The Irkutsk Region of Eastern Siberia is prosperous in gas resources, but gas supply is in little use for industrial needs or residents — gasification of the region is only about 10 percent. Natural gas in Eastern Siberia has not been in demand for decades due to a lack of transportation infrastructure and sales markets. That’s all set to change with the commissioning of the Irkutsk Polymer Plant in the district of Ust-Kut.
As Yakov Ginzburg, General Director of Irkutsk Oil Company, a parent company of Irkutsk Polymer Plant, says: “Reasonable environmental management and the search for new business development areas in the face of OPEC+ oil production restrictions were the key triggers for transition into the vertical petrochemical enterprise.”
Since 2014, the company has been forming a gas chemical cluster in the north of the Irkutsk Region, which includes gas production, treatment, transportation and processing facilities, two helium plants, and a polymer plant. It is estimated that total investments in gas projects will amount to 500bn Roubles ($7bn); 200bn Roubles ($2.8bn) have already been invested. Gas processing plants and a gas fractionation unit are also scheduled for commission in 2022.
The first helium plant will be put into operation in 2022, with a second plant scheduled to start operations in 2025. The total production output is expected to be 15–17 million litres of liquefied helium per year, turning the Irkutsk Oil Company Group into the second largest helium producer in Russia and among the top 10 in the world.
The Irkutsk Polymer Plant – the construction of which is now 40 percent complete – is the largest component of the gas chemical cluster. It is scheduled for commissioning in 2024, with a production capacity of 650,000 tonnes of commercial grade polyethylene per year.
More than 2,000 people are currently working on the site of the plant, with the Japanese engineering company Toyo Engineering responsible for design, equipment and material supply, and Gemont (Turkey) working as the general contractor on both the polyethylene and ethylene plants. Engineers and labourers come from all over Russia, as well as from Japan, Turkey, France, Holland and the USA. At the end of 2022 the number of employees will increase to between 7,000 and 8,000.
The total cost of the Irkutsk Polymer Plant is estimated at 250bn Roubles ($3.5bn), which includes the construction of a housing estate for the plant’s employees in Ust-Kut. Compared to initial estimates, the amount has increased due to the rise in the cost of materials including steel and concrete, as well as labour costs for construction and installation work.
Irkutsk Oil Company has developed its own energy-saving and green technologies
During 2020 and 2021, earthworks and foundations for large equipment were carried out at the site, the installation of which began in June 2021 and was completed in September. In total, 44 units of large equipment have been installed at the polymer plant. They were delivered to Ust-Kut from the South Korean port of Masan via the Northern Sea Route in the summer of 2020. A 500-tonne purge bin was the last piece to be assembled. Installed in a metal frame at a height of 60 metres, it required two cranes with lifting capacities of 1,600 (the largest in Russia) and 750 tonnes.
One hundred thousand cubic metres of concrete had been poured by the start of November this year, though that figure will have more than doubled by the end of the project. For comparison, 20,000 cubic metres of concrete were used in the construction of the foundations and concrete trunk of Moscow’s Ostankino Tower, the tallest freestanding structure in Europe. The next stage of work at the site is to install 1,100 pieces of small equipment, auxiliary equipment and systems.
Overcoming the challenges of the region
Ust-Kut, like most northern territories, has many problems. In the 1970s, during the construction of Baikal-Amur Mainline railway, it was a pleasure ground for the youth of the Soviet Union. After that, the era of stagnation began. A lack of modern social and community facilities and infrastructure, modern healthcare system and good quality education, as well as deteriorated utilities, have all been a catalyst for migration away from the region. These issues remain unresolved to this day.
Polymerization reactor
One of the challenges facing this ambitious project is a labour shortage – the launch of the polymer plant will create 1,600 new jobs. Tempting workers to relocate to Ust-Kut to fill those roles will be key to the plant’s success. In order to ensure comfortable living conditions for its personnel, the company decided to build a residential zone with capacity for 3,000 people, ample not just for plant employees but their families too. Among the facilities on offer, which will also be available to existing residents of Ust-Kut, are 30 housing developments, a school for 520 pupils with a swimming pool and a stadium, and two kindergartens. Commissioning of the first apartment buildings will coincide with the start-up of the plant; the entire complex will be ready by the end of 2025.
The Irkutsk Oil Company has played a vital role in supporting the region’s health system over the course of the pandemic, donating over 700m Roubles (approx $9.1m) so far. One of the key projects was the construction of a modern hospital with its own oxygen station for COVID-19 patients in the city of Ust-Kut. The 60-bed medical facility has single and double wards with modern equipment. The company has also contributed medicines, personal protective equipment and medical devices to other hospitals and medical institutions in the region.
A greener future
In Russia, as in the rest of the world, the green agenda has become mainstream. The Irkutsk Oil Company has long been ahead of the curve, implementing as far back as 2009 the sorts of projects that other companies only began adopting with the arrival of the ESG agenda in recent years. Irkutsk Oil Company, for example, was the first in Russia to launch recycling as part of its processes – the reinjection of gas into the reservoirs.
The company is actively engaged in reforestation, planning to plant seedlings over an area of 3,000 hectares by 2023. It’s also engaged in bioresource restoration: 500,000 juvenile graylings were released into the Lena River in the summer of 2021. An additional 120,000 fry are still to be released into the region’s water bodies. In addition, Irkutsk Oil Company has developed its own energy-saving and green technologies, and no PET water bottles are allowed on company property.
There is always scope for new ESG opportunities. A feasibility study is being developed in cooperation with Japanese partners for the production of blue ammonia, for example, a product considered to be the fuel of the future as it does not emit greenhouse gases (CO2). The company’s specialists are also studying the technologies of CO2 capture, injection and processing, as well as methane emission reduction. The company plans to create an eco-industrial park for on-site recycling.
Irkutsk Oil Company is laying the foundation for a better future and playing a vital role not just in its own industry, but in its attempt to revitalise a region and play an active part in a global agenda for change.
Formerly known as Visor Capital, Tengri Partners Investment Banking (Kazakhstan) JSC (Tengri Partners) was founded in 2004 with the aim of creating the best regional investment bank in Central Asia. Tengri Partners provides a full range of investment services and products in Kazakhstan, including – but not limited to – investment banking, securities trading and brokerage, industrial analysis, and investments. The company’s activities were recognised by World Finance, which awarded Tengri Partners the honour of the ‘Best Investment Bank in Kazakhstan’ in 2019 and 2020.
Paving the way for development
In 2018, Tengri Partners made its debut in bringing AAA-rated development financial institutions (DFIs) to the capital market of Kazakhstan. Thus, the company was first to place bonds of the International Finance Corporation (IFC) denominated in tenge on the Kazakhstan Stock Exchange (KASE) with a total volume of KZT8.6bn ($25m). For the first time, DFI bonds were included in the basket of government securities, which increases the attractiveness of the instruments for investors and, subsequently, bolsters the market activity. The transaction became a landmark event in the history of the development of capital markets in Kazakhstan. Following the IFC, Tengri Partners has successfully placed international bonds in tenge with such DFIs as the European Bank for Reconstruction and Development (EBRD) and the Asian Development Bank (ADB). The total issued volume of the AAA-rated DFI bonds in tenge in Kazakhstan currently amounts to KZT722.5bn ($1.83bn) – all of which were placed by Tengri Partners.
Introducing ESG financing
Although the topic of green financing is gaining widespread popularity in developed markets, it is too early to compare the performance of a given asset class to the conventional instruments as it is at an early stage of development in Kazakhstan. The first green bonds in Kazakhstan were placed by the ‘DAMU’ Entrepreneurship Development Fund JSC on the Astana International Exchange (AIX) in August 2020.
In turn, the debut issue of green bonds on the KASE platform is attributed to the ADB placement in November 2020 with Tengri Partners acting as a sole arranger. ADB tapped the market with two medium-term notes in the total amount of almost KZT14bn ($32m). The proceeds went to projects aimed at lowering or eliminating greenhouse gas emissions, as well as lowering the vulnerability of anthropogenic or natural systems to the consequences of climate change and enhancing resilience and adaptability.
Newly introduced green bonds demonstrated high appreciation by market participants reflecting oversubscription of 283 percent and 179.5 percent and negative spread of 10–12 bps to the government bonds despite a highly competitive environment with the ministry of finance and competition of high-grade SOEs for the spare liquidity at the time of placement.
Along with green bonds, ADB also launched the debut placement of gender bonds in Kazakhstan aimed at the achievement of gender equality and the promotion of women’s empowerment. Tengri Partners participated in this deal as a sole arranger placing about KZT8.4bn ($20m) worth of ADB bonds on KASE. Proceeds were directed to the ‘Promoting Gender Equality in Housing Finance Project,’ which focuses on increasing the lending operations of the Otbasy Bank House Construction Savings Bank JSC and promoting affordable residential mortgage loans for female borrowers in predominantly rural regions. Overall, the ESG bond market in Kazakhstan today amounts to KZT43.4bn ($102.4m), which already exhibits good opportunities for the development and stimulation of sustainable financing in the region.
Making securitisation work
Until recently, there were no precedents in Kazakhstan’s history of a multi-tranche securitisation of a mortgage portfolio based on the principle of ‘true sale’ adhering to the local law. That was due to several legislative and regulatory provisions that not only implied additional risk of loss of value for investors – especially in the event of SPV default – but also impeded fair reflection of the economic viability of the transaction and the quality of bond credit risk in the international credit rating.
Considering the amount of work and energy costs associated with initiatives to change legislation, a specific deal is often needed to clearly determine the ineffectiveness of certain provisions. Such a deal is the debut securitisation of the mortgage portfolio for the largest mortgage organisation in Kazakhstan – the Kazakhstan Housing Company JSC (KHC). It was initiated in 2019 in the amount of up to KZT26bn ($65m), and structured by Tengri Partners.
The preparation of the deal made it possible to identify the main barriers to the development of the market, gave impetus to a broad discussion of the issue at the legislative level, and served as a pretext for introducing key amendments to the legal infrastructure to bring it in line with global best practices.
The main limitation in Kazakhstan today, in comparison to more developed jurisdictions, is the lack of a full-fledged concept of subordination when registering several SPV bond issues within one bond programme. Although it is possible to prioritise the allocation of funds to investors from the proceeds on the underlying assets during the life of the SPV, the observance of such priority in the event of a default of the SPV contradicts the following provision of the law.
The second limitation is the lack of disclosure of how other parties in a securitisation transaction should be treated in case of default: service agent, custody, asset manager, management company, stock exchange, trustee, etc.
If the necessary amendments are adopted, the securitisation market in Kazakhstan has a great future
Initiated amendments by Tengri Partners and KHC account for all of these, allowing the trustee the use of cashflows from the remaining performing portfolio and recoveries for payment of third-party fees.
If the necessary amendments are adopted, the securitisation market in Kazakhstan has a great future. The reason for this is the growing loan market – the mortgage and car loan market, for example – amid a limited range of long-term funding instruments for local commercial banks and quasi-state-owned companies. In addition, given the high share of non-performing loans and, consequently, the high pressure on regulatory capital, securitisation may serve as an effective way to increase the level of banks’ liquidity and to provide capital relief without the need for government as previously observed with additional banks’ capitalisation programmes.
Global infrastructure practice
In 2021, Tengri Partners became a member of the International Swaps and Derivatives Association (ISDA). Membership in the international professional association will allow Tengri Partners to exploit the developed infrastructure of ISDA in the OTC-derivatives transactions, cooperate with industry experts on the issues of current interest, participate in the discussions of best practices and in the preparation of relevant regulatory documents. Thereby, Tengri Partners has proved that it is striving for active development of the company as a professional participant in the international capital markets and derivative instruments. Today, Tengri Partners is one of the few ISDA members in Kazakhstan.
Tracking the performance of TONIA
Overnight repo market is the most liquid segment of the capital market in Kazakhstan due to the large transaction volumes – about KZT400bn ($940m) per day – and many market participants: banks, insurance companies, funds, corporate treasuries. Tenge Overnight Index Average (TONIA) reflects a key short-term risk-free benchmark for the value of money in Kazakhstan’s financial market. In developed markets, government securities, corporate bonds, swaps and loans are linked to the analogous indicators (SOFR, SONIA, etc) to fairly reveal the change in the value of money.
In September 2021, Tengri Partners, in cooperation with EBRD and commercial banks, proposed an introduction of the TONIA compounded rate and TONIA compounded index indicators to the market on KASE. TONIA Index is a big stepping-stone to the development of the financial market in Kazakhstan assisting with liquidity enhancement and a wider range of instruments. TONIA-linked instruments will thus enable a more efficient way of investing in the risk-free money market, in comparison with the traditional rolling of position in the overnight repo market.
Launching the market analysis toolkit
In 2020 Tengri Partners commenced a PMI survey in Kazakhstan in partnership with IHS Markit that provides some of the most closely monitored reports of business activity worldwide. Thorough work has been carried out with IHS Markit in the development of the methodology and approach to calculating the PMI. The launch manifests Tengri Partner’s focus, which is to provide an essential entry point into Kazakhstan’s market for international investors and share vital analysis for investment decision, as well as to gauge market sentiment. Kazakhstan became the 44th country covered by the global PMI series from IHS Markit.
Despite turbulent conditions in capital markets over the course of 2020, and extreme volatility in the exchange rate, Tengri Partners has maintained all of its core business lines and remained focused on serving the needs of major institutional clients to a world-class standard.
BPI-Philam, the strategic alliance that allowed AIA Philippines (formerly AIA Philam Life) to offer life insurance through the Bank of the Philippine Islands (BPI), now has a new identity as BPI AIA. The redesigned brand will use its global heritage to fulfil its commitment to provide accessible, affordable, and personalised insurance for Filipinos.
The rebrand is another step in the company’s commitment to forward thinking and continual innovation and evolution. It wants to be a world-leading insurtech that stands out for its advanced technology that allows customers to ‘experience the future.’ The firm was founded in 2009 and is among the top insurance companies in the country recognised by the Insurance Commission. Its bank partner, BPI, is the leading bank in the Philippines and Southeast Asia, with a heritage of financial strength and innovation over the past 170 years.
Meanwhile, AIA Philippines has been a market-leading insurance company for over 70 years under the AIA Group – the largest independent publicly listed pan-Asian life insurance group, with a presence in 18 markets across Asia Pacific.
Strength and commitment
“As BPI AIA, this rebrand further communicates our company’s stability and commitment to our customers,” Surendra Menon, BPI AIA’s CEO, told World Finance. “The challenges we all experienced in the past years brought extraordinary changes to our customers’ lives, and as their life protection partner, we also evolve to deliver the support they need and deserve.”
Menon says the rebranding will entail an overall boost in BPI AIA’s standards of doing business. There will be significant improvements in processes and the technology it uses to service its customers. Specifically, it will be utilising data and digital tools even more efficiently to craft not simply products but solutions that will help improve the lives of Filipinos.
“Meanwhile, our people will also be more involved in every step along the customer journey. We are constantly evolving and innovating to give our customers, partners, and people the best experience whenever they engage with our brand,” he adds.
As expected, there will be an ever-increasing range and standard of services geared to how customers’ lifestyles are changing at the speed that is comfortable for them. “What we bring to our customers are the same high standards in terms of product and service quality that AIA is known for,” he continued to explain.
Alignment
Menon believes there are a number of advantages to aligning with the bigger umbrella that is the AIA Group. He says: “AIA has always been the North Star for us, we’ve always known we’ll adopt the AIA name one way or another.” AIA is a global brand that has had a positive association with the insurance industry for over a century now, so carrying the AIA name solidifies the company’s identity as a stable insurance company capable of delivering on its promises.
The mission at BPI AIA is to make sure that insurance is easy to get and easy to have for every Filipino, no matter what class they belong to
In addition, the global reinforcement of the AIA Group allows the company to tap into the industry’s best practices gained in the 17 other markets that AIA services in the Asia-Pacific region.
This will bring about continuous improvement in systems and processes, all aimed at the end goal of improving customers’ experience with insurance. BPI AIA already shares values, expertise, and levels of commitment with BPI and AIA Philippines. Customer centricity is at the heart of what they do collectively. “We are all working towards providing our countrymen with the appropriate financial solutions they need as they go through different life stages,” says Menon.
Post-pandemic
During the pandemic, BPI AIA prioritised ensuring the welfare of its own people so that they would be in a good position to help customers as soon as they needed it. Suddenly working full-time from home, teams rallied and continued business as quickly and as efficiently as they could.
The Philippine Insurance Commission approved digital selling and the company continues this practice today. Menon believes it is up to its customers to know whether they are comfortable with meeting with salespeople face to face; and if they aren’t, it’s absolutely understandable: “There are secure digital tools in place to provide them the services they require, without sacrificing their safety and peace of mind.”
Menon continued; “As the situation improves in the Philippines, we are looking forward to seeing more and more people come back into BPI’s branches and engage with our people again. But nonetheless, we have onboarded some of the latest technology that will allow for a more seamless, faster experience for our customers – and they work for both face-to-face and virtual.”
Service innovations
Aligning with the AIA brand in the time of a pandemic pushed for service and product innovations already scheduled to be developed and launched much earlier than planned. Systems and processes were streamlined and brought to life to improve the client service experience.
Many more innovations are expected from the entire AIA Philippines Group. These will include improving their self-management of policies via My AIA, a comprehensive health and wellness app with BPI AIA’s Total Health Solution and AIA Vitality, more payment options, and more customer touchpoints/communication channels. On top of all the digital developments on BPI AIA’s side, integration with their bank partner’s digital developments are at an all-time high – customers can expect a faster, more seamless interaction with BPI AIA through BPI’s mobile banking app.
Through one click of a button, a customer can use their own data to determine the best life insurance product the company has for them. Payments facilities through BPI are constantly evolving to include the latest and most secure payment channels customers prefer for their own convenience.
All these efforts together provide the fastest, most seamless customer experience. “We want our customers to feel the insurance experience of the future today – by having everything they need from BPI and BPI AIA just a few clicks away, on their mobile banking app or on our own platforms.
They can get insured virtually, manage their policy digitally, and even file their claims online – everything is there at their fingertips,” added Menon.
Protection gap
At present, insurance penetration in the Philippines is still very low. It is this huge protection gap that the combined companies are committing to address together. The geography of the Philippines makes it vulnerable to natural calamities such as earthquakes, volcanic eruptions, and typhoons. When there’s low insurance penetration in an economy, losses resulting from unforeseen events like these significantly limit economic and social development. There is an estimated PHP2.7trn ($54bn) protection gap in the country.
BPI AIA plans to help close it using its life, health, and income protection plans. It is making it its mission to come up with products that cater to various needs and different market segments to make a difference in the lives of its customers, and in the long run, help bridge that huge gap.
Community support
BPI AIA is committed to its ongoing initiatives. Financial literacy has always been central to the entire AIA Group. The mission at BPI AIA is to make sure that insurance is easy to get and easy to have for every Filipino, no matter what class they belong to. “We continuously work towards educating our countrymen on the importance of becoming financially literate and providing them with the skills and tools to do so,” says Menon. “Solutions such as microinsurance, for instance, have consistently been part of our offered products and services, and we continue to work with more partners nationwide to expand the reach of our microinsurance products and related solutions,” he continued.
Peace of mind
This all feeds into the company’s long-held desire to encourage its customers to live healthier (both physically and financially), longer, and better lives. “We share our philosophy that when you live healthily, you live well. And when you have peace of mind because you know your insurance will take care of everything when the unthinkable happens, you have more courage to live your life to the fullest,” said Menon.
As a company, BA Glass aims to go beyond just making glass containers. We aim to build a greener pathway by engaging different stakeholders to reduce the impact of our actions on the planet’s future. Given its natural properties, glass is the only packaging material that blends in with nature. It preserves the taste and ensures that there is no level of food contamination. Glass represents the safest material not only for humankind but for the world.
The industry faces continuous challenges regarding waste and gas emissions reduction, carbon footprint targets, talent attraction, and other materials’ competition, among many others. But not even a year of crisis with the global pandemic has prevented progress on topics such as sustainability, digitalisation, health protection and human wellbeing.
In fact, despite the unfavourable context, last year we accelerated the development of several projects that publicly express our commitment in the transformation of glass as the most sustainable and healthy packaging material on our planet. Furthermore, our shareholders decided to increase the environmental fund created last year, dedicating more than €7m to the cause. This fund supports research and development for CO2 capture and reuse initiatives.
In an era when the planet’s natural protection is under threat, environmental sustainability is at the heart of the group’s decision-making. Besides the internal goals and the public commitments shared in the Porto Protocol, BA decided to reinforce its public dedication to the environment. For that, another important step was taken at the beginning of 2021, as we joined the Science-Based Targets Initiative, an organisation that drives companies to establish ambitious science-based emissions reduction targets. We are now developing a roadmap that will enable us to reduce our carbon footprint by more than 50 percent by 2035.
Going green
Regarding green technologies, we continuously invest in our production facilities, implementing the most innovative ideas. In 2020, BA built a new furnace and rebuilt two others, and with these projects, a drop of 13 percent in energy consumption was achieved, representing a reduction of 23,000 tons in CO2 emissions. BA has been investing in clean energy and has a medium-term plan to cover the roofs of all the plants and warehouses with solar panels. With this investment, we expect to be reducing the annual CO2 emissions by more than 25,000 tons.
Additionally, BA has been working towards the increase of cullet in its production process, but its availability in the market is still below the needs of the industry. To promote and boost recycling behaviours in Europe, BA is proud to have joined the Close the Glass Loop Programme of FEVE. The goal is to reach a European collection rate of 90 percent by 2030, up from the current 76 percent, by joining forces with municipalities and recyclers.
But we seek more and we treasure the close relationships with suppliers, customers, consumers, and partners, which allows us to have real insights into their needs and concerns. In 2021, to respond to consumers’ demands for more sustainable packaging, BA launched ‘Pure,’ a new brand that aims to make glass more environmentally friendly through conscious design and production. ‘Pure’ has three distinct lines that express the different approaches to reach one same goal – to make the world a greener place. PURE Life, from BA’s conscious thinking and commitment of producing the most sustainable packaging. PURE Premium, from the consumers’ need of having a unique and special experience respecting nature.
And finally, PURE Innovation, that comes from the company’s ambition to challenge and be challenged by the market, its customers, and consumers. The constant drive for excellence, promoting benchmarking with other industries, and the sense of ownership and initiative of our people, allows the generation of new ideas and the implementation of innovative projects. The improvement of our production processes and the execution of several projects on BA digital transformation, are examples of it.
Therefore, we invite you to get to know more about BA’s commitments, on our social platforms, as well as our online sustainability reports. At BA, we believe we can make the difference with our people who dream about engineering transformations and of disrupting paradigms. We stand for our people, our customers, and our partners. And, like the glass we produce, we stand for life!
In the wake of the COVID-19 pandemic, many businesses are choosing to go back to basics. The extraordinary circumstances of the past 20 months – coupled with the threat of a global economic recession – have prompted companies to refocus on the essential. Many firms are now looking to streamline their business and achieve their highest potential while cutting unnecessary costs and minimising risks.
It is perhaps no wonder, then, that outsourcing is proving to be a popular option in the post-Covid climate. By outsourcing elements of their business that may have traditionally been performed in-house, companies are able to refocus on their core operations and fully devote themselves to ensuring that their business is the best that it can be. Outsourcing can give companies more freedom and flexibility to focus on what really matters – and in the current economic climate, that’s a valuable thing, indeed.
However, as the demand for outsourcing grows, the sector itself is becoming increasingly competitive. This, in many ways, is having a positive impact on the industry: with new competitors entering the market, existing outsourcers are looking to innovate and to explore new business lines and offerings in order to meet customers’ evolving demands. This healthy level of competition is fuelling some exciting new developments within the fast-paced outsourcing sector, with forward-thinking firms helping to craft a very bright future for the industry.
Going global
The pandemic has prompted a global pivot to digital at a scale that has simply never been seen before. Almost overnight, companies successfully adopted remote work as government-mandated lockdowns came into effect in the spring of 2020. This not only enabled employees to continue to work from the safety of their own homes, but it also had the added benefit of breaking down many geographic barriers for businesses. With meetings now taking place on Microsoft Teams or Zoom, companies found that they could easily communicate with international customers, stakeholders and investors all at the touch of a button. Simply put, business is becoming more global, and if companies want to survive and thrive in the post-Covid era, they will need to set their sights on the international market.
At Intelcia, we have always had a global outlook. In fact, from our earliest days, we had no intention of staying local. Intelcia was founded in Morocco in the year 2000, and even as the business was just beginning, there was already an appetite for growth and expansion. In 2011, Intelcia took its first real step towards achieving this vision, acquiring a French-based company that not only gave the company a presence in mainland France, but also brought onboard over 1,000 new employees. The move was a logical next step for Intelcia, as it was already working within the French-speaking world, thanks to its Moroccan roots. After establishing a base in France, Intelcia then set its sights on sub-Saharan Africa, opening branches in Cameroon, Côte d’Ivoire and Senegal, followed by Madagascar and Mauritius. In just a few short years, this strategic expansion saw Intelcia establish a unique pan-African footprint, with the company soon emerging as a market leader in the French-speaking world.
But Intelcia’s ambition didn’t stop there. In 2018, the company opened a multilingual site in Portugal, strengthening its presence within Europe and enabling the firm to support its customers in a wide range of European languages. The move has proved a success for Intelcia – by the end of 2021, the Portuguese branch is expected to rank as the country’s second largest outsourcing hub.
The most successful companies are those that are always looking to improve and advance, strengthening their core products
Intelcia has been busy founding bases on the other side of the Atlantic, too. Since 2020 – even amid the economic uncertainty caused by the pandemic – the company has successfully launched new operations in the US, Jamaica and the Dominican Republic. And more recently, it has expanded its operations into Spain, the UK, Colombia and Chile, following the acquisition of Spanish outsourcing player Unisono. While Intelcia has certainly established a strong international presence over the course of the past 20 years, its expansion into the Americas marks a significant turning point in the company’s development strategy. The English-speaking world represents a strong focus for the coming years, and offers a wealth of exciting new opportunities. Now operating in 16 different countries, spread across three different continents, Intelcia has firmly set its sights on becoming a truly global player, offering innovative and multilingual solutions to customers.
Evolving with the times
In the fast-moving and competitive outsourcing industry, an international presence is a must. That said, while geographic expansion is undeniably important, diversifying your business lines is just as crucial. The most successful companies are those that are always looking to improve and advance, strengthening their core products and services while introducing new, innovative solutions for customers. Diversification has always been at the very heart of Intelcia’s strategy, and continues to drive the company forward today.
Alongside our core customer service offerings, we are now proud to provide IT services, and currently have 250 employees dedicated to this line of work. Over the next three years, we plan to grow this area of our business to encompass 2,000 employees, who will serve our customers across a range of geographies. Alongside our IT development and supervision solutions, we are now in the process of consolidating our digital transformation consulting and support services, which we believe will prove incredibly useful to our customers as they look to digitise their businesses in response to the pandemic.
In addition to developing exciting new business lines, Intelcia is also committed to ensuring that its core business is as efficient and customer-friendly as possible. Since the beginning of the COVID-19 crisis, customer service centres have become the main – if not the only – point of contact between customers and brands. In these testing times, delivering an exceptional customer service experience is more important than ever. In addition to hiring the very best people, ensuring quality training and nurturing talent among our staff, at Intelcia, we are also committed to adopting the latest cutting-edge technologies to ensure a seamless customer service experience.
Over the past four years, Intelcia has invested in artificial intelligence (AI). Before we started on this journey, we made sure that we understood the value that AI would bring to our business, and how it would complement the customer experience. Indeed, as all outsourcing firms will understand, each and every contact centre’s processing capabilities depend on the available agents – and when there is a surge in incoming calls and queries, this can quickly turn into a bottleneck. In this industry, long wait times are, of course, unacceptable. In these instances where there is increased demand for agents, AI and smart automation technologies offer a simple solution. AI-powered chatbots can provide real-time, round-the-clock support to customers when human customer service agents might be otherwise engaged. What’s more, with the pandemic serving to accelerate digital adoption, most customers now expect instant, digital solutions as standard, meaning that the case for AI has never been so strong. At Intelcia, our highly efficient, talented workforce is now supplemented by a host of advanced ‘virtual agents,’ ensuring a quality customer service experience for all of our customers.
Looking ahead
We are now more than 20 months on from the world’s first lockdowns, and are cautiously looking ahead to a post-pandemic future. The crisis has completely reshaped the customer service industry, ushering in new trends and expectations. In the years to come, businesses in the industry will be defined by how they have reacted and responded to this new environment, and at Intelcia, we will use the lessons learned from the pandemic to propel us towards an exciting future.
There’s no denying that technology will play a crucial role in the future of the outsourcing industry. AI will undoubtedly become an increasingly common feature – but customers will gravitate towards those companies that use AI efficiently, respectfully and sensibly. Intelcia’s adoption of AI has always been driven by a desire to better serve our customers and to create a more harmonious user experience. Indeed, by automating repetitive, time-consuming tasks, AI gives the gift of time to our customer service advisors – allowing them to focus instead on more valuable ‘human’ activities that can’t be carried out by a machine or an algorithm, such as solving complex customer problems. We know that our first-class employees are one of our finest assets, and that’s why we use AI to complement – not replace – our staff. We are deeply committed to investing in our employees’ skills, and offer training and certification courses at all levels of the organisation. After all, our employees’ success is our success, and we want each and every member of staff to feel proud to be a part of the Intelcia family.
As for our global ambitions, we are setting our sights high: our goal is to reach $1.5bn in revenues by 2025, and to rank among the top 10 outsourcing companies worldwide. If our track record is anything to go by, then this target feels well within our grasp. With our unique geographic footprint, our highly motivated and capable staff and our appetite for growth continuing to propel us onward, Intelcia is very much looking forward to seeing just what the future holds.
It has been more than 18 months since the COVID-19 lockdown and the pandemic has dramatically reshaped our lives both personally and professionally. While these have been challenging times to live through, we are also seeing first-hand how the pandemic is fuelling innovation at an extraordinary scale, from the scientific breakthroughs behind the lifesaving COVID-19 vaccinations, to the technological advances that have facilitated a worldwide pivot to working remotely.
Progress has been rapid, effective, and driven by need. Now, as the world looks to move towards recovery, these innovations will continue to revolutionise our post-pandemic lives. For the banking industry, the pandemic has served to accelerate many of the digital changes that were already well underway. For Banorte in particular, the challenge has been to expedite our digital programmes to meet the evolving needs of our customers.
The digital transformation at Banorte
For years, a digital revolution in the banking industry had long been overdue. At Grupo Financiero Banorte, we have been working steadily to expand our digital offerings for many years and have been paving the way into the Mexican banking sector when it comes to both digitisation and personalised services.
It is our goal to seamlessly combine our branch-based services with our digital efforts
As part of that journey, we have launched many innovations, including features for our mobile banking app ‘Banorte Movil’; as well as passed several milestones by becoming the first bank in Mexico to offer a wide variety of digital features to our clients, such as: a mobile token in 2011; a digital debit and credit card that can be generated instantly in 2013; identity verification via selfie in 2016; and credit cards and mutual funds available from the app in a matter of minutes in 2019. For over a decade we have focused on our exploratory and research analysis on how to seize technological opportunities, and how best to meet the consumers’ changing needs.
Undoubtedly, this preparatory work served us well when the crisis struck, and we were forced to accelerate what we had planned for the next five years to occur in less than one. Having laid the groundwork for that digital transformation, we found ourselves well-placed to serve our customers when the pandemic arrived. As social distancing guidelines impeded in-person branch visits, our customers pivoted to digital with remarkable ease. In just one year, we observed an increase of 1.2 million customers using our digital services, with only four percent of transactions taking place in branches. While this growth is certainly something to celebrate, Banorte is not stopping yet; we still have much more to do to achieve our digital vision.
Recently, we signed a strategic agreement with Google Cloud to continue the IT modernisation across all our platforms and services, truly propelling Banorte towards a more technological and innovative future. The agreement will also get Banorte closer to artificial intelligence (AI) when it comes to data analysis, which will allow us to provide hyper-personalised experiences for our customers as we deepen our understanding of their needs. In a similar vein, in 2020 we also signed a joint venture with Rappi, a Latin American tech ‘unicorn,’ to develop a new generation of digital financial services within the superapp, another exciting initiative to add to our growing portfolio.
A strategy with customers at the centre
When it comes to Banorte’s approach to service, the pillar is quite simple: the customer is at the core of everything we do. That is why we are always working to better understand our customers, their needs, and their unique circumstances. We know that each individual – and indeed, each small business – is different, thus we strive to offer a highly personalised banking experience to each of our customers.
At Banorte, we believe that hyper-personalisation is the key to retain a competitive edge in this challenging industry. Increasingly, in all aspects of their lives, customers are demanding more personalised experiences and tailor-made offers, and banking is no different. Fortunately, every customer interaction provides us with valuable real-time data on their individual banking habits and lifestyles. We are then able to use AI to analyse this data, which helps us create a profile of each of our customers and offer them products and services in return, while simultaneously improving our branch efficiency in terms of sales and cost savings. This way, prioritising personalised experiences has proved beneficial to Banorte as well as to our valued customers.
Today, customers require access to a wide range of services while also feeling reassured that they are not compromising their security when banking digitally. If their needs are not met by their current bank, we can fully expect them to switch – after all, digital acceleration has made it easier than ever before for customers to change banks. With all this in mind, it is safe to say that the world of digital banking is becoming incredibly fast-paced and competitive.
While Banorte’s portfolio of digital products has been incredibly popular with its customers, we also understand that some customers continue to value the traditional banking experience. It is our goal to seamlessly combine our branch-based services with our digital efforts, ensuring a flexible experience that works for all whether a customer prefers to bank in-person or on their smartphone.
Solidarity with Mexicans
However, it is not just our digital products that have aided customers during the COVID-19 crisis. Guided by solidarity and our commitment to Mexicans, we were determined to stand by our customers from the very beginning of the pandemic. We are proud to have become the first bank in Mexico to offer its customers a loan deferral programme in response to the pandemic. Since we introduced this scheme, which allows for deferrals on payments from four to six months, more than 630,000 loans were deferred, providing customers with buffer time.
Grupo Financiero Banorte’s CEO, Marcos Ramírez-Miguel (left) and Chairman, Carlos Hank-González
During these unprecedented times, we are also committed to keeping our staff and our customers safe. Our remote work policy is still in place, with 60 percent of employees continuing to work from home, which has proven a more efficient way to work – on top of the reduced COVID-19 exposure risks, of course. These actions are not only a result of our commitment to customers and employees, but they have made us aware of the profound reassessment of values all people and organisations are going through.
The financial industry is key
Understanding this new set of needs individuals have takes us one step further in the banking industry. As a part of the financial sector, we must find opportunities in the crisis and embrace our key role on the path of economic recovery, which will also depend on our capability to transform ourselves and upgrade our business as necessary.
To attain long-lasting relationships through value-added proposals, we should consider working with all our stakeholders and understand that the context has changed. For a true recovery to take place, it must be comprehensive and sustainable. We already see clear signs of recovery. The main economic indicators are showing us that people and investors’ trust is back.
In Mexico, there has been an important growth in the economy as well as in consumption, investments, and credit. Although we should not claim victory yet, we must celebrate what we have already advanced together. Perhaps the challenges of the last year and a half did not allow us to go as far or as fast as we expected, but the pandemic has unleashed new opportunities. For Banorte, the mission is very clear: to be the engine of the recovery in Mexico by honouring our commitment to Mexicans to help them get ahead and fulfill their dreams.
Decarbonising our business
During the pandemic, we have kept our environmental, social, and governance (ESG) strategy at the core of our operating model and will continue to build on it in the years to come. This means that the environmental aspects of our commitment are as important as the social and governance ones.
As a founding member of the UN’s Net Zero Banking Alliance, we are fully committed to decarbonising our operations, as well as our loan and investment portfolios by 2050. Moreover, we are also a founding member of the UN’s Principles for Responsible Banking, and for over 10 years, we have pioneered best practices on social and environmental risk management in credit portfolios within the Mexican banking industry.
As we look towards the future, our ESG principles will continue to define our business model. In our digitisation strategy, we are also committed to exceeding and generating best practices by placing our customers first. Marrying the very latest technologies with our deep customer knowledge and understanding, we hope to go above and beyond our customers’ expectations, always striving for excellence as we shape the banking industry of tomorrow.
Since joining onsemi in February of this year, CEO Hassane El-Khoury and I, together with the rest of our leadership team, have been working on the transformation from the former ‘ON Semiconductor’ to the new ‘onsemi.’ On August 5 during our analyst day, we revealed our new trade name ‘onsemi’ and a refreshed brand as the next step in the company’s evolution to establish itself as the leading provider of intelligent power and sensing technologies. With a continued focus on the automotive and industrial end-markets, onsemi has sharpened its strategy to drive disruptive innovation that contributes to a sustainable ecosystem of high-growth megatrends such as vehicle electrification, advanced safety, alternative energy and factory automation.
We consider the changes in strategy a transformation of the company rather than a turnaround. Instead of looking at product lines, we now focus on the markets where our solutions can add value. By moving capacity to markets and solutions we want to sustain, we are shifting our product mix. Our new company name shows that we are not about what we make but what we provide our customers with: intelligent power and sensing technologies that help our customers solve their toughest challenges.
The results over the last few quarters are evidence of this. Adding value to our customers’ solutions has translated into a significantly increased growth margin, earnings per share (EPS), cash flow and record revenues. The new direction of onsemi, focused on our vision to empower a sustainable ecosystem, has already led to our transformation to a company with a more predictable financial performance.
Innovation-led sustainability
Today, the industrial and automotive end-markets are responsible for two-thirds of global greenhouse gas emissions. By applying its intelligent power and sensing technologies to these markets, onsemi has an immense opportunity to do its part in achieving a net zero economy. As we see it, climate change presents not only a risk to the environment, humans and animals globally, but plenty of opportunities for innovative business solutions.
We define disruptive innovation as providing our customers with differentiated solutions that add value to their own products and that contribute to a sustainable ecosystem. We are doing this at onsemi by powering the electrification of the automotive industry with intelligent power technologies that allow for lighter and longer-range electric vehicles and enable efficient fast-charging systems. We are also enhancing the automotive mobility experience with our intelligent sensing technologies with imaging and depth-sensing that make advanced vehicle safety and automated driving systems possible.
Sustainability is what governments are asking for, employees are demanding, shareholders are requiring, and companies are investing in
In the industrial market, we are propelling the sustainable energy evolution with our intelligent power technologies for the highest efficiency solar strings, industrial power and storage systems, while enabling Industry 4.0 with our intelligent sensing technologies for smarter factories, buildings and homes.
This includes high-efficiency power solutions with both insulated-gate bipolar transistors (IGBTs) and silicone carbide (SiC) for increased power throughput for charging stations and energy infrastructure. For factory automation, we offer high-speed sensing for robotics, scanning and inspection and the widest intelligent power portfolio across all voltages and technologies. In addition, we are leveraging some of our high-efficiency, intelligent power solutions to optimise power consumption in adjacent markets such as the cloud and telecom infrastructure.
Net zero emissions by 2040
While our company has a long history of dedicating itself to sustainable products and being a good corporate citizen, this year, onsemi has publicly committed to applying its research and design expertise and pledged to adapt its own operations to achieve net zero emissions by 2040. As our CEO stated on our analyst day, sustainability is what governments are asking for, employees are demanding, shareholders are requiring, and companies are investing in. But first and foremost, we are doing this because it is the right thing to do.
To achieve net zero emissions by 2040, we are implementing an aggressive strategy. But what it takes to get to net zero emissions is often misunderstood and not all climate pledges are created equally. So, what does net zero mean? How does this compare to what our competitors and other companies are doing around climate change? You have likely seen companies commit to being carbon neutral or net zero and there is a world of difference between the two of them.
Carbon neutral commitments do not require companies to eliminate any present or future emission from their operations. Instead, this type of commitment allows a company to continue its business-as-usual practices so long as it purchases enough carbon offsets to negate its emission activities. Carbon neutral pledges are not aligned with the Paris Agreement.
Before purchasing offsets equal to the emissions that cannot be avoided, net zero pledges require an ambitious 1.5 degrees Celsius aligned science-based target for emission reductions across the whole value chain. This means that the company ensures direct emission will not contribute to a global temperature rise exceeding 1.5 degrees Celsius above pre-industrial times. Net zero pledges align with the Paris Agreement.
The three pillar strategy
With this commitment, we have set the most ambitious goal among our competitors and will surpass the Paris Agreement’s goal by a full decade. Our strategy is focused on three pillars:
Firstly, ‘capitalise on efficiency’: Every ton of carbon dioxide (CO2) avoided is a ton we do not need to eliminate or offset. Our employees have already demonstrated their innovative abilities to create such efficiencies. We reduced our emissions by 12,101 metric tons of CO2 in 2020 through 49 projects centred on increased energy efficiencies.
Investments in facilities, processes and equipment to increase energy efficiency can reduce our greenhouse gas footprint by as much as 15 percent by 2040. We will also be focusing on our process gas usage as there is substantial opportunity for efficiency in this area.
Secondly, ‘renewable energy’: To achieve net zero, companies need to invest in renewable energy equal to the emissions associated with their energy consumption. Offsets cannot be used for electricity-related emission in a net zero model. The company will transition to an emissions-free renewable energy portfolio to achieve this goal. We plan to use 50 percent renewable energy by 2030 and 100 percent by 2040. We will engage with energy providers to identify power purchase agreements in locations where it is feasible to recoup investment costs in long-term agreements. To assist in our shift to renewable energy, we joined the Renewable Energy Buyers Alliance to ensure a rapid transition to a cleaner zero-carbon energy future.
And the third pillar, ‘offsets and influence’: For non-electricity emissions that cannot be eliminated, we will purchase certified carbon offsets equal to their amount. Green-E and Gold Standard certified offsets are the most credible and will be prioritised in our strategy. Science-based targets also require goals for reducing emissions in the supply chain. We will leverage our Responsible Business Alliance membership to engage suppliers on emissions reduction.
No goal is worth the paper it is written on without continuous measurement of progress against it. Our CSR report will be a key resource for anyone wanting to see our progress toward net zero emissions. We will report our emissions on a scope one, two and three basis. The scope of the emissions speaks to what kind of emission it is and how it relates to onsemi business operations.
Scope one emissions are direct emissions from company-owned and -controlled resources. The company will focus on removing scope one emissions as part of its net zero goal by capitalising on efficiencies in locations we operate in. Scope two emissions are indirect emissions from the generation of purchased energy, which we will eliminate by converting to 100 percent renewable energy.
Finally, scope three includes indirect emissions that occur in the supply chain of onsemi, including both upstream and downstream. As part of our net zero strategy, we will eliminate these emissions by working with our suppliers to implement their own emission reduction targets and offsetting the excess. In 2020, we started tracking some of them and will build the rest of scope three emissions into our reporting as we continue on this journey.
Lastly, our efforts have not gone unnoticed. Our sustainability programmes have been recognised many times over the years. For a second consecutive year we were declared the winner of the 2021 World Finance Sustainability Award in the category of the ‘Most Sustainable Company in the Semiconductor Industry – 2021.’ Some other examples are our Platinum award from Ecovadis for 2020, only awarded to the top one percent of companies assessed. This year we are ranked number 10 and the top-rated semiconductor company on Barron’s 100 most sustainable companies. For the fourth consecutive time, we are listed on the Dow Jones Sustainability Index for North America. We are also rated PRIME by ISS-ESG.
There is no question that there will be some learning on our way to net zero emissions, but our plan is in place and we are dedicated to its execution from the top down. We will measure our progress, make corrections as needed and pursue our goal with determination. In the end it comes down to what we started with: committing to net zero is the right thing to do.
There are many different ways of interpreting wealth management. On the one hand, there are those who focus on pure and ‘simple’ portfolio management, which is often far from simple. On the other hand, we have the consulting models that consider that service as a commodity, with limited added value. Between the two poles, there are infinite shades. We are inclined to view financial asset management as a solution. And not because that activity has lost its dignity. It remains essential.
However, in a market context like the current one, we are convinced that we need to broaden the analysis. And after all, the customers we turn to have much more complex needs. The synergy at BNP Paribas group level in wealth management is constant and strong, in order to bring the value of a large international group to its Italian clients. There are few pure wealth management players in the Italian market with a dedicated structure and strategy. HNWIs need dedicated offer and service models, but individual requirements must be articulated, because each customer is different from the others.
Our wealth model
A systematic method is needed. At BNL BNP Paribas, the wealth management model has four pillars when it comes to consulting needs: certified quality, integrated vision, effectiveness, and a 360-degree approach. To ensure quality, we have built and launched an ‘excellence academy’ that started in October 2021: an ambitious and concrete initiative, it was developed with SDA Bocconi to certify the quality level of BNL BNP Paribas wealth managers. This is a 24-month training course, developed internally, at the end of which bankers obtain a certification in wealth management, issued by SDA Bocconi. We built it together, but the teachers and the evaluation criteria are from the university’s school of management, one of the most prestigious in Italy. The training course is completed in a series of classes dedicated to analysing a wide array of potential issues identified by the individual operational managers of BNL BNP Paribas. This certification is for every one of our wealth managers; they attend it before receiving their final certification.
An integrated vision
Many of our wealth management clients are entrepreneurs. It does not make much sense to limit yourself to looking only at liquid financial assets, which omits the fact that typically the most important asset of these families is their company, which is sometimes worth much more than their financial assets. Since it is pure risk capital, it must be taken into account when it comes to investments. Above all, the needs of the company must also be considered. For this reason, we will continue to enhance the synergies with BNL’s corporate banking – a necessary choice if we want to look at customers’ assets as a whole. This liaison with corporate business is important and has become increasingly central to our overall approach, paving the way for our local clients to operate at an international level, on a global stage with BNP Paribas Group.
An integrated approach
Our third pillar is a means of organising work in a systematic way, preparing and planning each meeting with clients along with all other associated activities, with a minimum horizon of 15 days. Finally, the correct approach is needed. We are building a network of advisors, wealth planners and credit specialists who work in total support with the banker, developing a relationship founded on shared knowledge. The method we are applying is conceptually based on a very deep analysis of the client’s assets and the role of the wealth manager is now becoming more and more like that of a senior banker, one with an overarching view of a client’s needs. The essential focus must always be on this archipelago of needs in order to develop a healthy working relationship with the client.
Banker remains the relationship owner
In the world of business, being a door opener isn’t just about a sense of responsibility, it’s about being highly attuned and conscious of others, and we manage this at BNPP by bringing quality via a huge span of solutions and services to our clients. We are about to launch a consultancy service that provides the possibility for the client to access all advisory services whenever and however they want, and that is offered on the basis of a pricing that provides for an all-inclusive commission, measured according to the size of their assets.
Furthermore, this offer also allows for a dedicated wealth advisor, who supports the banker with the aim of bringing a specialist view directly to the client. It is just one of the many innovative ways in which we are transforming wealth management to offer transparent and timely advice. Here, value for money is the key.
Certified quality, integrated vision, an effective system and approaching customer needs from every conceivable angle. These are the ways that BNL BNP Paribas are leading the way in its industry.
While all recent research shows that the COVID-19 pandemic might be a thing of the past by the summer of 2022, it is not over yet. The last 18 months have proven to be crippling for most people on many different levels. Nevertheless, it has acted as a catalyst for necessary changes as we prepare to exit the COVID-19 era wiser, stronger and better in all aspects.
Many believe we now need to structure our choices around a more sustainable way of living to navigate these difficult times. The reliance on technology has been critical in keeping the world’s interconnectedness afloat while broadening the use of platforms. We believe it will fuel a decade of technological evolution; unlike anything we have experienced in the last 50 years in all sectors. Global financial markets went through unremitting periods but proved very resilient for those who were well prepared. Subsequently, our investors remained confident through these difficult times and are now reaping the benefits of the economic recovery.
The impact on global financial markets
The markets went through some very turbulent times during March 2020, where implied volatilities of stocks and oil spiked to crisis levels. The stock markets dropped as much as 30 percent while oil traded at below $0 per barrel. This was caused by a surplus in supply and a significant drop in demand due to the coronavirus pandemic. Simultaneously, credit spreads on non-investment grade debt dramatically increased as investors braced for a once-in-a-lifetime catastrophe.
However, the governments and central banks were prepared to take all necessary steps and supported the economy significantly. The US alone has brought an extensive fiscal stimulus of more than $5.8trn in three tranches. Two of them under the Trump administration, the $3trn stimulus in spring 2020, the $900bn stimulus in December 2020 and another $1.9trn stimulus this March from President Biden. Of course, we are also expecting the $2trn infrastructure bill to follow soon. The combined total exceeds $7.8trn in contributions to households and businesses. Comparatively, the sum is a far more extensive response to the COVID-19 crisis when compared to the 2008 global financial crisis.
Arguably, the above stimulus has sparked fears that hyperinflation will stay for years to come. The counterargument proposes that most of the financial support went directly to households to protect them from rising debts and helped them to increase their savings. These savings will prove vital if the Federal Reserve and central banks decide to delay their monetary tightening. Central banks not fulfilling their mandates to maintain inflation below two percent is a base case scenario for our investment committee. Otherwise, increasing yields could take indebted companies to bankruptcy, and a recession will follow. Consequently, the trillions spent to deter a decade-long recession will be immaterial.
Investors are keen to get back to normal
We see some risks associated with rising consumerism in sectors like real estate. Consumers refrained from making purchases during the pandemic. This helped build up a backlog of demand that became apparent after Q2 2021 when the first signs of recovery emerged. As a result of rising inflation, investors are keen on placing their bets once again in the real estate market, but things are a bit different this time. The real estate market has rapidly corrected since the drop from its all-time highs. We firmly believe it can promptly bring new highs with the recorded demand from domestic and international investors, especially in developed capitals.
We believe that global stock and bond markets will move to the next phase of mature growth, which will be reflected in investment flows
These developments are not isolated to the real estate market. Despite fears of a slowdown, the global economy shows signs of stability, with the stock markets preparing for another positive year. Nasdaq predominantly led the rally as tech stocks were resilient during the pandemic and made the case for digital evolution in a short period. While we believe tech stocks will continue their incredible performance for years to come, our focus has turned to value sectors and banking since the beginning of this year.
As we revert to everyday life and habits, specific sectors will begin to outperform during the following years. For instance, health companies will be of great importance in any portfolio. This is because people getting out of this pandemic now understand how R&D can prevent this from reoccurring. Additionally, mRNA technology will rise as a new approach to medicine.
Infrastructure companies are another area we are focusing on. Emerging from the pandemic our habits changed quite a lot and we believe that the ‘working from home’ concept will become mainstream for many companies, so fewer people will be required to commute to and from their physical offices. Additionally, the huge spike in digital retail sales during the pandemic will force retailers to re-think their physical presence with local branches. We expect infrastructure companies to play a significant role in transforming our cities. The $2bn infrastructure investments will – apart from demand – help to increase the supply side, which is vital to the economy and public finances. Another sector we have already invested in is banking. With all the turbulence in 2020, banks have shown that they are well capitalised and prepared to play a significant role in helping reshape our economies. That is why we believe banks are going through one of their best periods in history. All big banks announced better than expected profits. They were much higher than the estimates in several cases, causing a sharp rise in their stock price. Many banks have increased or are expected to increase the dividend they distribute to stimulate investment interest. However, the most important clue comes from the repurchases of own equity. Since the end of 2020, this practice has been allowed and utilised by banks. Subsequently, repurchases of own shares are intensifying month by month. Between August 9 and August 13 alone, banks bought $1.26bn worth of treasury shares. No other sector carries out more intense share buyback programmes. According to a report by BofA, a study of similar data from 2020 shows that banks have a strong chance of outperforming all other sectors in the coming months.
Our post-pandemic expectations
We believe that global stock and bond markets will move to the next phase of mature growth, which will be reflected in investment flows. Thus, we will experience a decade of growth in stock markets.
At XSpot Wealth, we analyse all possible scenarios and prepare our different plans with complex stress testing tools to respond to sharp market movements. All our plans are expected to produce great results by the end of 2021, a year that many believed would be negative for the stock markets. We have strategically shifted away from treasuries in riskier plans. As the economic trajectory continued to improve, we added an ESG-only thematic plan to our offerings. Not only do we believe flows in ESG investments will keep increasing but that returns of such investments will prove far more attractive.
With the markets entering the mature growth phase, capital movements to the banking, tourism, hotel, energy, and value sectors are already visible. There may even be an attempt for more sustainable growth in China. As time goes on, the situation in China is quite likely to start its normalisation course. As always, global markets will show signs of normalisation earlier, and that is why we are closely following the developments regarding a possible change in trend. Trading volumes in Chinese ETFs continue to be large. This is a very positive indicator as a potential trend change will have a solid basis. There is a particular focus in the Chinese technological sector, which is now trying to break the uptrend of the last six months following its recent drop.
Digital disruption is the way forward
At XSpot Wealth, our teams are working to augment artificial intelligence in most business actions. Our Robo-advisor program is designed to address clients’ needs better, faster and in a more efficient way. These developments are essential as private investors are moving away from the traditional models. We are expanding quickly and our clientele is growing at a rate that is 30 percent faster than last year as we prepare to expand in the Middle East with our office in Dubai.
Furthermore, we have started offering our technology to regional banks, asset managers and family offices, to expand our reach and strengthen institutions. This is achieved through a robust solution that can easily connect to existing infrastructures. This can contribute to the development of their offering through the automation of operations and the provision of advanced and personalised services to their customers. We are helping to provide a cost-effective solution with reduced risk and access to the world’s top-rated custodians and prime brokers.
As a state-owned commercial bank, Krungthai Bank always stands beside the people and society of Thailand as one of the country’s economic pillars and the government’s strategic partner in implementing government policies, reflecting our vision of ‘growing together for sustainability.’
In order to respond to drastic changes in customer behaviour due to digital disruption, we have decided to drive a dual strategy in which we improve the efficiency of our traditional banking business and safeguarding it against disruption while venturing into new businesses that focus on leveraging data on digital platforms so that we can interact with our customers more effectively and meaningfully. As we believe that digital technology is the key to empowering better lives for Thai people, we have been focusing on developing our digital infrastructure and using digital technologies to serve both our customers and the people of Thailand.
Our Thailand open digital platform, Pao Tang mobile application, now has over 33 million users, making it the largest digital banking platform in Thailand. We are also serving 13 million users of Krungthai NEXT mobile banking application, 16 million users of Krungthai Connext LINE service, and 1.5 million users of Tung Ngen mobile application for merchants.
We have defined five key ecosystems that are highly relevant to people’s lives and we believe that making improvements in these areas will eventually lead to better quality of life and sustainable growth.
1. Government technology
As the government is trying to realise its Thailand 4.0 ambition, we have been working closely with it to lay foundations for the country’s digital transformation and digitise government services. Our open digital platform, Pao Tang mobile application, is the main platform used to connect the people to government services, and as the platform provider, we expand our customer base and help Thai people familiarise themselves with digital and financial technologies. The COVID-19 pandemic has accelerated digital adoption rate and Pao Tang has become the main tool used to implement relief schemes and deliver financial aid to people, helping the people benefit from government schemes and helping the government gain valuable data that can be used to deliver more targeted economic policies and packages in the future.
Millions of people have benefited from different COVID-19 relief and economic stimulus schemes made available via Pao Tang. Among others, Half-Half co-payment scheme, where the government helps pay half of the bill when a registrant makes a payment at a participating merchant using Pao Tang’s G-Wallet, has helped people lower their cost of living, boosted domestic consumption and helped small merchants survive the economic slump.
Moreover, we have digitised and upgraded several government services with blockchain technology. For example, the blockchain-based Thailand VRT mobile application and web application allows tourists and merchants to process VAT refunds for tourists more conveniently, accurately and paperlessly.
The e-Court and e-Filing platforms have digitised court procedure, making dealing with the court faster and more convenient, which directly benefits the people and has helped Thailand’s ranking in the Ease of Doing Business Index.
2. Health and wellness
Krungthai Digital Health Platform was introduced to enhance the efficiency of the public health system and enable ‘Smart Hospital’ to improve the people’s medical and healthcare experiences. We have worked with the National Health Security Office (NHSO) to provide easier access to universal healthcare via Health Wallet on Pao Tang and improved the management systems for hospitals under the universal healthcare programme.
Within the Health Wallet, people can make appointments for medical services at hospitals or medical units nearby, view medical service history, use Health ID QR codes to verify their identities and make payments for the excess fee that is not covered by universal healthcare. Pao Tang is also used in COVID-19 management projects; for example, people can request free antigen test kits and people in Bangkok can register for vaccination in Pao Tang.
We believe that digital technology is the key to empowering better lives for Thai people
We have also partnered with various hospitals to pioneer the smart hospital model where health technologies, such as self check-in kiosks, AI chatbot for patient screening, telemedicine and a blockchain-based health information exchange system are employed to help them serve their customers better and improve their efficiency. Furthermore, as we realise that having a strong research and development capability will benefit the country in the long run, we provided financial support for King Mongkut’s Institute of Technology Ladkrabang to contribute towards the building of King Mongkut’s Chaokhun Thahan Hospital and establishing it as an innovative hospital and a medical research and development centre that will uplift the country’s healthcare industry and reduce reliance on imported technologies. All our efforts in the health and wellness ecosystem help to ensure healthy lives and promote well-being for Thai people.
3. Educational institutions and students
The bank has partnered with universities in the ‘Smart University’ project to develop a cashless society within the university by providing cash management solutions on the Krungthai digital platform and installing cashless payment facilities in universities. University-specific mobile applications are developed to help students and staff manage their university-related tasks and activities.
For example, students can view class schedules and check-in classes, receive class-related notifications, view an unofficial transcript, use the app as a virtual student ID card, and make payments. This helps students and staff familiarise themselves with the digital lifestyle and prepare them for the digital economy and Thailand 4.0.
4. Transportation
Transportation is one of the most important activities in people’s daily lives so we aim to make fare and toll payment simpler, faster and more convenient by making them cashless and creating a common ticketing system that includes different public transportation services.
We installed QR code payment and EDC machines on buses so that commuters can pay with a credit or debit card, a government welfare card in which people with low income receive financial aid, a BMTA contactless prepaid card, or by scanning a QR code.
We have installed contactless payment terminals on smart ferries so that fare payment can be made using a debit or credit card as well as a HOP prepaid card. As for expressway tolls, motorists can easily pay tolls with cards and we are currently developing a free flow toll collection system that will greatly reduce congestion at toll booths.
In an effort to create a common ticketing system that connects trains, buses and ferries, we have developed ‘Mangmoom Card’, a debit card that can be used to make fare payment within the ‘Mangmoom’ common ticketing network, which currently includes the blue and purple lines of MRT trains. The network is expanding and will cover more mass transit options in the future.
5. Payment
We have upgraded the Krungthai NEXT mobile banking application with cloud native technologies to make the application scalable, stable and secure, so that we can make lives simpler for everyone. The application can handle massive concurrent transactions while providing a stable and seamless user experience as well as maintaining the highest level of security. One of the key features in Krungthai NEXT is its bill payment service, which covers the largest number of payees in both public and private sectors, thus covering the payment needs of our customers in a single mobile application.
Krungthai e-Donation platform was developed to make donation simpler for both donors and organisations receiving donations. When a donation is made via QR code payment, the donation record is directly submitted to the revenue department, thus removing the paperwork and making it more convenient to claim tax deduction for the donation.
Go Local, Grow Local
Leveraging the bank’s strengths in financial literacy and a strong line-up of products and services, we, together with partners who are experts in different areas, engage with local communities to help them develop their local businesses and capabilities, promoting the sustainability of the communities.
Koh Tao, Better Together
Krungthai Bank joined hands with UNDP Thailand and Raks Thai Foundation in the ‘Koh Tao, Better Together’ campaign to help boat drivers in Koh Tao who were affected financially by the travel ban due to the pandemic. We used our e-Donation platform, which has made the donation process more convenient and improved the transparency of crowdfunding. The money raised was used to hire boat drivers to clean beaches and collect debris, which helped the nature of Koh Tao recover and promoted harmonious and sustainable living with nature.
We have prepared and readied ourselves, as well as the country, for the upcoming full-scale digital economy by continuously developing financial service platforms in the five ecosystems that respond to customer needs as well as employing technology to reduce inequalities and promote social and environmental sustainability. All of these efforts reflect our continued determination to realise and stay true to our vision #GrowingTogetherForSustainability.
Inflation is here, and higher than expected. Inflation-proof the portfolio with real assets, banks, robotification and companies with pricing power: they are the likely winners in an environment of higher cost pressure.
Growth in the world economy has peaked, we are approaching the apex of central bank liquidity injections and COVID-19 is still an uncertainty factor. Investors are moving into rougher terrain. Growth should remain above trend and is more likely to be subdued by supply issues than demand factors. The semiconductor famine is still ongoing, freight costs are sky-high, companies are having a hard time finding workers, and wages are accelerating.
Demand is likely to hold up, supported by budget stimulus packages, corporate investments and recovery in the service sector. On the other hand, the tax take on capital gains and labour has begun to rise in the UK and (soon) in the US. Growth is subsiding in China; the country is wrestling with over-indebtedness in the property sector and we have recently been hearing surprisingly harsh rebukes of business. Large central banks are easing up on the liquidity pedal, while smaller ones are already raising their reference rates. The stock market has taken this with equanimity thus far – a tapering without a tantrum. The economic impact of the pandemic will be determined by the race between vaccines and virus variants.
Hot stock and bond markets are probably approaching a correction phase. The risk of rising long rates in the US is intensifying since Congress has agreed to raise the debt ceiling and the Fed is putting the brakes on its asset purchases. The central banks’ toolbox is orientated towards the demand side, and eliminating labour supply bottlenecks is getting trickier.
Returns can still be found through stock-picking companies that can set their own prices and are not exposed to risks in unpredictable supply chains. Profits recovered dramatically in 2021 and persistent (single-digit) profit growth in 2022 is entirely possible in the light of issued economic growth projections. The virus is still generating uncertainty with Americans and Europeans heading indoors as winter approaches. High stock valuations and investor optimism imply significant risk of disappointments.
Carnegie Private Banking pocketed profits and reduced its overweight towards equities – at which point Nasdaq Stockholm had risen by about 30 percent this year. Other attractive investment opportunities are scarce in an environment characterised by minimal bond rates, low credit spreads and higher inflation. In ‘the return of inflation’ section, later in this article, we analyse these challenges and present a few investments in real assets.
The return of inflation increases incentives to protect assets against higher inflation. This favours real assets, including real estate and infrastructure, along with companies that can pass on rising costs to the end customer. Exposure to energy commodities and base metals is also of interest.
Is the positive scenario intact?
Basically, several of the positive drivers are still in play. The economy is chugging along nicely and a lot of curves are pointing upwards. The year 2021 is looking like it will be very good from a growth perspective and the signs are also positive for the outlooks in 2022. Listed company profits are thus expected to grow next year as well. Still, we cannot get away from the fact that profit and macroeconomic momentum have probably peaked, meaning the acceleration rate is likely to slow. The reasons are that expectations have risen during the year and there should not be the same pent-up need for many goods and services next year. The stock market thrives when data outcomes are better than expected and forecasts can be revised upwards.
We are seeing a similar pattern when it comes to stimulus packages. The central banks, with the US Fed leading the pack, are continuing to make the financial markets happy with liquidity, but that notwithstanding, the plan is to gradually slow the pace. The pundits are writing at great length about how this tapering is supposed to be a threat to the stock market, but we can count on the banks to move very cautiously to avoid unwanted market turbulence. However, we cannot ignore that the next step is likely to be incremental reductions of the liquidity injections, and thus a little less of the good stuff. The fact that we have reached a peak in our base scenario regarding growth, the profit growth rate and liquidity makes us a bit more careful heading into the autumn and winter. If we also consider that the stock market is relatively highly valued and there have been no major corrections since October 2020, a vague sense of unease creeps in. Some investors have no doubt had enough time to get used to the pace over the last year and have begun to underestimate the risks of equity investments.
China: A new cause for concern
There are other factors clouding the picture right now. The trend in China is often difficult to read. At present, we are witnessing some kind of economic slowdown combined with stricter regulations on certain industries and companies. China has been a key growth engine for the global economy, and if the country’s economy were to slow down more permanently, that would, by extension, mean problems for many other regions. Governments usually launch various stimulus packages as soon as the economy shows signs of weakening, but China is now aiming to curtail the economic significance of the real estate sector.
Downshifting before a bump
Our positive view on the stock market during the year was based on a strong economic trend, rising profits and massive liquidity injections trumping high valuations, certain bubble tendencies, inflation risks and the commonly moderate returns in the summer months of the year. We are now becoming a little more cautious, simply because we believe we have passed the peak and that risk/reward will be slightly poorer from here on out, meaning that the potential for further upturns is not much greater than for corrections. It should be noted, however, that we are not averse to equities.
2021 is looking like it will be very good from a growth perspective and the signs are also positive for the outlooks in 2022
Carnegie Private Banking is maintaining a small overweight against foreign equities. The reason is that the low interest rate level is still providing strong support for share prices. There is no doubt that TINA (there is no alternative) still applies. Although we can trace some upwards pressure on interest rates in the autumn, it would take fairly large upturns for this to be a problem. As we see it, the biggest risk over the next year is that the central banks will misstep in the tapering process, resulting in turbulence in the fixed income market.
We have placed the cash we freed up by lowering the equity weight in alternative investments. We still prefer this asset class over fixed income investments. Our forecast for rising rates combined with low credit spreads in corporate bonds indicates limited return potential going forward and this curbs our enthusiasm. Nevertheless, fixed income instruments serve a certain function as diversification in a well-diversified portfolio. We see somewhat better potential for return in alternative investments, where our uncorrelated strategies have worked well in the past year.
The return of inflation
Inflation is here – higher than expected and perhaps not as transitory as the central banks believe it will be. The US inflation rate has settled at an annual rate above five percent since May and inflation in the eurozone stepped up to three percent in August. At present, the inflation rate in Sweden is almost 2.5 percent.
US President, Joe Biden
The central banks have been trying to counter low inflation and growth since the financial crisis of 2008 by setting low and sometimes negative rates. In the past, holdings of cash and short nominal government bonds have been key instruments for managing risk and have produced positive real return. Today, such exposures cause a loss in purchasing power.
Regardless of whether or not inflation is here to stay, the central banks’ ‘kidnapping’ of nominal bonds makes asset allocation even more challenging. How should equity risk be balanced without digging into capital? Inflation-adjusted bonds have not been much help either because real interest rates have been low, often negative. There are, however, several indirect ways to protect capital against higher inflation. In our alternative portfolio, we are increasing the exposure to real assets including real estate and infrastructure. On the stock exchange, inflation can benefit certain sectors with pricing power, rising wages can work in the favour of companies in robotification, and bank stocks are likely winners if inflation results in rising interest rates.
Navigating in the rear-view mirror
Central banks in the western world believe the current rise in inflation is temporary, without saying how long ‘temporary’ is. The Fed has been trying to nudge inflation upwards for decades. Along the way, it has also changed the inflation measure from the consumer price index (CPI) to the personal consumption expenditure (PCE) deflator. The calculation of housing costs has also been changed. Since 2020, the Fed has changed its policy from the inflation target of two percent to average inflation targeting of two percent.
The biggest risk over the next year is that the central banks will misstep in the tapering process, resulting in turbulence in the fixed income market
The ECB also changed its policy as of this year and now follows a symmetrical inflation target of two percent, where the bank accepts up and down deviations. The aim of the new Fed and ECB inflation targets is for inflation to exceed the target for a period to compensate for earlier shortfalls. In addition, both central banks have purchased even more securities in response to the liquidity shortfall that followed the pandemic. This time, they did not buy only government bonds, but also bought housing bonds. The ECB and the Riksbank have also purchased corporate bonds.
Three winners in the face of higher inflation
1) Pricing power: Companies with a monopolistic position, less price-sensitive goods or a market-leading position are winners. When materials and purchasing costs rise in industry and consumer durables, the winners are the companies that can pass on these costs to the end customer.
2) The financial sector: Banks usually benefit in an environment of rising inflation and rising interest rates, especially when the interest curve gets steeper. Net interest income increases when the banks raise their lending rates. The banks are also interesting right now because they are raising dividends, which can compensate for higher inflation.
3) Robotification: Companies in automation and robotification are the winners when there are cost increases related to labour shortages (as we are now seeing in the US and China). This applies particularly when compared to labour-intensive manufacturing companies.
The support purchase programmes have reduced the supply and driven up the prices of government bonds, which has made investors look increasingly further out on the risk and reward curve. This has resulted in a lowering of the entire yield curve, which has lowered the discount factor for standardised valuation models and thereby contributed to the inflation we have seen in risk assets (especially in growth companies) over the past 10 years. The Fed has explicitly stated that the bank is now acting based on outcomes and not projections – reactively instead of proactively, in other words. Navigating by what can be seen in the rear-view mirror implies a risk that the Fed will react too late, when higher inflation has already become entrenched.
Deglobalisation and demographics
Inflation has fallen over the past 30 years in pace with rising globalisation as well as technological progress and digitalisation. It is hard to say whether these factors will become less counter-inflationary going forward, but globalisation is now taking a few steps back, not least due to chilly relations between the US and China. Global supply chains are being renationalised – including for subsidy reasons, like when US President Joe Biden’s electric vehicle initiatives focus on ‘all-American electric cars.’
Some also believe that the demographic effects of ageing populations have moderated inflation, as in the case of Japan’s ‘lost decade’ of deflation. Here as well, we are seeing a change. An increasingly older population can cause labour shortages and drive up inflation if automation and productivity do not increase to a corresponding extent.
China, which has added millions of workers to the total global workforce over the past 30 years, is one example. The country’s one-child policy was formally repealed in 2016 and three children are now accepted. But the labour supply is shrinking dramatically and the threat of moving production to China is not going to relieve wage pressure in the western world like it used to.
Major virus effects – but more than that
An analysis of the CPI in the US shows that the latest price increases have been driven mainly by Covid-sensitive goods. If the vaccination programmes also help global supply chains recover, there may be justification for the belief that the current increase in the inflation rate is only a temporary supply shock.
In our alternative portfolio, we are increasing the exposure to real assets including real estate and infrastructure
But a lot of things are getting more expensive and, even excluding pandemic-driven price hikes, US inflation is already above two percent. Energy prices and wage growth are both accelerating. The latter is problematic because wages are significantly more resilient on the downside than commodity prices. There is risk that trade barriers and reduced globalisation combined with expansionary monetary policy will raise the structural inflation rate.
The pandemic: a reflationary crisis
Crises have often been deflationary over the past 40 years. They have been of a financial nature, where bubbles have arisen in asset prices that later burst – such as the financial crisis in Japan, the Swedish banking crisis, the dotcom crash and the financial crisis of 2008. Inflation has often been pushed down due to weak demand when household and business indebtedness have been reduced.
Developments during the pandemic were not caused by economic imbalances. The pandemic has affected the supply side by impacting supply chains and freight prices, causing a component shortage and forcing production shutdowns. Demand has been stimulated by major financial and monetary policy support, which is why the pandemic has instead had a reflationary effect.
Finance Minister of Sweden, Magdalena Andersson
Four causes of inflation
Different asset classes are helped or hindered by inflation to varying degrees. The drivers underlying the inflation are the critical factors. We primarily see four separate (but closely interlinked) inflationary factors:
1. Supply of goods and services:
Controlled by the costs of taking goods to market. A supply-driven inflation shock may be due to wage growth or price increases in constituent goods, such as base metals or oil – there was runaway inflation in the 1970s in the wake of the oil crisis. Technological advances that make goods and production cheaper and more efficient help lower inflation – the chip manufacturing and robotification of the past 30 years, for example.
2. Demand for goods and services:
Controlled by individuals’ needs, budgets and willingness to pay. Inflation is often driven by demand outstripping supply, which sometimes takes time to increase – by building housing, for one such example. An expansionary monetary and fiscal policy has increased demand for housing, primarily in the US, where house prices are up 20 percent on an annual basis (Sweden: 13 percent). Price upturns of nearly 10 percent have been recorded for the OECD as a whole.
3. Money supply:
American economist Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” In a nutshell, this means that prices, and economic activity by extension, are directly proportional to the supply of money in circulation. This was the basis for how former Fed chair Paul Volcker chose to deal with the runaway inflation of the 1980s: by suddenly hiking the benchmark interest rate to reduce the money supply.
4. Expectations:
Americans were persuaded that the Fed was willing to take all necessary measures to get the price trend under control, which was critical to Volcker’s success. If households and businesses expect prices to be higher in a year’s time, they plan their finances accordingly by either bringing forward or postponing certain consumption and investment decisions. Wage earners who believe prices are going to go up demand higher wages to keep as much of their purchasing power as possible.
A better climate comes at a price
Greenflation refers to higher costs due to climate action. Some believe the oil price may remain high for a long time due to strong political resistance to new extraction of oil. Demand and prices for aluminium and copper, the two most important metals for electrification and green transition, have risen sharply. New extraction of these metals has impact on the environment, which can trigger protests from environmental groups and government intervention. Mines in Alaska and smelting plants in China (which produces 60 percent of all the aluminium in the world) have been forced to shut down or limit production. The prices of natural gas and electricity are currently exploding in Europe – before the arrival of winter. One reason is that Europe has scrapped coal power and shut down nuclear power plants and renewable energy is not meeting demand. Emission allowances have surged. Russia has cut its gas exports to Europe – the Russians might need the gas for themselves, or they might be aiming to hasten the opening of the Nord Stream gas pipeline that runs between Russia and Germany.
Inflationary environment investments
We have actually not seen a lot of inflation in central bank measurements since the financial crisis, but we have seen enormous asset price inflation, including in real estate, equities and, above all, bonds. Although there is little to suggest that consumer inflation is going to skyrocket to 1970s levels, more investors and managers are presumably abandoning the view that inflation is ‘extinct’ or ‘dead.’ For the first time in a very long time, we can expect somewhat higher inflation in the next few years.
The central banks are presently indicating that they will begin dismantling the current support purchase plans this year and might begin raising interest rates somewhat in 2023. This will have varying impact on asset prices.
Cash and long nominal bonds are called ‘junk investments’ by some because they reduce the holder’s purchasing power, but should, as in the past, be more resilient in the face of a possible major stock market downturn.
Natural resources and commodities: Inflation often goes hand-in-hand with rising commodity prices. The best protection is found in commodities such as energy commodities (oil and natural gas) and base metals (steel, copper, aluminium). Broad exposure to commodities also protects against inflation. The exposure can be obtained through both broad-based and niched ETFs, but also through certain specialised hedge funds.
Commodity producers: Producers of commodities and materials, such as mining and energy companies, benefit from higher commodity prices – they profit immediately when the goods they sell get more expensive. Exposure is obtained via individual equities or sector ETFs.
Real estate: Directly owned real estate has historically provided good protection against rising inflation. Higher prices for building materials increase the building replacement cost and makes it more difficult for new supply to reach the market. Higher inflation thus makes existing properties more attractive. Real estate assets with long leases, such as commercial office and industrial properties, are often automatically adjusted for inflation. There is some sluggishness in residential properties, but a certain level of protection against inflation is achieved as long as rents are regularly renegotiated. Higher interest rates are a risk for properties with a high loan-to-value ratio, but property owners with long-term loans at fixed rates run less interest rate risk. Nominal loans can also be repaid using ‘inflated’ money (SEK). As long as interest rates do not rise too quickly, real estate should provide good protection against inflation in general. Exposure to real estate is obtained by purchasing shares in property companies. Directly owned real estate provides more direct protection against inflation, but it is more difficult for private individuals to obtain exposure here.
There is risk that trade barriers and reduced globalisation combined with expansionary monetary policy will raise the structural inflation rate
Infrastructure: Infrastructure assets share many inflation-proofing characteristics with real estate assets, such as value growth through higher replacement costs, but also higher income from their utilisation. For example, through government regulation, electricity networks have built-in inflation and interest rate components in their pricing structures. Infrastructure assets are even more difficult for investors to obtain exposure to – it is easier to buy a rental property than it is to buy an electricity network.
Alternative strategies for managers who do not exclusively invest in the traditional asset classes (equities and fixed income securities) should have equally good chances to generate returns regardless of whether inflation is high or low. Global macro strategies, for example, can take both short and long exposure in fixed income investments, currencies and commodities. Relative value strategies, which exploit mispricing among the same or similar assets and are not dependent on price changes, are another alternative.
