Africa’s Richest Man Sees Company Joining Top 100 by 2017

Africa’s Richest Man Sees Company Joining Top 100 by 2017

Africa’s richest man Aliko Dangote said his Dangote Group would join the ranks of the world’s biggest 100 companies within three years as he invests in cement, agriculture and oil refining across the continent.

“We are targeted now to be one of the 100, in terms of ranking, global companies by 2017,” Dangote said yesterday in an interview at the World Economic Forum in Davos, where he is this year’s co-chairman. Lagos, Nigeria-based Dangote’s plan is “to be one of the leaders in terms of all the sectors we’re involved with,” its owner said.

Dangote is investing $16 billion over the next four years in cement, sugar, rice and oil, including the construction of a $9 billion oil refinery in southwest Nigeria. The company is considering the purchase of crude fields in Africa’s biggest oil producer to help supply energy to its petrochemical complex and cement plants, Group Executive Director Devakumar Edwin said in an interview in Lagos last week.

Aliko Dangote has seen his wealth climb $1.2 billion in the month to date, making him the world’s 27th richest person with a net worth estimated at $25.1 billion, according to the Bloomberg Billionaires’ Index.

“I’m going to actually put quite a lot of money in sugar and rice and then oil,” he said. “We invested heavily in Nigeria, but we’re not only looking at Nigeria, we’re looking at the regional market.”

Bad Dream

African policies have transformed the private sector, particularly in agriculture, Dangote said on a WEF panel today.

“If I had had a dream five years ago and you told me that I was going into agriculture, I would totally say no — that it would not only be a mistake, it must have been a bad dream,” he said.

Dangote said he would like to emulate the philanthropy of world’s richest man Bill Gates and said he spent $100 million in 2013 “giving back to society” in the areas of health and education.

To contact the reporters on this story: Matthew G. Miller in Davos, Switzerland at mmiller144@bloomberg.net; Chris Kay in Lagos at ckay5@bloomberg.net

Toxic Pubs: Punch Taverns’ financial engineering has harmed the pub industry

Punch Taverns’ financial engineering has harmed the pub industry
After 14 months of wrangling, Punch still couldn’t come up with an agreed deal with its bondholders
After 14 months of wrangling, and three sets of proposals for restructuring £2.3bn of securitised debt, pub landlord Punch Taverns still couldn’t come up with an agreed deal with its bondholders.
Instead, chairman Stephen Billingham produced a fourth proposal, declared the terms “final”, and told the various bondholders to vote.
If the answer is no among any one of 16 classes of bondholder, he says default and administration will follow.
Depending on your point of view, Billingham is either behaving recklessly in imposing a deadline, or is sensibly calling time on a process that has run for long enough.
Billingham’s gamble is justified. Clearly, he would be in a stronger position if he had been able to announce support from the two main groupings – the Association of British Insurers, representing the senior bondholders, and the hedge funds who dominate the junior varieties.
But, arguably, any attempt to secure a pre-agreement would simply generate yet another round of bickering.
The deep problem is that Punch’s capital structure – designed by over-confident, over-paid and long-departed financial engineers – is a complete mess.
Special clauses on access to the “liquidity facility” (don’t ask) apply on default. That gave the junior bondholders a hook on which to hang their claims for gentler treatment that would normally apply in a restructuring.
The seniors were understandably irate, especially as shareholders will avoid being wiped out entirely, which, by rights, they should be.
In the end, a vote seems a reasonable way to proceed if Billingham is convinced that it is now “economically rational” for all 16 classes to give approval.
If he’s right, Punch Taverns can limp on with a slightly lighter debt burden.
But this grotesque financial experiment, which has done only harm to the pub industry, should never be repeated.

Sri Lanka to sack officer over ‘false’ GDP data row

Sri Lanka to sack officer over ‘false’ GDP data row
Wednesday, January 22, 2014 – 19:21
AFP
COLOMBO – Sri Lanka’s main statistics office Wednesday said a senior official who denounced alleged government pressure to inflate economic growth data would be sacked after he was found guilty of leaking confidential information.
Accounts Director H.S. Wanasinghe faced two separate disciplinary hearings after he complained to the Asian Development Bank (ADB) and an opposition lawmaker that the government was manipulating data.
“We have recommended to the PSC (Public Service Commission) to sack him and it will be done soon,” Census and Statistics chief D.C.A. Gunawardena told reporters in Colombo.
Wanasinghe alleged that he was ordered to increase GDP growth rate for the first quarter of 2013 to 6.0 percent when his calculation showed it was only 5.4 percent.
Sri Lanka’s main opposition last month read out a statement by Wanasinghe narrating how he was under instructions to change national accounts to suit the government, an allegation which the authorities deny.
The anti-corruption watchdog Transparency International (TI) said the senior officer should be treated as a “whistle-blower” and be protected instead of being sacked.
“What we see is a systematic approach of a cover up rather than an investigation into what he has revealed,” TI Sri Lanka chairman J.C. Weliamuna told AFP. “Sacking a senior officer for raising this issue is completely unacceptable.”
Statistics chief Gunawardena denied that he was under pressure to change economic data to suit the government which relies heavily on foreign borrowings.
“It is a funny joke,” he said of the allegations. “People can talk about any rubbish, but the department of Census and Statistics has no political agenda.”
President Mahinda Rajapakse, who is also the finance minister, told parliament in November that he expected the economy to grow 7.5-8.0 percent in calendar 2014, up from a provisional 7.2 percent in 2013 and 6.4 percent in 2012.
The economy recorded 8.0 percent-plus growth for two straight years after the end of Sri Lanka’s decades-long civil war which saw troops crush separatist Tamil Tiger rebels in 2009.
UN human rights chief Navi Pillay said in August last year after a visit to Sri Lanka that the country under Rajapakse “is showing signs of heading in an increasingly authoritarian direction.”

IMF Questions South Korea’s Currency Policy

IMF Questions South Korea’s Currency Policy
IAN TALLEY
Jan. 22, 2014 6:17 p.m. ET
WASHINGTON—The International Monetary Fund on Wednesday questioned South Korea’s currency policy, telling Seoul that it should only intervene in exchange-rate markets to prevent volatility that might damage the economy.
The unusually explicit scrutiny of Korea’s currency policy comes after Bank of Korea’s top official indicated early this year the central bank is ready to intervene in currency markets to curb the won’s strength. It also follows U.S. criticism late last year in which the Treasury Department said it was concerned that Korea had resumed currency intervention and needed to be more transparent about its activities.
“The won should continue to be market determined, with intervention limited to smoothing disorderly market conditions,” the IMF’s executive board said in a statement on the annual review of the country’s economy.
The fund says the won is “moderately undervalued,” accounting for inflation, but the currency is coming under increased appreciation pressure by markets as the emerging market outperforms many of its peers.
Korean officials say their efforts are meant to stabilize markets. But some U.S. economists say Korea wants to keep a lid on the value of the exchange rate to bar exports from becoming too expensive.
Although countries can devalue their currency by buying foreign currency, it comes at the expense of other countries’ exchange rates rising and can fuel trade and political tensions between governments.
To avoid creating friction over currency policies, the IMF said, Korea should be more candid about its exchange rate operations.
IMF directors “considered that increased transparency in interventions would help enhance the credibility of the authorities’ exchange rate policy,” the fund said.
The executive board appeared to be divided, however, about whether the country should continue to build up foreign currency buffers to protect against potential economic crises.
“Some directors considered that the current level of reserves is adequate and does not warrant further accumulation, while a few others, noting the proven benefits of building a strong buffer in past crises, cautioned against prejudging the case,” the board said.

Thomas Dundon is poised to become a subprime billionaire; Subprime-Car-Loan Firm Has Flourished as Other Lenders Have Struggled

Auto Lender’s Drive Reaps a Fortune
Subprime-Car-Loan Firm Has Flourished as Other Lenders Have Struggled
ANDREW R. JOHNSON and TELIS DEMOS
Jan. 22, 2014 7:22 p.m. ET

Thomas Dundon’s 13,556-square-foot Dallas home features eight bedrooms, indoor and outdoor tennis courts, three wet bars, a swimming pool and an indoor slide that goes from the second floor to the first.
Those are only some of the spoils Mr. Dundon, 42 years old, has collected during his journey to the top of the subprime auto-lending business, where lenders make loans to borrowers with blemished credit. In 2012 alone he raked in $85.2 million in total compensation.
Now Mr. Dundon is poised to become a subprime billionaire.
Santander Consumer USA Holdings Inc., the Dallas-based auto-lending and consumer-finance company run by Mr. Dundon, is slated to debut as a publicly traded company Thursday. Owners of the firm, a unit of Spanish lender Banco Santander
SA, SAN.MC -0.82% raised $1.8 billion by selling about 75 million shares, or 22% of its outstanding common stock, at $24 a share. The deal values the company at about $8.3 billion, not including the exercising of stock options.
Mr. Dundon, the chief executive, stands to see his stake valued at $1.2 billion, based on the 13.6% share of the company that he will hold after the initial public offering, including stock options.
“It would not have crossed anyone’s mind that this was possible,” Mr. Dundon said about the company’s success in an interview Wednesday. “I’m not sure if we did it over again that you could replicate the success.”
The windfall is notable in an industry still dogged by the memories of the financial crisis. Subprime mortgages were among the first to go bust when the housing market foundered, erasing billions of dollars in assets for lenders, the Wall Street firms that packaged their loans into securities and the investors who bought them. Subprime mortgage lending activity has shriveled to just a tiny fraction of its peak during the housing boom.
But auto loans are a different breed. Subprime auto loans weren’t hit by the huge losses seen in other lending segments. Industry experts say many borrowers continued to make auto-loan payments before they paid down other types of loans, including mortgages and credit cards, because they rely on their vehicles to get to work.
Mr. Dundon keeps a high profile in sports-crazed Dallas. He attended the wedding of Dallas Cowboys quarterback Tony Romo in 2011, according to local news reports, and has played in golf tournaments with professional golfer Hunter Mahan.
But Mr. Dundon’s friends and acquaintances paint a picture of a self-made entrepreneur who came from humble beginnings. He earned his fortune by remaining intensely focused on achieving the goals he set for himself and his business partners, and by refusing to dwell on setbacks, according to those who know him.

“He’s hyper-focused,” said Mark Molthan, a Dallas real-estate developer who built Mr. Dundon’s home and has known him since high school. “When he knows what he wants…he figures out a way to get it.”
Mr. Dundon attended high school in Plano, near Dallas, and was the president of the Phi Gamma Delta fraternity at Southern Methodist University.
Former fraternity members recall Mr. Dundon’s leadership skills following a fire that destroyed Phi Gamma Delta’s house in 1992. Jon Altschuler, a commercial real-estate executive in Dallas who was in Phi Gamma Delta at the time, said Mr. Dundon led the effort to find replacement housing for the fraternity while continuing to recruit new members. He also was instrumental in marshaling support from the local business community to raise funds to support the fraternity’s operations.
After graduating in 1993 with a degree in economics, Mr. Dundon started a burger restaurant in Fort Worth, Texas, called Izzy’s. The venture lasted less than a year, according to friends. But the experience didn’t seem to faze Mr. Dundon, friends said. He often joked that Izzy’s became “Wasy’s,” they said.
“He just moved on,” said Mr. Altschuler. “He’s never been a down-in-the-dumps kind of guy.”
After the burger joint failed, Mr. Dundon got his start in the auto business, winning a job in the finance department of a Dallas auto dealer. He and some co-workers in 1995 struck out on their own to form an auto-finance company whose rapid success attracted outside investors. Banco Santander in 2006 agreed to buy a 90% stake in the company for $650 million. In 2011, Santander sold part of its stake to private-equity firms Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. and Centerbridge Partners LP, which together owned about 24% of the company before the IPO.
For the first nine months of 2013, the company earned $581.7 million, or $1.69 a share, down from $611.7 million, or $1.72 a share, a year earlier. The company’s net charge-off rate, or loans deemed uncollectable, for the first nine months of 2013 was 4.6%, down from 5.1% a year earlier.
The IPO comes amid a boom in auto lending, which has been a rare bright spot for lenders facing tepid customer demand for other types of credit. Loans to borrowers with weak credit have been particularly strong. Auto-loan originations to subprime borrowers—defined as consumers with scores below 660 on the industry’s FICO measure—totaled $153 billion last year, up from $66 billion in 2009, according to Moody’s Analytics and Equifax.
Other large consumer-finance companies are considering going public, as well. Ally Financial Inc., the former finance arm of General Motors Co., is looking to launch an IPO after the Federal Reserve releases results of its annual “stress tests” of big banks, people familiar with the matter have said. General Electric Co., meanwhile, wants to spin off its consumer-finance arm through an IPO this year, the company has said.
Despite Mr. Dundon’s success, friends say he hasn’t let his ego swell and remains focused on his family. He and his wife, Veruschka, have four children, and they often allow their kids’ sports teams and others to use the athletic facilities on their property, according to Mr. Dundon and his friends.
Mr. Molthan said Mr. Dundon had his estate built with his children in mind.
“It’s definitely a kid’s wonderland,” Mr. Molthan said.

Vietnam’s Stock Surge Encourages IPOs; New Listings in Developing ‘Frontier Market’ Will Enable Foreign Investors to Tap Country’s Growth

Vietnam’s Stock Surge Encourages IPOs
New Listings in Developing ‘Frontier Market’ Will Enable Foreign Investors to Tap Country’s Growth
JAKE MAXWELL WATTS and NGUYEN PHAM MUOI
Updated Jan. 22, 2014 11:57 a.m. ET
Rising share prices are encouraging the government, which owns many companies ranging from the country’s flagship airline to its largest brewery, to privatize by selling shares in Vietnam’s capital markets. Officials recently have signaled that they are proceeding with privatization plans, which has bolstered investors’ optimism about the government’s intent to liberalize some sectors of the economy.
Some bullish investors say the anticipated wave of initial public offerings is a sign that Vietnam is developing as a so-called frontier market and could eventually appeal to a broader range of money managers. Frontier markets are considered among the riskiest places to invest.
Investors are increasingly turning to smaller economies like Vietnam as growth slows in better-traveled emerging markets such as Brazil and India. Vietnam’s government predicts its export-driven economy will grow 5.8% in 2014, according to local media reports, up from 5.4% last year.
But like most frontier markets, Vietnam’s stock market is small. The roughly 300 publicly traded companies on the Hochiminh Stock Exchange have a combined market capitalization of $43.6 billion, smaller than package-delivery company FedEx Corp.FDX +0.11% Many shares are thinly traded or have caps on foreign ownership, so it can be hard for investors to gain a foothold and even more difficult to leave during times of stress.
As more companies list, it will alleviate some of those fears, said Sean Lynch, global investment strategist at Wells Fargo Private Bank, with $170 billion in assets. “The IPOs in Vietnam this year are a positive” because it expands the options for money managers, Mr. Lynch said. “Deeper markets can absorb more investment dollars.”
He said the bank’s most aggressive funds aim to invest 2% of assets in frontier economies and would potentially buy newly floated shares of Vietnam’s garment, automobile and airline companies when they hit the market.
The Hochiminh Stock Exchange’s VN Index is up 9.4% in January and touched a four-year high this week. MSCI Inc.’s index of Vietnamese shares is up more in 2014 than any other country tracked by the company.
Vietnam sets restrictions on foreign-ownership stakes in local firms, and at least 10 of the country’s 30 largest listed companies are already at their limits, according to data from Ho Chi Minh Securities Corp.
The government is starting to loosen some of those rules. It is set to raise the limit on foreign holdings of Vietnamese financial institutions to 20% from 15% starting Feb. 20. It will likely raise the cap on foreign ownership in other sectors to 60% from 49%.
Kevin Snowball, chief executive of PXP Vietnam Asset Management Ltd., which has $140 million in assets under management, said he may invest in some of this year’s IPOs. He is particularly interested in the planned listings of flag carrier Vietnam Airlines Corp. and apparel exporter Vietnam National Textile & Garment Group, or Vinatex.
“There is very little listed in the stock market that gives you access to [Vietnam’s] export story,” Mr. Snowball said.
In this year’s first listing, shares in the Joint Stock Commercial Bank for Investment & Development of Vietnam, or BIDV, will begin trading on Friday. Other companies that have signaled their intention to list include building-materials supplier Viglacera Corp., telecom operator MobiFone and beer maker Saigon Beer Alcohol Beverage Corp., or Sabeco.
“The IPOs are opportunities for foreign investors, who have been waiting for some years for the local market to open further,” said Nguyen Duy Hung, chief executive and chairman of Saigon Securities, a broker and asset manager.
Not everyone is prepared to jump in. Some Vietnam-based funds say the country hasn’t fully tackled a long-standing problem of bad debt, particularly among state-owned enterprises. BIDV held its IPO in December 2011 but delayed trading of its shares amid widespread mistrust of Vietnam’s finance sector.
For some foreign investors, Vietnam isn’t big enough to warrant a look. Small frontier markets, they say, could essentially shut down at times of stress, making it hard to take money out.
“Vietnam’s relatively small equity market…and its lack of liquidity make it an unattractive investment option for us,” said Audrey Kaplan, senior portfolio manager of the $614.5 million Federated InterContinental Fund.
Others see signs that Vietnam is solving its banking-sector problems, while they predict the IPOs will boost the size and stability of the stock market. Analysts say 2014 will be a big test for Vietnam, particularly as soaring U.S. share prices and an improved outlook for most European economies lure investors back to developed markets.
Bad debt in the banking system was 3.8% of the total, down from nearly 8% at the end of 2012, though some independent analysts say it could be considerably higher. In July, Vietnam formed a state-owned bank to take on financial institutions’ bad debt, and the country’s central bank aims to lower the figure to 3% by the end of 2015.
HSBC HSBA.LN -0.74% recently upgraded its outlook for Vietnam to “positive” from “neutral” but warned domestic demand is struggling due to “an overhang of bad debts.”
“Foreign-capital inflows will find good opportunities” in Vietnam, said Giang Trung Kien, chief analyst with FPT Securities. “Economic indicators suggest the Vietnamese economic recovery is likely to continue to improve and stabilize this year.”

Can an Embattled Thailand Find Compromise?

Can an Embattled Thailand Find Compromise?

As with so many seemingly intractable fights, the warring camps that have paralyzed Thailand both say they want the same thing: a cleaner, more legitimate democratic process. It’s time for them to prove it.

The country’s long-running political soap opera has lately taken a darker turn. The ruling Pheu Thai party of Prime Minister Yingluck Shinawatra has vowed to forge ahead with elections on Feb. 2, which the opposition promises to boycott. A 60-day “state of emergency” in Bangkok and surrounding areas has raised the prospect of violence between police and protesters. Under such conditions, a victory at the polls would leave a new Pheu Thai government with a dangerously weak mandate, increasing the likelihood of intervention by the army or the king.

Both sides protest their innocence. Yingluck, the sister of controversial tycoon and former Prime Minister Thaksin Shinawatra, has offered to discuss electoral reforms, but insists they can be enacted only by a new legislature. Her opponents demand that her government be replaced by an unelected group of “wise men” who would carry out reforms over the next 18 months, before overseeing any new vote. It might be easier to sympathize with one side or the other if both had not ignored the recommendations of a multitude of reform commissions while in office over the past decade.

One idea raised recently would be to form a small body — including members of both Pheu Thai and the opposition, as well as third-party figures — to hash out a half-dozen crucial political reforms, such as checks and balances on state power and measures that would reduce corruption and increase fiscal discipline. Although discussions would begin immediately, the commission’s work would continue past the Feb. 2 elections, no matter who wins. Parties would commit in advance to implementing the body’s recommendations — or to calling new elections if the commission judged they were needed.

If the parties are sincere in their claims, they should be looking for just such a middle ground. Even if they’re not, however, some agreed process would at least allow both to climb down from a confrontation that neither can win outright.

Assuming that, as part of such a compromise, the opposition agreed to participate in elections, the Feb. 2 vote could even be postponed for a couple of months to let tempers cool and give candidates time to campaign properly. (Rescheduling the vote would be extremely difficult constitutionally but perhaps not impossible.) The pause would be meant not to circumvent the democratic process — a fair description of the opposition’s current demands — but to bolster the legitimacy of the results.

Yingluck need only look to her embattled counterpart Sheikh Hasina Wajed, prime minister of Bangladesh, to see that winning an uncontested election marred by violence would be no victory at all. To plow ahead, using her draconian new security powers to detain opposition leaders and disperse protesters, would treat only the symptoms of Thailand’s malaise, not the cause.

By the same token, for the opposition to continue to reject any compromise would prove what many suspect — that its main goal is to regain power for Thai elites, who have lost their electoral majority to poorer rural citizens from the populous north. Ordinary Thais and elites alike have plenty of reason to criticize Pheu Thai’s stewardship of the economy. Sooner or later, opposition leaders will have to learn to beat their opponents with better ideas, not by rigging the system.

The alternatives to compromise now are a disputed election or a coup, either of which would keep the conflict going. Vague hints from top generals about the possibility of a military takeover damage Thailand’s economy and further dim its appeal as an investment destination. The country would be better served if both king and army — the two most powerful forces in Thailand – – used that leverage to push the two sides toward the middle ground they seem unable to find on their own.

To contact the Bloomberg View editorial board: view@bloomberg.net.

EB-5 visas, a federal program that allows foreigners to live in the U.S. if they invest in job-creating ventures took in a record number of applications last year

EB-5 Visas for Investors See Record Demand
Program Saw 6,434 Foreigners Apply in the Latest Year
ANGUS LOTEN
Jan. 20, 2014 7:22 p.m. ET
A federal program that allows foreigners to live in the U.S. if they invest in job-creating ventures took in a record number of applications last year.
Known as an EB-5 visa, the program has boomed over the past seven years, as traditional forms of financing dried up for projects ranging from hotels and casinos to wind farms and frozen-yogurt franchises. The minimum investment under the program is $500,000. Companies that have tapped EB-5 investors for cash include Marriott International Inc.MAR +0.75% and Sony Pictures Entertainment Inc.
Last year, 6,434 foreign investors applied for visas under the program, up from 6,040 in 2012, according to data from U.S. Citizenship and Immigration Services, the agency within the Department of Homeland Security that oversees the program. As of Sept. 30, the end of the federal government’s fiscal year, the agency had approved 3,696 investors, most Chinese, and denied 942.
If approved, investors receive a temporary visa for themselves and their families that can be converted into permanent residency—that is, a green card—if the investment is shown to have created at least 10 jobs within two years.
Last year, 6,895 Chinese nationals were issued visas through the program, outpacing all other nationalities by a wide margin, according to State Department data. South Koreans, the next largest group, were issued 364. A single EB-5 application can account for multiple visas for investors’ immediate family.
The 5% rate of growth in the program in 2013 was lower than in recent years, when the number of applications increased by 58%, in 2012, and 94% in 2011.
Launched by Congress in 1990, the program has recently been plagued by allegations of fraud and charges of mismanagement by immigration officials. That has led to increased scrutiny of the program by the immigration agency, which has caused delays in the application process, immigration lawyers say.
To date, the agency estimates the program has raised $8.6 billion and created at least 57,300 jobs since 1990.

Why We Are Lucky To Live In The Era Of Indexing

Why We Are Lucky To Live In The Era Of Indexing
by ElliotTurnerJanuary 22, 2014
Last week we were greeted with writings from two of the best investors and thought-leaders: Howard Marks of Oaktree and Murray Stahl of Horizon Kinetics. The decades of wisdom acquired by both Marks and Stahl now share with us youngens via these readings is a gift we must all take advantage of. I am about to grossly oversimplify the points from both of these greats in order to riff off of it into a point of my own. I give this warning both to preempt any complaints about my simplification, and as a suggestion to do yourself a favor and read what both of these gentlemen have to say before going one sentence further here. If you are kind and/or interest enough to return to this site, once done with those piece, please feel free to do so.
Since I received a link to Marks’ memo first, my evening reading started there and proceeded to Stahl’s piece. This was a fortunate coincidence. Marks lays out the case for the role luck plays in living life and attaining success in financial markets, tracing it to the idea markets are mostly efficient, but for those areas with a “lack of information…and competition.” Meanwhile, Stahl examines what he believes to be one of the single largest sources of market inefficiency today in what he calls “indexation.” After reading both pieces, I couldn’t help but think: “we are lucky to be investors in markets in this era of indexation.” This one thought struck me as the perfect conjunction between the two pieces.
Stahl has used the word “indexation” to explain the phenomenon whereby more assets and managers are investing in indices and ETFs which are designed to “provide portfolio exposure to very specific criteria, such as an asset class, an industry sub-sector, a growth metric, a stock market capitalization band, and so forth.” Over time, Stahl has discovered and invested in several of the inefficiencies resulting from such a phenomenon, including the “owner-operator” whose major stockholder manages the company, spin-offs designed to streamline business operations, etc. I recommend reading Stahl as to why these opportunities arise in today’s market.
Why do I say we are lucky to invest in this era of indexation? Because, as Stahl argues, indexation is an incredible source of market inefficiency. As more and more dollars seek out exposure in the broadest of ways, there is ample opportunity for those of us who seek to “turn over as many rocks as possible” to find the right opportunity. Two of my favorite setups fit this bill, although I never specifically delineated these ideas in writing as an outgrowth of indexation. This is so because both setups existed as long as there have been markets, and are in many respects traceable to behavioral traits of human beings. What has changed is that indexation provides a natural outlet through which these behavioral weaknesses are even more pronounced than in years past. I have named these setups “Guilty by Association” and “I’ve got a Label, but I don’t Subscribe.” While there are similarities between the two, they deserve to be thought about separately.
“Guilty by Association”
When a company is “Guilty by Association” they are treated in the same way as another, more identifiable peer group or index solely by some kind of perceived proximity. These tend to be situations that are more macro in nature, where a broader problem is reflected upon a specific company or sector. Some examples might be helpful.
During the crisis period in Europe, all European stocks were hit with equal force. The market “threw the good out with the bad” so-to-speak. One particular class of opportunities we spent considerable time on (and ultimately made significant investments in) was businesses listed in Europe, with a revenue base that was largely global. In other words, these were companies that traded in Europe, though they did the majority of their business outside of Europe itself. In these situations, there was selling, even from investors not situated in Europe, due to fears about the Eurozone’s viability. Yet, these companies themselves were in a position where if the Euro actually collapsed, they were unlikely to be significantly impacted in a negative way. In other words, they were “Guilty by Association” with the currency in which their shares were priced.
Another example would be the hatred of muni bonds in today’s environment. This entire asset class is hated due to concerns about Detroit’s bankruptcy and Puerto Rico’s solvency woes. Because Detroit and Puerto Rico are municipalities, conventional investment wisdom beholds that municipal bonds in the general sense must therefore be in trouble. This kind of extrapolation is abundant and wrong.
Indexation impacts these areas because people who invest in broad-based ETFs or indices sell their exposure entirely, in order to avoid the perceived fear. In doing so, the selling of the basket forces mechanical selling of all the subsidiary components without consideration for which specific constituents are and are not impacted on a fundamental level by the fear. Thus, the good that gets thrown out with the bad and is “guilty by association.”
“I’ve got a Label, but I don’t Subscribe”
This is the micro twin of “guilty by association.” Since so much money is moving into ETFs, and ETFs are trading with all kinds of sector and niche labels, there is pressure to fit each and every company into some kind of cookie-cutter genre. These labels impact how analysts and investors alike think about specific companies. Stocks get assigned to analysts based on the “sector” they cover, and many investors invest in sectors or companies that are in accordance with a specific mandate. I had been planning a blog post for a while called “Beware of Labels,” but I think all of those points would better fit the context of this post. One of the biggest misnomers in today’s markets is the “technology” label.  Mr. Market today dumbs “technology” down to mean: a) any company that is on the Internet; and/or, b) any company that makes hardware.
In my opinion, there simply is no such thing as an Internet company. There are retail companies who operate on the Internet (and at this point is there a single retail company who doesn’t operate on the Internet?), there are B2B companies who use the Internet to offer their services, there are financial platforms who provide web-based platforms. To ascribe the label “Internet” to one company and not another is merely referential of the fact that some companies are old and some companies are new. And even that is an oversimplification, for there are older Internet companies that are still called as much, despite being more analogous to marketing companies. And yet somehow, all these various, wide-ranging businesses end up with the “Technology” label despite the fact that their differences are far more pronounced and abundant than their similarities.
In a perfect world, we would throw away the technology label and call these companies what they are, whether that be media, retail, etc., but this isn’t a perfect world and that creates opportunities for us investors seeking out inefficiencies. Heck the “Telecommunications” sector is somehow a sub-sector of “Technology” and includes a company as old as AT&T (though I am aware AT&T today was actually one of the Baby Bells who ended up swallowing Mama whole). The biggest impact labeling has is in how analysts model these companies and the types of investors who are drawn to (or pushed away from) different sectors. We all know how popular comparables analysis and that too gets incredibly misleading when similarities and differences are conflated with one another.
An example of this would be my investment experience with Google. Over the past few years, Mr. Market has called Google an “Internet stock” and a “one-trick-pony” at that. To that end, analysts and investors alike oversimplified in comparing Google only to other Internet stocks, and in a perceived battle against Apple, this same community viewed the company as out of its league (See GigaOM
, CBS News and HBR on the “one-trick-pony”). I took a different perspective: Google is more akin to a media company whose advantage lies in the infrastructure and distribution side. Wikipedia describes media as “the storage and transmission channels or tools used to store and deliver information or data.” This certainly seems like an apropos description of Google, and it’s more clearly reflective of who pays Google money at the end of the day–advertisers, much like how we think about “traditional” media. If you think about Google this way, and realize one of the company’s crucial advantages is in how it stores, aggregates, categorizes and distributes information, it’s clear that Google does and can do far more things than “just” search. YouTube is a natural fit in this type of company, more so than just an Internet or search company, and as such, it leverages the advantages of Google’s platform while also leaving open the opportunity for Google to naturally segue into other areas altogether. Within that context, Google looks far less like a one-trick-pony, YouTube’s valuation becomes increasingly important (see my writeup on the importance of YouTube), and the company is in fact more diverse and capable beyond “just” search.
Labeling is a human endeavor; something we do in many disparate fields. One of the most well-known is the biological taxonomy (I think every adult still remembers “King Phillip came over for good spaghetti”), which is an organizational hierarchy. While labels have always been used in stock markets, only now are they actual forces behind the mechanical allocation of capital. This is so due to the proliferation of ETFs and “indexation.” Even in biology, there are blurred lines between different species, etc. This is but one reason why we have seen a great increase in spin-offs: when some companies who are thought of and thus modeled “that” way, have a subsidiary that doesn’t fit the bigger mold, that subsidiary tends to be “underappreciated” by Mr. Market.
Market Inefficiencies
A lot of people, myself included, like ripping on the Efficient Market Hypothesis. This is certainly not without merit; however, as Marks emphatically argues, there is much truth and wisdom in the idea that market participants are in fact really good at incorporating known information into the price of securities. When we look to make investments, we must then do what Marks’ implies in another of his spectacular memos, by asking ourselves “what is the mistake that makes this a mispriced investment opportunity?” With these two examples based on the problems associated with Stahl’s “indexation” we have two areas in the abstract within which we can identify mistakes. To that end, we are lucky to live in this era of indexation for how it exposes the market to repeatedly and mistakenly misvalue companies.

Muddy Waters Turns Up Heat on Auditor PwC of Chinese Firm NQ Mobile

Muddy Waters Turns Up Heat on Auditor of Chinese Firm
By WILLIAM ALDEN
Carson C. Block has already issued a blistering critique of NQ Mobile, a Chinese mobile security company. Now, he is going after NQ Mobile’s auditor.
Mr. Block, the head of the Muddy Waters research firm, has sent a letter to senior executives of PricewaterhouseCoopers, urging the accounting giant to take a closer look at the books of NQ Mobile, which Mr. Block contends are a “massive fraud.”
If the accounting firm is prevented from doing so, then it should consider resigning as NQ Mobile’s auditor, Mr. Block wrote. The letter, dated Jan. 13, has not been previously reported.
“Any PwC partner who believes the value of the PwC brand is worth preserving should take heed of the experience of other firms operating in China,” Mr. Block said in the letter. “Further unqualified opinions for NQ will likely end in embarrassment and litigation against the firm and its partners.”
A spokesman for PricewaterhouseCoopers declined to comment.
The letter — addressed to Dennis M. Nally, the chairman of PricewaterhouseCoopers International; Raymund Chao, the audit and assurance leader in Beijing; and Robert E. Moritz, the chairman and senior partner of the accounting firm — is the latest move in a months-long campaign by Mr. Block, a short-seller known for harsh reports purporting to uncover fraud at Chinese companies.
A previous target of his, a Chinese forestry company called Sino-Forest, filed for bankruptcy less than a year after Mr. Block called it a “multibillion-dollar Ponzi scheme.”
Mr. Block fired his initial salvo against NQ Mobile in October, saying that the majority of its China security revenue in 2012 was “fictitious.” The report, which also raised questions about NQ Mobile’s international revenue, sent the company’s stock price falling by half.
Last month, Muddy Waters offered to pay an auditing firm to review the results of an investigation being conducted by NQ Mobile’s independent board committee.
The Chinese company has denied Mr. Block’s accusations. And it still has some friends on Wall Street. Altimeter Capital Management, a hedge fund based in Boston, said in a regulatory filing on Tuesday that it had increased its stake in NQ Mobile to about 17.3 percent.
Muddy Waters is “very concerned” about PricewaterhouseCoopers’s audit of NQ Mobile’s financial statements for 2013, Mr. Block said in the January letter, which urged the accounting firm to perform “additional tests and procedures in response to clear heightened fraud risk.”
“If NQ Mobile prevents PwC from obtaining sufficient appropriate evidence to evaluate whether illegal acts material to the financial statements have (or are likely to have) occurred, PwC should probably disclaim an opinion on the NQ financial statements,” Mr. Block said in the letter. “If NQ management refuses to accept a modified a PwC report, PwC should resign from the engagement, possibly withdraw its opinions on prior financial statements and warn investors on management’s representations.”
“If PwC is unable to determine whether the acts are illegal because NQ imposes limitations on its work or because PwC is unable to interpret applicable laws, regulations or surrounding facts,” the letter went on, “PwC may have to resign the NQ audit.”

What Are the Top Five Risks the World Faces in 2014?

What Are the Top Five Risks the World Faces in 2014?
Jan 17, 2014 Global Focus
Extreme weather events. Climate change. Cyber-attacks. Mounting rates of unemployment and under-employment. Growing income disparities. More than ever before, corporations and governments all around the globe are deeply concerned about enacting strategies that address and mitigate the sorts of occurrences that can cause significant negative impact for countries and industries for as long as ten years.
To address their concerns, the World Economic Forum (WEF), based in Davos, Switzerland, issued its “Global Risks 2014” report this week. Two of the report’s contributors — Howard Kunreuther, Wharton operations and information management professor and co-director of the school’s Risk Management and Decision Processes Center, and Erwann Michel-Kerjan, the center’s managing director — offered Knowledge@Wharton their assessments of the report’s major takeaways and the challenges that lie ahead for global risk managers.
Both Kunreuther and Michel-Kerjan are optimistic that the 2014 edition of the annually published report — titled, “Understanding Systemic Risks in a Changing Global Environment” — will contribute to a steadily growing understanding of global risks. “We have found that, because of a whole series of events that have happened in recent years, corporations are paying much more attention to issues of global risk and recognizing that risk management is something that they have to put on the table,” Kunreuther says. “From that vantage point, this report is something that [executives] have found very useful because it highlights not only what they may be thinking, but also what a [number] of experts around the world are thinking” across various disciplines.
Perhaps not surprisingly, perceptions about what constitutes a major risk have transformed rapidly in recent years. For example, the top five global risks identified in the 2014 Report are entirely different from the top five risks identified by executives, researchers and other experts who were surveyed in 2007, Kunreuther and Michel-Kerjan note. This year, the most likely five risks, ranked in descending order, were income disparity, extreme weather events, unemployment and underemployment, climate change and cyber-attacks. In 2007, the five systemic risks rated most likely were, in descending order, the breakdown of official information infrastructure, followed by chronic disease in developed countries, oil price shock, China’s economic hard landing and, finally, asset price collapse.
This year, the most likely five risks, ranked in descending order, were income disparity, extreme weather events, unemployment and underemployment, climate change and cyber-attacks.
When ranked in terms of their potential impact — rather than likelihood — the five highest-ranked risks for 2014 were also completely different from those identified by respondents in 2007. In 2014, the five most impactful risks were fiscal crises, followed by climate change, water crises, unemployment and under-employment, and critical information infrastructure breakdown. Not one of these five risks was ranked as having the most potential impact in 2007. The 2007 top-five list began with asset price collapse, followed by retrenchment from globalization, interstate and civil wars, pandemics and, finally, oil price shock.
According to Kunreuther, the disparity is “extremely interesting” because “it highlights one of the major challenges one faces as one begins to look at the likelihood and consequences” of various risks. On the likelihood side, there is the “broader challenge of short-term thinking and myopia” whenever a threatening event occurs, he says. At the time such events occur, there may be good reason to believe they will continue to have an impact, such as the prominence of an oil and gas price spike on the lists in 2008 and 2009. “It may be right that attention has to be paid [to these challenging events when they happen], but … over a period of time, as with asset price deflation, that [event] may not emerge as [a major risk] from the point of view of likelihood or even consequences.”
Other kinds of risks that may not always appear in the top-five lists are nevertheless widely recognized as “going to be around for a while” by experts despite their absence, Kunreuther adds. In 2011, climate change was ranked fifth for likelihood and second for impact, but dropped off the list entirely until 2014, when it re-emerged — in part because of the destructive power of Hurricane Sandy. “Climate change is recognized, in general, as a long-term problem, but it did not have a lot of salience in 2007 and 2010” in the absence of dramatic news events, he notes.
Connecting the Dots
The 2014 report also highlights the critical issue of global interdependency. It includes a “Global Risks 2014 Interconnections Map,” which demonstrates that “the numerous and complex interconnections between [risks] can create consequences that are disproportionate and difficult to predict.” The map attempts to connect the dots by identifying and visualizing the underlying patterns between various risks and effects. The goal is to understand the impact of systemic risks in order to mitigate them “by identifying the transmission channels between risks and potential second- and third-order effects.” Importantly, Kunreuther and Michel-Kerjan point out, these interconnections “do not represent direct casualty,” but are likely to represent indirect impact or mitigation trade-offs.
“Risks should not be considered in silos…. Just because you are an environmental [specialist], that doesn’t mean you should be unconcerned about fiscal issues.”–Erwann Michel-Kerjan
The report also distinguishes between the way male and female respondents view various risks. Studies show “that women are more likely to be concerned about environmental issues,” the report notes, while adding that “some argue this reflects a tendency for women to think more [about] the long term than men, and to have a more network-focused rather than linear approach to problem-solving.” Moreover, the report adds, “the younger generation” – identified as aged 30 or below – “is more concerned about the potential impact of global risks, while perceptions of likelihood show no such consistent deviation.” Younger individuals also responded that an oil-price shock, the loss of biodiversity and collapse of the ecosystem, and the occurrence of various natural catastrophes were “more likely” than did those respondents who were over 30 years of age. Younger individuals also considered such events “more impactful” if they were to occur.
For his part, Kunreuther notes that “interdependency and the challenges that we face with interdependency” are a major theme of the 2014 report. For example, he says, “climate change is a global risk – everyone has to pull their weight. [Addressing it] requires the global community to try to take some steps, but [we] also have some real challenges with respect to doing that.”
Michel-Kerjan points out that in the case of systemic risks, such as asset price collapses, “whether it started in the U.S. or in Asia, everyone will be interconnected.” He adds that the 2014 report is hardly the first to stress that “risks should not be considered in silos…. Just because you are an environmental [specialist], that doesn’t mean you should be unconcerned about fiscal issues.” However, he concedes that such behavior requires a significant change in mindset. Numerous other reports have called for people not to “think in silos, but that is hard to do. People love boxes,” he says.
Diverse Strategies
Every corporation has its own set of agendas, depending on what kinds of challenges it faces, notes Kunreuther. “They are going to treat this report differently because they focus on the things that are of concern to them. A company that might be involved in supply chain problems will think about interdependency in a very different way from a company that is more self-sufficient. There are companies associated with issues of carbon emissions, climate change and greenhouse gas reduction, for example, that are taking a leadership role in terms of [what] we should do” to address those risks.
Kunreuther adds that the 2014 report doesn’t “talk about exactly what these companies should be doing [to mitigate risks]…. It is not designed to be prescriptive.” Instead, it provides a high-level list of some of the strategies that companies have been pursuing, “guided by [the] firm’s risk appetite [and] the level of risk an organization is prepared to accept to achieve its objectives, such as profitability and safety goals,” according to the report.
According to the report, income inequality is “most likely to cause serious damage globally in the coming decade.” Kunreuther points out that the problem can’t be isolated: Developed as well as developing economies will need to take steps to deal with issues of income inequality and affordability. Because of the interconnected nature of the potential risks the report highlights, “firms are trying to take a much more forward-looking approach – and to develop long-term strategies for dealing with them, which they had not necessarily been doing five years ago,” Kunreuther says. “And so, we are more optimistic on two levels. First, we are hearing more about firms doing this. Second, we are also recognizing that – from other studies – firms want to be given some benchmarks as to how they could go forward.”

Biotech IPOs: What Entrepreneurs Can Learn from a Banner Year

Biotech IPOs: What Entrepreneurs Can Learn from a Banner Year
Jan 22, 2014 Health Economics North America
The data is in, and there is no question that 2013 was the most active year for biotechnology initial public offerings since 2000. During the 12 months ended in December, 38 biotech companies debuted on Wall Street, all but two of which were listed on the Nasdaq exchange, according to FactSet, a Norwalk, Conn.-based provider of financial analytics. The performance of the biotech class of 2013 was rather impressive: As a group, the shares of the newly public companies rose 43% through the end of the year.
Is it a biotech bubble? Or will investors continue to pour money into this exciting but still quite young industry? And what can managers of biotech companies learn about raising capital from the experiences of those who ventured onto the public markets last year? All important questions, to be sure — but challenging to answer in this industry, where disappointments are more common than successes, and the time between an idea for a new medicine and an actual product can be as long as 20 years.
“There’s a huge amount of real uncertainty about the likely performance of some of these companies — scientific uncertainty about whether drugs will pan out in [late-stage] trials and market uncertainty as to how the products will be accepted,” says Patricia Danzon, Wharton professor of health care management. “There have been past booms that have ended up being bubbles, but with these early-stage companies, we may not know until the drugs succeed or fail on the market.”
“There’s a huge amount of real uncertainty about the likely performance of some of these companies.” –Patricia Danzon
Danzon notes that one of the most surprising aspects of this biotech boom was that it came at a time when mergers and acquisitions in the life sciences industry — the other popular exit strategy for private investors in small companies — have been rather stagnant. Indeed, the volume of M&A deals in the third quarter of 2013 increased 10% over the previous quarter, but was down by the same amount as compared to the same quarter a year ago, according to a report released in November by PricewaterhouseCoopers.
“It seemed as if, on the one hand, big pharma was looking at these companies and choosing not to acquire, while public investors were willing to acquire them,” Danzon says. “That might suggest that public investors were being overly optimistic.”
Danzon adds that she wouldn’t be surprised if more biotech companies jump through the open IPO window in the coming months, because a public offering can be a much more attractive proposition than an acquisition, particularly in life sciences. “Given the high risks and the significant number of failures that have occurred, pharma tends to acquire now with a lot of payment contingencies,” such as valuations that are tied to the acquired company hitting certain research milestones, she says. “One can see this from the standpoint of the smaller companies. If the IPO window is open, they may choose to go that route rather than accept acquisition offers that have contingencies. The IPO is money you get now. For the investors, it’s probably a better exit.”
The Influence of M&A
Some biotech industry watchers are betting that the resurgence of biotech IPOs will actually re-awaken the appetite for M&A, says Stephen Sammut, a senior fellow in the health care management department at Wharton and a lecturer in the Wharton entrepreneurship program. That’s because publicly held companies are often more attractive bait for potential acquirers than are private biotech firms.
“Most of the biotech acquisitions occur after the companies have gone public,” says Sammut, who is also a partner at Burrill & Co., a San Francisco-based life sciences venture capital firm. “There are two principal reasons for that. The first is that, in most instances, companies don’t become targets for acquisition until their products are much further along in clinical development. The proceeds of the public offering may well allow a company to bring its products to [later stages] of clinical development and therefore be much more attractive to a multinational company for acquisition. The other factor is that it does give acquirers some comfort to know that they’re buying a company that has undergone the scrubbing process of an initial public offering and [Securities and Exchange Commission] filings for some period of time. That translates to risk mitigation on clinical development. They’re more than happy to pay a premium for such companies.”
What’s more, pharma companies are facing increasing pressure to produce growth, which has been hard to come by in recent years due to the loss of patent protection on such blockbuster drugs as Pfizer’s cholesterol pill Lipitor. That’s why many large companies are looking to smaller, more innovative biotech firms to fill their pipelines. Even large companies that are not yet facing patent expirations are showing a willingness to shell out huge sums for smaller innovators. For example, last summer, Amgen upped its offer to buy cancer drug maker Onyx Pharmaceuticals from $9.3 billion to $9.7 billion. Such deals — along with generally healthy balance sheets and access to capital among life sciences companies — prompted PricewaterhouseCoopers to predict that M&A will increase in the coming quarters.
Sammut expects that the appetite for biotech IPOs will also persist, even though there was a slight slowdown toward the end of the year: Only seven biotech firms went public in the fourth quarter, as compared to 15 in the second quarter. The factors driving this boom are quite different than they were in 2000, he says, and current conditions portend a continued enthusiasm for biotech.
“What happened in 2000 was there was an overflow phenomenon from the tech boom on the one hand and the tech burst on the other.” –Stephen Sammut
“What happened in 2000 was there was an overflow phenomenon from the tech boom on the one hand and the tech burst on the other. There was an overabundance of capital looking for opportunities,” Sammut says. “As 2000 wore on and the tech stocks were in free-fall, there was still capital searching for good opportunities, and it buoyed the IPO market.”
The 2000 biotech boom also coincided with the mapping of the human genome — a milestone that investors mistakenly assumed would lead to an immediate revolution in drug development. “That has not materialized,” Sammut notes.
Now, however, he points out, there are strong signs that the genomic revolution may be starting. In 2012, the FDA approved 39 novel drugs — the highest approval rate in 16 years. The agency green-lit another 27 in 2013. “A large proportion of those drugs were products of the biotechnology industry. That, I think, sounded a wake-up call,” according to Sammut. “Are we at last seeing the fruits of nearly 40 years of investing in biotechnology? We’re at least seeing the front end of that.”
The performance of the Nasdaq Biotechnology Index reflected some of the industry’s recent accomplishments, and likely encouraged managers of privately held companies to jump into the IPO market. The index had a 66% return in 2013 — its best performance in at least 10 years, says David Krein, managing director and head of index research at Nasdaq, adding that in 2012, the biotech index rose 32%. “The big run of IPOs was backloaded in the second half, but it really came after a two-plus year run on biotech stocks generally,” he notes.
Biotech also outperformed the health care industry as a whole. “The health care sector itself was up 42%. So even within health care, biotech was a leader,” Krein says. The Nasdaq US Benchmark Index — which reflects the broader market — was up about 33%, he adds.
Some of the new biotech offerings performed so well last year that they were added to the Nasdaq Biotech Index, including Epizyme, Agios Pharmaceuticals and Chimerix. Because the index serves as the basis for the iShares Nasdaq Biotechnology Index Fund, which is an exchange traded fund (ETF), any company added to it automatically gains access to a whole new group of individual investors. “The ETF market has become in aggregate quite significant in investor portfolios, so these index changes actually result in meaningful capital flows,” Krein says.
Weighing the Pros and Cons of the IPO
The ability to exploit favorable market conditions and gain access to new investors is one of the major advantages of going public, states Wharton finance professor Luke Taylor. But that alone should not drive the decision to go public, he adds. There are, in fact, at least as many cons to the IPO as there are pros, Taylor notes.
“As soon as a company gets enough good news, it should go public.” –Luke Taylor
“The cons are increased disclosure. You may not want your competitors seeing all your performance information,” he says. “If you’re public, you’re under a lot of pressure to produce short-term results, possibly at the expense of long-term results. There’s a lock-up period of roughly six months when the founders and VCs cannot sell their shares. And you do lose some control.”
Taylor has done research looking at all the factors that surround the decision about whether to go public. The bottom line: Entrepreneurs should ride the news cycle. “As soon as a company gets enough good news, it should go public,” Taylor says. Once a company has enough good news, he adds, the so-called diversification benefit of going public — the ability for the founder and other investors to take their money out of one company and spread it around — outweighs the benefits of staying private. The capital raised also gives the company the ability to accelerate clinical trials of lead drugs, and to take other projects off the back burner, he notes.
Biotech companies that went public in 2013 witnessed the effects of both good and bad news. Acceleron Pharma, for example, rose 164% from its September IPO through the end of the year, according to FactSet. Much of the gain came in December, when the company announced that it had advanced its anemia drug into mid-stage trials, prompting a $7 million milestone payment from its biotech partner, Celgene. On the other end of the stock-performance spectrum was Prosensa Holdings, which dropped 64% from its June debut. It didn’t help that shortly after the IPO, Prosensa announced that its experimental drug to treat Duchenne muscular dystrophy failed in a late-stage clinical trial.
One of the most important lessons the biotech industry will take away from the boom of 2013 will come from observing how the CEOs of the newly public companies manage their capital over the long run, Danzon says. “One of the facts about biotech is that oftentimes, the companies that do succeed have a strategy that is quite different from [what they intended initially],” she notes. “It’s as much betting on management as it is on the actual drugs. If the original strategy fails, there’s always the question

Dow Jones CEO’s abrupt exit throws strategy into doubt

Dow Jones CEO’s abrupt exit throws strategy into doubt
6:20am EST
By Jennifer Saba
NEW YORK (Reuters) – News Corp said Lex Fenwick was leaving as chief executive of Dow Jones, less than two years after taking the helm, an abrupt departure that calls into question the future of its news wires and other products aimed at financial institutions.
Rupert Murdoch’s News Corp, which owns Dow Jones, did not explain the departure but said it was reviewing the one-size-fits-all strategy Fenwick had put in place for its news wires and other products. The bundled product offering that resulted, known as DJX, alienated some of the banks, hedge funds and retail brokers that were its main customers because of its rigid pricing structure.
“We’re reviewing the institutional strategy of Dow Jones with an eye towards changes that will deliver even more value to its customers,” News Corp Chief Executive Robert Thomson said in a statement on Tuesday.
News Corp said that William Lewis will take over as interim CEO. Lewis worked at News Corp’s British newspaper unit and the Financial Times.
Fenwick, 54, was appointed CEO of Dow Jones – publisher of The Wall Street Journal – in February 2012 after more than two decades at Bloomberg LP and did not immediately respond to a request seeking comment.
He was seen by some as a controversial leader, known for his hard-charging style and expletive-laced outbursts, who was tasked with overhauling Dow Jones’ institutional business. Following his arrival, a significant number of senior executives left the company.
People familiar with Dow Jones said that Fenwick staked Dow Jones’ turnaround on a product that was supposed to challenge Bloomberg as one of the dominant suppliers of financial news and data. Known as DJX, it essentially pulled all of Dow Jones offerings like news database Factiva and the real-time news wires on a single platform for one price.
It was a risky move: customers were used to cherry-picking from Dow Jones’ lineup of products and negotiating on price – a matter where Fenwick was unbending, taking a page from his former employer, where refusing to discount has paid off.
Thomson was quoted in the statement as saying the media company was “planning improvements to DJX” and said greater flexibility in its product offerings was likely in the near term.
DJX was launched last year and had yet to gain traction in the marketplace. During News Corp’s past earnings reports, the company had flagged weakness at Dow Jones’ institutional division. Several financial customers expressed concern last year over plans for DJX – especially its higher cost, according to people familiar with the matter.
Like Bloomberg, Thomson Reuters competes with Dow Jones in providing news and financial data to banks and other financial institutions.
Known for his purple suits and taste for modern art, Fenwick imposed his flashy style on the more button-down atmosphere of Dow Jones. He tore down office walls to create an open floor plan, installed a low-hanging crystal chandelier, and provided pricey espresso machines that one person familiar with the matter said cost about $30,000.
Rob Copeland, a reporter at the Wall Street Journal quipped on Twitter after the news was announced: “.@newscorp CEO confirms: @WSJsnackbar coffee machines sticking around.”
Fenwick spent most of his career at Bloomberg, where he was known as a master salesman who rose to the top ranks to lead the financial news and data company. He was CEO of Bloomberg LP until 2008, when he was demoted to lead Bloomberg Ventures.
It is unclear if Lewis will eventually get the top job at Dow Jones where a search is underway. Some people familiar with the matter predict that Lewis will remain in the role. At a meeting where Thomson introduced Lewis to the newsroom, Thomson never used the word interim.
Lewis was recruited to lead News Corp’s management and standards committee in the wake of the phone hacking scandal from 2011 to 2012. He was named chief creative officer of News Corp last year when the company split from its cable TV and movie properties now under 21st Century Fox.

Davos bosses tread warily in rocky emerging markets; MNCs are becoming more picky about emerging market investments as slowing growth in upstart economies and a recovery in the West takes the shine off a previous sure-fire strategic bet

Davos bosses tread warily in rocky emerging markets
7:59pm EST
By Ben Hirschler
DAVOS, Switzerland (Reuters) – Multinational companies are becoming more picky about emerging market investments as slowing growth in upstart economies and a recovery in the West takes the shine off a previous sure-fire strategic bet.
Executives in Davos said they remained committed to tapping into rising middle classes from Shanghai to Lagos, but some are pulling back and redeploying resources in particularly difficult, low-margin regions.
“It was a gold rush. Now the gold rush is over,” said Jeff Joerres, chief executive of staffing company Manpower Group (MAN.N: Quote, Profile, Research, Stock Buzz), whose clients include many top international firms.
“In the past, regardless of industry and regardless of product, you just ran to those emerging markets because there was an arbitrage opportunity. Now there’s a much more sanguine decision-making process.”
The new mood follows a marked shift in the balance between the world’s main engines of economic growth that will see developed economies, led by the United States, regaining their role as the central driver of global output in 2014.
Emerging markets will still grow at a faster clip than developed markets this year but the difference in growth rates will be the lowest since 2002.
The World Bank last week raised its forecast for global growth for the first time in three years, to 3.2 percent in 2014 from 2.4 percent in 2013. But it cut forecasts for developing countries to 5.3 percent for 2014, from 5.6 percent predicted in June.
MIDLIFE CRISIS?
The balance between emerging and developed economies is a central topic at this week’s World Economic Forum annual meeting in the Swiss Alps, as highlighted by a session on Thursday entitled “BRICS in Midlife Crisis?”
Growth rates for Brazil, Russia, India and China are half their pre-financial crisis levels – and companies are taking a hard look at alternatives beyond the “big four”.
The Middle East and Indonesia were highlighted as hot-spots for online growth by Yahoo (YHOO.O: Quote,Profile, Research, Stock Buzz) CEO Marissa Mayer, while Marriott International (MAR.O: Quote, Profile,Research, Stock Buzz) boss Arne Sorenson said his group was opening a new hotel in Rwanda.
However, a top executive at a U.S. tech company, who did not want to be identified, said his firm was having an especially tough time in Brazil, with big uncertainties also in Russia, leading the company to look at deploying resources elsewhere.
In fact 60 percent of firms now expect to shift investment away from the BRICs towards other more rapidly growing markets, according to an Accenture survey of more than 1,000 executives.
“It’s getting tougher and more competitive and some companies will find that they haven’t got the right strategy in certain places,” said Mark Spelman, Accenture’s strategy head.
“There may be some that will pull out, but we will continue to see more investment at the same time.”
From autos to soap to whisky, multinational companies have been increasing their exposure to emerging markets dramatically in recent years.
Europe’s top 505 companies generated a third of their sales in emerging markets in 2013, or 2.8 times more than in 1997, according to Morgan Stanley. But the curve from here is set to flatten.
“You should expect that line to go sideways for a while, but I don’t think it will fall materially,” said Morgan Stanley strategist Graham Secker.
“Companies will perhaps focus a bit more on opportunities in developed markets – for example, a European chemical company might want to relocate some assets in the U.S. to take advantage of low energy costs.”
MEGA-CITIES
In a few cases, companies are heading for the exit or scrapping certain product lines in some emerging markets.
Cosmetics maker Revlon (REV.N: Quote, Profile, Research, Stock Buzz) said at the end of December it would leave China, where sales have been falling, and French rival L’Oreal (OREP.PA: Quote, Profile, Research,Stock Buzz) has stopped selling its Garnier beauty products in the country.
In India, too, difficult market conditions have prompted frustrated foreign companies in sectors ranging from telecoms to retail to curb their ambitions.
The majority of firms, however, view current weakness in emerging markets as a strategic hazard that will not seriously derail planning assumptions based on solid long-term demographics.
“Since emerging markets are developing day by day, sometimes they may go down and sometimes they may go up. We should not be so much influenced by short-term trends or phenomena,” said Toshiba (6502.T:Quote, Profile, Research, Stock Buzz) chairman Atsutoshi Nishida.
Consumer goods giant Unilever (ULVR.L: Quote, Profile, Research, Stock Buzz) (UNc.AS: Quote, Profile,Research, Stock Buzz), which now generates well over half its sales in emerging markets, also says it not going to be deflected by tough times in Brazil, India and Indonesia.
That approach makes sound sense in the eyes of Martin Sorrell, head of advertising agency WPP (WPP.L:Quote, Profile, Research, Stock Buzz), who is a long-term bull of emerging markets.
“Having emerging markets exposure was an advantage with analysts and financial markets a year ago and now it’s a disadvantage, which is ludicrous. Whatever happens, these markets are the future,” he said.
Indeed, a glance at the world’s biggest cities suggests international companies ignore the mega-trend towards developing nations at their peril.
Only one of the world’s 10 biggest conurbations now lies in North America or Europe, according to consultancy Demographia – and New York’s position at No.8 looks precarious given the far faster pace of growth of cities in Asia and Africa.

Berkshire faces U.S. scrutiny on systemic risk: Bloomberg

Berkshire faces U.S. scrutiny on systemic risk: Bloomberg
6:41pm EST
(Reuters) – The U.S. risk council is looking to determine whether Warren Buffett’s Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) could be systemically important, a tag that would subject it to stricter regulatory oversight, Bloomberg reported, citing two people familiar with the matter.
The U.S. Financial Stability Oversight Council’s (FSOC) study of Berkshire may not mean the panel is inclined to designate the Omaha, Nebraska-based company, Bloomberg said. (link.reuters.com/guh36v)
Berkshire was not immediately available to comment, while the U.S. Treasury declined to comment.
The council, led by Treasury Secretary Jacob Lew, is evaluating which non-bank financial companies could threaten financial stability if they were to fail, Bloomberg reported.
The council in July designated insurer American International Group (AIG.N: Quote, Profile, Research, Stock Buzz), GE Capital (GE.N: Quote, Profile, Research, Stock Buzz) and Prudential Financial Inc (PRU.N: Quote,Profile, Research, Stock Buzz) as systemically risky, thus bringing them under stricter regulatory oversight.
The risk council, which includes the heads of other financial regulatory agencies, is a relatively new federal body that is testing its powers under the 2010 Dodd-Frank financial reform law.
After a number of non-bank firms struggled during the 2007-2009 financial crisis, Dodd-Frank gave the regulatory council the power to identify potentially risky non-bank firms and regulate them more like banks.

Ayer Rajah could be Singapore’s Silicon Vallery

Thursday, Jan 23, 2014
Grace Chng
The Straits Times
FINALLY, Singapore will have its own hub for start-up companies that thrive from the buzz and shared advice of having like-minded outfits around them.
It could eventually become the Republic’s own Silicon Valley.
The likely move to formalise this centre is one of eight recommendations of the Entrepreneurship Review Committee (EnRC) to foster entrepreneurship here. The recommendations were released last week.
In recent years, excitement over start-ups here has increased. Seed funding, primarily from the Government, has led to many start-ups being founded.
Last year, about 20 start-ups were acquired by various corporations – the ultimate acid test of business success. The largest was the sale of online video streaming portal Viki to Japanese e-commerce giant Rakuten for a reported US$200 million (S$318 million).
A hub for start-ups will help build on this success. Not only is the start-up hub proposal timely, but it should also be anchored by Block 71, amid lush greenery in the Ayer Rajah industrial estate.
Block 71 has already become an unofficial start-up hub, as it is home to more than 100 start-ups, from chapati maker Zimplistic and online travel portal Flocations, to incubators such as NUS Enterprise and tech accelerator Joyful Frog Digital Incubator.
Not a week goes by without a talk, hackathon or an event being held there.
People who want to know about start-ups in Singapore naturally converge at Block 71.
I am privy to discussions on the start-up hub as I am a member of the EnRC.
Suffice to say that the Government is firm on developing the area into Singapore’s Silicon Valley, home to the world’s largest start-ups, venture capital firms and angel investors.
The Ayer Rajah Valley – a name I, not the government agencies, coined – ought to be the start-up hub. It is ready-made, thanks to Block 71.
Having a place to call home is good. But issues still remain.
A quick peek into history: Block 71, a former flatted factory owned by JTC Corporation, began as a special scheme three years ago under the Media Development Authority (MDA) to offer lower rental rates to interactive digital media and gaming start-ups. It also offered space to start-up incubators and venture capitalists.
MDA has 58 tenants including incubators in the five floors it manages. JTC runs the other two floors, also occupied by start-ups.
A few months ago, fears emerged that the precious start-up community in Block 71 would be destroyed when rumours surfaced that the MDA would not renew their three-year leases ending in March this year.
With a long list of start-ups waiting to rent space at Block 71, MDA wanted to turn some tenants out so that others may enjoy the preferential rental rates.
But the MDA delivered a surprise hongbao to its 58 start-up tenants. It informed them last week that their leases will be extended for a year.
A great move from MDA. But what next?
Block 71 will continue to have a scheme of special rental rates for new start-ups.
But who gets to stay and who will get the axe? Will the venture capitalists funding the start-ups have a say? Or will this be the job of bureaucrats?
These issues need settling.
One day, hopefully not too far in the future, Singapore’s own Apple and Google will emerge from the Ayer Rajah Valley.

China Auditors Barred for Six Months for Not Aiding SEC Probes

China Auditors Barred for Six Months for Not Aiding SEC Probes

Chinese affiliates of the four largest accounting firms were barred for six months from leading audits for U.S.-listed companies after failing to comply with Securities and Exchange Commission orders for documents at the heart of a series of accounting fraud probes.

The auditors’ “actions involved the flouting of the commission’s regulatory authority, which may not be as egregious as, say, accounting fraud, but is still egregious enough that it weighs against leniency,” U.S. Administrative Law Judge Cameron Elliot wrote in a decision posted today on the SEC’s website. The firms were also censured.

The firms receiving the bans are Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. BDO China Dahua Co., Ltd. — now called Dahua CPA — was only censured since it had already withdrawn from the U.S. market.

The SEC filed an action against the auditors in 2012 after struggling for years to obtain information for dozens of accounting fraud probes at China-based companies. After an agreement between the two countries allowed some information to be shared, the accounting firms argued, unsuccessfully, that the SEC was getting what it needed and that the case jeopardized the listings of hundreds of Chinese companies trading in the U.S.

Dahua’s lawyer Deborah Meshulam declined to comment. Phone calls and e-mails to the other firms were not immediately answered.

The auditors are caught between U.S. law, which requires them to turn over all documents requested by regulators, and Chinese law, which prohibits transferring data to foreign parties that might contain state secrets. While the May accord between the two countries opened the door for some cooperation, it didn’t allow for inspections, a key requirement for audit firms doing work for U.S.-listed companies.

“To the extent Respondents found themselves between a rock and a hard place, it is because they wanted to be there,” the judge wrote. “A good faith effort to obey the law means a good faith effort to obey all law, not just the law that one wishes to follow.”

To contact the reporter on this story: Alan Katz in Washington at akatz5@bloomberg.net

Argentine Default-Era Chaos Relived as Blackouts Follow Looting

Argentine Default-Era Chaos Relived as Blackouts Follow Looting

For Dominga Kanaza, it wasn’t just the soaring inflation or the weeklong blackouts or even the looting that frayed her nerves.

It was all of them combined.

At one point last month, the 37-year-old shop owner refused to open the metal shutters protecting her corner grocery in downtown Buenos Aires more than a few inches — just enough to sell soda to passersby on a sweltering summer day.

“It was scary,” said Kanaza as she yelled out prices to customers while sipping on mate, Argentina’s caffeine-rich herbal drink. The looting that began in neighboring Cordoba province when police officers left streets unguarded to strike for higher pay had spread to the outskirts of Buenos Aires, sparking panic in Kanaza’s neighborhood. The chaos, she said, was like nothing she had seen since the rioting that followed the South American nation’s record $95 billion default in 2001.

Thirteen years after that collapse, President Cristina Fernandez de Kirchner is running out of time to avert another crisis. The policy mix that Fernandez and her late husband and predecessor, Nestor Kirchner, used to usher in 7 percent average annual growth over the past decade — higher government spending financed by printing money — is unraveling.

Inflation soared to 28 percent last year, according to opposition lawmaker Patricia Bullrich, who divulges monthly estimates for economists cowed into silence by Fernandez’s crackdown on price reports that clash with official figures. By the government’s count, inflation was less than 11 percent.

Peso Tumble

The peso sank 3.5 percent to a record low of 7.14 per dollar yesterday, according to Banco de la Nacion Argentina, and has plunged more than 25 percent in the past 12 months. That’s its worst selloff since the devaluation that followed the default. Currencies from only three countries in the world have fallen more: war-torn Syria, Iran and Venezuela.

Power outages like the one that sunk Kanaza’s shop into darkness are becoming more frequent, deepening the economic slump, after the nation’s grid atrophied under a decade of government-set electricity price controls. The International Monetary Fund, which censured Argentina last year for misreporting inflation, predicts economic growth will slow to 2.8 percent this year, about half the 5.1 percent average across developing nations.

Fernandez’s biggest financial problem is the loss of foreign reserves. They’ve tumbled 44 percent in the past three years to $29.5 billion as prices on the country’s soy and wheat exports slumped and Argentines circumvented currency controls created to keep dollars onshore. The government sought to stiffen those restrictions again yesterday, limiting people to two online purchases a year from overseas providers.

Default Concern

For a country that remains locked out of international debt markets as it haggles with billionaire hedge fund manager Paul Singer over lawsuits stemming from the default, the reserves are its main source of dollars to pay holders of $30 billion of bonds who accepted restructuring terms. When other foreign-currency obligations are included, the amount owed swells to $50 billion.

Investors are bracing for the possibility of another default. The country’s average dollar bond yield of 12 percent is the highest among major developing nations after Venezuela. Trading in swap contracts that insure bonds shows investors see a 79 percent probability of a halt in payments over the next five years, a reflection in part of concern that Singer’s demand of full repayment on the securities he kept from the 2001 default will disrupt debt servicing.

New Cabinet

“We’re seeing some sort of day of reckoning,” said Diego Ferro, co-chief investment officer in New York at Greylock Capital Management, which has been investing in the country’s debt since the 1990s. “The adjustment will have to happen if Argentina doesn’t want to hit a wall before 2015.”

Fernandez, 60, has overhauled her cabinet and reworked some policies in a bid to stem the capital flight. In her first day back on the job in November following surgery to remove a blood clot near her brain, she replaced the economy minister, cabinet chief, agriculture minister and central bank president. A day later, Guillermo Moreno, the trade secretary who played the strongman enforcing price controls, was gone.

The new cabinet pledged to work with the IMF to improve data, began talks to settle $6.5 billion of overdue debt with Paris Club creditor nations and unveiled plans to compensate Spain’s Repsol SA for the seizure of its local oil unit in 2012. Bonds advanced, driving yields on the country’s benchmark securities to a one-year low of 11.07 percent on Nov. 29.

Patagonia Getaway

Ferro doubts the measures are enough. Bolder steps, such as reaching a deal with Singer to regain access to overseas markets and lifting currency controls, are needed to regain investor confidence, he said. The bond rally began to falter in early December. By mid-month, all the gains had been erased.

An Economy Ministry spokeswoman didn’t return telephone calls seeking comment on the government’s financing plans.

Fernandez is giving no indication of what her next move is. After re-appearing following the five-week absence for surgery, she vanished again, spending much of December holed up in her 5,600-square-foot (520 square meters) brick villa in Patagonia. She went another five weeks without making a public appearance before unveiling a new student aid program before supporters in the presidential palace last night.

And that’s perhaps what angers Argentines like Miguel Llanes the most. While the looting spread across the country from Cordoba and the blackouts dragged on day after day in the capital city, Fernandez was nowhere to be seen. Llanes, unable to open his curtain shop in downtown Buenos Aires for over a week, vented by joining protesters who were burning tires and garbage in the streets.

“Where was the president?” he shouts.

And then he raises a question that holders of $50 billion of Argentine bonds are dying to know.

“How long will this last? They’ve spent all the money.”

To contact the reporters on this story: Charlie Devereux in London at cdevereux3@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net

Rajan Rate Revamp Hinges on Curbing India Fiscal Spending Sprees

Rajan Rate Revamp Hinges on Curbing India Fiscal Spending Sprees

For India central bank Governor Raghuram Rajan to more than halve Asia’s highest inflation rate, he’ll face his biggest challenge yet: Convincing the country’s politicians to spend less money.

A Reserve Bank of India panel proposed adopting a 4 percent consumer-price-inflation target by 2016 as part of an overhaul that would also establish an independent monetary policy committee. The moves, which signal elevated interest rates, would require lawmakers to curb spending and change the statute that governs the RBI.

“If the government doesn’t commit itself to cutting down the deficit, then the monetary policy framework can’t do much,” said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai and a member of the panel appointed by Rajan that made the proposals. “It critically hinges on the government cutting down wasteful expenditure.”

Rajan’s bid to lower consumer prices exceeding 9 percent in Asia’s third-biggest economy risks stalling without backing from the party that wins elections due by May. Prime Minister Manmohan Singh’s government has struggled to contain spending and a plunge in the rupee, which has stoked the cost of everything from onions to energy.

“Given the inclination of the political establishment for fiscal profligacy by way of huge welfare spending, the monetary policy framework might face hurdles,” said Arun Singh, an economist at Dun & Bradstreet Information Services India Pvt. in Mumbai. “What is now needed is for the government to come forward and say whether it’s ready to do the right thing.”

Price Surge

Consumer prices rose 9.87 percent in December from a year earlier, the fastest pace in a basket of 17 Asia-Pacific economies tracked by Bloomberg. The gauge has averaged 9.88 percent since it was created in 2011 as supply bottlenecks in everything from food to fuel stoke price rises.

The RBI currently uses wholesale-price inflation as the main cost-of-living measure to guide policy. The index, which conflates retail and producer prices and fails to reflect services, is more than six decades old.

Wholesale price inflation was 6.16 percent in December, the lowest in five months. It has averaged 6.65 percent in data compiled by Bloomberg going back to April 2005.

RBI rate policy should aim to reduce CPI to 8 percent within one year and 6 percent by 2016, at which point the 4 percent target would be adopted, the committee led by RBI Deputy Governor Urjit Patel said. The target should be at the center of a plus-or-minus 2 percentage point band, and there should be a rolling two-year horizon for meeting it, the panel said.

Premature

Arvind Mayaram, India’s Economic Affairs secretary, told ET Now television yesterday that it was premature to consider using CPI as a policy anchor due to structural issues and difficulties in curbing food inflation.

Finance Minister Palaniappan Chidambaram, who is attending the World Economic Forum meetings, said in Davos yesterday that he hadn’t seen the RBI report proposing a 4 percent CPI target. He said that a WPI target of 4 percent would be “reasonable.”

“We will never, never again allow our fiscal consolidation to weaken,” Chidambaram said in Davos. “That is priority number one.”

The minister reiterated on Jan. 15 that he will achieve his target of narrowing the fiscal deficit to a six-year low of 4.8 percent of gross domestic product this financial year. The shortfall in the eight months through November reached 94 percent of the full-year target of 5.4 trillion rupees ($87 billion).

Rural Wages

Singh said earlier this month that his government could have done better at controlling price rises. He more than doubled the guaranteed support prices for wheat and rice to boost the wages of Indian farmers, started a program to employ one adult in every poor rural household, and enacted a law that will provide cheaper food to about two-thirds of the country’s 1.2 billion people.

The RBI panel said the Indian government should reduce its budget deficit to 3 percent of GDP by March 2017, and commit to eliminating administered prices, wages and interest rates.

Those conditions might be “difficult to meet,” Standard Chartered Plc said in a note. “The pace of fiscal deficit consolidation and the move away from administered prices are political decisions over which the RBI has little control.”

Inflation-targeting regimes fall short of responding to asset price bubbles and often cannot respond appropriately to supply shocks, according to Deutsche Bank AG.

‘Out-Of-Fashion Club’

“India seems poised to join this out-of-fashion club,” Taimur Baig and Kaushik Das, Deutsche Bank economists in Singapore and Mumbai, wrote in a research report. “The road to inflation targeting is going to be long and hard, well beyond the 24 months envisaged in this well-intentioned report.”

Rajan surprised economists last month by holding the benchmark repurchase rate at 7.75 percent instead of adding to increases totaling 50 basis points since taking over the RBI. He will leave the rate unchanged at the next meeting on Jan. 28, according to all 18 economists in a Bloomberg News survey.

The rupee, which has fallen about 13 percent in the past year, strengthened 0.1 percent to 61.83 per dollar in Mumbai yesterday. The S&P BSE Sensex (SENSEX) gained 0.4 percent, while the yield on the 10-year bond rose to 8.61 percent from 8.55 percent on Jan. 21.

RBI Independence

The 1934 Reserve Bank of India Act says the federal government may give direction to the central bank on what it considers the public interest. The provision has never been used and doesn’t mention monetary policy, according to Chakravarthy Rangarajan, a former RBI governor who is chairman of Singh’s Economic Advisory Council.

“The Reserve Bank of India has taken decisions which it considers appropriate,” he said in an Oct. 9 interview. “Obviously the matter is discussed with the government, but I do not doubt the ability or independence of the central bank.”

Four previous reports have called for an independent monetary policy committee to set interest rates, the RBI panel said. That includes one in 2002 by former governor Y.V. Reddy suggesting legislative changes to the RBI Act.

Both inflation targeting and the establishment of a monetary policy committee require legal changes, according to Dhirendra Swarup, former expenditure secretary and member of a government panel set up to reform financial sector regulations. The RBI panel proposed a committee made of the governor, two other central bank officials and two outsiders to make decisions.

Sustainable Growth

Both the ruling Congress party and main opposition Bharatiya Janata Party would benefit from more responsible spending, Brinda Jagirdar, a former chief economist at State Bank of India, said in a telephone interview.

India’s economy grew 8.5 percent on average from 2009 to 2011, compared with 9.7 percent for China during that period, according to International Monetary Fund data. Gross domestic product in India expanded 5 percent last year, the slowest rate since 2003, and will probably grow at that pace in the fiscal year ending March 31, according to central bank estimates.

“A large fiscal deficit is the result of government spending, which in turn takes money away from the private sector and crimps investment,” she said. “So I don’t see any new government having a quarrel with the report’s logic. It in fact will help them form policy for sustainable economic growth.”

To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Kartik Goyal in Mumbai at kgoyal@bloomberg.net

Canada Loses Haven Status as Dollar Doesn’t Spark Exports

Canada Loses Haven Status as Dollar Doesn’t Spark Exports

Canada was the envy of developed economies following the global recession, boasting the world’s soundest banks and a robust housing market that helped push its currency above parity with the U.S. Those days are gone.

The dollar plunged to a four-year low yesterday and returns on Canada’s benchmark stock index were less than half of U.S. equities last year, underscoring an economy beset by the slowest rebound in exports since World War II. Consumers are tapped out with record household debt and governments are more focused on erasing budget deficits than providing stimulus.

With the outlook for other major economies improving and “the lack of job growth and economic growth here in Canada, comparatively I think we’re going to be sub-par for a little while at least,” said Brad Bardua, chief financial officer of Avigilon Corp. (AVO), the Vancouver-based maker of digital surveillance systems.

The recovery is so sluggish that Bank of Canada Governor Stephen Poloz may move as early as today to signal easier monetary policy while the Federal Reserve takes steps to taper stimulus, according to Gluskin Sheff & Associates Chief Economist David Rosenberg in Toronto and Sebastien Galy, senior forex strategist at Societe Generale SA in New York.

The International Monetary Fund yesterday forecast Canada’s economy would expand 2.2 percent this year, trailing both the U.S. and U.K. among Group of Seven countries. In 2009, Canada was the leader of the G-7 pack.

Missing Improvement

“The improvement in Canada hasn’t really been there since we started from a higher level,” said Malcolm J. Jones, a portfolio manager at Adroit Investment Management Ltd. in Edmonton, Alberta, who oversees about C$500 million ($456 million) of fixed-income securities.

The world’s 11th-largest economy, which relies on exports for about 30 percent of output, is struggling to build momentum for shipments abroad even as the dollar falls and the U.S. economy gathers steam. While the U.S. takes in about 75 percent of Canada’s exports, energy shipments have declined since 2011 as U.S. supplies have grown. Exports of metals have also fallen while auto and parts shipments are little changed over the past year.

“Fundamentally, Canada is a trees and rocks economy,” said David Garofalo, chief executive officer of Toronto-based HudBay Minerals Inc. by phone. “The weakness in the Canadian dollar reflects a softening of the commodities space.”

The Canadian dollar dropped beyond C$1.10 per U.S. dollar yesterday for the first time since 2009. At that time, the country was emerging from recession, buoyed by banks that remained solvent through the credit crisis and consumer that were ready to spend. The currency remains stronger than it was at any point from 1976 to 2006 — as it averaged 1.2870 per U.S. dollar during that period.

Stagnant Exports

Exports have been stagnant for more than two years, with shipments 19 percent below where they would be if the recovery followed the average of the last four economic cycles, according to Statistics Canada data compiled by Bloomberg.

“The big gap between our exports and the U.S. economy is the result of lost market share,” said Krishen Rangasamy, senior economist at National Bank Financial in Montreal. “That is the legacy of 10 years of the loonie appreciating,” he said, using the nickname for the Canadian dollar.

Canada’s benchmark Standard & Poor’s/TSX Composite Index has risen 9.1 percent over the past year, trailing the 24 percent gain for the Standard & Poor’s 500 Index, the third straight year of underperformance. Canadian government bonds due in five years or less yield more than U.S. Treasuries, with longer-dated U.S. debt carrying higher yields.

Canada’s manufacturing base has shrunk, meaning a weaker currency will provide less of a spark that it would have in the past.

Job Losses

Bombardier Inc. (BBD/B) said yesterday it was cutting 1,700 jobs in its aerospace division, or about 6 percent of the work force. The Montreal-based company is working to produce its new CSeries regional jet, a plane whose debut has been pushed back four times.

In December, Battle Creek, Michigan-based Kellogg Co. (K) closed a plant in London, Ontario, firing 500 workers who had produced Corn Flakes and All-Bran cereal. Weeks earlier, HJ Heinz Co., the ketchup-maker owned by Warren Buffett’s Berkshire Hathaway Inc. and 3G Capital, closed its plant in Leamington, Ontario, cutting 740 jobs.

“The tomatoes are going to go to the plants that have the low production costs,” Buffett said in November at an event in Detroit. “It’s really a question of having an unprofitable plant and concentrating production in a more profitable plant.” Heinz is based in Pittsburgh.

BlackBerry Cuts

Waterloo, Ontario-based BlackBerry Ltd. (BBRY) cut 4,500 jobs and wrote down $960 million of inventory in September. The smartphone maker, whose devices were once known as CrackBerrys for their addictive nature, now holds less than 3 percent of the global smartphone market.

Canada added a net 102,000 jobs last year, a 0.6 percent increase that was the slowest since 2009, Statistics Canada reported this month.

Stimulus options are limited. Canadian consumers, who took advantage of low interest rates and led the recovery by buying houses and cars, now face record levels of debt as a share of income. By contrast, U.S. debt burdens have been declining since a peak in 2007.

Governments, both federal and provincial, are paring deficits. While opposition lawmakers called for stimulus after the latest employment report, Finance Minister Jim Flaherty, who may introduce a new fiscal plan as early as next month, has ruled out major spending initiatives as the government seeks to return to surplus by the year beginning April 2015.

Short-Sighted Analysts

Prime Minister Stephen Harper said in an interview last week that analysts focusing on the sliding currency and weak jobs reports are being short-sighted.

The Canadian government has been “pleasantly surprised” by the strength of the Canadian economy since the end of the global recession, in the absence of similar growth for the country’s largest trading partner, Harper said.

“The strength of the American economy is a big deal,” Harper said Jan. 16. “For us to have better results we need to see the American economy expand.”

Economists are counting on the weaker loonie to boost exports and revive the economy. The Canadian dollar has dropped 10 percent in the past three months and foreign investors cut purchases of the country’s bonds last year, showing the country’s status as a haven is over.

Foreign investors bought a net C$36.9 billion of Canadian bonds through November last year, Statistics Canada reported last week, down 47 percent from C$69.8 billion in the same period of 2012.

Currency ‘Give-Back’

The currency’s drop “is a give-back to some degree,” said Andrew Gretzinger, fixed income portfolio manager with Manulife Asset Management in Toronto, which oversees C$16 billion in assets. “Canada had done better during the crisis.”

Canada’s superlative economic performance following the global recession made the economy a magnet for foreign investment and helped Mark Carney, then Bank of Canada governor, land a new job running the Bank of England.

“Canada is boring, it’s our trademark,” said Adroit Management’s Jones. “All of the exciting money is rushing out of Canada.”

Governor Poloz, who spurred the currency’s plunge by dropping a bias in October to raise interest rates, projects the weakness will help exports recover after the country recorded 23 straight monthly trade deficits.

Rate Announcement

Poloz will update the central bank’s economic forecasts and make an interest rate announcement at 10 a.m. in Ottawa today. While all 21 economists surveyed by Bloomberg forecast he’ll keep the main interest rate at 1 percent, investors will be looking to see if he introduces a bias to lower rates in the accompanying statement.

None of the 17 economists surveyed by Bloomberg News last week predicted the central bank would introduce an easing bias today.

Exports and investment have been disappointing and inflation has been “lower than we can explain,” Poloz said in a Dec. 18 interview in Ottawa.

To date, Poloz has pleaded for patience. The drop in the Canadian dollar is more reflective of the U.S. rebound, he said, and that will turn into more exports and spending.

“As we get a bottom in this through stronger exports from the stronger U.S. economy we are going to see, I think, the manufacturing sector recovering,” Poloz said. “That’s just the nature of how it works.”

Other commodity-linked currencies have been sliding against the U.S. dollar. The Australian dollar is down 8.7 percent in the past three months, while the South African rand is off 9.1 percent.

The depreciation is a boon for Avigilon, Bardua said. “It makes certain aspects of our business a little more costly but that’s overshot by the revenue side.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

With Asia Conquered, Golf Looks to Latin America

With Asia Conquered, Golf Looks to Latin America

Globalization is a focus not just for the business elite gathered this week in Davos but also for professional golf.

The Masters Tournament, the U.S. Golf Association and the R&A have teamed up to bring a golf tournament to Argentina as part of “an initiative for the development of the game in Latin America.” The Latin America Amateur Championship will be Jan. 15-18, 2015, at Pilar Golf Club in Buenos Aires, giving 120 of the region’s top amateurs a chance to earn a spot in the Masters.

Recent years have seen golf’s growth mirror economic development in emerging markets. Leader boards at major tournaments are speckled with players from Europe, Asia and Australia (with some alarmist articles spouting concern at the foreign threat to American dominance in the sport). In 2009, the Masters and the R&A established the Asia-Pacific Amateur Championship, whose winner also has the chance to play at Augusta. The culmination of the sport’s globalization will occur in 2016, when golf will be included in the Summer Olympics in Rio de Janeiro.

Expansion to Latin America also demonstrates a cultural shift in golf, a sport traditionally associated with wealth and nobility and whose cost, space and equipment requirements are generally too great for poorer populations. The late Hugo Chavez criticized golf as “a bourgeois sport,” as his loyalists tried to close golf courses in Venezuela. The emergence of players such as Argentina’s Angel Cabrera and Colombia’s Camilo Villegas on the PGA Tour has gone a long way to reshape golf’s image.

Of course, there are still challenges to growing a sport in a part of the world defined by poverty and corruption. Look no further than the mess leading up to this year’s World Cup, as Brazil struggles to meet budgets and construction deadlines for a sport that already has an enormous following in the region. But with many beautiful golf courses in place and the backing of the sport’s major governing bodies, Latin America looks to be the new frontier in golf’s push to go global.

(Kavitha A. Davidson is a Bloomberg View columnist who writes about sports. Follow her on Twitter at @kavithadavidson.)