The Global Economy in April 2018

Global markets in April were marked by a resurgent US Dollar, increasing crude oil prices, rising US Treasury yields and doubts over the sustainability of the synchronized global growth that underpinned market performances at the start of the year. Even as the US Federal Reserve held rates at its recent meeting, markets appeared to be certain of a hike in June with the Fed pointing to higher inflation. Markets appeared to be less focused on US-China trade tensions as other headlines took over in the month, including the dialogue between the two Korean leaders pointing to a reduction in geopolitical tensions in the East Asian region.

Foreign inflows to emerging markets appeared to have ground to a halt in April with $200mn in outflows from the EMs monitored by the Institute of International Finance (IIF). Further, the IIF stated that $5.6bn left EM stocks and bonds in the week to April 23. This could help explain why the JPMorgan Emerging Market Currency Index ended April with its biggest loss in 17 months. Given the broad weakness in most EM currencies, central banks in Argentina and Indonesia, in particular, were seen resorting to interventions in forex markets to stabilize their currencies.

Despite these figures, analysts have continued to stress that this is not a repeat of the 2013 ‘Taper Tantrum’ – where EMs suffered major outflows and deceleration in growth – which also happened in the context of rising US yields and a strengthening US dollar. Analysts point to improved fundamentals, like smaller current account deficits and higher foreign currency reserves, as evidence of EM resilience compared to five years ago.

Furthermore, it appears that the optimistic expectations for global growth persist with some arguing that growth will bounce back from the soft patch experienced in recent months. This is in line with the IMF’s April update to its economic outlook. However, the IMF did note that global growth could slowdown beyond the next two years as advanced economies close their output gaps.

Brent crude oil prices continued to rise in the past month, reaching the highest levels since November 2014. A major factor in this rise has been concern that President Trump will reimpose sanctions on Iran, which he did on the 9th of April, leading to a possible reduction in crude supplies from the country. In addition, supplies from Venezuela continued to contract amidst the country’s continued social and economic turmoil.

The Global Economy in March 2018

Global markets in March were seen recovering somewhat from the volatility experienced in February. But the fears of a US-China trade war continued to affect markets through the month. President Trump went beyond his earlier tariffs on steel and aluminium, calling for tariffs on certain Chinese exports to the US. These tariffs have been met by retaliatory tariffs by China on US exports. However, analysts see these moves as merely attempts at creating leverage for trade negotiations.

At its March meeting, the Federal Reserve announced its first-rate hike for the year as expected. It also forecast at least 2 more hikes in the year, 3 hikes for 2019 and 2 more for 2020. This highlighted its growing confidence that tax cuts and government spending will lead to higher US growth and inflation, spurring further tightening.

Short-term lending rates measured by the 3-month LIBOR moved up to reach 2.3% in the month, having started the year at 1.7%. This increase in global borrowing costs is partly due to the US Fed’s rate hikes, but is also partly due to the impact of US tax reforms causing repatriation of US dollars held in foreign banks by US firms. These foreign banks have raised deposit rates in order to attract funds to replace the dollars being repatriated, pushing up lending rates as well.

Net portfolio inflows of about $7.6 billion were recorded in the 21 emerging market economies monitored by the Institute of International Finance (IIF) for the month. While this marked a reversal of the outflows in February, the overall inflows were much less than what was seen on a monthly basis in the previous year. This could be a reflection of caution seeping into investors’ decision making in terms of both EM debt and equities, while continuing to find them an attractive asset class.

Brent crude prices returned to the $70 price level by end-March helped up by easing concerns of a US-China trade war and promises by Saudi Arabia to continue to work together with Russia and others on balancing the oil market. In addition, unexpected reductions in US stockpiles and another bout of Saudi-Iran tensions helped prices move up during the month.

The Global Economy in February

Global market performance in February contrasted sharply with the performance in January due to the volatility in markets following the selloff in US equities which spread across to other markets globally. Markets have recovered to an extent from the selloff over the course of the month, but the recovery was thereafter affected by concerns about a trade war and whether the US Federal Reserve will hike rates more than three times this year.

President Trump deciding to move ahead with relatively higher tariffs on imports of steel and aluminum, has raised the possibility of a global trade war if China, the EU and others decide to retaliate with tariffs of their own against US exports. Such a scenario carries the risk of denting the current optimism on global growth in 2018.

Meanwhile, Jerome Powell who took over as the new Fed Chairman during the month delivered his testimony to Congress on the Fed’s policies. He highlighted the requirement to balance between the need to prevent the US economy from overheating and the need to move towards the 2% inflation target. In line with this, markets widely expect the Fed to hike policy rates at its March meeting.

Europe saw the confirmation of a new grand coalition government in Germany and the prospects of a hung parliament in Italy, as anti-establishment parties surged leaving no party with a governing majority. Uncertainty in Italy could weigh in on European markets in the weeks ahead as coalitions talks proceed, although no major risk is seen yet.

Net Portfolio outflows of about $4.5 billion were recorded in the 21 emerging market economies monitored by the Institute of International Finance (IIF). The net outflows were concentrated in equities with net inflows to bonds offsetting it to an extent. While EM equities did fare better than developed market equities during the selloff, analysts have pointed out that the MSCI EM Index has gone through four different trends in the last nine weeks. This makes it hard to ascertain a potential direction for EM equities in 2018.

Brent crude prices eased from the $70 mark in February and moved within the $60-70 range. Prices reached a low of $62.59 on the 12th. This was largely due to concerns about rising crude output, increases in US shale oil rigs and build ups in US stockpiles. In early March, oil prices have been weakened by concerns of a trade war affecting global growth following the US tariff proposals.

LMD Interview – Tourism Sector Update

 

Speaker: Travis Gomez

Date – Jan 2018

Video length – 4:01 mins

How did the tourism sector fair in 2017?

  • 2017 was a challenging year with the tourism arrivals target falling short of what was expected.
  • This was partly due to weather related disruptions such as Dengue and flooding
  • These weather related disruptions seem to be taking place more frequently and regularly and hence they are likely to continue to affect the tourism sector
  • Another reason for the underperformance was the slowdown in tourist arrivals from the traditional tourist destinations such as Western Europe as well as shifting demographics where many more younger tourists who are more interested in experiential tourism are being drawn to Sri Lanka
  • However, this is being compensated by a pickup in tourist arrivals from Asia and Eastern Europe

What are your expectations for tourism sector in 2018?

  • The sentiment for the tourism sector performance in 2018 is that it would fare better
  • However, this is provided that Hotel operators accept the shift that has taken place in the tourism sector in terms of the geographical and demographic changes in tourist arrivals
  • Hotel operators need to up their game if they are to keep up with the growth shown by the informal sector
  • They shouldn’t view it as a threat but rather as an opportunity

What can we do to improve the Brand Image of Sri Lankan tourism?

  • We need to focus on and identify a consistent message for tourism.
  • Should the branding be a traditional view of Sri Lanka of being a destination for Sun, Sand and Beach as advocated by many traditional tour operations or should the branding be of a more holistic tourist destination offering a variety of experiences ranging from Heritage, Wildlife, adventure sports etc.
  • We need to get the branding right and answer the question of ‘What is Sri Lanka going to be known for?”

What are your thoughts on the practice of refusing to serve local tourists at certain establishments

  • The authorities have to look into this and prevent such incidences from happening as the local tourists make a significant contribution to the sector, particularly in the establishments along the Southern coast during the off season.
  • Most of the incidences that have been reported have been mainly relating to informal sector establishments.
  • The Informal sector now accounts for nearly 50% of the room capacity in Sri Lanka and the Budget Proposals for 2018 have acknowledged the role of the Informal sector.
  • Hence, since the informal sector has reached a critical mass, it is important for the government to step in and play a role.
  • The budget proposal to register supplementary establishments is a step in the right direction.

Businesses need “cowboys” and “farmers” – here’s why

Jim Carroll once posed the question “Are you a farmer or a cowboy?”, noting:

‘I often think that art is divided between the farmer and the cowboy: the farmer is the guy who finds a piece of territory, stakes it up, digs it and cultivates it – grows the land. The cowboy is the one who goes out and finds new territories.’

It’s a thought provoking distinction. And perhaps all of us in the field of commercial creativity should ask ourselves: What kind of creative am I? Am I more adept at pioneering or cultivating? Am I a cowboy or a farmer?”

I suspect most of us would like to imagine ourselves as cowboys or cowgirls; as experts in reframing, redefining, reinventing; as intrepid adventurers intent on discovering new frontiers. It’s the more romantic choice. Indeed this is Eno’s own understanding of himself.

But let’s not be too hasty.

Many of the world’s great artists could perhaps be described as more farmer than cowboy. Think Mondrian, Giacometti, Rothko or Pollock. They worked within a coherent conceptual space, repeatedly revisiting a relatively narrow terrain; making it their own through variety and depth of expression. They ‘grew the land.’

Perhaps a little predictably, I’m inclined to say that a healthy creative business needs both cowboys and farmers. We need to be able to pioneer as well as to cultivate; to reinvent as well as to refine. And critically, we need to know when to adopt each of these two modes; when to stick and when to twist.

We’ve got both farmers and cowboys here at Frontier. If you’d like to join us, either on the farm or off it, send us your details to http://frontiergroup.info/careers/

Salient Features of the New Forex Act – Interview Transcript

 

Speaker: Travis Gomez

Date: 13th Jan 2018

Video length – 8:40 mins

What is government’s intention with regard to the new Forex Act (0.36 -1.52)

  • This represents a shift in the policy direction from one of restricting foreign exchange movement to one that is facilitating exchange rate movement
  • The change in the name from Exchange Control to Exchange Management emphasizes this point
  • This goes in line with some of the other policy changes the Government has been making such as the new Inland Revenue Act, changes to the immigration and emigration laws.
  • The shift is towards a more rules based approach, which has greater transparency and less political discretion

What are some of the broad features of the new Act (1.52 – 4.00)

  • Greater clarity with regard to some of the definitions.
    • Ex: Who counts as a resident and who is eligible  for opening up the different types  of accounts
  • Reducing the complexity and simplification.
    • The Act clubs 18 different accounts into 5 main accounts.
  • Greater competition and discretion for banks.
    • The banks would have more discretion in the approval of forex transactions.
    • This is done with the intention of streamlining and speeding up the approval process
    • The Act also opens up the market for greater competition as licensed brokers can open up certain accounts as well.

What are the implications of the Act for the broad economy? (4.00- 5:35)

  • The act signals a more open approach to forex which could encourage a greater flow of FDI’s in to the country
  • The Act broadens the type of investment opportunities non-residents can participate in. Apart from the typical stock & bond investments, foreigners can also invest in Unit trusts, Fixed deposits in banks etc.
  • Of particular interest is the fact that the Act states that non-residents can invest in immovable property i.e: Real estate
  • The Act also allows banks to provide loans in LKR or USD terms to non-residents for the purpose of constructing and buying real estate.
  • This would be a positive development for the real estate sector, as given the level of activity ongoing in the sector, foreign investor participation can absorb some of the new capacity that is rapidly coming on line.

At a firm level, what are the implications of the Act? (5:35 – 6:37)

  • The Act extends the limits to which companies can invest. The limit for listed companies has been increased from USD 500,000 per year to USD 2 mn per year.
  • Firms also have the opportunity to invest in sovereign bonds and Unit Trusts abroad
  • The limits for individuals has also been increased from USD 100,000 (life time investment) to USD 200,000.
  • This would be an opportunity for firms in Sri Lanka and individuals to diversify their risk by investing abroad

For an individual, what are the implications of the Act? (6:37 – 8:10)

  • The limits on how much LKR and foreign currency that can be taken in and out of the country has been changed. You can take up to LKR 20,000 or up to USD 15,000 in foreign exchange without having to declare it.
  • With regard to migration transfers, the Act has increased the initial amount as well as the annual amount you can take as forex when migrating. The annual migration allowance has been increased to USD 30,000 per year
  • In addition, any pension payments, dividend income etc. would not be subject to the above limit.
  • Overall, there has been a reduction in the restrictions imposed on individuals.

The Global Economy in January

Global markets started off 2018 on a positive note in January with global stock markets continuing to make gains and emerging market inflows continuing amidst major sovereign debt issuances earlier in the year. However, the month ended giving way to what has been a global equity sell-off in early February, sparked by higher US Treasury yields that have reached multi-year highs. The sell-off started on February 2nd when US yields increased after US payrolls data indicated the highest wage growth since 2009, opening the door for higher inflation and thereby justifying US rate hikes.

On 8th February, the benchmark S&P 500 and the Dow industrials confirmed they were in correction territory, both falling more than 10% from the Jan. 26 record highs. While some analysts have called this sell-off the start of a new era, ending the period of low volatility enjoyed by markets, others see it as closing the gap between elevated asset prices and more sluggish fundamentals.

Emerging markets experienced $4 billion in outflows, mostly from equities, since January 30th according to the Institute for International Finance (IIF) – the largest outflow since the election of President Trump in 2016. South Korea, Indonesia, Thailand have suffered the worst losses so far as of 6th February. However, compared to previous global sell-offs most emerging markets have been faring better, despite the fact that higher US yields make EM risk assets less attractive.

These market movements are in the context of a US Federal Reserve that confirmed its projected rate hike path last week and Jerome Powell being sworn in as the new chairman on the 5th of February. Powell now faces the challenge of ensuring that the economy neither overheats nor goes cold. Moreover, January was also the first full month since the European Central Bank implemented the promise to halve the quantity of its monthly bond purchases to Euros 30 billion.

Brent crude prices were near four-year highs as prices reached $70 a barrel mark early in the year driven by continued optimism that the supply glut was ending this year and due to drops in US stockpiles. However, prices moderated slowly throughout the month, leading to prices reaching $62 a barrel on the 9th of February amidst the ongoing stock market turmoil and a scare about rising global supplies. Iran has announced plans to increase production and US production has surpassed 10 million barrels per day; a level surpassed only by Saudi Arabia and Russia.

I’ve failed a lot – Here’s why that’s OK.

A favorite question of mine at recruitment interviews and one we are always hoping to hear interesting answers to is “Tell us (if comfortable) about your biggest failings”. We don’t usually get good answers and this may be because, culturally we are not comfortable talking about failure.

To do my part, to make it clear that failure is ok and you need to fail to learn, at a recent speech to students at a University, I opened my speech with a story of one my failures. Here is a lightly edited draft of the start to that speech:

Good morning everyone! Thank you very much for this opportunity.

I very much appreciate the intro you gave me, listing out my achievements – But as you also just heard I have failed many times. So before I talk about how we do research at Frontier, let me give you a little background into some of the things I have failed in.

This is me at age 17, with a trophy for the “best results” in my school.

Then I went off to Uni and in my final year:

  1. I got a lot more involved in varied student activities that involved public speaking – this is something I took up as a personal challenge in Uni, because public speaking was something I was terrified of before going to University.
  2. I also went into a very deep study of 19th and early 20th century stock market bubbles, which was an optional and very small part of my course load, but led me to ignore the rest of my studies till far too late.

I got totally burnt out doing all this and I went into full blown “panic mode” in the final two months of uni. I had had a really great time in university before then, but those final two months were a really bad period.

This is me at age 21. Absolutely shocked at seeing my degree results and realizing I had passed. I was quite convinced I had failed. With that expectation, just passing was great news to me, but the reality was that I was definitely well in the bottom half of my batch and my hopes of getting into a good graduate school for studying beyond my degree were gone, so I felt it was not a good end to my Uni Career.

And it does not stop there. I returned to Sri Lanka from Singapore, because I completely failed to make progress after an initial great break with my first job overseas.  Then, after starting Frontier, for the first seven years it was a ridiculously small business where, even in my seventh year, I really did not know if I would continue in business or just have to quit.

 I am sharing this for two reasons:

  1. Now looking back, the study of bubbles in the 19th/20th century (which I burnt myself out doing) is the material from Uni that I think is the most fundamentally useful to my work now. And the ability to speak publicly is far more useful that any results from Uni. So now, using the term popularized by Steve Jobs, the dots connect well backwards.
  2. If you ever go through a hard time, I hope this helps. Knowing that failing badly is the story behind many successful figures, as shown in the following graphic, has helped me, so hopefully more stories like this with a Sri Lankan context would help you

“Failing” is also often the result of doing something risky or different. But knowing that it’s ok to take that risk, because it often works out better in the longer term, despite the initial failing, helps to encourage others to be open to taking more risk – this is something we need to build a more entrepreneurial and creative workforce in Sri Lanka.

I am also putting this on the blog, as a message to anyone looking to join Frontier. We want to make it clear that we are not “conventional” in wanting to recruit people with only a straight line track of success. We want to recruit team members who have failed and learnt from it – those that can bring those learnings to Frontier. If that sounds like you, send us your details to http://frontiergroup.info/careers/

“Do not be embarrassed by your failures, learn from them and start again.”

– Richard Branson.

Looking for creativity and innovation? Hire a Pirate!

“It’s more fun to be a pirate than to join the navy.” – Steve Jobs

Steve jobs had a different way of looking at recruitment. He preferred the unconventional and creative nature of ‘pirates’ to the discipline of the Navy. So, why pirates?

Well, according to this post from Fast Co. Design, he believed that:

A pirate can function without a bureaucracy. Pirates support one another and support their leader in the accomplishment of a goal. A pirate can stay creative and on task in a difficult or hostile environment. A pirate can act independently and take intelligent risks, but always within the scope of the greater vision and the needs of the greater team.

“Being aggressive, egocentric, or antisocial makes it easier to ponder ideas in solitude or challenge convention,” says Dean Keith Simonton, a University of California psychology professor and an expert on creativity. “Meanwhile, resistance to change or a willingness to give up easily can derail new initiatives.”

So Steve’s message was: If you’re bright, but you prefer the size and structure and traditions of the navy, go join IBM. If you’re bright and think different and are willing to go for it as part of a special, unified, and unconventional team, become a pirate.

At Frontier, we are always looking for the passion, drive and creativity that fosters true innovation. If this sounds like you, send us your details at http://frontiergroup.info/careers/

The Global Economy in December

December saw the US Federal Reserve carrying out its third rate hike for 2017, as expected, while increasing expectations for US economic growth and forecasting three further rate hikes for 2018. With US inflation remaining low, it appears that the Fed will continue down the current path of gradual monetary policy normalization despite the higher growth expectations, which has been helped by the passing of tax reforms by the Congress.

Looking ahead into 2018, analysts pointed to US tax reforms as possibly causing the US dollar to strengthen in the first quarter helped by US companies repatriating capital held overseas. While the Trump administration appears to see US growth jumping to 4% due to tax reforms, the Fed’s latest minutes show that it sees a much more moderate impact.

As 2017 came to a close the volatility in emerging market stocks seems to have increased, with the 30-day historical volatility on the MSCI EM Index climbing to its highest in almost 12 months. This could have been because investors were caught in a conundrum, stuck between the possibility of global growth driving further EM gains and the risk of tighter monetary policy affecting EM assets, leading some to take profit from the gains of 2017. Nevertheless, the Institute for International Finance noted that 2017 recorded $235bn in portfolio capital inflows to EMs; the highest since 2014.

Pakistan presented an interesting case in December, being able to comfortably raise $2.5bn in dollar debt despite the domestic political uncertainty and balance of payment imbalances, which have prompted foreign investors to move away from Pakistani stocks. Neighboring India has seen the budget deficit for the first eight months of the fiscal year jumping to 112% of the full-year target, prompting increased borrowing and reducing the space for the Modi government to adopt populist policies ahead of the 2019 elections, amidst slower growth.

Brent oil prices stayed above the US$60 mark, with a new two-year high of US$67.02 being reached on the 26th. Prices continued to be held up by hopes of the supply glut ending in 2018, as the OPEC-led group extended the production limitation at their November meeting. Helping prices has been the oil pipeline closures in UK and Libya, a strike by oil workers in Nigeria and promises by Saudi and Russia that any exit from production cuts would be gradual. But gains have been capped by concerns about rising US oil output amidst higher prices.