BY SWAHA PATTANAIK

Frankenstein may have created a monster but imagine stitching together a global, post-pandemic economic version of Mary Shelley’s fictional creature. This would be a country with the strengths of its global counterparts but not their weaknesses, and perfectly positioned to thrive post-Covid-19.

Changes to how people work, live, and consume will outlast 2020’s lockdowns. That will drive demand for information and communications technology, benefiting leaders in this field. The ideal composite country will therefore rival South Korea, where ICT accounts for nearly 28% of total trade on United Nations Conference on Trade and Development data. Nor will it just export such knowhow. Its citizens and companies would already have superb internet connections and be in the vanguard of rolling out 5G technology at home.

Economic success will also mean embracing productivity-boosting automation. That means emulating Singapore, which has a chart-topping 918 robots installed per 10,000 employees, according to the International Federation of Robotics.

Such technology can lead to the disappearance of lower-skilled jobs. But that won’t be a problem for this economic utopia, which dedicates resources to education and equips workers with new expertise. Think Switzerland, which tops the World Economic Forum’s league tables on the general level of its workforce’s skills, as well as the quantity and quality of education.

Trading partners also matter. Nations exporting to economies that tend to be resilient will fare better through future global downturns. China, whose policymakers manage activity more closely, is the ideal export destination on this count. It is the only major economy whose output won’t have contracted in 2020, the International Monetary Fund reckons.

Finally, the ideal Franken-economy of the future will have a green hue, like Denmark, which has the highest score in the Environmental Performance Index ranking produced by Yale and Columbia universities. Countries that are making good progress in becoming carbon neutral are less likely to face big cliff-edge transition costs. They are also more likely to have companies well versed in green technology, like renewables, that will be in demand for today’s less eco-friendly peers.

The ideal economy may be a fantasy but trying to be more like the best in each class is a realistic goal for policymakers in the coming year.

First published December 2020

BY PETER THAL LARSEN

Governments are the new activist investors. Not unlike the financial crisis, the pandemic liberated states to get more involved in the private sector. Bailouts have left them holding stakes in distressed companies, while security concerns have emboldened politicians to bolster strategic companies. The vital but often missing ingredient is good governance.

The belief that governments should get out of the way of business was already out of date before Covid-19. Mass privatisations of utilities and postal services often failed to deliver promised improvements in efficiency and service. Taxpayer-funded bank bailouts in 2008 ended the swagger of financial institutions.

Meanwhile, China’s economic success endorsed state-led capitalism as an alternative. At the beginning of the century, state-owned enterprises controlled just 5% of the assets of the world’s 2,000 largest companies, according to the International Monetary Fund. By 2018, they owned a fifth.

The pandemic accelerated this shift. Authorities from Hong Kong to Paris have sunk public money into grounded airlines and other flailing firms. Advanced economies committed more than 10% of GDP in the form of equity, credit, and guaranteed loans, the IMF calculates. Much of that debt may convert into equity, leaving taxpayers holding stakes, probably for years.

States have also become more proactive. Britain and Germany assumed greater powers to review foreign investments, mimicking the Committee on Foreign Investment in the United States. They’re investing directly in companies they deem strategic. The German government sunk 300 million euros into vaccine maker CureVac. Britain invested $500 million in defunct satellite operator OneWeb. Cassa Depositi e Prestiti, Italy’s sovereign wealth fund, in 2020 acquired investments in payments firm Nexi and exchange operator Euronext.

The biggest concern is that state shareholders will find their priorities get blurred. Political pressure to defend national security, develop new technology, or revive depressed regions runs counter to investment returns. A recent paper by the UCL Institute for Innovation and Public Purpose argues that governments should house their assets in arm’s-length funds with clear instructions to maximise value for taxpayers.

Singapore’s Temasek and Finland’s Solidium support the case that government ownership need not be synonymous with waste or inefficiency. Whether or not other states choose the same approach when the virus has lifted remains to be seen. Whatever path they go down, governments will be the investors to watch in the new year.

First published December 2020

BY JOHN FOLEY

BlackRock has a hotline to the bosses of the world’s biggest companies, thanks to its role managing $8 trillion of other people’s money. Having helped bring stock ownership to millions of small investors, BlackRock could go one better and give those same people the power to wield their shares in company votes.

More than half of BlackRock’s assets under management sit in index trackers and exchange-traded funds. The company run by Larry Fink buys and holds the shares, and bears the right to vote in shareholder meetings, though doesn’t itself gain or lose when stock prices move. Its funds typically own around 5% of big U.S. companies, from iPhone maker Apple to Utah’s Zions Bancorp.

BlackRock engages with thousands of companies on topics like sustainability. But sometimes its decisions are questionable. For example, BlackRock backed Chinese companies’ proposals to enshrine the Chinese Communist Party’s interests above those of investors in 2017. Expressing views on censorship, gun safety or diversity through its governance and voting policies can also make BlackRock a political target. Republican U.S. senators seized on the firm’s climate change stance as a sign of its political leanings in 2020.

Fink’s company is in part trying to channel what it hears from investors. Handing voting decisions to them directly would avoid misunderstandings. Doing so is far from simple, however, especially for products like ETFs, where BlackRock may have no direct link to the ultimate holder.

The Securities and Exchange Commission considered so-called pass-through voting in the 1970s and decided it was unworkable. But technology has advanced a long way since then. BlackRock’s Aladdin software amasses data on a scale unthinkable when it was created two decades ago. Fink’s company is buying Aperio, a technology firm that lets clients manage tailored portfolios, in a step towards giving more control to individual customers.

Introducing real shareholder democracy could be a worthy stretch project. Sure, asking most investors to vote on tens of thousands of director nominations and shareholder proposals is pointless. But giving them the option to do so, or to choose between BlackRock’s recommended voting preferences or alternative tailored policies, could be a selling point. There are technological, logistical and regulatory barriers to overcome. But connecting investors more directly to the companies they own could be Fink’s next contribution to finance.

First published December 2020

BY JEFFREY GOLDFARB

Sharing should be more caring in 2021. In one notable example of spreading the corporate wealth amid the Covid-19 crisis, Woolworths pared manager bonuses so that over 100,000 workers could have a little slice of equity in the Australian supermarket chain. If more companies followed suit in the coming year, it would create a lasting virus legacy.

The pandemic ought to bring the advantages of employee ownership into sharper relief. For one thing, research published a few years ago in the British Journal of Industrial Relations found links to much greater job security during downturns. That’s on top of the improved loyalty, work ethic, job satisfaction, wealth creation and financial literacy often associated with staffers owning stakes in their employers.

Despite these benefits, and few significant drawbacks beyond the administrative burdens, the idea has only slowly gained traction beyond Wall Street and Silicon Valley at companies like Starbucks. The percentage of U.S. private-sector workers holding equity in their companies– whether through options, share purchase programmes, 401k retirement accounts or formalised employee stock ownership plans – has been flat at about a fifth, according to the quadrennial General Social Survey.

Woolworths used the tough year as an opportunity to be more inclusive Down Under. Instead of just the usual cash or gift-card awards, the company also doled out up to A$750 ($555) in shares to full- and part-time employees to recognise them for braving bushfires and Covid-19. To help cover the cost, everyone from boss Brad Banducci to deli-counter managers took a cut in their bonuses. For about $37 million, the company in one fell swoop turned half its workforce into stockholders.

Although designed as a one-off expression of gratitude, it would be even better if Woolworths expanded the programme. There’s also time for hospital operators, restaurant chains and retailers worldwide to use equity to show appreciation for workers who provided lifelines throughout the pandemic. Walmart, for one, spent $850 million on stock-based compensation in the year to January 2020. Distributing such awards more widely should be a no-brainer.

In October, all the new employee owners of Woolworths received their first dividends. It will pay even bigger ones for the company, and others that can see clear to giving workers the gift of stock certificates.

First published December 2020

BY CHRISTOPHER THOMPSON

American cultural imports are often regarded with froideur in France. Recently, telecoms mogul Xavier Niel and banker Matthieu Pigasse received a warmer reception for their U.S.-style special purpose acquisition company focused on consumer goods. Despite the product’s poor track record in Europe, look for the SPAC craze to infect the continent’s rainmaker class.

These vehicles, set up by financiers to raise funds for unspecified deals, are rare in Europe. Prior to December, just 19 listed over the past six years, according to Refinitiv, raising $3.4 billion. In 2020 alone, bold-faced names on Wall Street like Pershing Square’s Bill Ackman raised $66 billion worth.

SPACs are often controversial because they hand outsized rewards to founders and allow companies to skirt listing rules when going public. In Europe similar vehicles have asketchy past. Vallar, the London-listed shell which raised $1.1 billion in 2010 for mining deals off banking scion Nat Rothschild’s contacts, foundered amid corporate governance problems.

Iliad co-founder Niel and Centerview Partners Paris chief Pigasse have broken the drought before. They launched Mediawan in 2016, which bought European media businesses. Their new venture, 2MX Organic, comes as the volume of initial public offerings has declined for the last three years. Just $17 billion was raised in 2020, down 20%. European investors are hungry for new ways to put capital to work.

The Frenchmen won’t be alone. The continent is chock-full of dealmakers and bankers who, like their American cousins, have the track records needed to win investor backing. Consider former bank chief executives like Jean Pierre Mustier of UniCredit and Tidjane Thiam of Credit Suisse. Or ex-UBS investment bank head Andrea Orcel.

Similarly, notable M&A grandees like Erik Maris in France or Claudio Costamagna in Italy may find a role model in former Citigroup executive-turned-rainmaker Michael Klein’s four U.S. SPACs. Gallic tech entrepreneur Marc Simoncini or Germany’s Samwer brothers, founders of Rocket Internet, could be in the mix. Even blank-cheque mining vehicles may stage a comeback: Imagine Glencore’s departing CEO Ivan Glasenberg buying his former company’s coal assets.

At least 10 European SPAC deals are in the pipeline, Reuters reports, set to raise some $3 billion. True, that’s small compared to the United States. But like other cultural imports, good and bad, what happens in America eventually makes its way across the pond.

First published December 2020

BY PETER THAL LARSEN

Banks will find deposits a growing liability in 2021. Turning short-term savings into long-term loans has been the bedrock of banking for centuries. Yet the pandemic threatens to strain that business model to its breaking point.

The industry was already under pressure before Covid-19. Low interest rates squeeze the margin banks earn from lending out deposits. The coronavirus crisis saw rates fall further, while customers rushed to stash spare money in the bank. U.S. deposits swelled to $15.7 trillion by the end of September, 21% higher than a year earlier, according to the Federal Deposit Insurance Corporation. Customers of British banks had 12% more on deposit at the end of October than at the start of 2020.

The pressure on lending margins will only grow as borrowers refinance loans at cheaper rates. McKinsey reckons bank revenue will be 14% lower than its pre-crisis trajectory by 2024, wiping out $3.7 trillion in cumulative top-line income. Though lenders can respond by cutting more costs, they will also have to take further-reaching steps. HSBC Chief Executive Noel Quinn, who oversaw customer deposits worth almost $1.6 trillion at the end of September, plans to beef up fee-based businesses, and may charge customers in some markets for holding their money. Rivals would probably like to do the same.

The crunch is also upending bank regulation. Authorities have long focused on deposit-taking institutions. Banks accepted cumbersome capital and liquidity requirements as a worthwhile tradeoff for privileged access to cheap, stable funds. The 2008 crisis reinforced the view that deposits are preferable to flighty funding from wholesale markets.

But upstart financial groups have bypassed deposits while eating into banks’ revenue. Companies like Global Payments, Adyen and Stripe have built businesses valued at more than $50 billion each by processing electronic transactions. China’s Ant lets its 700 million users make payments, borrow money, and buy investment products from their smartphone without accepting conventional bank deposits. Indeed, as deposit accounts that offer interest disappear, customers will be even more inclined to leave their cash with online firms that pay them nothing.

Banks can’t easily change their business models to focus on fees, though. Lenders on average earn between 50% and 75% of revenue from interest income, McKinsey reckons. The old privilege of safeguarding customer money increasingly seems like a burden.

First published December 2020