Structural reform needed now – OECD

BY Richard Summerfield

Though we are eight years removed from the last financial crisis, growth in the global economy has remained patchy at best. Improvements in advanced economies have remained subdued and the world’s emerging economies, once engines for growth, have also begun to splutter and fail. Global trade remains sluggish and overall investment has been weak. The stuttering Chinese economy in particular has hindered global growth over the last year or so, increasing global volatility.

With global growth prospects likely to remain cloudy for some time, the Organisation for Economic Cooperation and Development (OECD) has called upon the world’s 20 biggest economies to rise to the challenge and act quickly in order to improve growth. According to a recent report from the OECD – the 2016 Going for Growth Interim Report – the G20 nations must improve the pace of structural reform to boost global economic growth.

As it stands, the G20 countries will likely miss their 2014 pledge to boost their combined GDP by 2 percent by 2018. “According to the joint assessment by the International Monetary Fund, OECD and World Bank…more effort is needed for the full and timely implementation that would be needed to meet the GDP objective", says the report.

Two years ago the countries had promised to implement around 800 reforms in total; however delivery of those reforms to date has been substandard, according to the OECD.

Though some progress has been made in terms of recent structural reform, countries must do more to quicken the pace of change. "Global growth prospects remain clouded in the near term, with emerging-market economies losing steam, world trade slowing down and the recovery in advanced economies being dragged down by persistently weak investment," the OECD says. "The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation."

According to the report, the pace of reform was generally higher in Southern European countries like Italy and Spain, than among Northern European countries. Outside Europe, the reform leaders were Japan, China, India and Mexico.

The OECD has called upon the G20 nations to improve their policy coordination moving forward, as policy synergies will help stimulate growth.

Report: Going for Growth Interim Report

The Internet of Threats

BY Richard Summerfield

Much has been made of the Internet of Things (IoT) over the last few years. Heralded as the dawning of a new technological era, or perhaps the next industrial revolution, the IoT will see smart devices of all shapes and sizes combine to create a network of connected devices communicating and sharing vast quantities of highly valuable data.

Although the technology is still in something of a nascent state, it is slowly beginning to live up to its reputation. Smart or connected devices are becoming more common, and generating considerable amounts of data. The IoT will, and is, changing the way firms do business, making new capabilities possible and introducing efficiencies to companies to help them remain competitive in an increasingly crowded marketplace.

For many companies, these predicted data flows are seemingly too good an opportunity to pass up, and firms are rushing headlong into the burgeoning IoT space. According to a report from AT&T, 'Exploring IoT Security', which surveyed 500 companies around the world with more than 1000 employees, 85 percent of organisations are exploring the prospect of implementing connected devices across their enterprises.

However, the scramble to gain a part of the IoT market is not without risks; indeed, for companies hoping to incorporate the IoT into their wider operations, the proliferation of connected devices will expose their businesses to considerable cyber security risks. AT&T’s data suggests that just 10 percent of the firms surveyed are confident in the security of connected devices. With more and more companies marrying their products with connected technology, the importance of effective and efficient cyber security is obvious. According to AT&T, by 2020 there will be around 50 billion smart devices ‘in the wild’. With smart technology finding its way into everything from home heating systems to cars, organisations cannot afford to neglect their cyber security obligations.

Given that the cost of a cyber attack can run into the millions, organisations must be prepared - yet data suggests that many companies are still scrambling to get their houses in order. Alarmingly, the report notes that only 47 percent of respondents say their organisations analyse connected device security logs and alerts more than once a day. Furthermore, only 14 percent of companies have instituted a formal auditing process to help understand whether their devices are secure and how many devices they have; only 17 percent of companies involve their boards in decision-making around IoT security.Obviously, improvement is needed. 

Efforts are underway to improve cyber security provisions. The report recommends that companies: (i) assess their risk; (ii) secure both information and devices; (iii) align their organisation and governance for IoT; and (iv) define their legal and regulatory issues.

Clearly, these measures would be a good starting point for any firm; however, more must be done - and quickly, if the IoT is to fulfil its potential as a true technological game changer.

Report: Exploring IoT Security

Big banks take multi-billion dollar hit after 9 percent FICC revenue drop in 2015

BY Fraser Tennant

Big banks took a multi-billion dollar hit last year with a new snapshot of earnings and volumes revealing that revenue from fixed income, currencies and commodities (FICC) trading was down 9 percent in 2015 for the world’s 12 largest investment banks.

In its ‘IB Index – FY15’ report published this week, which analyses the public disclosures of the aforementioned banks, Coalition confirms that FICC trading revenue was $69.9bn for FY2015 compared to $76.7bn in FY2014 (the figure was $109.1bn in 2010).

Much of this decline, according to the report, can be attributed to the impact of regulatory changes (Basel III) which require banks to hold higher levels of capital and liquidity. In addition, trends such as high litigation costs and volatile markets have led to job losses and business line exits which have substantially impacted the banks’ FICC activities (usually one of the most profitable areas).

The Coalition analysis tracks the public disclosures of Bank of America Merrill Lynch; Barclays; BNP Paribas; Citigroup; Credit Suisse; Deutsche Bank; Goldman Sachs; HSBC; JPMorgan; Morgan Stanley; Societe Generale; and UBS.

Additional key findings in the report include: (i) commodities revenues dropped by 18 percent, due mainly to slow business in metals and investor products; (ii) investment banking divisions (IBD) saw a 5 percent fall in revenue to $40.5bn due to a surge in M&A activity being offset by declines in equity and debt capital markets activity; (iii) return on equity (RoE) declined slightly to 9.2 percent from 9.3 percent, due to both increased capital requirements and weak performance; and (iv) poor trading results and low client activity in the second half of 2015 contributed to an overall 3 percent decline (to $160.2bn) compared to a year ago in investment banking revenue across the world's major banks.

However, in contrast to the above litany of gloom, Coalition reported that the banks' equity businesses - including cash equities, equity derivatives, prime services and futures and options – did well in 2015, with revenue rising 10 percent to $49.8bn.

“Poor trading results and low client activity in 2H led to a marginal decline in IB revenues for FY15”, said Coalition in summation. “Equities outperformed at the start of the year, but Fixed Income struggled throughout, especially in Credit, Securitisation and Commodity related activities. IBD declined as improvements in M&A were more than offset by declines in ECM and DCM volumes.”

Report: Coalition IB Index – FY15 February 2016

Energy faces uncertain future as megatrends transform oil & gas sector

BY Fraser Tennant

Industry megatrends, such as historically low commodity prices, are transforming the oil & gas sector with a challenging future the likely outcome, according to PwC’s New Energy Futures report published this week.

Recognising the uncertainty clouding the sector’s future, the report proposes a framework which evaluates four potential future scenarios that could help companies successfully navigate an increasingly complex and volatile global market over the next 5 to 15 years.

The four are: (i)  the oil and gas sector evolves along current lines with limited government intervention; (ii) demand from energy consumers (retail & commercial) for cleaner energy drives the transition towards a low carbon; (iii) governments drive increased energy efficiency, expansion of renewable energy demand and accelerated development of disruptive technologies; and (iv) supply constraints are triggered through direct government action, such as implementing carbon legislation or withholding licences (e.g,. Shale, Arctic) or geopolitical disruption.

“Global demand for affordable, reliable energy will continue to grow for the foreseeable future, but there is a new longer-term backdrop, as the world transitions to a low carbon system,” said Viren Doshi, PwC’s Strategy& oil and gas leader. “Momentum to replace fossil fuels with cleaner energy sources is building, and oil and gas companies need to consider their futures in this context."

The report also recommends that companies across the oil & gas chain: (i) have a clear strategy and alignment with portfolio, decision making processes and capabilities; (ii) have an ability to be agile and resilient in uncertain times; (iii) have an innovative response to disruptive change using existing assets as well as technology, knowledge and capabilities; (iv) have a readiness to form alliances and collaborate across the supply chain; and (v) safeguard the social licence to operate by sustaining the trust and support of investors and wider stakeholders through increased transparency.

Jan-Willem Velthuijsen, PwC’s chief economist in Europe, believes that the recommendations will allow companies to “reassess their current strategy and plans, with implications for the operating model, partnering strategy, resourcing and technical capabilities and other areas".

Despite all the uncertainty and prediction of a challenging future, Mr Doshi is in no doubt as to oil and gas sector’s ability to innovate and adapt to a rapidly changing world: “Time and again, successful operators have demonstrated the ability to respond to challenges by taking a long term view, innovating, adapting and gauging major trends as they define medium-long term investment plans.

“We are convinced that they can do so again."

Mylan’s long deal wait over – shares plummet

BY Richard Summerfield               

Generic and speciality drug company Mylan N.V. has been in an acquiring mood for some time. In November the firm attempted a hostile takeover of rival drug manufacturer Perrigo, offering $26bn but being rebuffed.

However, last week Mylanannounced a deal for Swedish drug maker Meda for $9.9bn, including $2.7bn worth of existing debt. The agreed price for Meda’s shares – SKr165 per share – was more than double the company’s closing price of SKr86.05 on the day before the deal was announced.

Once completed, the transaction will see the combined company boast more than 2000 products including brand-name drugs, generics and over-the-counter medicines. The firm will have a presence in more than 165 countries.

“This transaction builds on everything we have put in place around the world, including our recent acquisition of the Abbott non-US developed markets specialty and branded generics business. Meda brings us greater scale, breadth and diversity across products, geographies and sales channels, and together we will have an even stronger global commercial infrastructure,” said Mylan’s chief executive, Heather Bresch.

But the acquisition has met with dismay among Mylan’s shareholders, partly because Mylan has offered more than 12 times Meda’s EBITDA. Analysts have suggested that the company may have been better off using the cash for other means, such as buybacks.

Following the announcement of the deal, shares of Mylan traded in the US plummeted, eventually closing down 18 percent at $41.42. The company also posted fourth quarter earnings last week, which were sluggish and lagged behind market expectations.

Meda’s shareholders, however, expressed their satisfaction at the transaction. Shares in the company, which are traded in Stockholm, rose 70 percent to $17.41. The company’s largest shareholders, Stena Sessan Rederi AB and Fidim S.r.l., which collectively own 30 percent of Meda, have already accepted the deal.

Despite the concerns of Mylan’s shareholders, and the high transaction value, the acquisition could make strategic sense in the long term, according to a number of analysts and industry observers. Mylan will significantly enhance its position in a number of key markets, including China, Russia and Southeast Asia.

Ms Bresch moved quickly to dismiss fears that the company had overpaid for Meda, “It will take a little time for everyone to catch up with the opportunity,” she said. “I think over the next days and months the value will be realised."

News: Mylan to Acquire Meda