Are we about to witness global financial meltdown again?

Many investors were nervous about the outlook for this year, but few expected it to begin with a full-blown stock market bloodbath.

The first full trading day ended in carnage, as Chinese share prices crashed 7 per cent and global stock markets followed.

Chinese regulators halted trading in a bid to stem the panic and three days later had to trigger their new #x201c;circuit-breaker#x201d; system again, closing the market after less than 15 minutes, making it the shortest trading day in the country#x2019;s history.

The United States suffered the worst opening week to a year since records began, with the Dow Jones Industrial Average falling 6.2 per cent while the United Kingdom, Europe, Asia and other emerging markets also crashed.

In the Arabian Gulf region, Dubai#x2019;s financial market fell 5.8 per cent in that first desperate week. Abu Dhabi was down 4 per cent, while Saudi Arabia was the hardest hit, falling almost 10 per cent.

More than US$2.3 trillion was wiped off the value of global share prices in just five days, according to the Samp;P Global Broad Market index.

UAE and Saudi markets fell again on Tuesday after oil sank to a 12-year low of about $30.50 per barrel amid growing talk that it could fall to $20 or even lower. Throw rising US interest rates into this toxic mix and you can see why growing numbers of analysts believe there is a reckoning at hand.

Don#x2019;t panic

The sense of panic only grew when the British bank RBS issued a note advising clients to #x201c;sell everything except high-quality bonds#x201d;, as this would be a #x201c;cataclysmic#x201d; year for markets, with share prices likely to fall another 20 per cent, and oil to plunge to $16 per barrel.

It urged clients to beat the forthcoming rush to sell, warning that: #x201c;In a crowded hall, exit doors are small#x201d;.

If the financial world is in disarray, the political world looks equally desperate, with global acts of terror almost a daily occurrence and Saudi Arabia and Iran squaring up to each other, which will only make finding a solution to the Syrian civil war even harder.

Joshua Mahoney, a market analyst at IG Index, says the investor uncertainty has further to run. #x201c;If markets abide by the mantra of starting as you mean to go on, we could be in for a seriously messy 2016.#x201d;

Fear over China is at the heart of this year#x2019;s problems, as the authorities continue their increasingly desperate battle to avoid a hard economic landing.

Mark Mobius, the renowned fund manager at Templeton Emerging Markets, says the #x201c;entire psychology of the market#x201d; has been hit by China#x2019;s plunging currency and fears over how the US Federal Reserve#x2019;s decision to raise interest rates would hit other economies.

Further interest rate hikes are likely to follow, possibly as many as four this year, raising global borrowing costs and upping the pressure on indebted businesses and individuals.

Like most analysts, Mr Mobius predicts more trouble to come. #x201c;Volatility is increasing in many markets, and it#x2019;s something investors will likely need to learn to live with.#x201d;

However, he denies the Chinese economy will come crashing down, as its GDP is expected to grow 6 per cent this year. #x201c;The fundamentals in China are still excellent, in our view. It is one of the fastest-growing economies in the world, even if the growth rate has decelerated.#x201d;

After a dogged 2015, when the Middle East was in turmoil, oil and commodity prices slumped, global deflation reared its head and China went through Black Monday, this year was always going to be tough.

HSBC delivered an early signal by listing the 10 risks investors face this year, including a fresh euro-zone crisis, Chinese corporate defaults, a US recession and a rise in the number of stock market #x201c;flash crashes#x201d;.

Jeremy Batstone-Carr, the head of private client research at Charles Stanley Stockbrokers, has been a worried man for some time.

His faith in the global economy was shaken by the volatile start to the millennium, which featured the technology crash, September 11 terror attacks, the financial crisis, a euro-zone meltdown, Middle East instability and increased sabre-rattling by China and Russia.

But his biggest worries are two underlying dangers that most people choose to ignore: debt and demographics.

Mr Batstone-Carr says: #x201c;The world is drowning in debt while developing countries face falling birth rates and ageing populations.#x201d;

Both contributed to the financial crisis, and both have only worsened since, he says. #x201c;Global debt has increased rather than fallen, while the only positive action on demographics was China#x2019;s recent decision to scrap the one-child rule.#x201d;

Japan is the poster child for both problems, Mr Batstone-Carr says, with debts worth a staggering 245 per cent of its annual GDP and a fertility ratio of just 1.42, against the 2.07 that countries need to keep their populations stable.

Debt levels

Where Japan leads, the West is following. Mr Batstone-Carr says this paves the way for an even bigger financial crisis, and central bankers have already expended their ammunition, such as quantitative easing and low interest rates, on the last one.

All major economies have higher levels of borrowing relative to GDP than they did in 2007, according to the McKinsey Global Institute.

Global debt has grown by $57 trillion, posing new risks to financial stability and threatening global economic growth, it warns.

Last year, total debt stood at 286 per cent of global GDP, and the pile continues to rise as emerging markets try to prop up their ailing economies. China#x2019;s has quadrupled in just seven years, to $28tn from $7tn.

These challenges are harder to bear as ageing populations demand expensive pensions and health care, and will have to be supported by a dwindling band of younger workers.

Mr Batstone-Carr says: #x201c;No amount of economic chicanery can get around the two unavoidable threats of debt and demographics.#x201d;

Plenty of people saw this year#x2019;s crisis coming. Last year, the fund manager Crispin Odey, of Odey Asset Management Group, argued that stimulatory measures such as quantitative easing and low interest rates have bloated asset prices, and stocks in developed markets #x201c;need to fall 30 to 40 per cent to be compelling#x201d; again.

Robin Griffiths, the chief technical strategist at ECU Group, said last year that stock market valuations, as measured by the price-to-earnings ratio, have only been this high on three occasions since 1882: in 1929, 2000 and 2007. No prizes for guessing what happened next.

Ashley Owen, the head of investment strategies at advisers AES International in Dubai, says the pessimists look prescient today. #x201c;Global debt levels are still at record highs, and prolonged low interest rates only made things worse.#x201d;

Mr Owen says the world also remains vulnerable to #x201c;great unknowns#x201d; such as geopolitical risk, which seems to be worsening by the day. #x201c;Shocks seem to come out of nowhere.#x201d;

One shock that certainly came out of nowhere was the collapse in the oil price, which traded at about $115 per barrel just 18 months ago, a figure unthinkable today.

Cheaper petrol may help to sustain spending in consumer countries such as the US, China and India and in Europe, but it has come at the expense of producer nations in the Middle East and beyond.

The oil sector now accounts for about 50 per cent of Abu Dhabi#x2019;s GDP, according to data from Statistics Centre Abu Dhabi.

Dubai has far greater diversification, with oil making up less than 2 per cent of GDP, the Dubai Economic Council recently calculated.

Property

Faisal Durrani, the head of research at the global property consultant Cluttons, says low oil prices will raise the pressure on the UAE property market.

In November, Cluttons reported that residential property prices in Dubai had fallen for five successive quarters, and were likely to fall another 3 to 5 per cent over the next year.

Mr Durrani says Abu Dhabi#x2019;s property market is in the firing line: #x201c;Office space consolidation by local and global oil corporates threatens to undermine rents and may lead to a supply glut.#x201d;

But he remains optimistic, arguing that this may be offset by government investment in sectors such as health care, aviation, education and hospitality. #x201c;Growth in these areas may offer some respite to the residential property market.#x201d;

Mr Durrani says the outlook for Dubai remains positive. #x201c;With mega infrastructure such as the $32 billion expansion of Al Maktoum International Airport and the hosting of the World Expo in 2020, the prospects for the residential and commercial markets are brighter.#x201d;

Your portfolio

Keren Bobker, a senior consultant at Holborn Assets and a columnist for The National, warns that markets have to cope with another toxic element this year: the US presidential election, so far dominated by the Republican hopeful Donald Trump.

Ms Bobker says investors need to stay calm, rather than simply panic and sell. #x201c;If your portfolio is properly diversified across several markets and reflects your attitude to risk, you should be able to tolerate any short-term falls in value.#x201d;

You need to review your portfolio to see whether this is the case. #x201c;Far too many people have been unwittingly put into volatile, high-risk funds, which makes them vulnerable.#x201d;

There is no such thing as a safe bet these days, Ms Bobker says. #x201c;No one can buck markets, but the fluctuations tend to be ironed out over time.#x201d;

In volatile times it makes sense to invest small regular amounts every month rather than making large lump sum investments. This way you can turn volatility to your advantage, because your contribution payment will buy more units in your chosen funds when markets fall, and you will benefit when they recover.

Ms Bobker adds: #x201c;I expect further turbulence this year, but if you are sensibly invested for the long term you should be able to ride it out.#x201d;

Equities

Dan Dowding, an investment adviser at Killik amp; Co in Dubai, says investors can still make money from the stock market, but through careful stock picking rather than simply buying index trackers.

#x201c;Too many big companies are boring businesses with little competitive advantage and second-rate management. The UK#x2019;s FTSE 100 index is a good example. Today it is about 10 per cent lower than it was 15 years ago.#x201d;

The major indexes fail to reflect the technological revolution affecting transport, energy, health care and social media, he says.

Mr Dowding says: #x201c;Facebook recently reported 1.49 billion monthly active users and WhatsApp has 900 million users. These two companies did not even exist 15 years ago.#x201d;

He says we live in an age of #x201c;creative destruction#x201d;. #x201c;Just look at the businesses that have been destroyed by Apple, Netflix, Google and Amazon. The numbers will be dwarfed when the same thing happens in the oil, auto and pharmaceutical industries.#x201d;

The world may be heading for further turbulence, but if Mr Dowding is right, short-term destruction will fire new types of creativity.

Good news

There is other good news out there, if you look for it. US employment figures continue to rise. Europe is growing thanks to monetary stimulus. The UK remains robust, although growth is easing off.

Tim Edwards, the senior investment director of index investment strategy at Samp;P Dow Jones Indices, says history suggests worse is to come: #x201c;Historically speaking, years that have started badly have more frequently ended badly #x2013; and to a greater extent than might be supposed.#x201d;

The truth is that nobody can predict the future, and investors who try to do so invariably fail. By selling up now, you will only crystallise your losses.

Brave investors might even want to take advantage of market falls to pick up shares at reduced prices.

They should heed recent comments from Christian Mueller-Glissmann at Goldman Sachs. He said the China-led rout may get worse, and when it does, that is the time to buy. Are you brave enough to buy shares today?

pf@thenational.ae

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UPDATE 2-UK builder Countryside plans return to London stock market

* Co likely to be valued at 1 bln stg – source

* Expects minimum free float of about 25 pct after IPO

* UK housebuilders outperform FTSE in 2015

* Strong 30 pct payout target could lure investors

(Adds industry context, report, details on dividends)

By Esha Vaish

Jan 14 British property developer Countryside
Properties Plc plans to raise about 114 million pounds ($164
million) through an initial public offering, returning to the
London market after more than a decade in private hands.

The offering is likely to value Countryside at about 1
billion pounds, said an industry source, who asked not to be
identified.

Countryside, backed by private equity firm Oaktree Capital
Management, said on Thursday it would use the IPO proceeds to
reduce debt and accelerate development at several sites in
Britain.

The listing, expected in February, follows a strong year for
UK housebuilders, which have benefited from a steady rise in
house prices and surging demand, partly due to government
measures that make it easier to secure a mortgage.

The homebuilders index surged nearly 29 percent
in 2015, whereas the FTSE 100 fell about 5 percent.

Persimmon Plc and Berkeley Group Holdings Plc
hit a record high, while Taylor Wimpey Plc and
Barratt Developments Plc touched their highest since
the 2008 housing bust.

More growth is expected this year as economists predict that
prices will keep rising and brokerages expect order books to
grow. Both Barratt and Taylor Wimpey have expressed confidence
for the year.

As well as building on its own land, Countryside works with
local authorities to develop public sector land – a business
that analysts say could give the company an edge over rivals as
Britain sets aside more funds for regeneration projects.

Property firm Savills estimates that 480,000 additional
houses can be built on 8,5000 hectares of public-sector land in
London – one way to start addressing the annual shortage of
around 50,000 homes in the capital.

Countryside said it would use about 50 million pounds from
the offering to speed up development of its sites in Acton,
Beaulieu, Hazel End and Rayleigh.

The company said it expected a minimum free float of about
25 percent after the IPO.

A vehicle controlled by Oaktree, some management members and
employees will also sell a portion of their stake. The company
declined to estimate its valuation.

Countryside, founded by chartered surveyor Alan Cherry in
1958, traded as a public company from 1972 to 2005. In 2013,
Oaktree bought a controlling stake in the company from Lloyds
Banking Group.

Countryside said it was targeting a 30 percent payout ratio
– making it attractive to investors.

Housebuilders offer some of the strongest dividends in the
UK market and often top it up with special payouts. The sector
is moving towards a 35 percent payout ratio, according to data
firm Markit.
($1 = 0.6960 pounds)

(Reporting by Esha Vaish and Noor Zainab Hussain in Bengaluru;
Editing by Sunil Nair, Robin Paxton and Saumyadeb Chakrabarty)

Venture capital funding for startups is down sharply in 2015

There are a lot of indicators that weve reached the peak of the VC investment cycle, said Daniel Cook, an analyst at New York research firm PitchBook Data Inc.

The number of first financings, the very first round of professional funding for nascent startups beyond money from family or friends, stood at only 1,983 financing deals as of Dec. 1, compared with 3,368 for full-year 2014, according to PitchBook. The total dollar amount for first financings figures to be flat or down: $6.91 billion recorded through Dec. 1 compared with $7.5 billion last year.

Meanwhile, money reaped through so-called exits — via the sale of startups to another company or through an initial public offering of stock — is projected to end the year off dramatically: about $64 billion on 860 deals compared with $93.77 billion on 994 deals in 2014, according to a Pitchbook analysis.

The drop in first financing indicates that the future crop of VC-backed companies will be weaker than were used to seeing, Cook said. Plus, he said, Exits are down dramatically, and the public markets are in limbo.

Demand for VC funds, however, continues strong, with investors pouring in nearly $37 billion so far this year, up from $34 billion in 2014, to get a slice of later-stage startups such as Uber and Snapchat.

Still, the slowdown for the youngest companies and waning exits indicate a general cooling, analysts said. Among the causes: the lackluster performance of major public stock markets, which provide a guidepost for valuations and an important market for venture capital firms to sell their holdings and exit their positions. Meanwhile, fundamentals in technology, a key sector among VC firms, are weakening.

John Lonski, chief economist for Moodys Analytics, said revenue for software and services was down 2.4 percent in the third quarter from the year-earlier quarter while even once-booming tech hardware saw sales rise only 3.6 percent. Those numbers are not exactly barnburners, he said.

Investors are pulling back on riskier investments across the financial spectrum, Lonski said, noting that borrowers in the high-yield corporate bond market, often seen as a proxy for venture capital and other risky markets, have been forced to pay ever-higher interest rates in recent months.

Meanwhile, the IPO market in general has hit the skids. The value of deals in the economy was just $36 billion through Dec. 10, compared with $95 billion for all of 2014, according to the research firm Dealogic.

Other cautionary signals for the VC sector, analysts say, are recent IPOs that saw highly touted startups trade at lower-than-expected valuations. San Francisco-based payments company Square Inc., for instance, was priced at $9 a share at its November launch, lower than the expected range of up to $13. And while the shares did shoot up 45 percent to $13.07 in the first day of trading, they had drifted down to $12.65 as of Wednesday.

Steven N. Kaplan, a finance professor at the University of Chicago, said 2014 and 2015 marked a frothy period of startup valuations that was bound to taper off. He said the rapid rise in the number of startups valued at $1 billion or more, known as unicorns, is coming to an end for the time being.

A little bit of the luster has come off a lot of the unicorns, Kaplan said. A lot of them have had trouble maintaining their values.

Some observers see a softening in the VC sector as posing risks to future innovation.

Its certainly on the decline, and its a not-so virtuous cycle, Mark Cuban, the owner of the Dallas Mavericks who made his fortune in the dot-com era with broadcast.com, said in an email interview. Fewer exits mean less money to invest in new deals.

But while most observers take a cautious approach to the sector for now, few foresee a calamitous decline approaching the dot-com crash of 2000. Pitchbooks Cook, for instance, says its more likely that the sector will slip back 2013 levels, when VC firms raised about $24 billion from investors compared with the $37 billion expected to be raised this year.

And some say its still too early even to call a peak in the VC cycle. A report by PriceWaterhouse Coopers and the National Venture Capital Association notes that the $47.2 billion invested by VC firms in startups in the first three quarters of 2015 was higher than the full-year totals for 17 of the last 20 years, indicating continued momentum heading into the current quarter. Whats more, the report notes 1,070 individual funding deals recorded in the third quarter, although 11 percent below the second-quarter figure, is roughly in line with the number of deals per quarter going back to 2011.

Tom Ciccolella, who heads PriceWaterhouseCoopers US venture capital market group, also noted that the overwhelming majority of the largest VC deals of all time, including those raising $1 billion, were done in 2014 and 2015.

I dont know if were in the sixth inning or the third or there are two outs in the bottom of the ninth, he said.

Predictions about the sector are particularly difficult these days, analysts say, because the VC sector rarely held on to startups once they were valued at billions or even tens of billions of dollars. Snapchat Inc. in Venice and Uber Technologies Inc. in San Francisco fit that category.

The sector has crossed into a new era in which companies grow to maturity in the private markets and achieve levels of revenue growth, and in some cases, profitability, not seen in the dot-com era. As a result, any funding or exit slowdown is far less threatening, analysts and observers say, because many startups have the wherewithal to continue to grow on their own.

Its a paradigm shift in the way these companies are financing themselves, said Bill Siegel, head of Nasdaq Private Market, a unit of Nasdaq Inc. that helps large privately held companies manage their shares. Its the new normal.

Still, even those who believe that its too soon to call a peak say a cautious approach to the sector is in order.

We all know were in uncharted, unprecedented territory, PriceWaterhouseCoopers Ciccolella said, recalling the dot-com crash. Its good to keep an eye on it because of where weve been.

———

Â2015 Los Angeles Times

Visit the Los Angeles Times at www.latimes.com

Distributed by Tribune Content Agency, LLC.

_____

Topics: t000181653,t000156231,t000002537,t000002731,t000040342,t000023124,t000182022,t000182050,t000023142,t000023146

5 signs of employee financial stress

Photo: AP

Employees, heads up. Your boss may be watching you.

Many employers are concerning themselves with employees financial wellness far more these days than they used to, going beyond simply providing a retirement plan and/or health care benefits and offering a number of workplace assists.

Hundreds raised for charity as the beard gets the shave

“We will be fundraising all year and have lots of events planned, we have received a lot of support from local businesses and we are very grateful.”

A spokesperson for Luton Borough council said: “Luton CCG routinely funds insulin pumps in children where the patient meets national criteria (as in the National Institute for Health amp; Care Excellence (NICE) Technology Appraisal 151).

“Where a clinician wishes to prescribe an insulin pump for a child who does not meet the nationally set criteria then the clinician may put in an individual funding request putting forward a case for exceptionality.

“Luton CCG has only one record of an individual funding request for an insulin pump in a child and this request was approved.”

Scrap DB to Save Public Pensions, Says Think Tank

The UK’s local government pension schemes (LGPS) should move
from defined benefit to defined contribution (DC) by 2018 to escape an impending
funding crisis, according to a leading think tank.

“It would be a tragedy if the LGPS were to be forced to make the move to DC.”In a report published yesterday, Michael Johnson, research
fellow at the Centre for Policy Studies (CPS), claimed the 89 public pension
funds in England and Wales that make up the LGPS faced a “cash flow crisis” and
remained unsustainable in the long term–despite plans to increase efficiency
through pooling.

The LGPS’ cash flow “faces a perfect storm,” Johnson wrote, due
to pressures resulting from underfunding, declining prospects for future
returns, an aging membership, and a “crippling” accrual rate.

According to March 2013 valuations, the 89 pensions were
roughly 80% funded on average. However, individual funding ratios ranged from
56% to 101%–and the pensions are not all valued in the same way.

The LGPS was overhauled at the start of 2014, moving from a
final salary to a career average defined benefit (DB) system. But Johnson
argued a defined contribution structure, with individuals taking on investment
and longevity risk, was the only way to ensure local authorities’ pensions were
sustainable. He cited the National Employment Savings Trust as a potential
provider of DC services: “There should be no need for taxpayers to fund another
administrative structure.”

“The LGPS has been allowed to become a staggeringly inefficient, self-serving empire.”Karen Shackleton, consultant to a number of local authority
pensions with AllenbridgeEPIC Advisers, agreed that the LGPS’ funding situation
had to be addressed, but said it would a “tragedy” if local government workers
lost out on DB guarantees.

“There comes a point where we have to ask, ‘What are we going
to do about this?'” Shackleton said. Some LGPS funds face the prospect of a
negative cash flow in the near future, she warned, as job cuts lead to lower
employee contributions while demographics push liabilities higher.

“DC is the obvious answer,” Shackleton added. “But it would be
a tragedy if the LGPS were to be forced to make that move. We are talking about
[employees] that are not paid a lot of money.”

The prospect of smaller DC pensions for such workers could put
pressure back on the government through the welfare system if pension savings
are insufficient, Shackleton argued.

“It is likely that the outcome would be much worse for
pensioners if the LGPS moved to DC, but better for the government,” said William
Bourne, director at consulting firm City Noble. “I understand that the world is
moving that way but pensioners will lose out.”

“Why is the LGPS where it is? It’s largely down to government policy over the last 20 years.”Bourne agreed with Johnson’s assertion that LGPS funding was
unsustainable, but claimed there were other solutions than the radical move to
DC, including a change of accounting measure. Using the government actuary’s methods
of calculating unfunded pensions, Bourne said, would reduce much of the
shortfall in local authority pensions.

Johnson also claimed that collaboration between LGPS funds was
“not necessarily the panacea that many believe.” While he supported UK Chancellor
George Osborne’s plan to create six large “British Wealth Funds” from LGPS
assets to lower costs and improve economies of scale, Johnson said such a move
would not bring about the “transformational change necessary to put the LGPS on
a sustainable footing.”

“The LGPS has been allowed to become a staggeringly
inefficient, self-serving empire,” Johnson wrote, “the interests of those who
work within it, or provide services to it, riding roughshod over the interests
of its membership, employers, and taxpayers, as well as common sense and
economic rationale.”

AllenbridgeEPIC’s Shackleton defended local authority pension
funds, however, arguing that in most cases the investments had been well run
despite limited resources.

“Blaming the situation on the authorities is misplaced,”
Bourne added. “They have done a pretty good job. Why is the LGPS where it is?
It’s largely down to government policy over the last 20 years. If you look at
the numbers, the returns have been pretty good.”

Read Johnson’s report, “LGPS
(2018)”, in full.

Related: London United
amp; UK
Government Said to Target £30B Public Asset Pools

Nick Reeve | nreeve@assetinternational.com | (44) 207 397 3827

New year, new financial outlook: Tips for 2016

  1. Listen

    New year, new financial plans: Ruth Hayden shares 2016 tips

You didnt win the lottery, so now what?Karen Bleier | AFP / Getty Images file

Subscribe to the MPR News with Kerri Miller podcast

January is the ideal time to take stock of your finances and make a plan for your money, according to financial educator Ruth Hayden.

Obama Seeks to Boost Financial Assistance for States’ Medicaid Expansion

The Obama administration is proposing to extend a financial sweetener the federal government offers states that expand their Medicaid programs, in a bid to persuade more to do so before the president leaves office.

White House officials said President Barack Obama will ask Congress to include three years of full federal funding of expansion for any state that extends eligibility for the program to most low-income residents. Officials…

What do financial journalists think of ‘The Big Short’?

The idea here was pretty simple. With “The Big Short” getting some Hollywood love at today’s Oscar nominations — it received nominations for Best Picture, Best Director, and Best Adapted Screenplay — I’d chat up local business/financial columnists and gurus for their impressions of the movie. Impressed, distressed, bored … whatever.

As Paul Krugman,one of the few in the press who foresaw the financial crisis, wrote about the movie: “You don’t want me to play film critic; you want to know whether the movie got the underlying economic, financial and political story right. And the answer is yes, in all the ways that matter.”

Quickly my problem became this: Almost none of the locals had seen it. There’s no law requiring anyone to be a movie buff. But after three weeks on screens all over town and very good to enthusiastic reviews, you’d think people with, presumably, a higher-shy;than-shy;average interest in how The Great Recession went down and who saw it coming would find time and invest $10 in a ticket.