Volatile global markets leave financial services sector in business volume slowdown

BY Fraser Tennant

Volatile global markets are having a marked effect on the financial services sector with business volumes slowing from July to September, according to the latest CBI/PwC Financial Services Survey.

Strong competition is being blamed for the slowdown, with financial services firms taking a big hit on fees & commissions, net interest, investment and trading income.

Despite this impact on income growth, the overall business situation is viewed as stable, with profitability still growing, albeit at a significantly slower rate than that seen in recent years.

The Survey’s key findings include: (i) 25 percent of financial services firms reporting that business volumes were up, while 21 percent said they were down (the slowest rate of growth seen since September 2013); (ii) 24 percent of firms expecting business volumes to increase, while 8 percent believe they will fall; and (iii) 28 percent of financial services firms stating that they felt more optimistic about the overall business situation compared with three months ago, while 26 percent said they felt less optimistic (the lowest rate of growth since September 2012).

“The winds of volatility blowing through global markets have left a clear mark on the financial services sector, impacting business volumes and investment intentions, particularly in investment management and securities trading," said Rain Newton-Smith, director of economics at the CBI.

“Nevertheless, building societies’ business volumes have rebounded, and with financial sector costs under control, profitability is in good shape. At the same time, investment in IT is set to increase as firms aim to improve efficiency.”

Mr Newton-Smith also points out that slower growth in China and other emerging markets has had a knock-on impact on confidence in the world economy, with the Federal Reserve holding off raising interest rates in the United States.

Kevin Burrowes, PwC’s UK financial services leader, added: “Business confidence among banks flat-lined in the quarter leading to September 2015, leaving the sector cautious over its short-term outlook. Recent macro-economic events such as the fall in oil prices, China’s Black Monday, and the ongoing turmoil in global stock markets might have fuelled this sentiment. With interest rates expected to remain on hold, growth for UK banks continues to be challenging.”

Challenging for sure, but the outlook for the financial services sector is encouraging with growth forecast to pick up over the coming months (keeping pace with business volumes in  life insurance, building societies and securities trading), although still well short of the growth levels seen in early 2015.

Report: CBI/PwC Financial Services Survey – September 2015

Second time around: Syriza election win is ‘victory for the people’ hails Tsipras

BY Fraser Tennant

Greece’s newly re-elected prime minister Alexis Tsipras has described his party’s return to power as a 'victory for the people’ and pledged to make persuading the country’s creditors to remove more debt his first priority.

The second general election to be held in Greece this year - triggered by Mr Tsipras' announced resignation on 20 August - saw the left-wing Syriza party win 145 seats (35 percent of the vote), delivering a fresh mandate to govern, albeit alongside a coalition partner.

Despite the re-endorsement, analysts are warning that Mr Tspiras faces tough times ahead.

“Syriza’s resounding win came after a painful and dramatic seven-month negotiation process with creditors that ended last July with the signing of a new harsh austerity program," observes Dimitris Rapidis, a political analyst and director of the think-tank, Bridging Europe. “In addition to that, Tsipras’ major argument to convince voters was the renegotiation of the sovereign debt that is expected to surge over €300bn.”

Further concern was expressed by the familiar figure of Yanis Varoufakis, the prime minister’s former finance minister, who said that Mr Tspiras’ fate “depends on whether his new government implements genuine reforms to give bona fide business some confidence to invest, and uses the intensification of the crisis to demand real concessions from Brussels".

The vote by the Greek people to give Mr Tspiras a second chance to make a difference means that full implementation of the spending cuts demanded by international creditors (and promised by Syriza in the summer following an anti-austerity U-turn) in return for an EU bailout of €86bn, will now have to be swiftly carried out by the new administration.

“The Greek economy will get back to health if it sticks to the terms of its new bail-out program," European Commission vice president Valdis Dombrovskis said earlier this week. “If the reforms agreed are properly implemented, Greece can grow again quite quickly. The underlying growth potential is still there.”

Should the newly installed Greek government fail to implement the reforms and appease international creditors, the consequences for the country remain dire: a default and potential ejection from the eurozone (the dreaded Grexit).

“The true winners of the Greek election are the creditors that will now squeeze the government to force a bailout deal that is designed to fail," claims Mr Rapidis. “Syriza pledged to implement a parallel program against austerity aimed at supporting and protecting the most vulnerable parts of society. But under pressure from creditors, it is likely that the Greek government will end up failing in i mplementing both programs.”

For now, although the election may be over, Greece’s long-standing economic problems remain. 

News: Triumphant Tsipras returns to fight for debt relief

$1 trillion wiped from Asian markets as Chinese economic slowdown verges on meltdown

BY Fraser Tennant

In a major drop in stocks verging on a meltdown, more than $1 trillion has been wiped from Asian markets following a sharp drop in the value of Chinese shares.

Yesterday saw the biggest one-day drop since 2007 with the Shanghai Composite, the mainland benchmark index, down 8.5 percent at 3,209.91 points (erasing all the gains made this year), the Hong Kong Seng index closed at 5.2 percent (21,251.57 points), and Japan's Nikkei 225 (the region's biggest stock market), closed 4.6 percent lower (18,540.68 points) - its lowest point in almost five months.

Markets were also dragged down elsewhere in the region with the Australian S&P/ASX 200 finished 4.1 percent lower (5,001.30 points), while South Korea's Kospi index ended yesterday 2.5 percent lower (1,829.81 points).

As Chinese shares continue their fall this week, the country's slowing growth and volatile markets sparked panic among global traders, with stock markets in London, Paris and Frankfurt reacting with alarm to the crisis engulfing the world's second largest economy.

"It is a China driven macro panic," said Didier Duret, chief investment officer at ABN Amro. "Volatility will persist until we see better data there or strong policy action through forceful monetary easing."

In a frenzied attempt to reassure investors, the Beijing government has made use of its cash reserves to shore up the market (a figure of at least $1 trillion as been quoted) and has given the go-ahead for its main state pension fund to invest in the stock market. 

Under the government’s plans, the fund will be allowed to invest up to 30 percent of its net assets in domestically-listed shares. By increasing demand for them, the government hopes prices will rise. So far though, this intervention appears to have done little to calm the fears of traders both within China and overseas. 

"China could be forced to devalue the yuan even more, should its economy falter, and the equity markets are dealing with the prospect of a weaker yuan amplifying the negative impact from a sluggish Chinese economy," said Eiji Kinouchi, chief technical analyst at Daiwa Securities in Tokyo.

If the yuan is devalued further and Chinese citizens end up losing their life savings in the stock market, widespread social unrest may follow: a true nightmare scenario for a an under-fire Beijing government. 

News: Great fall of China sinks world stocks, dollar tumbles

‘Abenomics’ under fire once more as Q2 GDP data confirms weak Japanese economy

BY Fraser Tennant

Second-quarter GDP figures have confirmed that the Japanese economy,  the world’s third-largest, shrank at an annualised pace of 1.6 percent – a contraction that keeps up the pressure on prime minister Shinzo Abe and his economic policy package, Abenomics.

According to data released this week by the Cabinet Office, on a quarter-on-quarter basis, Japan’s gross domestic product contracted 0.4 percent in the April to June 2015 period. Economists surveyed by The Wall Street Journal forecast a 0.5 percent contraction (1.9 percent annualised).

Despite the weak economic growth, the Japanese economy actually expanded over the previous two quarters, although that expansion followed two quarters of contraction.

A slump in overseas demand for Japanese goods and more frugal attitudes toward household expenditure have been cited as the major reasons for the stagnating Japanese economy.

As well as essentially confirming that its economy is at standstill, the austere Japanese GDP data also steps up the pressure on senior policymakers to devise a fresh monetary/fiscal stimulus to bolster the economy and reverse decades of deflation.

Since taking office in December 2012, prime minister Abe has struggled to bolster economic growth, with his audacious Abenomics revival program so far failing to turn the Japanese economy around.

Commenting on the Cabinet Office figures, economics minister Akira Amari stated that the government did not have any concrete plans as yet to introduce a new stimulus package but would concentrate for the moment on pressuring companies to direct their profits toward raising wages and capital expenditure.

Responding to Mr Amari’s view, Hiromichi Shirakawa, chief Japan economist at Credit Suisse, said: “If weak private consumption persists, that would be a further blow to Abe's administration, which is facing falling support rates ahead of next year's Upper House election. This could raise chances of additional fiscal stimulus."

Although economists do expect economic growth to pick up in Japan in the second half of 2015, for now there is considerable pressure mounting on prime minister Abe and his government to take steps to boost the economy, sooner rather than later.

News: Japan economy shrinks in second quarter in setback for 'Abenomics'

Trials and tribulations: China's shifting business landscape highlighted in new report

BY Fraser Tennant

The deeper trends reshaping the business and investment environment in China today are the focus of a new report – ‘China 2015: China’s shifting landscape’ – by the boutique investment bank and advisory firm, China First Capital.

As well as highlighting slowing growth and a gyrating stock market as the two most obvious sources of turbulence in China at the midway point of 2015, the report also delves into the deeper trends radically reshaping the country’s overall business environment.

Chief among these trends is the steady erosion in margins and competitiveness among many, if not most, companies operating in China’s industrial and service economy. As the report makes abundantly clear, there are few sectors and few companies enjoying growth and profit expansion to match that seen in previous years.

The China First Capital report, quite simply, paints a none too rosy picture of China’s long-term development prospects.

“China’s consumer market, while healthy overall, is also becoming a more difficult place for businesses to earn decent returns," explains Peter Fuhrman, China First Capital’s chairman and chief executive. “Relentless competition is one part, as are problematic rising costs and inefficient poorly-evolved management systems.” 

“From a producer economy dominated by large SOEs, China is shifting fast to one where consumers enjoy vastly more choice, more pricing leverage and more opportunities to buy better and buy cheaper. Online shopping is one helpful factor, since it allows Chinese to escape from the poor service and high prices that characterise so much of the traditional bricks-and-mortar retail sector. It’s hard to find anything positive to say about either the current state or future prospects for China’s ‘offline economy.’”

Elsewhere in the report there are discussions that provide signals about future growth and profit opportunities in China, including: China’s new rules and rationale for domestic M&A; background on China’s most successful, if little known, recent start-up, mobile phone brand OnePlus; the implications of  shutting out most private sector investment in shale gas; how Nanjing is emerging  as the core of China’s ‘inland economy’; and why the Chinese stock market is currently in such a woeful state. 

“We’re at a fascinating moment in China’s story of 35 years of economic transformation," says Peter Fuhrman. “But it takes more insight and focus to outsmart the competition and succeed.”

Report: China 2015: China’s shifting landscape