Chinese investors at home in US

BY Richard Summerfield

The Chinese economy has been experiencing a well documented slowdown and re-tooling. As a result, many Chinese businesses have begun to look overseas for their next growth opportunity.

Chinese foreign direct investment has climbed considerably, with investment into the US skyrocketing,  according to a new report from the Rosen Consulting Group and the Asia Society, titled 'Breaking Ground: Chinese Investment in US Real Estate'.

In 2014, Chinese outward FDI flows totalled $116bn, around $18.1bn of which entered the US market. A year later, Chinese outward FDI flows totalled $118bn, with $22.3bn flowing in to the US

The real estate market has been an increasingly attractive investment destination for Chinese businesses in recent years. In the US residential segment, Chinese acquirers spent around $93bn between 2010 and 2015. Accordingly, China has overtaken Canada as the lead foreign investor in the US residential space.

Much of the foreign capital has been concentrated in New York, Los Angeles and San Francisco, with the remaining volume spread widely across the rest of the country. The housing market in California and New York accounted for 35 percent and 7 percent of all transactions, respectively.

Furthermore, Chinese funded projects under construction or planned in the US totalled at least $15bn by the end of 2015. “What surprised me most is the speed of Chinese investment growth, but also the breadth of asset types and geographical locations,” says Arthur Margon, a partner at Rosen Consulting Group and lead author of the report.

Although the tightening of capital controls may impact upon Chinese acquisitions in the residential space in the short term, it is likely that Chinese investment in the US real estate space will continue to climb - particularly as there is an ever widening field of Chinese real estate investors, many of whom have yet to dip their toe in the American market.

Report: Breaking Ground: Chinese Investment in US Real Estate

Infrastructure investment boosts global economies claims new report

BY Fraser Tennant

A large-scale investment in infrastructure is the answer to the stumbling economic growth rates in many large economies, according to PwC’s new ‘Global Economy Watch’ report.

This stumbling growth or “sizable negative output gaps” identified by PwC provides a snapshot of the amount of spare capacity in an economy by estimating how close it operates to its potential level of output. Moreover, of the G7 group of countries, only the UK and Germany are anywhere near to closing the gap, while Italy is furthest adrift, reveals PwC.

“We don’t expect this to change soon, since our main scenario sees global growth of around 2.5 to 3 percent this year, the fifth year of below trend growth measured in market exchange rate terms," confirms Richard Boxshall, a senior economist at PwC. “The UK saw growth slow to a slightly-below-trend rate of 0.4 percent in the first three months of 2016, while the US grew at a lethargic rate of 0.1 percent quarter-on-quarter.

The answer, claims PwC, is to boost growth rates by investing in infrastructure – a strategy that the professional services firm claims would boost aggregate demand through increased construction activity and employment in the short-term and increase the potential supply capacity of an economy in the long-term.

To this end, PwC has set out four key investment principles for policymakers to utilise when deciding where to invest: (i) ensure it meets a need, identifying current and future needs, supplementing the base case analysis with a range of scenarios including optimistic and pessimistic cases; (ii) ensure consistency with other objectives, including social and environmental as well as economic goals.; (iii) ensure the numbers add up, as governments with a relatively low net debt position and healthy public finances (e.g., Germany and Canada) can boost aggregate demand/long-term supply capacity via infrastructure-led programmes; and (iv) ensure it will benefit the wider economy, factoring in both the long-term effects as well as the direct and indirect impacts.

“This type of investment is once again being touted as the key to unlock our low growth environment – but the effectiveness of this policy will ultimately depend on how many shovel-ready projects in different economies meet the principles we’ve outlined," concludes Mr Boxshall.

PwC’s Global Economy Watch is a monthly publication which examines the trends and issues that are affecting the global economy, detailing the latest economic projections for the world’s leading economies.

Report: Global Economy Watch

Crude awakening: oil price falls following failure of OPEC talks

BY Fraser Tennant

The price of oil has fallen after a meeting of the world’s major oil producers – the Organisation of the Petroleum Exporting Countries (OPEC) – ended in failure. 

The meeting, held in Doha, Qatar on 17 April with most (but not all) OPEC members present, had intended to sign a deal to cap oil output. However, it concluded with no agreement being made – an outcome which is being largely attributed to tensions between Saudi Arabia and Iran.

Prior to Doha, Saudi Arabia had demanded that Iran sign up to the deal to freeze oil productions, but Iran (a non-attendee) is unwilling to do so and has stated that it will continue to increase output following the lifting of a number of sanctions.    

In a statement, the Iranian government said that as it was “not going to sign anything” and was "not part of the decision to freeze output”, it had decided not to send a representative to the OPEC meeting.

“It doesn’t come as a huge surprise to me that the talks could not reach a conclusion, given Iran and Saudi Arabia’s previously stated positions, which they stuck to," said Clare Munro, a partner at Brodies LLP and head of the firm’s oil and gas team in Aberdeen, Scotland. “However, it does demonstrate the pressure on the various countries involved, which leads me to believe that at some point a deal will be achieved."

Just a few days prior to the aborted talks, Brent crude had climbed to a four-month high of just under $45 per barrel – an increase that reflected global market hopes that a deal to cap oil output would hold crude oil production at the January 2016 level and slow the oversupply.

Ms Munro continued: “Although the oil price did suffer a set-back, Brent remains above $40, which is better than where we have been for most of the year so far.”

Addressing the failure of the OPEC meeting, Dr Mohammed Bin Saleh Al-Sada, Qatar’s minister of Energy and Industry, said his administration respected the Iranian position and that the freeze “could be more effective if major producers, be it from OPEC members like Iran and others, as well as non-OPEC members, are included".

Ultimately, the major oil producers concerned required “more time” to agree a deal, admitted Dr Al-Sada.  

News: Oil Plunges After Output Talks Fail Amid Saudi Demands Over Iran

Optimism has fallen: new survey highlights sharp slump in financial services sentiment

BY Fraser Tennant

Optimism in the financial services sector has slumped alarmingly in the past five years, with firms citing market instability, sector competition and macroeconomic uncertainty as their top three challenges, according to the new CBI/PwC Financial Services Survey published this week.

The survey, a quarterly analysis of 104 financial services firms, reveals that banking and investment management respondents in particular had seen the sharpest slump in sentiment, while optimism across building societies and in the insurance sector was found to be broadly flat.

Drilling down, the survey shows that optimism in the financial services sector has fallen at its fastest pace for over four years, with 14 percent of firms more optimistic, but 35 percent less so, giving a balance of minus 21 percent. In comparison, the balance was 24 percent in December 2011.

“Concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services,” said Rain Newton-Smith, the director for economics at the CBI. “As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.

“Investment intentions for IT remain resilient, but spending plans are being scaled back in other areas. Investments are increasingly motivated by the need to promote efficiency, while uncertainty about demand appears to be holding additional investment spending back.”

However, despite the findings, the survey does indicate that business volumes have continued to expand at a solid pace, and profitability has improved, albeit at the slowest pace for two years. Overall, business volumes rose at a decent pace, with 44 percent of firms stating that volumes were up, 18 percent saying they were down, giving a balance of +26 percent.

The survey also notes an increase in staffing levels in financial services during the last quarter, though this uptick is expected to flatline in the next three months, with insurance and building society sector staff increases being offset by losses within the banking fraternity.

“The lack of opportunities to generate revenue has shifted the focus of financial services companies to how they make their business models more efficient or effective - no easy task in such an unpredictable climate,” said Kevin Burrowes, UK financial services leader at PwC. “Despite the pessimistic mood in the sector, it is very encouraging to see that many financial services organisations are planning to up their game around talent attraction and diversity."

News: ‘Perfect storm’ of events dampens optimism among financial services firms

Landmark year in global renewable energy investment

BY Richard Summerfield

Global investment in renewable energy reached record levels in 2015, according to a new report from the United Nations.

Renewable energy investment climbed to $286bn last year, a 3 percent increase on the previous record set in 2011, and more than double the $130bn invested in coal and gas power stations over the same period.

The report – Global Trends in Renewable Energy Investment 2016 – is the tenth edition of the UN Environment Program’s annual publication and has been launched by the Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance and Bloomberg New Energy Finance (BNEF).

“Global investment in renewables capacity hit a new record in 2015, far outpacing that in fossil fuel generating capacity despite falling oil, gas and coal prices,” said Michael Liebreich, chairman of the advisory board at BNEF. “It has broadened out to a wider and wider array of developing countries, helped by sharply reduced costs and by the benefits of local power production over reliance on imported commodities.”

One of the most notable features of the of the UN backed report is that while global investment in solar, wind and other renewable sources of energy has climbed considerably, for the first time ever the developing world accounted for the majority of investments. According to UNEP’s data, renewable investment in developing countries climbed 19 percent to $156bn in 2015, $103bn of which was invested in China alone. “Renewables are becoming ever more central to our low-carbon lifestyles, and the record-setting investments in 2015 are further proof of this trend,” said UNEP Executive Director Achim Steiner.

However, the growth in developing economy investment contrasts with a fall in similar investment in the developed world. Though US investments rose 19 percent to $44bn, investments in developed countries fell 8 percent to $130bn. Investment in Europe was down 21 percent, from $62bn in 2014 to $48.8bn in 2015, the continent’s lowest figure for nine years, despite record investments in offshore wind projects. Japanese investment in renewable energy was much the same as the previous year, at $36.2bn.

There has been good progress made in renewable energy investment and it is clear that some structural changes to the energy space are underway; yet there is still a great deal of work to be done. Renewables still only accounted for one-tenth of global power generation, the majority of which comes from coal and natural gas.

Report: Global Trends in Renewable Energy Investment 2016