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Private and Confidential
February 2007
- Perspective
- Investment, finance & VC * Interest rates and currencies * Trade & FDI
- Activities and Media
The following sections are delivered through Astraea. The links below will take you to those sections.
Perspective
Rapid system change is becoming inevitable. Although the call to tackle climate change is rising from a shout to a clamour, people are not finding answers easily. Perhaps you have been deluged by an avalanche of do good entreaties and information. "Save the planet this way", "use less energy", "eat less", "give more". Its all overwhelming and no one prepared us for this.
We've got all the answers, but somehow solutions are not working. We can fly to the moon and split an atom, but the planet's getting toasty, half the people in the world are hungry and we're still bombing each other. We may have the technology to achieve control of humanity, but without ethics life will die. Nanotechnology, quantum mechanics, and military science will continue to deliver fantastic advances, but the utilisation choices we make must consider big picture consequences. We must take globally responsible initiatives.
The emerging intelligence is to avoid knee jerk remedies of classic capitalist style (like fire them! or DDT it! or do it now!). Our usual prescribed knee jerk solutions are insufficient and sometimes counter productive. Meanwhile our unwillingness to forgo material luxuries for the uncertain promise of happiness, or even survival, continues. We will find soon that whole system change is needed to resolve the conflicting goals of a viable biosphere and being happy.
However, there is no prescriptive solution as we are used to. Instead our lessons will be learnt experientially and will focus on compromise. How can wars bring peace? How can consuming the planet's resources faster than they are replaced be good (or right)? As Einstein said, and others have reiterated, "We can't solve problems by using the same kind of thinking we used when we created them." The problems of today will not be solved with the tools of yesterday. System emergence to an integral dynamic is natural and inevitable. The resulting whole system change will expand our perspectives physically, mentally and spiritually.
Reflecting on the rising importance of Africa in our world, I'm hopeful that there are signs that Africa is rising up. The continent has some challenges. At the top of the list is the frightful legacy of resource extraction by colonists and western markets. In the past half century, African oil has fueled a technological and consumption boom in the west. In return their social fabric has been ripped apart, the agricultural infrastructure has been decimated, and few resources have been left. The resources were not used to build alternative capacity, or intellectual capacity - at least not in Africa. Despite this it can still run. And Africa does not need money to do it. It will be the people of Africa. Seeds of change nurtured in middle class neighbourhoods are being catalysed via the internet throughout society. The continent is uniting in a common cause - its own emergence. As they unite they will be strong - ubuntu.
I also wondered about taking a positive approach to North Korea - carpet bomb them with comics and gossip magazines and pot noodles ... catalyse a revolution from within. And then I learnt that their food aid has been significantly curtailed because of its nuclear weapons research. It seems unnecessary to punish people for their leader's mistakes. Perhaps pot noodle diplomacy has some merit.
Investment, Finance & VC
Although we have highlighted indicators of increasing financial market risk over the past months, there has been little acknowledgement by the markets. Even at the World Economic Forum in Davos, risk was high on the agenda of financial discussions, and a recent survey by Merril Lynch found that 82% of respondents expect volatility to rise this year. While equity prices hardly reflect that expectation, the downward blip in stock markets at the end of February might be a sign of more to come. Let's reiterate some of the known possible shocks that are present: US housing market recession, credit market collapse, halt of yen carry trade. All three are increasingly likely to occur because they are founded on unsustainable financial models - they are currently operating as pyramid schemes. Tread carefully.
Perhaps the expected volatility is arriving: In February the Dow Jones Industrial Average index hit an all-time closing high, to 12,768 - it has hit 30 records since the beginning of October. But at the end of February, Chinese markets tanked and others followed. The Shanghai market dropped 8.8% and Shenzhen dropped 8.5%, sending waves around the world.
The Chinese market move was in fact not such a big deal - an already volatile market, known to be speculative and representing an insignificant weight of capitalisation in equity markets globally. In fact its drop was almost to be expected as Chinese officials try to bring speculation under control. And the market remained up for the week despite suffering its largest drop in a decade! Speculative overinvestment is being additionally felled by the same politically connected government officials who started dud companies now re-leveraging their equity and ordinary citizens are now borrowing, often against their homes to play the stock market. In January, the number of total traders on the Chinese exchanges grew by 1.38 million, an increase of 134% from a month earlier, while stock turnover was up 700% from a year earlier. The net result is a stock surge with no basis in fundamentals - some Chinese banks now have PE ratios higher than financial blue chips such as Deutsche Bank and Chase, despite deplorable management and a history of highly questionable lending policies. Expect much more volatility in China, prompted by regulatory moves to clean up the market.
As philanthropic business increasingly becomes the objective
of wealthy entrepreneurs and investors increasingly demand SRI or ethical
portfolios, the ludicrous contention that business is solely about money
is being rapidly eroded. Adam Smith's contention that corporate organisation
is an effective means to bring people to a common goal - efficiency, effectiveness
and philanthropy - is taking root. Immature capitalists who rationalise
their neglect of ethics by claiming that it is not their job are rapidly
being demonised. As Harry
Moran notes: Tell me, is a strategy of investing in a company
with egregious environmental problems and then donating some of the profits
to environmental causes more or less effective than withholding capital
and working to improve the company's environmental impact? The strategy
of investing for maximum profit and then using philanthropy to attempt
to correct the problems created is both ineffective and unpalatable for
many investors today.
Take for example Walmart's announcement ... Wal-Mart
CEO Announces Company-Wide Sustainability Plan "The company's
"Sustainability 360" project promotes eco-friendly expansion around the
globe, and fine-tuning business practices in the U.S. to reduce the chain's
environmental footprint." Mmmmmm ... but the alternative we all really
need is one that reduces the burden of transport by producing more locally
and operating cooperative communities. They are going quickly in
the opposite direction - their new distribution centres are the size of
towns and are built to serve very large geographical areas. Wal mart could
make that happen and preserve a role as important as any by engaging consumers
and bringing them consumables they need, but turnover would go down because
more products, especially food, would be produced locally. Big picture
thinking may be beyond the scope of large homogenous organisations, so
naturally calcified, but that is what is needed.
The anticipated implosion of the sub-prime lending market in the US is well underway. Even the blue chips like HSBC are getting burnt. Glance at this website to see how many lenders have imploded in the past three months - it is scary. And investment banks exposure to this sector is significant and demonstrates a lingering dotcom mentality in organisations that should set a better example. Bear Stearns's stake in non-investment-grade retained mortgage securities, or what its keeps from packaging loans into bonds, represents about 13% of the firm's "tangible" equity, according to CreditSights. For Lehman, it's 11%, Goldman, Morgan Stanley, and Merrill don't disclose how much of their total retained securities are rated below investment grade, or junk. Overall, their exposure is in "the low to mid teens". The major investment banks have made a great deal of money over the past few years from securitising subprime mortgages and while that portion of their income is going to drop dramatically, these banks are not in any trouble - Goldman, Merrill, and Morgan Stanley made a combined and record $24.5 billion last year.
The Association for Sustainable & Responsible Investment in Asia has warned in a report that the use of toxic chemicals dangerous to human health and the environment is a "classic sleeper issue" for Asian companies. The report, which is based on the FTSE Asia ex-Japan All Cap index, notes that while product scandals and groundwater problems are rising, the broader economic and social implications for human health have largely been ignored by policymakers and the financial community. ASrIA puts this down to government failure to put in place policies on chemicals, or effectively police existing policies. With a "policy vacuum" across much of Asia, developments are driven by EU and, to a lesser extent, US legislation on chemicals safety. Companies are also failing to act on, or embrace, the concept of the precautionary principle to competitive advantage – which is behind tough new chemicals legislation in the EU.
In the UK the Co-operative Insurance Sustainable Leaders fund has become the best performing unit trust in the UK over the past year - the first time an ethical fund has achieved pole position.
A special report in The Economist reports that offshore financial centres are a useful part of the global financial system, not least because they allow for otherwise inefficient regimes to improve their own financial efficiency and effectiveness.
Another special report in The Economist covers European Business and is a comprehensive perspective relevant for those doing pan-European business or considering an entry.
An online educational tool is delivered by Fidelity. Their Knowledge Center offers discrete modules with crisp graphics. There's a beginners video and most of us would benefit from a browse through Strategies and Insights.
Responsible Investing
Innovest Strategic Value Advisorss released updated Intangible Value Assessments for the Insurance-North America sector. The Winter 2007 rating cycle for the 37 companies in the sector includes various rating changes based on relative ESG performance. Innovest Analyst, Greg Larkin says, “Recent events, beginning with Hurricane Katrina, shed significant light on which insurers are prepared to manage risks associated with climate change and more severe weather patterns and which are struggling. Many insurers were upgraded because their performance and response to such events demonstrated an advanced environmental risk prediction capacity, broad stakeholder engagement and superior capacity to price environmental risk. For other insurers Katrina showed, in very stark terms, that they were not prepared to forecast, or competitively price the risks that they underwrote, and their response since the disaster has not restored the Insurance Team’s confidence.” Obviously, the insurance sector remains exposed.
Companies will have to meet a new set of climate change criteria or face expulsion from the FTSE4Good SRI index family which includes indexes covering the UK, Europe, Japan, US and global markets. FTSE4Good has identified 255 constituent companies out of 898 with a high or medium operational impact on climate change, who will have to meet the criteria within two years or lose their place in the index. Of these, less than 50 already meet the new standard. But all firms admitted to the index in the future will have to meet the criteria immediately. High-impact companies, in sectors such as mining, steel, building materials, electricity, oil and gas, air travel and coal, will be expected to have a climate change policy, demonstrate board level responsibility for climate change issues, set long- or short-term goals to reduce greenhouse gas emissions and disclose their GHG emissions. Companies in the aerospace, oil and gas, automobile and coal sectors will have to meet extra requirements, because their products have a particularly high impact on climate change. For example, car firms will have to disclose and improve the fuel efficiency of their fleets. FTSE4Good has also flagged a number of medium-impact sectors, which it may reclassify as high impact at a later date - specialty chemicals, paper, construction, brewers, soft drinks and food producers. Other sectors, such as computer hardware and consumer electronics, house builders and commercial developers may be asked to meet the criteria in future.
EIRIS published"Valuing ESG issues" which provides a global survey of over 40 mainstream and socially responsible institutional investors' views on the extent to which ESG issues impact upon a companies' financial performance. Institutional investors highlighted a total of 15 sectors where ESG issues have a significant impact on financial value, and they also ranked the top five ESG issues for each of the 15 sectors they identified. Climate change emerged as the key ESG issue most likely to impact upon company performance and was ranked as one of the five most financially significant ESG issues for nine of the 'top 10' sectors.
Green Mountain Coffee Roasters topped CRO Magazine lists 2007's "100 Best Corporate Citizens" for the second year in a row.
Eurosif launched Spanish version of Handbook on Active Share Ownership in Europe.
(A WWF report undertaken by PwC predicts that biodiversity is becoming a tradable commodity ... see the Environment section.)
Venture Capital
Around €1.25 billion of "venture capital for sustainability" has been raised by European venture capitalists as of September 2006, according to a report from the European Social Investment Forum . The Paris-based organisation defines such investment as "a specific area within venture capital where profit objectives are supplemented by a mission which has direct impacts on sustainability". It explicitly says it is not synonymous with 'clean-tech' investing, which has a narrower remit. Eurosif's report is based on a survey of European VCs, and claims the sector accounts for about 6% of the European VC market.
Private equity funds focused on the emerging markets raised over $33 billion last year, which was 29% higher than the $26 billion raised in 2005 and 5x the $6.5 billion raised in 2005. This was more than just China and India - it was across all emerging market regions. For example, there was major growth in Latin America, Sub-Saharan Africa and the Middle East. It also was across sub-asset class, with the 153 funds being fairly evenly-split between venture capital, buyouts and growth/expansion equity. This data comes from the Emerging Markets Private Equity Association which provides additional data and analysis here.
In the UK, the newly established Birkenhead Forum is a series of monthly networking events for private investors, funds, foundations and intermediaries engaged in responsible investment and venture philanthropy. It was hosted by Foursome Investments, GEXSI and P3 Capital.
Shelfari, a Seattle-based online social network for book aficionados, has raised $1 million in VC funding led by Amazon.com.
Sterling Planet of Atlanta has raised an undisclosed amount of Series B funding from Low Carbon Accelerator Ltd. of London. VentureWire puts the round amount at $7 million. Sterling Planet is a retail provider of solar, wind and other clean, renewable energy through direct sales and electric utility partnerships.
Segetis Inc., a Plymouth, Minn.-based tech startup focused on renewable chemical products, has secured $5 million of a $15 million Series A round led by Khosla Ventures, according to a regulatory filing.
Vietcom Fund Management of Vietnam has raised $120 million for its second private equity fund. Vietcom is a joined venture between Vietcombank and Viet Capital Holding Pte. of Singapore.
Interest Rates and Currencies
Rudi Bogni has shared a succinct and insightful description of the current high market liquidity and the problems it is fostering, with an illuminating reference to middle ages banking. (Bogni is a well known, high level wealth manager based in Switzerland.)
Reality is much simpler. Take a bathtub and fill it to 1/3,
then throw a stone into it. It may cause waves, but it might not flow
over. Take the same bathtub and fill it to the brim, then throw a
stone into it. It is most likely to flow over.
What we are experiencing is an unusually long period of extreme liquidity.
Whatever the motivations for it, they are essentially political motivations,
driven by political intents. Whether it is to finance wars without increasing
taxation, whether it is to make people feel good about the inflated
value of their assets so that they are going to spend more and promote
GDP growth, whether it is to buffer one country's voters from the natural
effects that working less should entitle them to a lesser share of global
goods and services, there are political intents behind the excessive liquidity.
Politicians are shying away from telling the truth to their voters and
a vicious circle of self-indulgence and self-deceit is being buttressed
by excessive liquidity.
Blaming incorrectly the equivalents of the Jews and
Lombards of today, ie hedge funds and private equity investors, is
the modern version of the French kings locking up the bankers in order
to avoid taking the due blame and repaying the debts.
Long term it is a strategy which can ultimately lead only to decline.
Turning difficult issues which require courage, like global warming or
global competition, into a religion of fear is the novel way by which
politicians aim and unfortunately short-term succeed in keeping the masses,
and often even the intelligentsia, in the dark and unable to confront
policy-makers on the rightful field of rationality.
The US Federal Reserve kept interest rates at 5.25%.
US unemployment has risen to a four month high of 4.6% . Analysts said figures showing that 110,000 new jobs were created in January were disappointing, but still reflected steady growth in the market. And the latest consumer sentiment figures from the closely watched University of Michigan report rose to 96.9 in January, its highest level since 2004, from 91.7 in December.
A bipartisan group of US Congress wants to capitalise on momentum on Capitol Hill to restrain China's growth, reintroduced a bill Wednesday that would add currency manipulation to the list of unfair trade practices actionable under U.S. law. The legislation would pave the way for U.S. manufacturers to file currency complaints against China and seek sanctions against the country's imports. Called the "Fair Currency Act of 2007," the measure would define "exchange rate misalignment" by any country as an illegal subsidy, allowing U.S. firms to file illegal subsidy cases against non-market economies, such as China's, which is not allowed under current law. This is another unfortunate attack on free trade by the US and a surprising disappointment from Congress. China's problems are not America's and America will only compromise her own future by raising misguided international policy against the most significant influence on global economics today - China.
Japan's central bank raised interest rates to 0.5% following signs of steady growth in the economy. In July last year, the bank raised the rate to 0.25% following six years of zero interest rates designed to help the economy recover. Resurgent consumer spending has helped Japan's economy to grow faster than expected in the last three months of 2006. The economy grew at an annual rate of 4.8% in the Q406, news that boosted the yen and added to speculation that interest rates would be raised soon. Consumption, which makes up half of Japan's gross domestic product, was up 1.1% on the same period a year ago. Travel, flat-screen TV's and mobile phones were among the big sellers. The government also noted that cheaper heating oil and a mild winter freed up money for consumer spending.
Trade and FDI
The following snippet from PPI online illustrates why the Doha trade round is not going anywhere - emerging economies are paying 10x the what developed economies are paying to engage in international trade! When are the global superpowers going to wake up, act with decency and allow emerging economies to make our clothes and food staples, while we focus on more varied and sophisticated activities?
PPI Online Trade fact of the week ...
| Country |
U.S.
Imports |
U.S.
Tariffs |
Avg. Rate |
|
|
|||
| United Kingdom |
$53.5 billion |
$430 million |
0.8% |
| Bangladesh |
$3.3 billion |
$496 million |
15.2% |
|
|
|||
| France |
$36.8 billion |
$367 million |
1.0% |
| Cambodia |
$2.2 billion |
$367 million |
16.9% |
As PPI Online notes:
Last year, the American tariff system raised a bit more than $25 billion. Nearly half of it, $11 billion, came from tariffs on shoes and clothes. Though these goods accounted for only 5% of imports, tariff rates on them average about 12%, 15x higher than the 0.8% average on other products. As a result, the American tariff system is uniquely tough on low-income countries in Asia and the Muslim world, with Cambodia, Bangladesh, Nepal, and a few others the extreme cases.
Cambodia's $2.2 billion in clothing exports -- the top sellers are cotton pullovers and T-shirts, cotton pants, and pajamas -- accounted for a third of Cambodia's $6.8 billion real-dollar GDP. These goods face U.S. tariff rates ranging from 8 percent to 32 percent. Last year's total tariff penalty came to $367 million, and meant an average of 16.9%.
On the other edge of the Eurasian land-mass, the lead exports for France, the old colonial power, include medicines, airplane parts, wine, artwork, and perfume. The U.S. tariffs on these goods are respectively zero, zero, 0.1%, zero, and zero. France's total $37 billion in exports received the same $367 million penalty imposed on Cambodian goods; the average U.S. tariff on French goods was 1 percent. Elsewhere, China's exports mix high-tariff shoes and clothes with zero-tariff phones, computer monitors, cameras, toys, and furniture, and get a 3 percent average; Saudi Arabia's crude and refined petroleum products come in at 0.2%; South Africa combines zero-tariff platinum, diamonds, and other metals with auto kits, some clothes, and farm products often exempted from tariffs through the African Growth and Opportunity Act, and had a 0.1% average.
Having pursued venture capital on the ground in some of these countries, including Cambodia, I can empathise with the people in these factories. The following description illustrates the consequence of rich country protectionism:
A Day in the Life of Cambodia's Typical Factory Worker: A young woman, 18 to 20 years old. Recently arrived from a rural town or village -- 10 million of Cambodia's 14 million people live in rural districts -- she earns about $600-$700 in her first year working in one of Phnom Penh's 278 garment factories.The figure seems small to a western eye, but is not: $650 is nearly twice Cambodia's $350 per capita income, and five times as much as domestic-industry workers in the rural provinces usually earn. She will save 30 percent to 50 percent of her pay -- usually in the form of silver bracelets, earrings, and necklaces; shaky rural ID systems make bank accounts hard to get, and wearing your savings is safer than leaving cash in a rented room -- and then bring it home, after turning the jewelry back into cash, during holiday trips for the April New Year's or the autumn rainy-season festival. The jobs are prized: a rural Khmer family normally has about two months of food security, and one daughter in a clothing factory means a year of food security, while two means enough cash to buy fertilizer and some simple farm machinery. The International Labor Organization's Better Factories Cambodia program reports: http://www.betterfactories.org/
How it got that way -- PPI explains America's tariff system.
Activities and Media
Chinese
New Year is a special time because it retains its wholesome values
that other festivals have lost. It is about family and being responsible
for others, whether children or employees. This year is apparently a golden
year - the year of the golden pig. The pig is the last of 12 animals in
the Chinese zodiac and symbolises good luck, but also turbulence. Babies
born in Golden Pig years are believed to be particularly lucky, though
may in fact find challenges
ahead because parents try to give birth in the golden year and the
baby boom means more competition for school and jobs later. We wish you
all a golden year. Kung hei fat choi! (Celebrations
in pictures )
Do The Right Thing is a great initiative for ranking businesses' credentials. Its easy in teh eye and is a quick valuable reference. Well done!
The shark story brought us to Care2.com - the largest online community for people who want to make a difference.
Big Picture TV has relaunched. The new site includes a number of new features and services. Among them is an embedded flash video player, meaning that all videos can now be played on an in-built screen. Streaming video content remains free. But best of all, the relaunch is celebrated with Annie Lennox! Annie Lennox is a long-term supporter of human rights and social justice issues and hasoften campaigned for Greenpeace and Amnesty International. In 2005 she was awarded the title Campaigner of the Year by the charity Make Poverty History.Annie Lennox talks about what it means to be green in her view. She speaks about the shifts that are necessary if we are to overcome the various environmental challenges that confront us. She explains why, in her opinion, real action is all too often bound by short-term thinking and the drive for profitability. She also talks about the limitations of green consumerism and suggests that tough legislation is a surer way forward. Check out Drums and Bells (3m 19sec).
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