operating parameters” agreed
bycompaniesTheDAOinvestsin.Thecomputercode behindthe organi-sation was written by Mr Jentzsch’sbrother,Christoph,andreleasedpubliclyon GitHub, an online code repository.“We didn’t want to be the ones whostartedor controlledthis,wedidn’twanttodoitforourselves,”saidMrJentzsch.
According to The DAO’s website, theonly human involvement comes fromvolunteers called“curators”who check the identity of people submitting pro-posals and make sure the projects arelegal before “whitelisting” them. Theorganisation’s investors will then voteonwhichonestogivemoneyto.
As of Monday, Slock.it, a blockchaintechnology company where the Jentzschbrothers holdseniorpositions,was one of only two organisations topitch for financial backing from TheDAO. Mr Jentzsch said that, if success-ful,theywoulduse themoneytobuild a“universal sharing network”, a world-wide network “where you can sharewhateverthingsyouhave, [like] carsorhouses”.
Asked howtheautonomousorganisa-tion couldensure itwas notbeing used
for money-laundering by its anony-mousinvestors,Mr Jentzschsaida vehi-cle had been set up in Switzerland tofacilitate The DAO’s investments inother companies as Swiss law made itpossible to “take money from anunknown source as long as you knowwhereit’sgoing”.
Technology
Automated group reaches funding milestone
The DAO, whichwill invest in otherbusinesses, isrun by computercode rather thanhuman managers
shareholder in International AirlinesGroup, saidyesterdaythatit haduppeditsstakeinIAGfrom12to15percent.
The government-controlled airlineadded thatitcouldlookto“increaseits
stake over time within the allowablelimits”, acknowledging the ownershiprestrictions thatapplyto non-EUshare-holdersin EUairlines.
Consolidationin theaviation sector ishamstrung by foreign ownership rulesthat were put in place because of
national security issues and complexagreements that govern landing rightsinthird countries.
The non-EU ownership cap for EU-based airlines is set at 49 per cent,
althoughthe EuropeanCommissionsig-nalled last year that it would considerlifting that limit through agreementswithindividual thirdcountries.
But such a move is unlikely unlessBrusselscan reacha dealwithWashing-ton that would allow an EU-based air-
line that is majority owned by non-EUinvestorsto serveUS destinations.
US legislators and unions are reluc-tanttoopenup thecountry’sairlinesec-torto foreign ownership,with thelimit
set at 25 per cent. Gulf carriers, led byEmirates Airline, have encounteredfierce opposition in the US over their growingpresenceinNorthAmerica.
Thatopposition makesthe extensivetransatlanticnetworksoperatedby BAand Iberia, another IAG subsidiary, of
increasing interest to Qatar. QatarAir-ways disclosed it had built up a 10 percent stake in IAG in January last year,andsaidlastmonththatithadincreasedtheshareholdingto 12per cent.
Thetwocompaniesarealreadywork-ingtogetherin thecargobusiness, andWillie Walsh, IAG chief executive, saidrecently there were discussions aboutextendingthis topassenger operations.
Thecompaniesare exploringthepos-sibilityof a jointventurethatwouldalso
cover procurement and maintenance,butanalystssaidQatar didnot needtoincrease its stake to cement thesearrangements.
“Theholdingis notnecessarytostrike
commercial arrangements,” said ChrisTarry,anaviationconsultant.“Itopensthe opportunity forbenefits
like the dividend but an investment israrely seen as necessary. They arealready good partners working welltogether.”
MAGGIE FICK — ABUJA
Several Nigerian airlines have can-celledanddelayeddomesticflightsthisweek as yet another shortage — thistime, ofjet fuel— grips Africa’s biggesteconomy.
Justdays afterthe government boostedpetrol prices at gas stations by 67 percenttoeasea fuelcrisisthathasplaguedNigeria sinceMarch,a shortageof avia-tionfuelhitthecountryof 180m.
The oil-producing country has toimport nearly all the fuel it consumesbecauseof itsrundown refineries.
ers.“Weapologisefor therecentdelaysexperienced asa resultof shortageof JetA1,” DanaAirsaid ina statementon itswebsiteyesterday.
Arik Air, the largest regional carrierinWestand CentralAfrica,has saidthatthescarcityof aviation fuel “on andoff in the past few weeks has reached an
alarming proportion” because of delayed deliveriesby fuelmarketerstothe airline. Flights from Lagos andAbuja weredelayed andsomewere can-celled, itsaid ina statementreleased onMonday.
In the city of Port Harcourt, FirstNationcancelledits flightto Lagos,cit-ing the fuel shortage, according to a
traveller there, and a call-centre agentfor a fourth airline, Aero Contractors,toldtheFinancial Timesthatflights hadbeencancelled yesterday.
At theheartof theshortages, econo-mists say, is a scarcity of a nother keycommodity: dollars. Since oil pricesbegan tumbling in 2014, fewer dollarshave been flowing into Nigeria. State
revenue has plummeted and foreignreserves have fallen by nearly $3bn inthepastyear.
On Sunday, South African Airlineswas forced to disembark passengersafter 2am from its Lagos to Johannes-burgflightowingto a jet-fueldelay,twopassengers told the Financial Times.The airline did not immediatelyrespondto requestsfor comment.
Thoughflight delaysare notuncom-
mon, the spate of cancellations sinceSundayis anotherfrustrationfor Nigeri-answho havebeencopingwith snakingqueuesat gasstationsformonths.
Higher pump prices have provokedsome anger, with two labour unionspledging an “indefinite” strike if the governmentdoesnotreversecourse.
Airlines
Nigeriancarriers cancel flights as fallout from fuel crisisspreads
Qatar raises stake in British Airways parent IAGGulfcarrier liftsholdingto15%andsays itmay bolster position again
PEGGY HOLLINGER — LONDON
Thecommercialaerospaceindustryhaslongbeencyclical,flyingin closeforma-tion with the rise and fall of economic growth. Butnot anymore, accordingtoDennis Muilenburg, chief executive of Boeing.
Speaking at an investor conferencelastweekin Seattle,thehead ofthe USaircraft maker insisted his aim was tobreak outof thatpattern.“We wanttobuild a long-term sustained growthbusiness,” he said.“That’sour headset,nota cyclicalbusiness.”
Itwas a statement that caused a stir, givenmountingconcernsthat aboominorders forpassenger jetsis coming toanend.This inturn raisesquestionsabouthow long the flagship commercial air-craft divisionsat Boeingand archrivalAirbuscan sustaina trendof risingreve-nuesthatgoesbackto2010.
Furthermore, Airbusand Boeingaretesting themselves to the limit by pro-ducingexistingjetsatrecordrateswhilealso starting to manufacture new air-craft. Thishugeindustrialchallengehasalreadyrunintosomeproblemsat Air-bus, while Boeingfaces a riskas itpre-pares to start production of its 777Xlong-range jet. Should either stumble,therecould becostly repercussions.
Onekey reason forinvestorconcernsabout the aircraft makers is evidencethat some airlines, amida sluggishglo-baleconomy,have beenexpanding theirfleetstoo quickly.
European carriers, notably Interna-tional Airlines Group and Lufthansa,haveoverthepast monthsaidtheywillmoderate their capacity growth, whileUnitedAirlinesoftheUS warnedits per-formancehadbeenaffectedby“passen- ger demand not growing at the samepaceasindustrycapacity”.
“Airlines are less positive than theywere12 months ago,” saysRob Stallard,analystat RBCCapitalMarkets.
To be fair, Mr Muilenburg is not theonly optimist out there — Airbus isequally bullish on the outlook for itscommercialaircraft division.
Bothcompaniesbasetheir confidenceonthe recordorder backlogs theyhavebuiltup. Boeing’s backlog of 5,800pas-sengerjets andAirbus’s 6,800 givelong-term visibility, they argue, andall thatneedsto bedoneis tobuildtheaircraftontimeandtobudget.
But these backlogs may not be assecureas they sound.If globalaviationmarkets are weakening, some airlinescould ask Airbus and Boeing to deferdeliveryofnewjetsor evencancelthem.
This appears to be a higher risk inemerging markets, because severalcountries— includingChina,Brazil and
Russia — are experiencing slowing growth or recession. Both Airbus andBoeing havesignificantordersfromair-linesin developingcountries.
And even if the concerns about theaircraft makers’ backlogsbeing vulner-abletodeferralsand cancellationsprovemistaken, Airbus and Boeing are con-tendingwith theimmediate challengeof
ensuring their suppliers can cope withincreasedproduction.
Supplierssay Boeing’sattentionis ondriving down their prices as part of itsplans to push its commercial aircraftdivision’s operating margin from 9 per
cent tothemid-teensover thenextfewyears.
Airbus, meanwhile, is putting itsefforts into keeping suppliers on track as it increases production of two of itsnewest aircraft — the A320neo singleaisleandtheA350wide-body.
It is struggling. The A320neo short-haul jet is using Pratt & Whitney’s
geared turbofan engine, the first in anew generation of more fuel efficientproducts,butit issufferingsevereteeth-ing problems and this has promptedAirbusto delaydeliveries tocustomers.
Separately, repeated problems atZodiac, the French supplier of cabininteriors on the A350 long-range jet,have caused Airbus to delay deliveriesofthisaircraft.
Delivery issues were part of the rea-sonAirbuslast monthreporteda 50percent fallin netprofitat itsfirst-quarterresults. The Toulouse-based companyinsisted itwouldcatchupon deliveriesinthesecondhalf, butthereis a lotrid-ingonjusttwosuppliers.
Theseinclude pooling suppliers’ rawmaterial purchases with Boeing’s, andsharingmanufacturingtechniques.
Inall,says MrFisher,the supplychainis “performingbetter”this yearthan in2015, when one supplier’s switch to anew resource management systemcaused “the biggest number of short-ages in my eight years of supply man-agement”.
While Boeing and Airbus are optimisticabout the passenger jet market, things
have already been looking darker forboth companies over some of theirmilitary aircraft programmes.
Airbus revealed last month it was againsuffering delays and technical problemswith its A400M military transport aircraft,already several years behind scheduleand billions over budget. In 2009, thecontrol system on the turboprop engine— described by the UK’s Royal Air Forceas the most powerful in the westernworld — was at fault.
Last year, incorrectly installed enginesoftware resulted in the crash of a testaircraft, killing four of its crew. Now it isthe gearbox that is causing problems.
Hefty earnings charges seem certain —the only question is how large. So farAirbus has taken some €4bn in provisionson the programme, while government
customers agreed in 2010 to a €3. 5bnbailout of the A400M.
Boeing meanwhile might beregretting its victory over Airbus onthe KC-46 aerial refuelling tanker forthe US Air Force in 2011. The battlewas so bitter that ministers fromFrance, Germany and the UK accusedthe US government of giving Boeing aclear advantage in the tender process.
Boeing last month recorded a $156mearnings hit on the $35bn tankerprogramme at its first-quarter results,taking the total charges over $1.3bn.
Dennis Muilenburg, Boeing’s chief,insisted the charges would help keepthe programme on track to deliver thepromised 18 aircraft by August.
The difficulties were not withtechnology, he said, but with finishingdevelopment while simultaneouslyramping up production.
Grounded
Delaysplaguemilitaryprojects
Commercial aircraft orders
Sources: Bloomberg; Thomson Reuters Datastream
Net of cancellations
Airbus Boeing
0
200
400
600
800
Commercial aircraft deliveries
Units
AirbusBoeing
Airbus and Boeing stockperformanceShare prices (rebased)
Closing prices and highs & lows are in traded currency (with variations for thatcountry indicated by stock), market capitalisation is in USD. Highs & lows arebased on intraday trading over a rolling 52 week period.♦ ex-dividend■ ex-capital redistribution # price at time of suspension
FT 500: TOP 20
C lo se P re v Day Week Monthprice price change change % change change % change %
Day's Mth's SpreadRed Ratings B id B id ch ge c hg e vs
May 17 date Coupon S* M* F* p rice y ield y ield yield USHigh Yield US$Nav ient Corpo ra ti on 06/18 8 .45 BB- Ba3 BB 107 .41 4 .71 -0.01 -0.52 3 .91High Yield EuroK az ko mmer ts I nt l B V 02 /17 6. 88 B C aa 1 B 9 7.5 0 - 0. 00 0.0 0 -Emerging US$Me xic o 09 /16 1 1. 40 B BB + A 3 BB B+ 1 06 .8 0 1 .4 9 0. 03 0.0 1 0 .4 4Brazil 01/18 8.00 BB+ Ba2 BB 105.29 4.66 0.03 0.12 3.86R uss ia 07 /18 1 1. 00 B B+ B a1 B B B- 1 17 .4 6 2 .7 1 0. 00 - 0.2 5 1 .9 0Peru 03/19 7.13 BBB+ A3 BBB+ 128.75 1.95 0.00 0.00 1.15Peru 03/19 7.13 BBB+ A3 BBB+ 114.01 2.60 0.00 0.20 0.84C olo mb ia 07 /21 4. 38 B BB B aa 2 B BB 1 04 .7 5 3 .3 9 0. 00 - 0.0 5 2 .1 3B ra zil 01 /22 12. 50 B B+ B a2 B B 1 06 .8 3 10 .8 5 0 .03 - 0.9 6 9 .5 9Poland 03/22 5.00 A- A2 A- 117.38 2 .80 0 .00 0.00 1 .54Turkey 09/22 6.25 - B aa3 B BB- 110.65 4.36 0.00 0.34 3.10Turkey 10/26 4.88 - B aa3 B BB- 101.09 4.80 0.00 0.30 3.04Emerging EuroB ra zil 02 /15 7. 38 B BB - Ba a2 B BB 1 11 .7 5 0 .7 3 0 .00 0.0 0 0 .0 9Me xic o 07 /17 4. 25 B BB + A 3 B BB + 1 11 .1 3 1 .5 0 0 .00 0.0 0 0 .6 9Me xic o 02 /20 5. 50 B BB + A 3 B BB + 1 21 .6 3 2 .0 6 0 .00 0.0 0 0 .7 9B ulg ari a 09 /25 5. 75 B B+ - B BB - 1 17 .6 2 3 .5 5 0 .00 - 0.1 8 1 .8 0Data provided by SIX Financial Information & Tullett Prebon Information. US $ denominated bonds NY close; all otherLondon close. *S - Standard & Poor’s, M - Moody’s, F - Fitch.
BONDS: GLOBAL INVESTMENT GRADE
Day's Mth's SpreadRed Ratings Bid Bid c hge c hge vs
May 17 date Coupon S* M* F* p rice yield y ield y ield USUS$H al li bu rt on C om pa ny 0 2/ 27 6 .7 5 A A 2 A - 1 24 .1 8 3 .9 9 0 .0 0 - 0. 06 2 .2 4Korea Electric Power Corporation 08 /2 7 6 .7 5 A A- A a2 A A- 10 3. 53 6 .4 0 0 .0 0 - 0. 04 4 .6 5Archer Daniels Midland Company 1 2/ 27 6 .7 5 A A2 A 12 5. 88 3.9 8 0 .0 0 - 0.02 2. 22S ou th Tr us t B an k 1 2/ 27 6 .5 7 A A a3 A + 1 25 .3 7 3 .8 7 0 .0 0 - 0 .2 7 2 .1 1SunTrus t Banks , I nc . 01/28 6 .00 BBB+ Baa1 A- 117 .44 4 .14 0 .00 -0.34 -FleetBoston Financial Corp. 01/ 28 6 .8 8 B BB B aa 3 A - 12 4. 22 4.2 7 0 .0 0 - 0.09 -EuroCredi t Agr icol e S .A . 03/27 2 .63 BBB Baa3 A- 100.92 2 .53 0 .00 -0.03 0 .77Electricitede France(EDF) 0 3/ 27 4 .1 3 A+ A2 A 12 2. 21 1.9 1 0 .0 0 0 .00 0. 15B HP B il li to n F in L td 0 9/ 27 3 .2 5 A + A 3 A + 11 5. 08 1 .7 7 0 .0 0 0 .1 9 0 .0 1Tel ia C om pa ny A B 0 9/ 27 3 .0 0 A - B aa 1 A - 11 4. 52 1 .5 9 0 .0 0 - 0. 03 - 0. 17YenWal -M ar t S to re s, I nc . 0 7/ 15 0 .9 4 N R W R N R 1 00 .0 0 0 .3 1 0 .0 0 0 .0 0 -£ SterlingI PI C G MT N L im it ed 0 3/ 26 6 .8 8 A A A a2 A A 1 22 .6 5 4 .1 1 0 .0 6 0 .1 2 1 .8 2B.A.T.IntlFinplc(Re- BritishAmericanTobacco) 0 9/ 26 4 .0 0 A- A3 A - 10 4. 67 3.4 7 0 .0 6 0 .29 1. 18Dataprovided bySIX FinancialInformation.U S $denominated bondsNY close;all other Londonclose. *S - Standard& Poor’s,M -Moody’s,F - Fitch.
INTEREST RATES: OFFICIAL
May 17 Rate Current Since Last Mnth Ago Year AgoUS Fed F un ds 0 .2 5- 0.50 1 6-1 2- 201 5 1 .0 0 0 .2 5- 0. 50 0 .00 -0. 25US Prime 3.50 16-12-2008 3.50 3.50 3.50US Discount 0.75 16-12-2015 0.75 1.00 0.75Euro Repo 0.00 10-09-2014 0.05 0.05 0.05UK Repo 0.50 05-03-2009 0.50 0.50 0.50J ap an O 'n ig ht C al l 0 .0 0- 0. 00 0 5- 10 -2 01 0 0 .0 0 0 .0 0- 0. 10 0 .0 0- 0. 10Swi tz er land L ibor Targe t 0 .00-0.25 15-01 -2015 0 .00-0.75 -1.25 --0.25 0 -0 .25
INTEREST RATES: MARKET
Over Change One Three Six OneMay 17 (Libo r: May 16) n ight Day Week Mon th mon th mon th mon th yea rUS$ L ibor 0 .38550 0 .000 0 .001 0 .002 0 .43620 0 .62610 0 .90640 1 .23265Euro L ibor - 0. 3957 1 0 .000 -0.001 0 .000 -0 .35129 -0 .27529 -0 .16343 -0 .03443£ L ib or 0 .4 83 75 0 .0 00 0 .0 01 0 .0 00 0 .5 11 56 0 .5 90 75 0 .7 31 88 0 .9 89 00S wiss Fr Li bo r 0 .0 01 - 0. 77 30 0 - 0.7 33 00 -0 .6 462 0 - 0. 52 400Yen Libor 0.000 -0.05386 -0.03114 -0.00343 0.08743Eu ro E uri bo r 0 .0 01 - 0. 34 80 0 - 0.2 57 00 -0 .1 430 0 - 0. 01 200Sterling CDs 0.000 0.50000 0.60000 0.77500US$ CDs 0.000 0.43000 0.62500 0.87500Euro CDs 0.000 -0.37500 -0.28500 -0.18500
Short 7 Days One Three Six OneMay 17 term notice month month month yearEuro -0.45 -0 .35 -0.45 -0 .35 -0.45 -0 .30 -0.36 -0 .21 -0.26 -0 .11 -0.08 0 .07S te rlin g 0 .4 5 0. 55 0.45 0.5 5 0. 55 0.6 5 0.7 0 0. 85 0.9 3 1. 08Swiss Franc - - - - - - - - - - - -Canadian Dollar - - - - - - - - - - - -U S D ol la r 0 .3 5 0 .4 5 0 .3 5 0 .4 5 0 .4 0 0 .5 0 0 .5 5 0 .6 5 0 .8 5 0 .9 5 1 .2 0 1 .3 0Japanese Yen -0.20 0.00 -0.35 -0.15 -0.35 -0.15 -0.35 -0.15 -0.20 0.00 -0.10 0.10Libor rates come from ICE (see www.theice.com) and are fixed at 11am UK time. Other data sources: US $, Euro & CDs:Tullett Prebon; SDR, US Discount: IMF; EONIA: ECB; Swiss Libor: SNB; EURONIA, RONIA & SONIA: WMBA.
BOND INDICES
Day 's Month' s Yea r Return ReturnIndex change change change 1 mon th 1 yea r
Markit CDXE me rgi ng M ar ke ts 5 Y 2 90 .5 0 - 1. 10 - 6. 63 11 .9 6 31 1.2 9 27 1. 25N th Ame r Hig h Y ld 5 Y 4 46 .2 1 - 6. 82 - 12. 37 15 .5 9 46 3.5 1 41 5. 17Nth Amer Inv Grade 5Y 81.51 -1.66 -2.49 3.73 85.25 72.99Websites: markit.com, ftse.com. All indices shown are unhedged. Currencies are shown in brackets after the index names.
COMMODITIES www.ft.com/commodities
Energy Price* ChangeCrude Oil† Ma y 47. 95 0 .1 1Brent Crude Oil‡ 4 9. 33 0. 30RBOB Gasoline† May 1.61 0.00Heating Oil† May 1.44 0.04Natural Gas† May 2.07 0.04Ethanol♦ - -Uranium† Ma y 29. 00 0 .0 0Carbon Emissions‡ - -Diesel† - -Unleaded (95R) - -Base Metals (♠ LME 3 Months)Aluminium 1544.00 -6.00A lu mi ni um A ll oy 1 54 0. 00 - 6 0. 00Copper 4628.00 -26.50Lead 1721.00 -25.00Nickel 8680.00 -5.00Tin 16880.00 -70.00Zinc 1890.00 -8.00Precious Metals (PM London Fix)Gold 1285.75 19.85S il ve r ( US c en ts ) 1 73 2. 00 2 3. 00Platinum 1058.00 16.00Palladium 591.00 -1.00Bulk CommoditiesIron Ore (Platts) 54.40 0.95Iron Ore (The Steel Index) 5 5. 70 1 .9 0G lo ba lC OA L R B I nd ex 5 4. 75 0 .6 5B al ti c Dr y In de x 64 3. 00 30 .0 0
Agricultural &Cattle Futures Price* ChangeCorn♦ J ul 392 .75 -0 .75Wheat♦ J ul 4 75 .2 5 2 .0 0Soybeans♦ J ul 1068.25 6 .00Soybeans Meal♦ J ul 3 63 .9 0 3 .0 0Cocoa (ICE Liffe)X Jul 2132.00 -24.00Cocoa (ICE US)♥ Jul 2901.00 -21.00Coffee(Robusta)X May 1670.00 26.00Coffee (Arabica)♥ J ul 1 34 .6 0 0 .9 0White SugarX 478.50 -2.50Sugar 11♥ 16.95 -0.17Cotton♥ Ju l 6 1. 36 0. 43Orange Juice♥ J ul 14 4. 05 0 .4 0Palm Oil♣ - -Live Cattle♣ J un 12 2. 95 0 .0 0Feeder Cattle♣ M ay 1 48 .9 3 1 .0 8Lean Hogs♣ J un 8 2. 98 0. 00
% Chg % ChgMay 16 Month Year
S &P G SC I S pt 3 71 .0 3 1 0. 33 - 17 .7 0DJ UB S Sp ot 85 .8 4 6. 76 - 18. 53R /J C RB TR 1 86 .7 1 7. 13 - 19. 53Rogers RICIX TR 2198.71 - -M Lynch MLCX Ex. Rtn 231.14 -9.84 -33.05UBS Bbe rg CMCI TR 13.27 7 .36 -19 .00LEBA EUA Carbon 5 .01 -0.99 -26 .32L EB A C ER C ar bo n 0 .4 0 5 .2 6 - 11 .1 1LEBA UK Power 4345.00 75.91 37.07
Sources: † NYMEX,‡ ECX/ICE,♦ CBOT, X ICE Liffe,♥ ICE Futures, ♣ CME,♠ LME/London Metal Exchange.*Latest prices,$unlessotherwise stated.
BONDS: INDEX-LINKED
Price Yield Month Value No ofM ay 1 6 Ma y 1 6 P rev r et ur n st ock Ma rk et sto ck s
Can 4.25%' 21 127.16 -0.568 -0.588 0.94 5.18 7 4151.95 7Fr 2 .2 5% ' 20 1 14 .7 3 - 1. 16 1 - 1.16 5 0. 18 2 0. 31 22 731 1. 40 15S we 0. 25 %' 2 2 1 11 .6 3 - 1. 37 7 - 1.38 1 0. 87 2 9. 90 24 247 4. 03 8UK 2.5%' 20 360.64 -1.524 -1.532 0.30 6.58 507693.32 27UK 2.5%' 24 342.12 -1.002 -1.014 0.91 6.82 507693.32 27UK 2%' 35 232.61 -0.820 -0.831 1.13 9.08 507693.32 27U S 0 .6 25 %' 2 1 1 04 .8 2 - 0. 30 1 - 0. 32 6 - 0. 03 3 5. 84 1 15 55 34 .7 1 3 7US 3 .6 25% ' 28 1 37 .8 7 0. 37 2 - 0.32 6 0. 12 1 6. 78 1 15 553 4. 71 37Representative stocks from each major market Source: Merill Lynch Global Bond Indices † Local currencies. ‡ Total marketvalue. In line with market convention, for UK Gilts inflation factor is applied to price, for other markets it is applied to paramount.
Italy 1.52 1.38 -0.24Japan -0.11 -0.24 -1.87N et he rla nd s 0. 23 0 .0 9 - 1. 53Norway 1.36 1.23 -0.40Portugal 3.14 3.01 1.38Spain 1.56 1.43 -0.19S wit zer la nd - 0. 31 -0 .4 4 - 2. 06U ni te d K in gd om 1 .5 0 1 .3 7 - 0. 25Un it ed S tat es 1. 76 1.6 3 0. 00
Data provided by SIX Financial Information & Tullett Prebon Information
VOLATILITY INDICES
M ay 1 7 D ay C hn g P re v 5 2 w k h ig h 5 2 w k l owVIX 14.67 -0.01 14.68 53.29 10.88VXD 14.46 0.00 14.46 56.32 7.76VXN 16.64 0.27 16.37 46.72 12.06VDAX 19.15 0.41 18.74 32.55 16.71† CBOE. VIX: S&P 500 index Options Volatility, VXD: DJIA Index Options Volatility, VXN: NASDAQ Index Options Volatility.‡ Deutsche Borse. VDAX: DAX Index Options Volatility.
BONDS: BENCHMARK GOVERNMENT
R ed B id B id D ay c hg W k c hg Mo nt h Yea rDate Coupon Price Yield yield yield chg yld chg yld
Price Indices Day's Total Return ReturnFixed Coupon M ay 1 7 ch g % Re tur n 1 mo nt h 1 yea r Y ie ld1 Up to 5 Years 98.45 0.04 2403.04 0.20 2.41 0.532 5 - 10 Years 184.19 0.17 3374.81 0.70 6.25 1.083 10 - 15 Years 215.21 0.26 4008.49 1.23 8.27 1.654 5 - 15 Years 191.66 0.20 3528.47 0.86 6.79 1.335 Over 15 Years 317.42 0.40 4642.94 2.25 10.83 2.137 All stocks 178.47 0.23 3 380.23 1.21 6.93 1.85
D ay 's M on th Yea r' s Tot al R et ur n R et ur nIndex Linked M ay 1 7 c hg % c hg % c hg % R et ur n 1 m on th 1 y ea r1 Up to 5 Years 309.36 0.03 -0.14 -1.28 2384.91 0.00 0.502 Over 5 years 582.62 0.35 0.20 2.30 4 314.46 0.35 2.993 5-15 years 436.40 0.15 -0.03 0.72 3 335.85 0.20 1.794 Over 15 years 719.52 0.43 0.29 2.94 5224.40 0.41 3.485 All stocks 537.96 0.30 0.15 1.77 4038.17 0.30 2.62
Yield Indices May 17 M ay 16 Yr ago May 17 M ay 16 Yr ago5 Yrs 0.71 0.73 1.34 20 Yrs 2.17 2.19 2.5410 Yrs 1.47 1.49 2.04 45 Yrs 2.09 2.11 2.5715 Yrs 1.96 1.98 2.39
inflation 0% inflation 5%Real yield May 17 Dur yrs Previous Yr ago May 17 Dur yrs Previous Yr agoUp to 5 yrs -1.27 2.01 -1.29 -1.17 -1.97 2.02 -1.86 -1.73Ove r 5 yr s - 0. 89 23 .5 6 - 0. 88 - 0.7 9 -0 .9 2 2 3. 67 -0 .9 0 - 0. 815-15 yrs -0.91 9.30 -0.91 -0.85 -1.05 9.31 -1.00 -0.91Ove r 15 y rs - 0. 88 29 .1 8 - 0. 87 - 0.7 9 -0 .9 1 2 9. 24 -0 .8 8 - 0. 80All st oc ks - 0. 89 20 .5 7 - 0. 88 - 0.8 0 -0 .9 4 2 0. 71 -0 .9 1 - 0. 84See the FTSE website for more details: http://www.ftse.com/products/indices/gilts
All data provided by Morningstar unless otherwise noted. All elements listed are indicative and believed accurateat the time of publication. No offer is made by Morningstar or the FT. The FT does not warrant nor guaranteethat the information is reliable or complete. The FT does not accept responsibility and will not be liable for anyloss arising from the reliance on or use of the listed information. For all queries [email protected]
Data provided by Morningstar | www.morningstar.co.uk
The US Treasury hasrevealed for the first timethe scale of governmentdebt held by Saudi Arabiaand other oil producers,
whose fiscal health hasbeen hit hard by the rout incrude prices since thesummer of 2014.
Saudi Arabia, the world’sbiggest oil exporter, held$116.8bn of US Treasurydebt as of March 2016, theTreasury said on Monday.That makes the kingdomthe 13th-largest foreignholder of the $13.3tnTreasury market, behindthe likes of India, Belgium,Taiwan, the UK,Switzerland and Ireland.
China, with a $1.24tnportfolio, and Japan, with$1.14tn, dominate the list offoreign holders, whichtogether hold just underhalf of the largestsovereign debt market.
Fears emerged this yearthat Saudi Arabia mightbegin to shed its holdings,given rising budgetarypressure caused by slidingoil prices.
The kingdom recentlynegotiated a $10bn loanfrom a consortium ofglobal banks and hasunveiled an ambitious planto shift its economy awayfrom hydrocarbondependency.
Oil prices have droppedfrom a July 2014 high of
$115 a barrel to less than$30 this January, beforerising towards $50 thismonth.
The scale of thekingdom’s holdings, whilesubstantial, is not seen as aliquidation risk for theTreasury market.According to Treasurydata, the Saudi holdingsrose from $102.8bn overthe year to March.
“That is not to suggest
$116.8bn isn’t a significantamount, but compared tothe largest holders, itdoesn’t point to systemicrisk for Treasuries shouldoil prices fail to recover,”
says David Ader, strategistat CRT Capital.
“Nonetheless, it is aninteresting data point aswe contemplate the
potential ramificationsfrom the current state ofthe global energy market.”
The Treasury tweakedits data after a freedom ofinformation request byBloomberg. Previously ithad lumped Saudi Arabiain a broad category of “oilexporters”, together withEcuador, Venezuela,Indonesia, Bahrain, Iran,Iraq, Kuwait, Oman, Qatar,the United Arab Emirates,Algeria, Gabon, Libya andNigeria.
As of February the oilexporters’ group held acombined $281bn.
Under the latestdisclosure, the UAE holds$62.5bn (down from$79.5bn in March 2015) andKuwait has $31.2bn.
The Treasury has alsoreplaced the “CaribbeanBanking Centre”classification with CaymanIslands. Long seen as aproxy for Treasuries heldby hedge funds, Caymanaccounts for $265bn, thethird-largest holding.
Of the $6.3tn in Treasurydebt held by foreigninvestors, central banksand other officialinstitutions account for$4.07tn.
Hefty foreign ownershipof Treasury paper has beena cause for concern forsome market watchers.
Bouts of weaknessamong emerging marketcurrencies in the past yearhave prompted some
central banks to sell downtheir reserves to protectexchange rates.
China’s official holdingshave fallen slightly overthe past year from $1.261tn,while Brazil has eased from$261bn to $246bn. Mexicohas slimmed its holdingsfrom $85bn to $71.6bn.
However, official figuresfor countries reflect flowsvia US-based custodiansand broker/dealers. Assuch they do not reflectactual holdings bycountries.
Much of the UK’sholdings of $227bn arebelieved to be held byother countries that usethe City as their buyer ofTreasuries.
In the past year Ireland
has shot up the list offoreign holders, with a tallyof $264.3bn, boosted byglobal companies attractedby lower corporate taxes.Michael Mackenzie
Capital markets
Treasury breaks down debtto other oil-producing nations
Saudi Arabia’s Treasury holdings
Source: Department of the Treasury/Federal Reserve Board
$bn
Mar Mar
MARKETS & INVESTING
ROGER BLITZ
The cost of insuring portfolios andbusinessesagainst a collapse insterlingafter the“Brexit”voteisrising,as sell-ers of insurance back away from themarket,accordingto currencytradersandstrategists.
A stable pound in recent weeks hasdiverged from the market for sterlingoptionscontracts. Risingoption volatil-ityreflects market makers— bankdeal-ingdesksthatsellinsurance tocompa-niesandinvestors— beinglesswillingto
riskexposure tosterling volatilityaheadof the June 23 referendum on Britishmembershipof theEuropeanUnion.
The cost of hedging against largeswings in sterling in the next twomonths— knownas two-monthimpliedvolatility — is up from 10.72 per centthree weeks ago, to 16.85 yesterday. It
reached 18.35 per cent on Monday, itshighestlevel since2009.
Three-month implied volatilitypeaked this year at 16.26 per cent onApril 7, before dropping to 12.74 percent, but has climbed again, reaching14.81per centyesterday— moderatingfromMonday’s15.86percent.
Currency strategists said while fearsof a British exit, or Brexit, may in partexplainthehighcostof insurance,lack ofliquiditywas amorelikelyfactor.
Paul Lambert, head of currency atInsight Investment, saidthe experience
ofbig currencyfluctuations,suchas lastyear’s dramatic moves in the Swissfranc, left banks unwilling to take onexposureto sterlingoptions.
Options sellers would hedge theirrisks bytradingin thecashmarket, hesaid. “However, if prices widen thenthey will notbe able todo soefficiently
and may be left with exposure toadverseprice movements,”MrLambertadded.“Theirresponseisto pushupthepriceofsuchoptionsto deterbuyers.”
Ahead of the referendum, sterlingmoves have tended to track opinionpollsandbettingmarkets,as wellaseco-nomicdata. Thepoundrose0.9per centyesterdayinresponsetopollsmovinginthe Remain camp’s direction, beforeretreating after publication of poorinflationnumbers.
Another sign ofstresswasthe differ-ence in the cost of buying upside and
downside insurance against sterlingafter the referendum. That difference,calledthe two-monthrisk-reversal,has jumpedto -5.73 percentagepoints.NextMonday is expected to be a significantdate for gauging market sentiment,whenone-monthoptionscontractswillcoverthedateof thereferendum.
Currencies
UK’s ‘Brexit’ vote raisessterling insurance cost ROCHELLE TOPLENSKY AND JOEL LEWIN
Positive investor momentum behindGreekbank stocksand bonds isbuild-ing on higher expectations for a debtrelief agreement at next week’s euro-zonemeeting.
Someanalystshaveraisedratingson gov-ernmentdebtandsomebanks,inlightof expectations fora successful completionofthefirstreviewofGreeceandanagree-mentondebtreliefon24May.
“The bailout review looks set to beconcluded,” saidMorgan Stanley.“This
isset toultimatelypavetheway fordebtreprofiling, ECB QE, lifting of capitalcontrolsand economicrecovery.”
UBSupgradedAlphaBank yesterday,following Morgan Stanley whichrecentlyturnedbullishon Greeksover-eigndebtand fourbanks— AlphaBank,Eurobank,NBG andPiraeusBank.
Sharesin AlphaBankrose5.5per centyesterday, but are down almost 85 percent in the last year and 99.5 per centfrom their 2008 peak. Greek 10-yearbenchmark bonds are yielding 7.4 percent,thelowestlevelin fivemonths.
Earlier yesterday, Alpha Bank unveiled its participation in a KKR-ledvehicle aimed at easing the burden of badloansand enablinglendingtoGreek companies.
Greecefaces€3.5bnof debtpaymentsinJulyandan agreementisexpectedatthe 24 May meeting as European offi-
“Wedobelievethatperhapstheloom-ing UK referendum is creating somepressure,” said Richard McGuire, ratesstrategistat Rabobank.“Anyre-ignitionof Greek concerns may play into the
UBSraisedAlphaBank’s ratingfromneutral to buy pointing to “attractiveupside potentialboth inabsolutetermsandalso relativeto peers”, as thesharescurrentlyoffer nopremium tothoseof its peers, despite “higher operationalefficiency and superior profitability”,saidMateNemes,analystatUBS.
Morgan Stanley said Greek bank stockscouldsoaras muchas90 percentshouldthe country’screditors completethefirstreview ofGreece’sprogresson
bailoutreformimplementation.However, Mr McGuire sees anyimprovement in sentimenton theback ofpositivedevelopments on24 Mayas“a sellingopportunity, as any improve-ments insentimentis likely tobe short-livedas tensionsare likelyto riseas weinchcloser toJune 23UK referendum”.
Equities
Investor momentum builds behind Greece
ELAINE MOORE
Italy plans to join the latest Europeanclub of countries tapping yield-hungrybuyersfor 50-yeardebt.
Even thoughit hasoneof theworld’slargestdebtburdens,at 133per cent of
grossdomesticproduct, and a bankingsectorwhoseproblems areraisingfearsacross Europe,Italyis contemplatingitslongest-maturity saleto date.
It is an approach that is becomingcommonplace in Europe, where debt-servicing costsare at near-recordlows.Spain, France and Belgium have sold2066 bonds this year, and a spate of longer-dated sales have pushed theaverage maturity of euro-area govern-ment debt back to pre-crisis levels atabout6.6 years.
To an optimist this may look like asignof confidenceonthe partof inves-tors. During the sovereign debt crisis,bondholders favoured shorter-datedissuesbecausethey worriedthat paperwith longer maturities were at greaterriskofgoingunpaid.
However,the trendalso suggeststhatinvestorsin Europeare lookingto lock in higher rates of interest against theriskof Japanese-style deflationand atatimewhen closeto €3tnof governmentbondsyieldless thanzero.
“All investors are looking at is theyield,” saysKit Juckes, globalstrategistat Société Générale. “With ultra-lowrealinterestrates andquantitative eas-ing, fixed income investors who needyield can choose either emerging mar-kets, high-yield bonds or long-datedeurozonebonds.
“Ifyou’renot worried aboutinflationcoming back to Europe any time soon,whywouldn’tyoubuy50-yeardebt?”
Inspiteof aggressivemonetaryeasingpolicies, eurozone inflation forecastshave been downgraded to 0.2 per centthis year, far from the near 2 per centtarget of the European Central Bank.Thealteredoutlookhas inturnpusheddown borrowing costs across Europe,leaving Italian 30-year bonds yielding
just2.65percent.The question is what investors will
consider fairvalue over 50years.Itis amaturity outside the ECB’s bond-pur-chase spectrum and involves taking alonger beton a government’screditrisk andinterest ratemovements.
“Investors will be looking across atother 50-year bonds to work this out,”saysDarren Ruane,seniorbond strate- gistatInvestecAssetManagement.
Bonds issued by Spain, a southernEuropeancountrybesetby itsown debtproblems,tradeat about15 basispointsaboveItaliandebtin30-yearmaturities.If the 50-year bonds follow suit, Italymight be expected to price a bond at3.2percent.
At these yields, says Mr Ruane, Italywill easily find buyers. “If you believeyieldshavefurtherto fallthenthewaytogetthemostoutofthatisto buylong-dated European debt,” he says. “Thebonds with greatest duration will risethemostinpriceterms.”
Ralf Preusser, head of rates research
at Bank of America Merrill Lynch,points out that the ECB appears to bebuying larger quantities of long-duration bondsas itrunsoutof eligibleshorter-dated debt to buy — whichcould mean better returns at the longendofthe curve.
Add to that the fact that the ECBhas been buying longer-dated maturi-tiesin peripheralcountriesrather thanin the “core” — a weighted averagematurityof 9.27years inItalycomparedwith8.2years inGermany— andItalianlong-dated debt begins to look moreappealing.
For investors who have purchasedlong-dated debt this year, the bet hasalreadypaidoff,albeitwithsomevola-tility. A 50-yearbondsoldbyFranceonApril12 at94centsintheeurotoreflecta 1.75per centcoupon,currentlytradesat97 cents,althoughthere wasa dipto91centsinmid-April.
Thisillustratesone ofthe mainrisks
of buyingultra-longdebt: smallmovesin yield tend to result in large move-ments in price, meaning the potentialforgainsandlossescanbe outsized.
Forinvestors in Italy, thereis alsothequestion of creditrisk. Whilethe ECB’sQE programme has helped to shieldItaly’s borrowing costs, some econo-mists insist that the size of its debtremainsa problem.
Ashoka Mody, visiting professor atPrincetonUniversity, hasspentthe pastfew years drawing attention to Italy’sdebtprofile.
“Thefactthatmarketsdo notregistermuch uneasiness about the credit-worthiness of Italy does not mean it isnota problem,” hesays. “Therealprob-lemisnot debtbutgrowth.
“People have adapted their expecta-tionsso severelythat ifItalyshowsthesmallest bitof growth theyare pleased,but growth is grinding down. I think Italycould becomeEurope’sfaultline.”
Analysis. Capital markets
Italy set to jump on ultra-long debt bandwagonRomeconsiders following
Spain,Franceand Belgium
with50-yearbond issue
1/5Fraction of USgroups that willsurvive, accordingto Interactive
ThomasPeterffy, thebillionaireownerofInteractive Brokers anda pioneerof electronic markets, has predicted ahuge cull ofthe USbrokerageindustryin years to come, triggered by fallingrevenues, rising costs and a mountingregulatoryburden.
Mr Peterffyfounded InteractiveBro-kersnearlyfour decadesago toharnesstechnology to broaden and improveaccesstoequitymarkets.Manyof thoseadvances have proliferated across theindustry, and trading US stocks hasneverbeencheaperoreasier.
Coupled with the burden of increas-
inglyonerous regulation,only a minor-ityof thenearly4,000securitiesgroupsregistered with the US regulators willendure, Mr Peterffy told the FinancialTimes.
“Thebrokerage industry hasbecomeincrediblyefficient. It’s allabout takingcostsout ofthe system,”he said. “Onlyone-fifth of brokerages will survive.There will be fewer and bigger firms.Trading will be extremely cheap andefficient, and there will be more semi-automatedtradingalgorithms.”
Competitive pressures are expectedtointensifyin thecomingyearsas tech-nology lowers commissions whileincreasingcosts.
recent overhaul of retirement adviceaimedatfinancialadvisers—is alsoseenasweighingonbrokers.
“Everyone is feeling the cost pres-sures,” said Fred Cannon, director of
global research at KBW. Although hedoubted that as many as 80 per centwould drop away, “there will be moreconsolidation to come . . . There isexcesscapacity inthe industry.”
The number of US groups providingbrokerage services registered with theFinancial Industry Regulatory Author-ity has been shrinking for some time,with nearly500 disappearingfromtheregulator’sbookssince2011.
Eric Noll, chief executive of Con-vergex,a USbroker,saidsmallerstock market-focusedcompanieswould comeunderparticularpressurefrom slump-ingtradingrevenuesandrisingcosts.
“It has become a scale game,” he
said. “Increasing competition hasbrought rates under pressure. Thereis more regulation and more technol-ogyinvestment . . . Everyone is lookingfor new and better ways to run their
business.”MrNoll arguedthatsmalland nimblecompaniesthat tookadvantage oftech-nological advances more quickly thanthe“bigfive” — CharlesSchwab,Fidel-ity, ETrade, TD Ameritrade and Scot-trade—wouldthrive.
“The industry has overcapacity andcostshavecome up,butsmall,innova-tiveplayerscanstillflourish,”he said.
Mr Cannon said another bright areawasthebondmarket,whichwas garner-ing more interest from retail investorsbut was still at the early stages of embracing electronic trading, so com-missions were typically much higherthaninequities.
Equities
US brokers warned of impendingcullElectronic trading pioneersays technology willintensify competition
Signsof fatigue emerged on WallStreetyesterday following Monday’s strong gains,evenas energy stocks gainedfur-ther ground while oil prices remainedwithin striking distance of the $50-a-barrelmark.
A batchof solidUS economicreleasesfuelled speculation in some quartersthat USinterestratescould risesoonerthan expected, although the data werelargelyignored bythe dollar.
Bymiddayin NewYork theS&P500was down 0.3 per cent at 2,060, after a1 per cent jump for the equity bench-mark on Monday. Across the AtlantictheEuroStoxx600indexendedflat.
Thosemovescame in spiteof further gains for oil prices. Brent, the interna-tionalcrudebenchmark,was up0.5 percent at $49.22 a barrel — after earliermatching Monday’s six-month high of $49.47.Thatlevelmarkedan 82per centrallyfroma 12-yearlowof $27.10hiton January20.
US West Texas Intermediate, mean-while,was0.8percentfirmerat$48.08.
JimReid,macrostrategistatDeutscheBank, noted that while oil had prettymuch been on a one-way track sinceFebruary, USequitiesappeared to havehita stumblingblockthismonth,evenafterMonday’sstrong performance.
“In fact in the nine sessions prior toMonday, the S&P 500 had followedthree days of consecutive losses withthreedaysof gainsand thenthreemoredays of losses again — with the index
backtoflat forthemonthof May, whichcompares to a 4 per cent return foroil,”he said.
“So while the old adage ‘sell in Mayand go away’ hasn’t quite been com-pletely true, it’s proving to be a muchmore directionless month for US equi-tiescompared to the positive perform-ancesof Marchand April.”
Indeed the focus in the markets yes-terdaybeganto shift awayfromtheoilprice and towards the outlook for USinterest rates, after a bullish batch of economicdata.
US industrial productionrose 0.7percent in April, well ahead of analysts’forecasts, bolstered by an outsizedincreasein utilitiesproduction.Housing
starts also increased by more thanexpected.Perhaps most notably, US consumer
pricesrose 0.4per centlastmonth— thebiggest gain since February 2013 —taking theannualrate ofheadlineinfla-tionto1.1percent.
Steve Murphy at Capital Economicssaid:“Thereboundin commoditypriceswe’ve seen in recent months now sug- gests that headline inflation will snapbackto 2 percent inthesecondhalfof theyear.”
Coreconsumer prices, whichexcludethe more volatile food and energycomponents, rose 0.2 per cent lastmonthalthoughbaseeffectsnudgedtheannual rate down to 2.1 per cent from
2.2percent.“With inflation heading back in theright direction, financial conditions
benignand some betterrecent dataoneconomicactivity, thechancesof a Juneratehikearegrowing,”said RobCarnell,chiefinternational economistat ING.
“Comments from Federal Reservespeakers overrecentmonthshave reit-erated that June is a ‘live’ month, andthat two rate hikes look a reasonableprospectfor2016,”he added.
“But financial markets have beenpricingin a farflattercurveforthe Fedoverthe comingyear.Today’s inflationdata are a clarion call for a marketrethinkon theFed.”
However, there waslittlesignthat thecurrency or Treasury markets werepayingtoo muchattention.
Thedollarindex,whichmeasurestheUS currency against a weighted basketofpeers, wasdown0.2per cent,hurtbya 0.2percentrise fortheeuroto $1.1334and a 0.6 per cent gain for sterling to$1.4479.Dollar/yenwasflat at¥109.03.
The yield on the policy-sensitive UStwo-year Treasury was up just 1 basispointat0.80per cent, althoughitdid hit0.82 percentin earlytrade,thehighestsincetheendofApril.
“Support for staying in the EU roserelativeto a similar pollin April,” notedShaun Osborne, chief FX strategist atScotiabank.
“UK CPI data showed price growthslowing in April, however, as airfaresand clothing prices fell. With employ-ment data out [today], there is a risk that more disappointing data will clipthepound’swings somewhat.”
TheAustralian dollar wasup 0.9 percent at US$0.7351 after the minutes of theReserveBankof Australia’s meetingin May, at which it cut interest rates
and displayed a broadly neutral tonewithan absenceof biastowardsfurtherpolicyeasing.
Global overview
Stocks stall as oil holds near $50and US data renew talk of rate riseBullish economic releasesrevivepossibility of JuneFedmove,while opinionpollboostfor Remaincamp boostssterling
Markets update
Day's
Indices Close change
S & P 500 2062.49 -4.17
DJ Industrials 17670.06 -40.65
Nasdaq Comp 4767.96 -7.50
Russell 2000 1204.70 -8.35
VIX 14.67 -0.01
US 10 yr Treas Bd 1.76 -0.01
US 2 yr Treas Bd 0.80 0.01
Hedge funds woes explained in 90 seconds: FT.com/videoThe FT’s global investment editor Miles Johnson explainswhy hedge funds have come under scrutiny
Apr May
Apr May
Apr May
Apr May
S&P indexChange on day
FTSE index
Change on day
Eurofirst index
Change on day
Nikkei index
(’ ) Change on day
US equities Wall Street gave backsome of the previous session’s heftygains, with retailers back in thespotlight after the release of quarterlyfigures from Home Depot
UK equities Taylor Wimpey rose 4.7per cent after the housebuilderannounced a special dividend, whilethe mining sector also enjoyed apositive session
European equities An early rise forthe Eurofirst 300 melted away intandem with a softer start on WallStreet. Fiat Chrysler’s 6.7 per cent dropled a decline for European carmakers
Japanese equities Overnight strengthfor US stocks helped push the Nikkei
higher, with exporters lifted by an earlyrise for the dollar above the ¥109 mark
The start of the week saw a flurry of13F filings by fund managers, themost-reported of which containednews of Berkshire Hathaway’s $1bn
bite into Apple.This melding of the world’s mosthigh-profile investor — Warren Buffett— with probably its most high-profilecompany bolstered the bullish mood.
Yet recent moves by another wellknown trader possibly paint a moregloomy picture.
It was widely reported that GeorgeSoros’s eponymous fund managementgroup (SFM) had doubled its bearishbet on US stocks.
As Reuters said, SFM in the Q1 2016owned 2.1m “put” options for shares ofthe SPDR S&P 500 exchange-tradedfund (ETF), which tracks thebenchmark Wall Street index. This wasup from 1m puts in Q4 2015.
And as Bloomberg noted, the samefiling showed that SF M’s publiclydisclosed US equity holdings fell 37 percent to $3.5bn in Q1.
As if to reinforce his nervous view ofmarkets, Mr Soros bought a $264mstake in Barrick Gold, the world’sbiggest bullion producer, whilepurchasing a chunk of “calls” in theSPDRGold Trust, a precious metal ETF.
Butinvestorsneedto becarefulaboutmisconstruingoption positionsin13Fs, asthey mayreflecta hedgethatprotects a long portfolio.The timingandstrike price arenotrevealedandthecostis expressedas a notionalvalueratherthe actualamountpaid.
Anyway, no need to panic. Giventhat Mr Buffett tends to take a longer-term stance, both he and Mr Soros canbe right. [email protected]
S&P index
Source: Thomson Reuters DatastreamMay May
TRADING POST
JamieChisholm
Lucas Jackson/Reuters
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At grain terminals from Durban toDalian, the world’s main ports havebeen busy as growing consumptionfrom risingmiddleclasses andhealthysupplies have boosted trade flows torecordhighs.
The international trade in grain andoilseeds has grown to 699m tonnes inthe2014-15 crop year — thehighestonrecord, rising almost a third from fiveyearsago, accordingto Rabobank.
“We are seeing more and moredemandin regions like AsiaandAfricaand strongcommodity flowsfrom pro-ducers inNorthand SouthAmerica andtheBlackSea,” says StefanVogel, headof agricultural commodity marketsresearchat Rabobank.
Despitethejumpin volumes,the fallinpricesdue torisingproductionon theback of acreage expansion and goodweatherhas meant thetradevaluehasfallenalmost10 percentin theperiodto
just below $200bn. “We haven’t seensuchstronggrowthat thesametimeas afallinvalue,”notesMr Vogel.
Thestrongtradeflowshavebeensup-ported by rising supplies over the pastfive years, which have increased fasterthandemand growth.
vested for corn and soyabeans rose 11per cent from 2010-11 and 2014-15,whilea risein productivityand favoura-bleweatherin keygrowing areasmeantoutput rose 21 per cent, says the USDepartmentof Agriculture.
Meanwhile, the Federal Reserve’smovein2013to endquantitativeeasing,followedbya fallin theoilprice,ledtoaplungein emerging market currencies.This made agricultural commodity
exports from countries such as Braziland Russia more competitive, andhigher returns in local currency termsencouragedfarmers in developedmar-ketstoproducemore.
The currency backdrop has meanttradeflowsfromSouthAmericaand theBlack Sea region — namely Russia andUkraine— haverisensharplyin thepastfive years, while exports from the UShavebeenaffectedbythehighdollar.
Rabobank data show that Brazil’s grains andoilseedexportssurged78 percent, while that of the former Sovietcountriesalmost tripled.
Russianfarmers havebeen expandingtheir output of corn, which is higheryielding thanothergrains, saysAndreySizov at Moscow-based SovEcon. Rus-sian wheat production in 2015 rosealmost50 percentfrom2010 to61.8mtonnes, while corn output more than
quadrupled to 13.2m tonnes, he says.FromRosario in Argentina to Rostov
in Russia, ports handling grain andoilseeds areexpectedto remainbusyasinternational trade continues to growoverthenextfewyears.Brazil,inpartic-ular,is forecast to increase acreage andproduction.
In countries such as Argentina andRussia, the government’s policies willplaya crucial rolein determining plant-
ingandexportlevels.In Argentina,thecutinexporttaxesandcurrencydevalu-ationattheendof lastyearbythegov-ernmentofMauricioMacrihas ledto a jump in overseas sales. “It has been averybusyyearfor Rosario,”says EmilceTerréattheRosarioboardoftrade.
In Russia, where the governmentimposedan exporttax onwheat, grow-ersand exporterswillbe waryofsimilarmoves for other grain sales and could
limit future output growth. “The waythegovernmentbroughtin wheattaxescouldaffectfutureproductionas grow-ers could become more cautious,” saysMr Sizov. Meanwhile, more US corn islikelytocomeon toexportmarkets.
Demandin Africa andtheMiddleEastispredictedto remainstrong.
Sub-SaharanAfrica is forecast toseefirm growth in wheat and soyabeans,saysWandile Sihlobo,agricultural econ-
omist at South Africa’s AgribusinessChamber. “There is growth in foodproducts which use wheat while thosewhichuse cornare decreasing.”
ThemainfocusfordemandisChina.Beijingsaidthisyearit wouldend its
pricesupportpolicyinan effortto cutitscorn stockpile, and international grainexporters to China are watching howthis will affectthe country’simportsof othergrainsusedas livestockfeed.
Analysis. Commodities
Grains trade sets record volumesTotalvaluedrops 10%as
jump in production outpaces
growth in global demandSoyabean import forecastsTonnes (m)
Shares of gold miners havemore than doubled thisyear, crushing the 20 percent gain in the preciousmetaland prompting inves-tors such as billionaireGeorge Soros to increasetheirbetson thesector.
Soros Fund Managementboughta 1.7per centstakeinminer Barrick Gold in thefirstquarter, worth$263.7m,accordingto afilingonMon-day.Sharesin theCanadian-listed company have surged139percentsofarin2016.
The precious metal hasbenefitedfromlowandnega-tiveinterestrates, as, unlikebonds or equities, gold doesnot pay a yield. A weakertone for the US dollar afterpeaking in late January hasalsospurred a solidreboundincommodityprices.
Gold miners have alsospent the past four yearswritingdown billions of dol-lars in assets and cuttingcosts to reduce their debtsafter gold prices tumbledfrom their 2011 peak. Bar-rickGoldhascutitsdebtbynearlyathirdoverthepast15months.
“They’ve gone through abadfewyears(thegoldmin-ing companies) but theyseem to come out the otherside,” said David Govett,head of precious metals atbroker Marex Spectron.“They’re easier to trade andyou don’t get the ridiculousfluctuations we see in thecommodity price some-
SharesETFisup20percent.GreenlightCapital,a hedge
fund founded by David Ein-horn, has a 2.64 per centstake in the Vectors GoldMinersETF,filings show.
But other prominentinvestorshavestartedtotakeprofits.JohnPaulson’s hedgefund cut its stake in Anglo-GoldAshantito15.2msharesin the first quarter from22.9m,a filingwithUS regu-latorsthis weekshowed.
Paulson also cut his stakein the SPDR Gold Trust to4.8m shares from 5.8m, thefilings reveal. However, thefund is still the third largestholder of shares in the ETFwitha1.67percentstake.
Analysts are warning of acorrection in the gold priceshould the Federal Reserveseekto raiseborrowing costsin the coming months — apolicy shift that is seen asboostingthedollar.
Physicaljewellery demandin India and China has alsobeen weak, which meansadditionalpurchasesof gold-backedETFsarerequiredtohelppropel theprice higher.
Gold would need an extra12m to 13m ounces of netnewbuyingto getthepriceto$1,400a troy ouncefromitscurrent level of $1,273,accordingtoTomKendall,anICBCStandard Bankanalyst.
Inthe first four monthsof this year about 30m ouncesofgold wasboughtbyinvest-mentmoney,he said.
“Is it realistic to expectETF holdings to get back tothe 65m to 70m ounce level
Commodities
Soros buys Barrickasminers outpacegold
I twasnevermeanttobe likethis.Afterthe initialfiscal
pump priming that followed the financial crisis, theadvanced economies were supposed to engage in a
judicious mix of fiscal consolidation and structuralreformsin theinterestsofdebt sustainabilityandeco-
showsthatthe advanced countries’gross general govern-mentdebtrosefrom92 percentof grossdomesticproductin2009to 106percentin 2015.WiththenotableexceptionofGermany,all thebigeconomiessawsignificantincreasesin governmentdebt. Thosemost committedto austeritywere amongthe least successfulin preventingdebtfromrising,despitetighteningbudgetarypolicy. Thiswas mostnotably trueof theUK.Between 2009and 2015its gross general government debtroseat nearlydoubletherate of theeurozoneandmuchfasterthantheUSorJapan.
Themostegregiousdebtor, predictablyenough,is Japanwhere thegrossfigureamountedlast yearto 248per cent,althoughthecountryis unusualin thesizeof thedisparitybetween gross and net debt, which is calculated afterdeducting intra-governmental debt and other govern-ment-owned assets. The net figure last year was 128 percent— significantlylowerbut nonethelessalarming.
Will this publicdebteverbe repaid?An optimist couldlegitimatelyclaim thatsuch numbers are notoutrageousinthelightofhistory.
Consider, forexample, theBritish nationaldebt sincetheNapoleonic wars, when thedebt-to-GDPratioreached260
percent. By1914, afternearlya century of peace in Britain,that figurefellto 24per cent.Therewas virtuallyno reduc-tioninthedebt.Infactthebur-den was made worse by adeflationthatstemmedchieflyfrom a fallin agricultural pricesin thesecondhalf ofthe19thcentury. Itwas compound averageannualrealgrowthof2 percentovertheperiodthatdidallthework.
Today economic growth is anaemic and the climatemore deflationary. Yet IMF simulations show that inadvanced economies with relatively high debt ratios in2015,thebuild-upofdebtsince2008couldbe undonewithone percentage point of additional real growth over thenext10 yearson average, providedgovernmentssave thehigherrevenues.
Thesnagis that centralbanks’currentlow ornegativeinterest rates are removing discipline from the system.Evenwith sky-highdebt-to-GDPratios,governmentshavenoproblem servicingand refinancingdebt. Withnotableexceptionssuch asGreece,markets havebeenlulledintoafalse sense of security on the issue of debt sustainabilityandthe riskof insolvency. Theroleof thebondvigilanteisimpossiblewhena quarteror moreoftheglobalbondmar-ket has negative yields. Nor is there much pressure forstructuralreform. Inpractice,fiscalconsolidationis beingachieved by tax increases and reduced publicinfrastruc-turespending, ratherthan pro-growthmeasures.
Meanwhile,in theprivate sectorunconventionalcentralbankpolicieskeep inefficientcompaniesin business andriskanother accumulationofhousingdebt.
Demographics are also much less helpful than in thedecades that followed the second world war. Japan pro-vides a chilling illustration. Its economy has shownhealthygrowthin per-capitaGDP sincetheburstingof the Japanesebubble in the1990s, despite thegeneralpercep-tionof stagnationin theeconomy. Butfast growth inper-capitatermsis nohelp indealingwitha huge debt over-hangiftheabsolutesizeof theeconomyis shrinking.
Inthe absence ofmore pro-growthpolicies anda returnto inflation, the public debt overhang will remain obdu-rate.Yetwitha returnofgrowthand inflationtheissue of solvency would resurface. There is no escape from thisdoublebind.
