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Safe Money into Emerging Markets: Funding the Gap

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Development finance institutions (DFIs) have a rich history with assisting emerging market participants in funding much needed infrastructure projects. However, the nature of these DFIs is that of a policy driven multinational juggernaut, which could at times skew bargaining positions of emerging market borrowers.

For emerging market borrowers, the idea of policy driven requirements could sometimes be seen as a convenient safeguard to fall back on when negotiations became tense. DFIs would also provide standard form documents as a base on which to begin negotiations and would leverage their position on similar financings where these documents were used. From the DFIs perspective, some of these transactions could be considered high risk, whether in the form of regime changes, volatile industries, or concerns on repayment. There is also a reputational aspect to consider, especially with the additional magnification of ESG requirements.

The debt offered from DFIs is not cheap, on the contrary, commercial terms are usually onerous on borrowers. Most DFIs do not take hard collateral either as the back office burden of managing an asset is wrought with complications (that once again link to policy). Usually cash collateral is preferred, however the fundamental issue with that approach is that cash collateral could be used elsewhere.

Towards the late 2000s, a trend started to develop where sovereign money from developed economies started being pushed into emerging markets. By 2009, China became the largest trade partner in Africa and was (and still is) the largest bilateral lender for public sector loans across the continent. The debt offered presented a stark contrast the policy laden DFI debt that African borrowers were accustomed to, and allowed borrowers to accelerate growth plans for much needed infrastructure.

This new debt was to usher in a new age of economic prosperity for Africa. However, details of these financing arrangements were not made public in most instances, save for terms like below market interest rates and extended grace periods on debt. By looking at market indicators it became apparent that the true costs of this debt were ring fenced elsewhere into the structure.

Resource backed lending is not novel by any means and forms the foundation for pre-export financing transactions. However, the concept is not without controversy, as borrowing countries must commit future revenues to be earned from its natural resource exports to service the over-arching loan. On its own the model is commercially acceptable when there is a stable market for the underlying commodities, however where is a dip in the price of these commodities the results can be catastrophic. Unable to service loans, African states would either turn to the IMF for a bail-out or be forced to honour the terms of hard collateral terms.

Africa started to turn away from these debt arrangements, knowing that the IMF would no longer assist and that aggressive collateral terms and low-priced debt are a fatal concoction. Evidence of this change in dynamic includes the slowing down of the belt and road initiative, as well as a 30% drop in committed Chinese loans into Africa between 2018 and 2019. We are past the peak. There is a gap left, one which would represent a middle ground between policy laden expensive debt, and cheap collateral heavy debt.

The gap has attracted institutional investors, who are regarded as safe money financiers. As opposed to outright loans, these investors prefer a portfolio of capital market instruments which indirectly offer emerging market participants capital holidays while servicing coupons only. Investing in these markets has also been made easier through de-risking instruments offered by DFIs. Apart from de-risking, these safe money investors are attracted to emerging markets due to portfolio diversification, extended geographical footprint and ESG impact.

Portfolio diversification has become more prevalent in light of the unstable macro environment of the global landscape. Whether it be wars, inflation or political uncertainties, the need to have a portfolio of assets that can counterbalance each other is crucial for risk averse underlying investors.

Exposure to perceived high risk industries could also be more profitable going forward, as produce from industries like agriculture will retain value as the cost of living increases. These industries also offer institutional investors the ability to scale at levels of what they are comfortable with, with different tenors of debt which allows for a diverse cashing out policy that can promote liquidity at different intervals. This principle goes hand in hand with geographical diversification, as with uncertainty looming in the West (and the East), countries or regions which remain out of the political limelight may be safer options to have exposure to. This would also offer institutional investors a degree of neutrality given the current global climate.

Probably the most obvious synergy between institutional investors and emerging market projects is the steady supply of sustainably linked investments. We saw this with the influx of investments by US State pension investors in Kerala, with the trend extending to agriculture projects in Africa. De-risking takes some of the sting out of what could be perceived as putting capital at risk in order to bolster ESG credentials, but sheer variety and volume of pipeline transactions serves as a risk mitigator in itself.

There is a funding gap, but not for long. Institutional investors can take the middle ground between aggressive debt and cautious debt. What has accelerated this trend is the ESG agenda that has come to the forefront both in collective consciousness and in finance. The next decade will determine how successful this trend can be, but there is ample opportunity for both emerging market participants and safe money to create a mutually beneficial, and most importantly, scalable relationship. It would seem that each party would have a paramount role is shaping the policy of the other.

 

Marc Naidoo is a finance partner in international law firm, McGuireWoods’ London office.  His practice focuses on emerging markets, with a particular emphasis on Africa and sustainable finance.

 

Banking

Wealth Managers and the Future of Trust: Insights from CFA Institute’s 2022 Investor Trust Study

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Author: Rhodri Preece, CFA, Senior Head of Research, CFA Institute

 

Corporate responsibility is more important than ever. Today, many investors expect more than just profit from their financial decisions; they want easy access to financial products and to be able to express personal values through their investments. Crucial to meeting these new investor expectations is trust in the financial services providers that enable investors to build wealth and realise personal goals. Trust is the bedrock of client relationships and investor confidence.

The 2022 CFA Institute Investor Trust Study – the fifth in a biennial series – found that trust levels in financial services among retail and institutional investors have reached an all-time high. Reflecting the views of 3,588 retail investors and 976 institutional investors across 15 markets globally, the report is a barometer of sentiment and an encouraging indicator of the trust gains in financial services.

Wealth managers may want to know how this trust can be cultivated, and how they can enhance it within their own organisations. I outline three key trends that will shape the future of client trust.

 

THE RISE OF ESG

ESG metrics have risen to prominence in recent years, as investors increasingly look at environmental, social and governance factors when assessing risks and opportunities. These metrics have an impact on investor confidence and their propensity to invest; we find that among retail investors, 31% expect ESG investing to result in higher risk-adjusted returns, while 44% are primarily motivated to invest in ESG strategies because they want to express personal values or invest in companies that have a positive impact on society or the environment.

The Trust Study shows us that ESG is stimulating confidence more broadly. Of those surveyed, 78% of institutional investors said the growth of ESG strategies had improved their trust in financial services. 100% of this group expressed an interest in ESG investing strategies, as did 77% of retail investors.

There are also different priorities within ESG strategies, and our study found a clear divide between which issues were top of mind for retail investors compared to institutional investors. Retail investors were more focused on investments that tackled climate change and clean energy use, while institutional investors placed a greater focus on data protection and privacy, and sustainable supply chain management.

What is clear is that the rise of ESG investing is building trust and creating opportunities for new products.

TECHNOLOGY MULTIPLIES TRUST

Technology has the power to democratise finance. In financial services, technological developments have lowered costs and increased access to markets, thereby levelling the playing field. Allowing easy monitoring of investments, digital platforms and apps are empowering more people than ever to engage in investing. For wealth managers, these digital advancements mean an opportunity for improved connection and communication with investors, a strategy that also enhances trust.

The study shows us that the benefits of technology are being felt, with 50% of retail investors and 87% of institutional investors expressing that increased use of technology increases trust in their financial advisers and asset managers, respectively. Technology is also leading to enhanced transparency, with the majority of retail and institutional investors believing that their adviser or investment firms are very transparent.

It’s worth acknowledging here that a taste for technology-based investing varies across age groups. More than 70% of millennials expressed a preference for technology tools to help navigate their investment strategy over a human advisor. Of the over-65s surveyed, however, just 30% expressed the same choice.

 

THE PULL OF PERSONALISATION

How does an investor’s personal connection to their investments manifest? There are two primary ways. The first is to have an adviser who understands you personally, the second is to have investments that achieve your personal objectives and resonate with what you value.

Among retail investors surveyed for the study, 78% expressed a desire for personalised products or services to help them meet their investing needs. Of these, 68% said they’d pay higher fees for this service.

So, what does personalisation actually look like? The study identifies the top three products of interest among retail investors. They are: direct indexing (investment indexes that are tailored to specific needs); impact funds (those that allow investors to pursue strategies designed to achieve specific real-world outcomes); and personalised research (customised for each investor).

When it comes to this last product, it’s worth noting that choosing advisors with shared values is also becoming more significant. Three-quarters of respondents to the survey said having an adviser that shares one’s values is at least somewhat important to them. Another way a personal connection with clients can be established is through a strong brand, and the proportion of retail investors favouring a brand they can trust over individuals they can count on continues to grow; it reached 55% in the 2022 survey, up from 51% in 2020 and 33% in 2016.

 

TRUST IN THE FUTURE

As the pressure on corporations to demonstrate their trustworthiness increases, investors will also look to financial services to bolster trust. Wealth managers that embrace ESG issues and preferences, enhanced technology tools, and personalisation, can demonstrate their value and build durable client relationships over market cycles.

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Business

How to Build Your Credit Up Safely

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by Taylor McKnight, Author for Compare Credit

 

What Is Credit?
Credit is money owed by a person that allows them to pay off debts at a lower interest rate. Most banks use your credit score to determine how much they should lend you. Any business loan or mortgage requires that you have a good credit history. However, if someone has poor credit(www.comparecredit.com/credit-cards/credit-range/poor/), they may struggle to pay back these loans, resulting in higher interest payments, making it more difficult than ever to repay the debt. Lenders are aware of this issue and keep a close eye on your credit rating to ensure that no negative information gets reported. This could prevent you from getting another loan in the future. It is important to note that having a bad credit score does not mean you have had a bankruptcy or other kinds of defaults. Many people often face this problem because of unpaid bills or late payment fees. However, this does not mean that you cannot repair your credit – it simply means that all parties involved must work together to solve the problem.

How to build your credit safely
Building your credit score is a major concern for most people, especially if they plan to purchase something as big as a home or car. A good credit score will help one get better rates in the future and make it easier to finance their next venture. Here are some things you should know to improve your credit to be used for the best possible purposes.

1. Keep paying down your balances every month: One of the biggest mistakes that could hurt your credit score is not paying your balance down each month. People who don’t pay their credit card down within the agreed-upon time typically have high-interest rates and expensive monthly costs.

2. Pay your bills on time: The same goes for making payments on a bill. Not paying it within the specified timeframe will result in negative information being added to your report, further lowering your credit score. Ensure that your bank statements are accurate and that all accounts are up to date.

3. Become an authorized user: Some companies will allow customers to become authorized users after meeting certain requirements. Take a look at the terms and conditions before applying for this option. These programs usually give access to one particular service, such as checking or ATM transactions, but are helpful when you need additional coverage.

4. Set up automatic credit card payments: There are several ways to set up auto payment options on your credit cards, including sending them directly to your checking account via email or the phone. In addition, you may want to consider enrolling in online banking services that automatically make payments from your checking account into your credit card accounts.

Other tips when it comes to credit
1. Learn how to manage debt responsibly. This is true for both personal and business debts. Many people tend to spend more than they earn, especially during rapid growth and expansion. If you find yourself facing difficult circumstances, you can seek assistance by talking to friends and family members, getting professional advice, or using online budgeting tools.

2. Don’t skip any repayments. This rule applies specifically to late payments. You need to continue making regular payments, even if you’re behind by a few days or weeks. Once you miss a payment, you’ll start accumulating late payments that negatively impact your score.

3. Try consolidating your loans. Consolidation involves combining multiple small loans from various sources into one large loan, thereby lowering the total interest cost of the loan and reducing the risk associated with it.

4. Be wise with your credit report. One huge mistake most people make is neglecting to pay their bills on time or paying only the minimum due balance each month. As a result, bad information remains on their reports, impacting their scores. All outstanding balances must be paid off completely. Otherwise, negative items that remain on your report can keep you from achieving the best borrowing potential.

5. Get your questions answered. If you have any questions regarding your credit, ask for answers now rather than waiting until you’re experiencing trouble. With a little research, you should be able to learn enough to begin repairing your damaged credit report.

What to look out for that can harm your credit
1. Not checking your credit report: Most people use their credit cards frequently but fail to check their credit reports periodically. Checking at least every 12 months can give you valuable insight into whether or not there are errors on your credit.

2. Paying your bills late: Late payments can lead to hard inquiries affecting your score, which means it appears that you’ve applied for more credit elsewhere. Make sure you never miss a bill.

3 You Close Old or Inactive Credit Cards: If your close old cards, they may show up on your credit report for some time. Closing accounts can impact your score by causing “hard inquiries” that appear on your credit report. Before closing them, look for inactive or closed card accounts on your credit report.

4. You Have Negative Records: Many people think they’re protected because they haven’t had past credit problems. However, many factors may cause a “bad” rating to linger. A single application for a credit product with a low limit may count towards a negative review.

5. There Are Errors on Your Report: Mistakes such as missing debt or inflated balances can damage your credit report. Find out how much money you owe and what types of products you purchased, then try to dispute those entries on your credit report. Ensure you correct any information that needs to be corrected. Failing to do so could hurt your chances of getting approved for future credit.

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