Let the Show Begin

Waiting for my youngest son (above) to participate in his first nativity play yesterday afternoon, I tried not to look at my Bloomberg app. Or think of the roller-coaster the financial markets could embark on if we were to get a surprise from the U.S. Federal Reserve later in the day.

When my son arrived in the gym hall, I could see his excitement with dad in the front row. I arrived early just to make sure I’d get a good seat (and parking). As the older kids and teachers started their introductions, etc. I could see my son’s excitement start to wane as he sat with his classmates waiting for the show to begin.

Bump up not lift-off

Just like the millions of professional investors who literally were sitting on their hands for most the day waiting for Janet Yellen and the Federal Open Market committee at the same time. Providing us their interest rate decision so we can move on with our day. Which makes me wonder, why they don’t hold the conference first thing in the morning and help reduce the anxiety on trading floors worldwide!? One of many humble suggestions I can give to central bankers if I were to get in a room with them.

So now we finally have the much-anticipated interest rate hike in the U.S. It’s not a major move. However it’s the potential of it becoming the beginning of the end of low-interest rate environment that has some economists and “fed watchers” all excited.

But what does it mean for most investors and business managers? Based on my crystal ball and the Economist in me (yes, I do have a degree in Economics), I don’t think we’re going to be out of the low-interest rate environment anytime soon.  The U.S. economy is not healthy enough to be able to sustain series of interest rate rises based on the data I’ve seen. Sure the U.S. jobless rate is the lowest it’s bee in seven years. We’ve seen relatively good performance out of the U.S. economy over the past few years. But the U.S. is not immune to the global economic slowdown and will have to tread very carefully to avoid falling into a recession.

But it doesn’t matter what I or you think about interest rates. It is what it is. It will be what it will be. Many investors and business managers spend too much time trying to figure out what will happen. And often times what ends up happening is what we least expected. We simply need to understand the possible scenarios, what impact these scenarios will have on our assets or earnings, and take steps to mitigate the impact of these potential scenarios. Or preferably how to benefit and improve the financial position under these various scenarios. Difficult but not impossible.

What it means to you?

As an equity investor I don’t see any significant impact from the interest rate hike on my portfolio. Since most of my companies have low debt and I’m defensively positioned. However if interest rates do start to increase steadily over the next year, the already fully valued equity markets in the U.S. could see major price declines.

For the struggling pensioners and savers relying on interest income, it’s too early to start rejoicing. The quarter basis point increase or 0.25% is nothing to cheer about just yet. Over the past almost decade savers have been punished with huge transfer of wealth from savers to debtors by means of a low-interest rate. They will not see improvement in their miserable investment income anytime soon.

Business managers need to become more prudent with their accounts receivable to ensure they get paid timely and proactively monitor their clients financial positions. Bad debt is often a silent killer on balance sheets.

Key is to seriously consider what are the implications of a series of interest rate hikes next year. That would significantly increase the cost of borrowing despite interest rates still being near historical lows.

As a business manager you need to be conscious of potential change in interest rate environment and the economic instability or recession it could trigger. Be extremely careful taking on debt and on the other hand if requiring financing to do it sooner rather than later.

An interesting fact is that credit markets have been tightening well before yesterday’s interest rate increase. Goldman Sachs tracks a financial conditions index which measures and incorporate factors such as stock prices, credit spreads, interest rates, and the exchange rates to determine the impact of the interest rate movements.

According to Goldman Sachs estimate, it says that every 1% rise in the federal funds rate shows up as 1.5%  increase in the index.  The index sits at the highest level it’s been in five years since September of this year. Borrowing costs for business could increase dramatically over the next few years if interest rates continue to rise.

Get ready for a quite a show

But at least the December interest rate hike is done and dusted. Investors are in for quite a show as market participants (primarily economists) will continue their obsessive discussions of how much and when interest rates will rise next year.

Smart equity investors will ignore them and carefully look at valuations and rotate out of momentum and high-beta shares in favour of value and distressed equity. Speaking of distressed equity, energy shares which have taken brunt of the tax-loss selling may finally stabilize. Successful investing over the long-term is always about quality assets and cash flow.

I don’t know if the Santa Claus rally will transpire over next few weeks. But either way Mr. Market can now get the show on the road.

Happy holidays to everyone!

Giving Away Money (While You Can)

I applaud Mark Zuckerberg and his wife Priscilla’s announcement this week to give away 99% of their Facebook shares to a new charitable foundation. The news brought to the forefront the Giving Pledge initiative started by Bill Gates and my mentor Warren Buffett. The duo challenged the world’s richest families to join them in not hoarding their money but using it for the greater good.

Bill and Melinda Gates said in a statement after the Zuckerberg-Chan news said: “As for your decision to give back so generously, and to deepen your commitment now, the first word that comes to mind is: Wow. The example you’re setting today is an inspiration to us and the world. We can be confident of this: Max and every child born today will grow up in a world that is better than the one we know now. As you say, ‘seeds planted now will grow.’ Your work will bear fruit for many decades to come.”

Added Buffett in a statement: “A combination of brains, passion and resources on this scale will change the lives of millions. On behalf of future generations, I thank them.”

Now you don’t have to be a billionaire to pledge and make a difference. Each and every one of us can make a committment to be more responsible with our money and making sure we give it away while we can.

To inspire us we have the likes of Zuckerberg and according the Generosity Index (calculated as the ratio of lifetime donations to current net worth in U.S. dollar figures), there are many unsung heroes who have truly made a sacrifice and given away the vast majority of their fortune during their lifetime.

Ranking in absolute dollar terms, they most generous as posted on Business Insider are:

1. Bill Gates

Co-founder of Microsoft

Lifetime donations: $27-billion

Net worth: $84.2-billion

Generosity Index*: 32%

2. Warren Buffett

Chairman and CEO of Berkshire Hathaway

Lifetime donations: $21.5-billion

Net worth: $61-billion

Generosity Index: 35%

3. George Soros

Retired founder of Soros Fund Management

Lifetime donations: $8-billion

Net worth: $24.4 billion

Generosity Index: 33%

4. Azim Premji

Chairman of Indian consulting and IT company Wipro

Lifetime donations: $8-billion

Net worth: $15.9-billion

Generosity Index: 50%

5. Charles Francis Feeney

Retail magnate

Lifetime donations: $6.3-billion

Net worth: $1.5-million

Generosity Index: 420,000%

6. Sulaiman bin Abdul

Aziz Al Rajhi

Co-founder of Al Rajhi Bank

Lifetime donations: $5.7-billion

Net worth: $590-million

Generosity Index: 966%

7. Gordon Moore

Co-founder of Intel

Lifetime donations: $5-billion

Net worth: $6.5-billion

Generosity Index: 77%

8. Carlos Slim Helú

Chairman of Grupo Carso

Lifetime donations: $4-billion

Net worth: $27.3 billion

Generosity Index: 15%

9. Eli Broad

Former CEO of SunAmerica

Lifetime donations: $3.3-billion

Net worth: $7.3-billion

Generosity Index: 45%

10. George Kaiser

Chairman of BOK Financial Corp.

Lifetime donations: $3.3-billion

Net worth: $9.3-billion

Generosity Index: 35%

13. Mark Zuckerberg*

Founder and CEO of Facebook

Lifetime donations: $1.6-billion

Net worth: $40.7-billion

Generosity Index: 4%

Insights from Global Ethical Forum 2015

“I am at peace. If you see graft and don’t speak out against it, you are part of the system that enables it. I was unable to let it continue to happen and weigh on my conscience.” stated HRH Muhammad Sanusi II, Emir of Kano and former Central Bank Governor of Nigeria in an extraordinary live on-stage interview at the end of the Global Ethical Finance Forum held last week at the prestigious Balmoral Hotel in Edinburgh, Scotland.

The interview with the Emir of Kano was the perfect culmination for the two-day forum which gathered 300 delegates from across the ethical finance industry including Islamic Finance, Socially Responsible and Impact investing. The delegates included industry leaders, academics, students, and financial service participants from across the Middle East, Africa, East Asia, Europe and North America.

The candid and informal interview with the Emir of Kano describing his own personal experience as the former central bank governor of Nigeria during the credit crisis of 2008. His experience and advice for Islamic bankers was to install safeguards to eliminate corruption and to hold accountable individuals for their irresponsible actions. He feared that we were heading towards another global financial crisis as many of the issues from the previous banking crisis remained unresolved.

The Emir further clarified that ethical finance to fully be a leading part of the future of global finance; it must not only incorporate Islamic finance and other faith groups but also provide a real value proposition that puts the customers and depositors ahead of the equity stakeholders. A key issue in the current financial system as current banking and financial regulations favoured the equity holders of the bank which typically account for only 10% of the assets at the expense of the customers (deposit holders) that have contributed the remaining 90% of the bank’s assets.

The Emir also highlighted an underlying holistic issue for conventional banking which is also shared by most Islamic banks; failure to contribute to the good of the society with emphasis on fairness and social justice.

Almost certainly most of the delegates at forum shared the views of the Emir and even Keith Brown MSP, Scotland’s Cabinet Secretary for Infrastructure, Investment & Cities in his opening remarks stated, “Creating a fairer society is not just a good on its own, it is also essential for long-term prosperity.”

The renowned Dr. Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, the leading voice of emerging markets stressed the need for sustainable economic development saying: “The value of financial intermediation includes mobilize savings, promoting the efficient allocation of resource, reducing informational asymmetry, and manage risks. Emerging markets have benefited from transformative role of finance in the development of emerging markets in the 21st century.”

So indeed the forum provided a great platform for discussion between Islamic finance and conventional finance on a unified platform of “ethical” finance. Panel discussions included investment screening processes, green bonds and sukuks, regulation, technology and the summary of the newly released Responsible Finance Report produced by Thomson Reuters and the Responsible Finance Institute.

The forum reaffirmed the similarities between ethical and Islamic finance but also brought to light a key issue for Islamic financial institutions that is often overlooked; is it possible for a product to be “Shariah Complaint” and not ethical?

The answer is yes. One panel discussion highlighted this very issue and discussed ways to incorporate ethical guidelines in Islamic finance products to make the product not just be Shariah compliant on the surface but Islamic to the core.

A simple example helped delegates understand the issue at hand. A clothing manufacturer with no debt and meeting other generally accepted Shariah screening metrics which typically are financial ratios and business or product being of a halal nature would pass as being a Shariah compliant investment. However, the company is using suppliers in Thailand which are employing child labour or have exploitive employment practices. Shariah screening would fail to capture this issue which is clearly against Islamic or Shariah principles.

Socially responsible investing employing Environmental, Social, and Governance screening would be able to capture the issue of child labour as it would extend its screening beyond the surface of the company to look at the supply chain and practices of the company.

Shariah screening in most cases would fail to capture unethical practices of any business and would wrongly pass off businesses as being Shariah compliant despite their un-Islamic business practices. Panellists suggested Shariah scholars be given a broader mandate which would include assessment of the business operations. Perhaps even having Shariah scholars sit on the boards of financial institutions or companies so they can see that board and management decisions are being made in an ethical responsible manner.

Then we would surely solidify ethical and Islamic finance by ensuring that every Islamic finance product is truly ethical meeting the requirements of responsible Muslims and non-Muslims alike.

Learn more about HRH Emir of Kano

Download PDF copy of the article.

Identity Crisis for Gold?

Gold prices hit a five year low yesterday. Many gold shares on the other hand hit decade year lows or in the case of one of the largest gold miners in the world, Barrick Gold Corp. of Canada share prices fell to levels not seen since the 1990’s!

Yesterday’s sell-off can conveniently be blamed on the Chinese who revealed less then steller gold holdings on Friday. Followed with an investor dumping $1.7 billion worth of gold shortly after market opening in Asia causing a “flash crash” of a kind in gold prices which dropped 4% in a matter of seconds.

Gold has traditionally been a good hedge against inflation and a weaker U.S. dollar. Unfortunately neither scenarios are at play with the U.S. dollar acting like a runaway train and Europe battling deflation risks.

But you would think the EU/Greek debt crisis and the Chinese stock market sell-off would have diverted some assets to the safety of gold over past few weeks. Especially considering gold prices are 40% off their peak of $1,900 seen in 2011 and represent good relative value.

Could there be a more serious underlying issue for gold? As an equity investor in gold miners and explorers, I’m concerned about the long-term supply demand for gold. I’m been underweight gold in our portfolios but haven’t abondoned the sector (yet). I see a great short-term trading opportunity in gold shares for active investors. But I also see cracks in the long-term viability of gold as a safe-haven.

© Suhail Ahmad

Canada’s First Impact Angel Network

“Reason often makes mistakes, but conscience never does.” – Josh Billings

Earlier this week, Canada witnessed first of its kind partnership between government and private sector as Province of Ontario is making it easier for businesses that have a positive social or environmental impact to get funding needed to grow and succeed in the competitive angel investing market.

The province, in partnership with the Network of Angel Organizations-Ontario (NAO-Ontario), is launching the Impact Angel Alliance. The Alliance will encourage more investors to help kick-start promising, high-growth social ventures in Ontario. This will be Canada’s first impact investing angel network.

The Alliance will work with NAO-Ontario to:

  • Raise awareness of social ventures among established angel investor groups.
  • Help diversify angel group membership to help bring in more women, visible minorities, and new Canadians.
  • Bring together angel groups and non-traditional funding partners to increase co-investment into social ventures in priority areas, such as community health and sustainable craft industries.
  • Research emerging trends, challenges and opportunities in impact investing to reduce risk, save time and attract better opportunities.

Supporting investment in businesses that have social or environmental benefits is part of the government’s plan to build Ontario up. The four-part plan includes investing in people’s talents and skills, making the largest investment in public infrastructure in Ontario’s history, creating a dynamic, innovative environment where business thrives, and building a secure retirement savings plan.

Source: Ministry of Economic Development (Canada)