The world’s most-watched central banks are finally stamping down on a surge in inflation. But this week it became clear that they know this comes at a cost.

From the UK, where the Bank of England raised interest rates for the fifth time in as many meetings, to Switzerland, which bumped up rates for the first time since 2007, policymakers in almost every major economy are turning off the stimulus taps, spooked by inflation that many initially dismissed as fleeting.

But for the big two in particular — the US Federal Reserve and the European Central Bank — the prospect of sharply higher rates brings awkward trade-offs. For the Fed, that is in employment, which is at risk as it pursues the most aggressive campaign to tighten monetary policy since the 1980s. The ECB, meanwhile, this week scrambled an emergency meeting and said it would speed up work on a new plan to avoid splintering in the eurozone — an acknowledgment of the risk that Southern Europe and Italy in particular could plunge in to crisis.

Most central banks in developed countries have a mandate to keep inflation under 2 per cent. But the roaring consumer demand and supply-chain crunch stemming from the Covid reopening, combined with the energy price spiral generated by Russia’s invasion of Ukraine, has made this impossible.



At first, policymakers considered inflation spikes to be transitory. But now, US inflation is running at an annual pace of 8.6 per cent, the fastest in more than 40 years. For the eurozone, it is 8.1 per cent and in the UK, 7.8 per cent. Central banks are being forced to act far more aggressively.

Investors and economists think policymakers will struggle to avoid imposing pain, from rising unemployment to economic stagnation. Central banks have moved “from whatever it takes to whatever it breaks”, says Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

The Fed faces reality

Above all, the US Federal Reserve this week dramatically scaled up its response. It has been raising rates since March, but on Wednesday it delivered its first 0.75 percentage point rate rise since 1994. It also set the stage for much tighter monetary policy in short order. Officials project rates to rise to 3.8 per cent in 2023, with most of the increases slated for this year. They now hover between 1.50 per cent and 1.75 per cent.

The Fed knows this might hurt, judging from the statement accompanying its rate decision. Just last month, it said it thought that as it tightens monetary policy, inflation will fall back to its 2 per cent target and the labour market will “remain strong.” This time around, it scrubbed that line on jobs, affirming instead its commitment to succeeding on the inflation front.

To those familiar with reading the runes of the Fed, this matters. “This was not unintentional,” says Tim Duy, chief US economist at SGH Macro Advisors. “The Fed knows that it is no longer possible in the near term to guarantee” both stable prices and maximum employment.



The prospect of a recession in the US and elsewhere has already sent financial markets swooning. US stocks have posted the worst start to any year since the 1960s, declines that have accelerated since the latest central bank pronouncements. Government bonds, meanwhile, have flipped around violently under the competing forces of recession fears and rising benchmark rates.

“The big fear is that central banks can no longer afford to care about economic growth, because inflation is going to be so hard to bring down,” says Karen Ward, chief market strategist for Europe at JPMorgan Asset Management. “That’s why you are getting this sea of red in markets.”

At first glance, fears of a US recession might appear misplaced. The economy roared back from Covid lockdowns. The labour market is robust, with vigorous demand for new hires fuelling a healthy pace of monthly jobs. Almost 400,000 new positions were created in May alone, and the unemployment rate now hovers at a historically low 3.6 per cent.

But raging inflation puts these gains in jeopardy, economists warn. As the Fed raises its benchmark policy rate, borrowing for consumers and businesses becomes more costly, crimping demand for big-ticket purchases like homes and cars and forcing companies to cut back on expansion plans or investments that would have fuelled hiring.

“We don’t have in history the precedent of raising the federal funds rate by that much without a recession,” says Vincent Reinhart, who worked at the US central bank for more than 20 years and is now chief economist at the Dreyfus and Mellon units of BNY Mellon Investment Management.



The Fed says a sharp contraction is not inevitable, but confidence in that call appears to be ebbing. While Fed chair Jay Powell this week said the central bank was not trying to induce a recession, he admitted that it had become “more challenging” to achieve a so-called soft landing. “It is not going to be easy,” he said on Wednesday. “It’s going to depend to some extent on factors we don’t control.”

That more pessimistic stance and the Fed’s aggression against rising prices has compelled many economists to pull forward their forecasts for an economic downturn, an outcome for the central bank that Steven Blitz, chief US economist at TS Lombard, says was a “moment of their own design” by moving too slowly last year to take action against a mounting inflation problem. Most officials now expect some rate cuts in 2024.

“Because of their inept handling of monetary policy last year, and their own belief in a fairytale world as opposed to seeing what was really going on, they put the US economy and markets in this position that they now have to unwind,” he says. “They were wrong and the US economy is going to have to pay the price.”

Whatever it takes?

The ECB has a challenge of a more existential kind.

This week it called an emergency meeting just days after its president Christine Lagarde announced a plan to raise rates and to stop buying more bonds in July. That plan makes sense in the context of record-breaking inflation. But it had the awkward effect of hammering government bonds issued by Italy, historically a big borrower and spender. Italy’s 10-year bond yield rose to an eight-year high above 4 per cent and its gap in yields from Germany hit 2.5 percentage points, its highest level since the pandemic hit two years ago.

This outsized pressure on individual member states’ bonds makes it hard for the ECB to apply its monetary policy evenly across the 19-state eurozone, risking the “fragmentation” between nations that ballooned a decade ago in the debt crisis. Faced with early signs of a potential rerun, the ECB felt it had to act.

Italian central bank governor Ignazio Visco said this week that its emergency meeting did not signal panic. But he also said that any increase in Italian yields beyond 2 percentage points above Germany’s created “very serious problems” for the transmission of monetary policy.



The result of the meeting was a commitment to speed up work on a new “anti-fragmentation” tool — but with little detail on how it would work — while also reinvesting maturing bonds flexibly to tame bond market jitters.

Some think this is not enough. It has certainly not repeated the trick achieved by Lagarde’s predecessor Mario Draghi — now the Italian prime minister — who famously turned the tide of the eurozone debt crisis in the summer of 2012 simply by saying the central bank would do “whatever it takes” to save the euro.

For now, the ECB has halted the downward spiral in Italian bonds, stabilising 10-year yields at about 3.6 per cent with the spread at 1.9 percentage points. But investors are hungry for details of its new toolkit.

“All the ECB did [this week] was show it is watching the situation,” says one senior London-based bond trader. “It does not have the leadership that’s willing or able to do what Draghi did. Eventually the market will test the ECB.”

The central bank hopes that by introducing a new bond-buying instrument it will be able to keep a lid on the borrowing costs of weaker countries while still raising rates enough to bring inflation down.



Hawkish rate-setters at the ECB normally dislike bond-buying, but they support the idea of a new tool, believing it will clear the way to increase rates more aggressively. Deutsche Bank analysts raised their forecast for ECB rate rises this year after Wednesday’s meeting, predicting it could lift its deposit rate from minus 0.5 per cent to 1.25 per cent by December.

“Central banks will hike until something breaks, but I don’t think they’re convinced that anything has broken yet,” says James Athey, a senior bond portfolio manager at Abrdn.

Financial asset prices have tumbled, but from historically elevated levels, he says, and policymakers who have in the past been keen on keeping their currencies weak — a boon for exports — are now raising rates in part to support them, to deflect inflationary pressures.

“The [Swiss National Bank] is a case in point,” he says. “All they have done for a decade is print infinite francs to weaken their currency. It’s a complete about face.”

The Swiss surprise leaves Japan as a lone holdout against the tide of rising rates. The Bank of Japan on Friday stuck with negative interest rates and a pledge to pin 10-year government borrowing costs close to zero.



The BoJ can afford to bet that the current bout of inflation is “transitory” — a term ditched long ago by central banks elsewhere in the developed world — because there is little sign that the commodity shock is shaking Japan from its long history of sluggish price rises in the broader economy. Consumer inflation in Japan is hovering at about 2 per cent, broadly in line with targets.

Even so, the pressure from markets has become intense. The Japanese central bank has been forced to ramp up its bond purchases at a time when other central banks are powering down the money printers, to prevent yields being dragged higher by the global sell-off. At the same time, the growing interest rate gulf between Japan and the rest has dragged the yen to a 24-year low against the dollar, spreading unease in Tokyo’s political circles.

The pain from rate rises will be felt globally, Athey predicts. “When the basics that everyone needs to live, like food, energy and shelter, are going up, and then you jack up interest rates, that’s an economic sledgehammer. If they end up actually delivering the tightening that’s priced in then economies are in big trouble.”

Alex Mashinsky used to like to tell people that “banks are not your friends”. Banks stopped caring about their depositors, he said, and haven’t innovated since the automatic teller, a line he borrowed from former Federal Reserve chair Paul Volcker.

Mashinsky, chief executive of crypto lending platform Celsius, is now suffering from a rather banklike problem: after a big increase in withdrawals of crypto deposits, his company has had to suspend such redemptions. The move will “put Celsius in a better position to honour, over time, its withdrawal obligations”, according to a company statement. To honour over time: this, too, is a rather banklike way of phrasing a promise.

It’s always satisfying to watch the third act of a play about hubris. But banks, particularly American banks, are not your friends. They provide month-to-month liquidity to consumers through credit cards at rates that remain high no matter what the Fed does. They make transfers needlessly difficult and expensive. They charge by the month to manage small-dollar deposits, and can’t quit the destructive habit of imposing huge fees on minor overdrafts. Something does need to fix banks. It’s just that crypto assets, crypto liabilities and crypto culture don’t seem to have been up to the task.

Mashinsky, like other crypto believers, seems to be making a structural argument: banks are bad, so good thing we’re not a bank. But Celsius takes deposits and lends at interest. So Mashinsky is actually making a cultural argument; he’s promising to be a better banker than all those other bankers. The challenge with the cultural argument against bankers is that there’s a reason why they don’t provide better financial products for consumers: the returns are terrible. To be a better banker, unfortunately, you don’t need to be more innovative. You have to want to do good.

In May, just as cryptocurrencies were collapsing in value, the Fed released the results of its annual survey of economic wellbeing in American households. Overall, 19 per cent of families either used alternative financial services such as cheque-cashers, or did not have a bank account at all. These portions are dramatically higher for families without a high-school degree, or who earned less than $25,000 a year. They’re higher for Black and Hispanic families, as well.

The Fed’s report is consistent with 2019 survey data from the Federal Deposit Insurance Corporation, which offers a little more detail on why so many people seem genuinely to believe that banks are not their friends. Of those without bank accounts, half say that they don’t have enough cash to meet minimum balance requirements — almost a third give this as their main reason. This is not a question of financial education. Avoiding fees on small-dollar deposits, and in particular the punitive and unpredictable fees on small overdrafts, is a rational choice.

Banks don’t charge these fees because they lack the ability to innovate. They charge fees because fees are a good way to boost margins, particularly on low-balance accounts. A study this year by the US Government Accountability Office found that for banks with more than $1bn in assets, overdraft fees make up just over 1 per cent of operating revenue. The Cities for Financial Empowerment Fund, a non-profit, has developed standards for checking accounts with low balances, low monthly costs and no overdraft fees, but so far only 238 of 4,800 FDIC-insured banks and savings institutions have voluntarily adopted those standards. A bank can be your friend. But it’s not an innovation. It’s a choice.

That Fed survey offers an interesting picture of what kinds of services people are turning to instead. To start with, they’re just not that into crypto. Last year, 12 per cent of American adults did hold some kind of cryptocurrency. That’s not nothing. But almost all of them held crypto as an investment, not as a service. Only 2 per cent had used a cryptocurrency to buy something, and 1 per cent to send money to friends or family. Crypto doesn’t seem to be more appealing than the banks. It does seem to be more appealing than the stock market — sometimes, though obviously not right now.

A far higher portion of Americans, 10 per cent, used a buy now, pay later service last year. Borrowing a small amount on purpose from a BNPL service is a better experience than borrowing a small amount on accident from a bank through an overdraft on your cheque account. These services have their own challenges with consumer protection, and tend not be profitable over the long term, particularly if they’re regulated as thoroughly as the banks they so clearly resemble.

At the very least, however, buy now, pay later seems to be a banking innovation that people actually want to use — as intended, and not as a back door to higher investment returns. Mashinsky is right. Banks are a problem. But banks have always been a problem. That doesn’t mean that crypto is the solution.

Is it time to buy the dip? Some fund managers think so.

US stocks suffered another brutal sell-off this week. The S&P 500 index has now fallen nearly a quarter from its January high. Yet for all the talk about a looming recession following the Federal Reserve’s monster 0.75 percentage points interest rate increase, people continue to park their money in American equities.

Investors pumped $14.8bn into US equity funds in the week to June 15, according to EPFR Global data. That marks the sixth consecutive week of gains for the asset class and stood in contrast to an outflow of nearly $9bn from US corporate bond funds.

The urge to bottom-fish is understandable. The “buy the dip” strategy has rewarded investors handsomely in the past. The S&P 500 more than doubled from its March 23, 2020 low during the pandemic to its January 3 high this year. Those who bought at the bottom would still be sitting on a 60 per cent return despite the current rout.

US small caps and value stocks are popular. Funds that invest in those two asset classes received $6.6bn and $5.8bn in inflows this week.

Investors resolve will be tested. The sell-off may still have some way to go. Macroeconomic conditions are quite different from 2020. Then, low interest rates and emergency stimulus programs helped shore up the economy. The flow of cheap money kept valuations of buzzy, lossmaking tech companies sky high.

These days, inflation is at a 40-year high. Stimulus has ended. The Fed has embarked on an aggressive tightening cycle. Interest rates will stay elevated for a while. Corporate profits are under pressure.

Analysts are over optimistic to believe S&P 500 companies will increase average profits by 10 per cent this year, according to Capital IQ data.

Valuations do not yet look cheaper. The S&P 500 is currently trading on 16 times forward earnings, compared with 14 times during the pandemic. Investors should wait for a bigger dip to buy into.

An interesting thing about flash crashes is that they should no longer happen. The rules to protect markets against algorithmically generated disorder are established, wide-ranging and highly demanding.

Problem is, those rules don’t seem to be applied.

Consequences can appear obvious, such as last month, when European markets sold off after a Citigroup trader in London reportedly added an extra zero to an order. Cross-market ripple effects that session strongly suggest that algos across multiple firms were failing to respond to thinner-than-usual volume and contributing to the turbulence. That in turn raises difficult questions around whether the same algos might be rocking the boat in less obviously stressed conditions.

An overarching rule of securities legislation is that market abuse is market abuse, irrespective of whether it’s committed by a human or machine. What matters is behaviour. An individual or firm can expect trouble if they threaten to undermine market integrity, destabilise an order book, send a misleading signal, or commit myriad other loosely defined infractions. The mechanism is largely irrelevant.

And importantly, an algorithm that misbehaves when pitted against another firm’s manipulative or borked trading strategy is also committing market abuse. Acting dumb under pressure is no more of an alibi for a robot than it is for a human.

For that reason, trading bots need to be tested before deployment. Firms must ensure not only that they will work in all weathers, but also that they won’t be bilked by fat finger errors or popular attack strategies such as momentum ignition. The intention here is to protect against cascading failures such as the “hot potato” effect that contributed to the 2010 flash crash, where algos didn’t recognise a liquidity shortage because they were trading rapidly between themselves.

Mifid II (in force from 2018) applies a very broad Voight-Kampff test. Investment companies using European venues are obliged to ensure that any algorithm won’t contribute to disorder and will keep working effectively “in stressed market conditions”. The burden of policing falls partly on exchanges, which should be asking members to certify before every deployment or upgrade that bots are fully tested in “real market conditions”.

But what that means in practice gets complicated quickly, because for specifics it’s necessary to dive into Mifid II's Regulatory Technical Standards (RTS) updates.

RTS 6 sets out the basic self-assessment framework for investment firms to certify that their bots won’t antagonise markets. Its sequel, RTS 7, has a separate and completely different definition around whether bots will contribute to market disorder. In short, an RTS 7-compliant firm must certify that all systems won’t amplify any market convulsion, and must include an explanation of how this testing has been done.

RTS 6 is well understood, but how many trading firms are meeting the RTS 7 criteria? According to Nick Idelson, technical director of consultancy TraderServe, it’s likely that fewer than half have stress tested their algo strategies to the standard required. The scale and complexity of the job suggests even this estimate may be optimistic.

Mifid II’s definition of an algo lets through automated venue routing and catches pretty much everything else. If there’s “limited or no human intervention” required when generating a quote, it’s an algo. If pre-determined parameters control price, order size or timing, it’s an algo. If there’s any post-submission strategy in place other than straightforward execution, it’s an algo. Stress tests of these systems need to prove that everything will work as intended both individually and in combination.

Equally broad is the regulation’s reach, which applies to all Mifid II-defined financial instruments on any venue that allows or enables algorithmic trading. The “or enables” bit puts within its scope venues that ban automated trading strategies, as well as those without auto-matching trading systems. (See question 31 of ESMA’s 2021 Q&A.) Using a strict interpretation of the rules it’s almost impossible for any trade to meet best execution obligations without also being defined as automated.

Penalties for non-compliance are significant, at up to €15mn or 15 per cent of turnover for firms and up to four years in prison for individuals. The global picture is similar, with IOSCO’s market integrity principles providing a cross-border enforcement framework.

But in contrast to the US (where JPMorgan Chase landed a $920mn settlement in 2020 for spoofing precious metals futures) and Hong Kong (where Instinet Pacific and Bank of America have been fined for bot management failures) the approach to algo policing in the UK and Europe has been softly-softly. As the FCA noted in its May 2021 Market Watch bulletin:



One hurdle the regulators face is around definitions, because it’s tricky to pin down exactly what contribution-to-market-disorder stress testing means.

Is it enough for firms to run historic markets data through bots within a sandbox? Or does such an approach risk missing the feedback loops created when the fleet interacts with responsive markets? TraderServe has worked with regulators on best practices using live market simulations yet, according to Idelson, it remains impossible for an outsider to know whether any firm’s approach to testing was comprehensive, cursory or nonexistent. For that reason, establishing some public precedents would be useful.

Judged by the weaknesses exposed by the Citi flash crash, Europe’s nudge approach to bot regulation is looking insufficient. But the wide-ranging obligations set out in Mifid II make more proactive forms of policing difficult to maintain. If non-compliance is as widespread as it appears, the most effective form of enforcement available to regulators may be a good old-fashioned show trial.

Further reading:
AI Trading and the limits of EU law enforcement in deterring market manipulation — Computer Law & Security Review (PDF)

ESG and emerging markets: Doing more harm than good?

Undermining development in poor countries is not something any investor would want to achieve with an ESG strategy. But that is precisely what seems to be happening, according to a troubling report out this week.

The study, carried out for the UK government by the consultancy Intellidex, aimed to identify the big impediments to capital flows into developing countries, through interviews with 52 market professionals. One of the biggest obstacles, it found, is the rise of ESG strategies.

“It was a surprise to me, to what extent ESG — as it’s practised — is not aligned with the SDGs,” Intellidex co-founder Stuart Theobald told Moral Money, referring to the UN’s 17 Sustainable Development Goals, which target issues ranging from hunger to education.

The key problem, according to the report, is the emphasis that many ESG strategies put on avoiding risk — especially of the reputational sort — rather than achieving positive impact. That very often leads investors to “downweight” developing markets, or avoid them altogether — either because of concerns about social and governance flaws, or a simple lack of data.

That ESG headwind is the last thing these countries need amid a broader souring of investor sentiment as global interest rates rise. Emerging market bonds have been suffering their steepest falls for almost three decades. There have been sharp outflows, too, from equities in developing countries, which have been underperforming in recent years.

So what’s the answer? An obvious one is tackling that lack of data. Intellidex is urging development institutions to help create user-friendly platforms that EM businesses can use to share the ESG data sought by investors. Fuller and more frequent reporting of economic data by national governments could also have a big impact.

But the effect of such measures can only go so far without a fundamental rethink of the ESG paradigm, Theobald argues. “Do we merely want to have capital swerving certain issuers, or do we want capital to be flowing towards opportunities to deliver on our social and environmental objectives?” While much ESG reporting is preoccupied with dodging risks, Intellidex argues for a far greater emphasis on “additionality”, centred on how far investments further the SDGs.

“A lot of investor behaviour is about reputational risk fundamentally. It’s about being nervous about anything that might bite you,” Theobald said. “If you want to make a big difference, you have to trade in harder, more difficult markets, and you’ve got to have a risk appetite for that.”

ESG investors’ nervous approach to frontier markets might be understandable. But if their strategies are impeding urgently needed capital flows, that looks like a pretty dire risk in itself — reputational and otherwise. (Simon Mundy)

Mutual funds target scope 3 in SEC proposal



The comment period ends today for the Securities and Exchange Commission’s big climate proposal, and lobbying associations — companies’ attack dogs in Washington — have submitted thousands of letters to the agency.

Among the notable responses, the fund industry, represented by the Investment Company Institute, said the SEC’s requirement to make companies publish their scope 3 emissions would not work.

“Currently, data gaps and an absence of agreed-upon methodologies would leave deficiencies in any such disclosure,” ICI said. “It is difficult to see how an overwhelming amount of additional disclosure, difficult to produce and validate, would add value for investors.”

The ICI’s scope 3 stance is expected. The lobbying group last year warned the SEC not to include scope 3 among its climate demands.

Other investors also threw cold water on such disclosures. Harvard University’s endowment manager said that it was reasonable for companies to disclose their own scope 3 emissions as part of reduction targets. But it might not be useful information for investors.

Despite their scope 3 concerns, investors broadly applauded the SEC’s climate rules. Companies, however, are digging in to fight. The US Chamber of Commerce said the SEC did not have the authority to impose climate and environmental regulations. Petroleum lobbyists said they wanted the proposal rescinded.

The investors’ concerns about scope 3 disclosures imperil the SEC’s desire to require that information. Given its size in the financial industry, investment funds hold sway at the SEC. If the SEC preserves scope 3 disclosures in its final rule, it will be skating on thin ice.

All this posturing does not change the high likelihood that the SEC’s final rules will be challenged in court. Washington’s big law firms are licking their chops at the hefty fees they can bill to bring the case to a courtroom.

But the action on this proposal will take a pause until the autumn when the SEC begins drafting the final rule. (Patrick Temple-West)

It has been a brutal year on financial markets. Stagnant economic growth and soaring inflation have sent global stocks and bonds falling in tandem, leaving investors “nowhere to hide” according to the head of AllianceBernstein, the giant US asset manager.

So this may not seem an ideal time to take a bet on emerging markets, traditionally a very volatile asset class — particularly not for retail investors, who mostly lack the time and the knowhow to gather information on the vast and varied world of developing economies.

Yet this is what some analysts suggest. For example, the asset management arm of Pictet, the Swiss bank, says emerging market equities could deliver double-digit annual returns over the next five years. It recommends them not as a speculative punt but as part of a balanced portfolio.

FT Money takes a look at the arguments of the bulls and the bears at this difficult time in financial markets — and considers what might be right for retail savers.

Emerging markets as an asset class have been around since the late 1980s, often delivering returns that investors in comparatively staid markets in the rich world could only dream of. In the six and a half years from when China joined the World Trade Organization in late 2001 — turbocharging emerging economies with its apparently insatiable demand for the raw materials many of them produce — to the eve of the global financial crisis of 2008, emerging market equities delivered returns of 300 per cent in US dollar terms. American stocks managed a fifth as much in the same period.

Since then, however, US stocks have staged a steady march upwards while EM stocks have gyrated.



This year, investors have taken flight. Mutual funds and exchange traded funds, the main vehicles for retail investors and for many institutional investors, have dumped more than $40bn of emerging market bonds this year according to EPFR Global, a Boston-based research company that tracks fund flows. Flows into EM equity funds, which held up well last year on the promise of a post-pandemic recovery, have also turned negative since the start of May. The benchmark stock index, the MSCI-EM, is down almost 20 per cent this year.

Investors have plenty of reasons to worry. This year’s surge in inflation worldwide, rising interest rates and a widespread slowdown in economic growth are all bad for EM assets, as investors worry that these often vulnerable economies will be hurt the hardest. China’s aggressive zero-Covid policy, with its paralysing lockdowns, and Russia’s war in Ukraine make the outlook bleaker.

The question is, how long will the bear market last? The forces arrayed against emerging markets are powerful and show little sign of fading any time soon. Nevertheless, a handful of asset managers are saying now could be the time to get involved. While the outlook for the rest of this year remains deeply uncertain, they say, this could still be a good entry point for those with a five to 10-year horizon.

“Valuations today are attractive,” says Arun Sai, senior multi-asset strategist at Pictet Asset Management in London. “We are not saying they are going to shoot the lights out, and investing in EMs tactically is never a valuation call. But where valuations do help is in guiding returns over the medium to long term.” 



Dzmitry Lipski, head of funds research at Interactive Investor, a UK online investment platform, also sees valuations as attractive, especially for EM stocks, which are trading at a discount to those in developed markets.

“Nevertheless, investors should be very cautious and selective, as the asset class consists of a diverse collection of countries and companies,” he says.

Forces lined up against EM

Valuations are low for several reasons, of course. Chief among them, says David Hauner, head of EM strategy and economics at Bank of America Global Research, is tightening global financial conditions, as the US Federal Reserve, the world’s biggest central bank, begins raising interest rates and reversing the flood of stimulus it has poured into markets during the pandemic.

“The prospects for EM assets can mostly be summarised by the level of global liquidity, which in this case is clearly getting worse,” Hauner says.

The amount of liquidity, or money looking for investments, in global financial markets is a core driver of asset performance. Since the global financial crisis of 2008-09, central banks in advanced economies, led by the Fed in the US, have run aggressive bond-buying programmes to encourage investors to buy risky assets, hoping this will boost economic activity and output.

It is debatable whether such purchases, known as quantitative easing or QE, did much to drive economic growth. But they have certainly done a lot to boost asset prices. Now, however, those policies are going into reverse. This year, the Fed has begun to raise interest rate and to swap quantitative easing for quantitative tightening, or QT.

Although QT only got under way officially at the start of June, CrossBorder Capital, a London-based analytics firm that monitors global liquidity, says the Fed has been discreetly withdrawing liquidity from US money markets since December. In a report this month, it says such withdrawals already amounted to a net $1tn, more than a tenth of its balance.

Drawing a direct correlation between global liquidity and global wealth, CrossBorder Capital says: “A rising tide may well float many boats but a tsunami of monetary tightening unquestionably sinks asset markets. More pain lies ahead.”

For emerging market assets, rising interest rates and falling liquidity can be especially bad news. When times are good, EM stocks and bonds attract interest from so-called crossover investors — people who do not typically invest in EMs but will put some of their money in when times are good. They tend to be slow to join but quick to leave when the tide turns.

Incentives for such investors have changed dramatically over the past year. A year ago, the 10-year US Treasury bond — the benchmark “risk free” asset — paid a yield of about 0.75 per cent. Today, it pays more than 3 per cent — more than a Chinese 10-year government bond.

For EM bond investors overall, the outlook this year is bleak. In any economy, rising interest rates cause bond prices to fall, as investors expect higher rates to slow economic growth. As inflation and rising rates in advanced economies push up the yields on so-called safe assets such as US Treasury bonds, they also stoke anxiety about economic growth worldwide. This in turn raises fears of insolvency among bond issuers in developing economies, so that their bonds fall in price by more than those in the rich world.



A related headwind to rising interest rates is the rising US dollar. The Fed’s index of the dollar’s value against a basket of 26 global currencies, which fell for almost a year from its most recent peak at the start of the pandemic, has bounced back and reached a new record high last month. This is a worry for emerging market governments and corporates that borrowed in foreign currencies, as well as those that borrowed at variable rates. As the World Bank has noted, external public debt in developing countries is at record levels. It warns: “Debt distress — previously confined to low-income countries — is spreading to middle-income countries.”

Many larger EMs, including Brazil, India and South Africa, have avoided foreign exchange risk by borrowing in their own currencies. But they have also had to raise interest rates early and aggressively to fight inflation. Even for them, rising borrowing costs are a drain on other fiscal resources, putting a brake on investment for growth.

Since the one-off boost to commodity exporting EMs from China’s arrival at the WTO, many developing economies have struggled to find a new path to growth.

For investors able to do the research, investing in EMs has become increasingly an issue of diversification, with many questioning the validity of lumping so many different countries together in a single asset class. When the MSCI EM index — the benchmark for many equity funds — was launched in 1988, Malaysia was the biggest EM, with more than a third of the index; China only joined in 1996, with a weight of just 0.46 per cent.

Today, Chinese equities make up more than 30 per cent of the MSCI EM, followed by Taiwan, India, South Korea and Brazil. Russia has been dropped altogether after its invasion of Ukraine.

Raw materials, which used to dominate, now account for just 9 per cent, with less than 8 per cent split between energy and utilities. Financials, information technology, consumer discretionary and communications services make up two-thirds of the index.

Today’s composition, EM enthusiasts argue, leaves these economies well positioned to gain from post-pandemic, postwar, post-stagflation world development, when (and if) it comes.

Calling the bottom

Brett Diment, head of emerging market debt at Abrdn, a London-based asset manager that specialises in emerging markets, argues that recent rises in US interest rates have already started to tilt the balance by slowing the US economy and reducing the appeal of the dollar.

Another factor that could soon start to weigh in favour of emerging market assets is the relative pace of US economic growth compared with the rest of the world. While other advanced economies are unlikely to catch up with US growth rates soon, a narrowing in the gap may be enough to encourage US investors to think again about overseas assets. That could also be good for emerging market assets.

The problem is that most emerging markets are struggling to deliver very much economic growth at all. The World Bank, in a report this month, warned that per capita output growth in developing economies outside China will be slower this year and next than in advanced economies.

This undermines the basic case for investing in EMs at all — that they grow faster than advanced economies.

“What debt investors in particular are looking for [in emerging markets] is improvements in balance sheets, better fiscal situations, better current accounts and so on,” says Hauner at Bank of America. “But net-net, EM is likely to deteriorate and when you go down into the countries, it is very hard to find stories where this or that country is on an improving path.”

This is especially true of China — for many years the biggest single engine of EM growth — where investors worry the government will struggle to exit from its aggressive zero-Covid policy. This has shut down large sectors of the economy, dragging down growth rates both for China and those developing countries that rely on it as an export market.

Positive signs

Nevertheless, there may be grounds for optimism. This year, for sure, Covid-19 casts a shadow over Chinese growth. So does geopolitics with Russia’s invasion of Ukraine and increased fears that China will attempt to take Taiwan.

But Sai at Pictet Asset Management argues it is a given that the pandemic will pass and sees encouraging signs in a moderation of the amount of new regulation the Chinese government has imposed on various areas of economic activity.

“Our view is that [the recent increase in regulation] is the government putting in guardrails for Chinese corporates to operate in,” he says. “Have we been able to time this? No. Have people called for a let-up in the past, which has not materialised? Yes, and we have had false starts.

“But this is not the Chinese leadership rewriting its economic model . . . we think this headwind will fall away, and that should lead to some reasonable re-rating.”

Until recently, expectations for Chinese equities were often unrealistic. He says: “That has been washed out now, so some of that froth has been skimmed off.”

Still hanging over the investment outlook, however, is Russia’s war in Ukraine. António Guterres, the United Nations secretary-general, warned this month that the war was “threatening to unleash an unprecedented wave of hunger and destitution”.

The damage will be particularly severe in developing countries, with the worst impact for those countries most affected by the disruption in supplies of food and fuel from Russia and Ukraine.

Conversely, for alternative suppliers, such as the commodity exporters of Latin America, there have seen some gains — although these may be overshadowed by a bigger overall hit to EM growth as a result of the war.

Time to dial up the risk?

While mindful of these risks, some analysts say a good part of the potential downside is already reflected in EM asset prices. Diment at Abrdn says: “We are looking to get a little bit less defensive across our EM strategies, adding a bit of risk.”

Pictet’s latest five-year outlook report, published this month, predicts that returns over that period will be driven by commodities, private markets and EM.

For the sake of simplicity, Sai says, Pictet takes as its benchmark a 50/50 split between global stocks and bonds, with 5.5 per cent allocated to EM equities. With today’s outlook, this would deliver only about 2 or 2.5 per cent annual returns over five years.

But double-digit returns are possible from EM equities and other high-risk assets, including alternatives such as infrastructure, real estate and private equity, he says.



To achieve 5 per cent returns with a reasonable level of risk, he says, investors should first adopt a more conventional allocation split of 60/40 in favour of equities, with 14 per cent in EM equities. For those with greater appetite for risk, Pictet suggests putting almost a quarter of a portfolio into alternatives, leaving a bit less than 30 per cent in bonds and about 50 per cent in equities, with 13 per cent in EM stocks.

Lipski at Interactive Investor notes that investor behaviour on the platform this year has mirrored that of global markets, with sharp outflows from all three of the main investment vehicles — funds, investment trusts and exchange traded products.

Savers who now go back into the markets, including EMs, need to take care. Lipski cautions that it is not a good time to rely on passive funds that mirror the benchmark indices, which were so popular in the bull market.

He says: “As there are likely to be clear winners and losers in this market, active managers employing more flexible approach and accurately managing risk, should be a better choice for investors.”

In other words, investors who decide that the sell-off is a time to buy, should do their homework. Those who want to spend less time managing their investments might be more comfortable in less tricky waters.

Some market data has been updated since publication.

Trigger warning: if you are a crypto fanatic you may find this column both offensive and distressing.

Right, that bit out of the way, it is not crypto I want to start with. It is other, lesser, chaos. If you spent the past few weeks attempting to navigate stock markets — or attempting to ignore them — you might have the feeling that everything is unmapped, unprecedented and unpredictable.

But it isn’t really so. We have had no shortage of warnings from history — and from many a market old timer — about all this. We know that over easy fiscal and monetary policies lead to inflation.

We know that very low real interest rates tend to lead to capital misallocation. We know that investors mostly don’t like inflation to get over 4 per cent — although they were a little too sanguine when it hit 4 per cent this time around.

We know that long-duration stocks — the jam-tomorrow ones that soared during the pandemic years — are very sensitive to moves in interest rates. We know that long-term market valuations tend to return to the mean — and we have lots of rules of thumb that give us some hints as to when we should start worrying about that kind of thing.

Think of Warren Buffett’s focus on the ratio of total US stock market valuation to US GDP for example — the latter is currently rather higher than the former, something which suggests the US market is still unpleasantly overvalued.

We have also had lots of numbers to add to those rules of thumb — there is an almost overwhelming volume of data on stock markets. So we know, for example, that even at the end of April this year the US market was trading at somewhere between 30 per cent and 50 per cent higher than its 15-year median on pretty much every valuation method you might have thought of using — for example, 50 per cent for price to book and 33 per cent for dividend yield.

We are also aware that there was no major market globally that could be considered properly cheap. If you think of that — as Duncan Lamont, head of research and analytics at Schroders, does — as being over 15 per cent below the 15-year median in valuation terms, this represented a pretty clear and present danger to markets.

Things have eased a little over the past week — Lamont’s latest numbers have most markets showing at least some green with even US stocks, as measured by the MSCI US index — 6 per cent below their 15-year median, at least in terms of the trailing price/earnings ratio.

These numbers don’t tell us everything of course — in a world of cost-push inflation and super-stressed consumers, the e in lots of p/e calculations is likely to be too optimistic meaning valuations are actually even higher than they look.

At the same time the past 15 years have been all about the easy money macro regime that we are now leaving far behind us: over the past 15 years, for example, the US median p/e has been 19.6 times, but over the very long run it has been more like 17.5 times. Maybe 17.5 is a more relevant number to watch. Something to worry about.

We also know quite a lot about how bear markets tend to play out. We’ve seen these kinds of multiple collapse before — think the early 1970s, 1987 and the early 2000s — and we’ve also seen profit collapses of the type we might now expect.

Liz Ann Sonders, chief investment strategist at Charles Schwab, has looked at US market falls in bear markets (including those that fell 19 per cent rather than the full technical 20 per cent) with recession and without recession.

The average market fall in the no-recession group has been 28 per cent and in 34 per cent with recession — not much difference in the great scheme of things but it is worth noting that the recessionary bear markets lasted on average twice as long as the non-recessionary.

Lamont has also looked at how long losses have lasted in previous market collapses — in nominal terms. If you had stuck with stocks after the first 25 per cent fall in markets in 1970, 1974, 2001 and 2008 you would have been even after somewhere between 2 and 4.8 years.

If you had dashed for cash after a 25 per cent fall instead, that number rises very substantially — to 5.3 after the crash of 1974, and to very big indeed post-2001, as you are still under water.

More to worry about. The key point here is that we might not know quite which template to use for the crash of 2022 yet (although the 1970s look like the best place to start). But we do at least have templates to choose from. It is also worth noting that using these templates is not about recognising that there is value in listed companies — of course there is. It is about figuring out how to price that value in any one environment.

On to the offensive and distressing bit. Ready? None of the above is true of cryptocurrencies. None of it. There is no template for their behaviour — there is no history to lean on. And there is also very little to back up the idea that there is value in crypto that we can find a way to price rationally.

It isn’t a store of value — bitcoin is 70 per cent off its highs and down 25 per cent in the last five days alone. It isn’t an inflation hedge — it would be up 10 per cent this year if it were. It isn’t uncorrelated to interest rates — far from it!

It doesn’t provide a hedge to equity markets — again, far from. It isn’t better at shifting money around the place than conventional methods — for those of us not evading taxes, money laundering or fleeing war zones.

It isn’t environmentally friendly and, crucially, it isn’t easy to use. As all the fluff around it disappears it is hard to see what will be left for crypto holders.

This is the first bubble that has even been quite like this: you may have lost all your money in the tulip bubble for example. But tulip bulbs can be planted or, in extremis, eaten — they taste a bit like onions . . . 

All in all, so far all that bitcoin — and the other cryptos — have proven themselves to be is temporarily turbocharged plays on money printing. I can make a case for there being residual value in almost any asset. I can’t make one for bitcoin. I’ll keep holding my £1,000 worth (once £4,000 worth) as a tiny hedge against my old-fashioned thought processes. But when I use the templates of the past to tot up the current value and the expected minimum value of my overall portfolio (this is not a happy calculation to make) I will continue to value it at £0.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal. Author's email: merryn@ft.com

Glencore expects to make more money in six months than it typically generates from its marketing business in an entire year as commodity traders profit from soaring prices and volatility following Russia’s invasion of Ukraine.

The Swiss-based company said on Friday that earnings in its marketing business for the first half of the year were likely to exceed $3.2bn, representing the top of end of the $2.2bn-$3.2bn guidance it had given for earnings across the entire year.

“Our marketing segment’s financial performance has continued to be supported by periods of heightened to extreme levels of market volatility, supply disruption and tight physical market conditions, particularly relating to global energy markets,” the company said in a trading update.

It is the second major commodity trader to reveal soaring earnings from high prices and the redrawing of trade flows resulting from the war in Ukraine. Trafigura last week reported record profits of $2.7bn for the six months to the end of March, up 27 per cent from last year.

Glencore said it expected “more normal market conditions” to return in the second half of the year. Still, it is on course to far exceed the record $3.7bn in earnings before interest that the trading business generated last year.

Citibank said it now expected the trading, or ‘marketing’, division to generate full-year earnings of at least $5bn. In addition to $5bn in dividends expected in 2022 and 2023, as much as $20bn could be returned to shareholders over the next 18 months through share buybacks, it added.

Shares in the London-listed company have risen more than 25 per cent this year, exceeding 500p a share in March for the first time since its initial public offering in 2012. Glencore shares rose almost 2 per cent on Friday.

In addition to shifting millions of tonnes of metals, minerals and oil across the globe, Switzerland-headquartered Glencore is also a leading mining house and a major producer of copper and coal.

Glencore said it had realised particularly high prices for its coal, which has become one of the company’s biggest earners. However, that business was also facing higher costs for diesel, explosives, logistics and electricity, Glencore said.

Activist investor Bluebell Capital Partners has previously called on Glencore to spin off its coal division, arguing that the company’s value would increase if it did not produce the polluting fossil fuel.

Chief executive Gary Nagle has told investors it was in the best interests of the company and “the planet” for Glencore to run down its coal mines over the next 30 years.

Glencore is aiming to cut its total emissions by 50 per cent by 2035 compared with 2019 levels and achieve net zero emissions by 2050, but 24 per cent of shareholders voted against the company’s climate progress report in April.

As a result Glencore must now speak to its biggest shareholders to consider changes to its strategy and provide an update in the next six months.

Though obituaries were written long ago, King Coal not only survives but thrives. Glencore’s trading update on Friday featured a punchy assessment of the coal price, combined with news of a barnstorming performance from its marketing arm.

Despite all its past woes, this revealed why the London-listed natural resource company has become so popular following Russia’s invasion of Ukraine, at least for investors who can stomach the black stuff’s environmental impact.

Glencore’s marketing arm, customarily adept at navigating volatile markets, made the most of wild price swings. It should rake in more operating profit in the first half as it typically does in a full year. But the bulk of its profits — about two-thirds over the past two years — come from the mining side.

Coal mining — second only to copper in ebitda contribution last year — will also perform well. City consensus had expected first-half coal ebitda of $8.1bn. Glencore should beat that by a tenth, though higher coal prices come with greater government royalties, electricity and shipping costs. Its production cost per tonne could be a third higher than it forecast in February.

Royalties are likely to increase further. As an example, the Queensland government has flagged a likely rise after a 10-year freeze. But other cost increases can be passed on, given the lack of spare capacity in the mining industry.

Glencore is a cash machine and dirty coal helps. It will generate half its market value in free cash flow in less than three years, says Deutsche Bank. So long as net debt is below $10bn, Glencore will return any excess cash to shareholders. They could see a return of more than $6bn at the halfway point.

The looming economic downturn is a dampener. But an EU ban on Russian coal imports, from August, should offer price support. Glencore retained its coal assets, while also convincing investors of its ESG credentials. So far warnings of its demise, too, were premature.

FT Alphaville loves Charlie Munger, the famously irascible billionaire vice-chair of Berkshire Hathaway. Earlier this year Charlie turned his ire towards a phenomenon his partner Warren Buffett has frequently praised.

“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Munger said at the annual meeting of Daily Journal Corp in February. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.”

Munger’s words reflect an increasing concern among some investors, corporate executives, regulators, policymakers and politicians. Academics have even coined the term “asset manager capitalism” to describe the new reality of a financial system now dominated by money managers rather than banks.

This is a phenomenon that is only going to grow more pronounced. Some think that the end result of the current passive investing trend in asset management is that just a dozen or so people could end up enjoying de facto control over most public companies in the US — and even perhaps the world.

That was the provocative argument of John Coates, a professor at Harvard Law School, in an incendiary 2018 paper titled The Problem of Twelve.



Naturally, the investment industry — and above all the biggest index fund giants — have scoffed at this. But the benefits of scale in asset management, and passive investing specifically, are becoming clearer. Iconoclastic law professors are no longer the only ones warning about mounting concentration of shareholding, with even finance industry insiders becoming increasingly uncomfortable with the current trajectory — as Munger’s acerbic observation highlighted.

Last year, the big once again became even bigger. At the end of 2021, Vanguard, BlackRock and State Street, the three biggest index fund providers, together control on average 18.7 per cent of S&P 500 companies, according to Lazard. Their ownership of smaller companies is even more concentrated. By the end of last year, they held 22.8 per cent of shares in the midsized S&P 400 index, and 28.2 per cent of the small-company S&P 600 benchmark.



Elon Musk is among those now railing against this. As Lazard noted in its report, “continued inflows into passive strategies have fuelled ownership concentration in the ‘Big 3’ index fund complexes, inviting an increasing level of scrutiny by regulators and other stakeholders”.

The debate got FT Alphaville thinking.

Prof Coates was talking about an even more concentrated index fund future, but who are the best candidates for the roughly dozen people of power he posits today?

Here is the entirely informal FTAV list of who we reckon are currently the most powerful people of the investment industry — and therefore the financial world. Some are obvious, while others wield more subtle influence.

Larry Fink



The most obvious member of this group. Fink’s astute purchase of index fund giant Barclays Global Investors in 2009 has transformed his company BlackRock into the world’s biggest investment group, with almost $10tn of assets under management — roughly two-thirds of which are in passive funds. Coupled with Fink’s tradition of an annual open letter to chief executives, it has put BlackRock in the crosshairs of both the American left and right.

Tim Buckley



Leads Vanguard, BlackRock’s biggest competitor in the US, and an index fund juggernaut with about $8tn under management. Despite contemplating following his parents in a medical career, Buckley joined Vanguard in 1991 as assistant to founder Jack Bogle. In 2018, he became the company’s third CEO since Bogle’s retirement. The company is now transforming itself into a broader wealth manager with a big move into financial advice as well.

Abigail Johnson



State Street is usually considered the third member of the index fund industry’s “Big Three”, thanks to the size of its pioneering exchange-traded fund business. But Johnson’s family firm Fidelity has leapfrogged it to become the world’s third biggest asset manager, with its $4.2tn only surpassed by BlackRock and Vanguard. Its passive money management arm Geode last year crossed the $1tn-in-assets mark, underscoring its emergence as a major player in the index fund world.

Ron O’Hanley



State Street’s CEO is an asset management veteran, having joined in 2015 to initiallylead its investment arm State Street Global Advisors from Fidelity, where he ran the rival Boston outfit’s money management business. Although O’Hanley is widely respected in the industry, SSGA is growing more slowly than many of its main rivals, leading O’Hanley to look for acquisitions to bulk up.

Henry Fernandez



When Fernandez engineered the spinout of Morgan Stanley’s financial benchmarking venture with Capital Group, indexing was a sleepy industry and the unit was valued at just $20mn. Today, MSCI is one of the benchmarking business’ “Big Three” and is valued at more than $31bn. MSCI is particularly dominant in international indices and has close links with BlackRock. (Many of its exchange traded funds track MSCI gauges.)

Dan Draper



The CEO of S&P Dow Jones Indices is an index fund veteran, having worked at the pioneering Barclays Global Investors in the mid-noughties and since then led the ETF units of Lyxor, Credit Suisse and Invesco, before jumping ship to benchmarking giant S&P. Draper also chairs the industry’s trade body, the Index Industry Association, which brags about how its members manage over 3m indices with tens of trillions of dollars tied to them.

Arne Staal



A former Aberdeen Standard Life Abrdn quant who ascended to the top job at the London Stock Exchange’s “big three” index provider FTSE Russell last year. In addition to the formerly FT-associated FTSE indices, Staal oversees the big Russell benchmark. Their annual changes tend to lead to the single biggest trading day in the US every year.

Gary Retelny



Retelny has for more than a decade led one of the two least-appreciated power brokers of the investment industry, proxy adviser Institutional Shareholder Services. Thousands of investors with trillions of dollars use ISS’s recommendations on how to vote on various AGM issues, from the mundane to the incendiary, sometimes riling CEOs and their allies in the process.

Kevin Cameron



Glass-Lewis is the second of the two dominant proxy advisers, and is led by its co-founder Cameron, a former lawyer. Like ISS, Glass-Lewis is quietly influential in the world of corporate finance, given how many investors will blindly vote whatever way it recommends.

Masataka Miyazono



There is no single pool of money larger than Japan’s $1.5tn Government Pension Investment Fund, which gives its head Masataka Miyazono a lot of sway in the financial world. Attention naturally gravitates towards asset managers like BlackRock, but vast “asset owners” like GPIF also help set standards for global markets. When it stripped a big mandate from BlackRock and gave it to Legal & General, it is said to have helped influence Fink’s decision to throw his weight behind the burgeoning ESG phenomenon.

Nicolai Tangen



A former hedge fund manager was an odd choice to lead Norway’s overwhelmingly passive $1.2tn Norges Bank Investment Management, but Tangen has thrown himself into the public spokesman aspects of the job. NBIM has long excluded companies that it finds ethically incompatible with Norwegian state ownership, but has become increasingly vocal on a range of issues, and transparent about how it votes on a host of sensitive subjects.

Peng Chun



While GPIF and NBIM will let its views be known fairly publicly and regularly, the third asset owner on this list is diametrically different. China Investment Corp was set up with $200bn in 2007 to diversify China’s foreign reserves, and is today one of the world’s biggest sovereign wealth funds, with an estimated $1.2tn of assets under management. There’s little online on its chair and CEO Peng Chun — except a fairly classic technocratic career through the Chinese banking industry — but the size of the cheques he writes and China’s growing financial might make him an inescapable member of this group.

OUTSIDE CONTENDER: Hamed Bin Zayed al Nahyan



The Abu Dhabi Investment Authority was set up in 1976, the year Mao Zedong died and when Norway was only starting to pump a few barrels of oil out of the North Sea. Adia has therefore been a major player in finance for much longer than its Norwegian and Chinese counterparts.

But it is smaller the other three asset owners on this list — while Adia has stayed schtum about its size, the Sovereign Wealth Fund Institute estimates its assets at about $700bn — and in terms of profile the investment group overseen by Sheikh Hamed is these days arguably outstripped by other Abu Dhabi funds like Mubadala.

When Walt Disney became one of the first US companies to offer healthcare benefits to the same-sex partners of its employees back in 1995 the move was hailed as a big moment in the American gay rights movement.

Not everyone was in favour — some conservative Christians saw it as evidence that Disney supported “antifamily values”. But the policy inspired decades of loyalty among the company’s LGBTQ staff.

Almost 30 years later, Disney is embroiled in another controversy over its support of the LGBTQ community. This time it is facing perhaps the worst public relations crisis in its 100-year history — and now the criticism is coming from across the political spectrum.

“In a short period of time they managed to piss off both the left and the right,” says a former senior Disney executive.

The goodwill the company had built among its LGBTQ employees has been stretched to breaking point following its botched response to a proposed Florida law, labelled “Don’t Say Gay” by its critics, to restrict discussion of sexual or gender identity in primary schools.



Disney’s initial reluctance to speak out against the bill, which was viewed as dangerous and discriminatory by staff at its Orlando theme parks, prompted walkouts and an outcry by rights activists. But when the company reversed course and condemned the bill it found itself in the crosshairs of the right.

Led by Florida’s governor, Ron DeSantis, the state’s Republicans — including several who had accepted campaign contributions from Disney in the past and reliably voted for legislation the company backed — have turned on the company.

Rightwing commentators went on the attack, sometimes using inflammatory language. The conservative journalist and activist Chris Rufo has declared “moral war against Disney” and published leaked videos from an internal meeting in which a Disney employee talked about her “not-so-secret gay agenda”. Fox News presenter Tucker Carlson claimed that sounded like “the behaviour of a sex offender”. Others have accused the company of producing content aimed at “grooming” American children.

The crisis is the result of what Disney officials now acknowledge was a failed attempt to placate its employees while also avoiding taking a public stand on one of the most divisive issues in US politics.

DeSantis, who is up for re-election this year and thought to be eyeing a White House run in 2024, has slammed Disney as a “woke” corporation. This spring he signed legislation to strip the company of the special tax status that allows it to govern the area around Walt Disney World theme park in Orlando. Other Republican lawmakers are taking aim at some copyright protections for Mickey Mouse.



It looks as though critics are causing Disney serious reputational damage: a recent survey of Americans’ views of corporations by Axios and the Harris Poll shows Disney’s public image dropped from 28th place last year to 65th in 2022.

How did one of the world’s most beloved family brands find itself in this position? The answer lies in a series of unexpected social and political shifts for a new generation of employees who believe the companies they work for should be agents of social change — and in a Republican party whose loyalty to corporate America is no longer certain.

Confronted with these changes, Disney, a company that has adeptly shaped popular culture for nearly a century, badly misread the moment.

‘Don’t Say Gay’

The controversy has piled pressure on Disney’s chief executive, Bob Chapek, who took the reins from Bob Iger in 2020, only weeks before the Covid-19 pandemic forced a near-shutdown of the company. Having survived that, Chapek had hoped to put his own stamp on the company this year following Iger’s departure as chair emeritus. Instead, he has found himself leading Disney through a new and unpredictable phase of America’s raging culture wars.

The trouble began on January 11 when Joe Harding, a Republican legislator from the small town of Williston, Florida, introduced a four-page bill known as the Parental Rights in Education act in the Florida House of Representatives. It landed amid a roiling national debate about gender-neutral bathrooms, transgender participation in school sports and “gender-affirming” medical procedures.

In mostly vague terms the bill called for guidelines to inform parents about “decisions affecting a student’s mental, emotional or physical wellbeing”. But it also included this line: “a school district may not encourage classroom discussion about sexual orientation or gender identity in primary grade levels or in a manner that is not age-appropriate or developmentally appropriate”.



LGBTQ rights activists were worried. Ryan Thoreson, a lawyer at Human Rights Watch, says the bill is less about protecting young children than shutting down conversations about LGBTQ issues in schools. Such discussion has previously been “at teachers’ discretion”, Thoreson says. “The Florida law intentionally leaves teachers without a sense of what is and isn’t permissible.”

Anna Eskamani, a Democrat who represents Orlando in the Florida House, says soon after the bill was introduced she began to hear from concerned LGBTQ Disney World employees in her district, many anonymously, who were “frustrated by Disney’s lack of attention to this”.

Concerns began to surface at Disney’s headquarters in Burbank, California, at the beginning of February. An executive at Disney World suggested the company could soothe employee nerves if it signed a public letter, circulated by the LGBTQ advocacy group Human Rights Campaign, which allowed corporations to register their opposition to bills such as this one. Big companies including Apple and Amazon had been among the first to sign on.

But that idea was rejected by Geoff Morrell, who had arrived at Disney in late January as its new head of corporate affairs, according to three current and former Disney executives.

Morrell is a registered Republican and, although he worked for the Obama administration, he started at the Pentagon under Robert Gates, George W Bush’s defence secretary. He argued that Disney, one of the last “unifying” brands, should avoid taking stands on hot-button cultural issues. Morrell wanted to let the company’s formidable team of 38 lobbyists in Florida work behind the scenes to soften the bill — if not kill it altogether.



The decision not to sign the letter was a big mistake, say current and former Disney officials. Doing so would have eased internal tensions without attracting heat from Florida Republicans, they argue. Others who were aware of the discussions dismiss this as revisionist history, reasoning that Disney’s signature would have probably been turned into an issue anyway.

Still, Disney’s public silence started to seem more conspicuous at the end of February, when Iger retweeted a two-week old statement from President Joe Biden condemning the “hateful” bill. “I’m with the president on this,” wrote the former chief executive, who remains an influential figure in Hollywood. “If passed, this bill will put vulnerable, young LGBTQ people in jeopardy.”

At Disney HQ, alarm bells started ringing.

The three Cs

Iger’s tweet would not in itself have been surprising to anyone who had followed his 15-year career at Disney’s helm. His progressive politics were well known in Hollywood and beyond. Over the years he had spoken out on social issues, including abortion rights, gun control and LGBTQ rights, usually in a strategic manner that appeared to advance his employees’ interests without landing the company in political trouble.

But Chapek was left in an awkward position by the tweet, which came on the same day the Florida Senate began considering the bill. An internal debate began over when, or whether, Chapek should issue a statement. “Bob kept asking when to take a more public position,” says a person who was involved in the discussions.

Morrell contacted Disney’s lobbying team in Tallahassee, the state capital, to find out what was happening in the Senate. The next day, a Disney-friendly Republican senator named Jeffrey Brandes, who was not seeking re-election, filed an amendment proposing to remove the words “sexual orientation or gender identity” from the bill and replace them with “human sexuality or sexual activity”. It was rejected by his fellow Republicans.

Both within the company and outside it there was surprise to see that Disney’s efforts to water down the bill were not working.



In the 55 years since Walt Disney and his older brother Roy chose Florida as Disney World’s home, the company “has pretty much been able to get everything they wanted from the Florida government”, says Aubrey Jewett, an associate professor of political science at the University of Central Florida. “If anybody was complaining about Disney it would usually be coming from Democrats and progressives,” he adds.

Disney has been a generous donor to Florida’s politicians and their campaigns. Among them is DeSantis, who received about $100,000 in contributions from Disney between 2019 and 2021. But a number of other influential Republicans who have tended to vote for Disney’s favoured legislation seemed immune to its lobbying this time.

“This is where [the Republican party] is right now,” says one senior Disney adviser. “If you have someone with the gravitational pull of DeSantis pulling you in one direction and you go the other way, you now have a problem.” 

As the bill made its way through the Senate, Chapek began to feel more pressure from his employees. In early March, he met with a small group of Disney LGBTQ leaders to discuss the bill: “It is a conversation I will not forget,” he told staff.

Neither is he likely to forget the events of the following week, which became the defining period of his tenure. On Monday, March 7, he issued a memo to staff acknowledging employee “disappointment” that Disney had not condemned the bill. Yet he defended the decision by saying — prophetically, as it turned out — that corporate statements “are often weaponised by one side or the other to further divide and inflame”.



Instead Disney’s most effective tools to effect change, the memo said, were the “three Cs” — a concept Morrell had come up with — which included content, corporate culture and support of diverse community organisations. The reference to content angered creatives at Disney, including animators at Pixar who noted that the company frequently cut out or minimised gay or lesbian characters in their work.

The day after the memo was released, the bill passed the Florida legislature. Furious employees planned walkouts and asked why Disney had contributed funds to Republicans who voted for the bill.

At the company’s AGM the next day Chapek noted that “weeks of effort” to neuter or kill the bill had been unsuccessful but, with employee anger still at fever pitch, he sent out another memo to staff on Friday, March 11. This time the tone was straightforwardly contrite.

“You needed me to be a stronger ally in the fight for equal rights and I let you down. I am sorry,” he wrote, announcing that the company would suspend its political donations in Florida and review its strategy for contributing to campaigns in future.

It was the cue DeSantis needed to scale up his attack on “woke” Disney. The company, he said, is “going to criticise the fact that we don’t want transgenderism in kindergarten and first grade classrooms . . . that’s the hill they’re going to die on”.

DeSantis’ campaign has raised more than $50mn this year as his national profile has grown, according to state election records, dwarfing Disney’s contributions.

Course correction

Reflecting on the debacle, a Republican senator in Florida put the blame squarely on the company. “Disney was listening to certain stakeholders and got the wrong comms advice. They should have stayed quiet,” he told the Financial Times in May.

Chapek has been in course-correction mode ever since. He began by ousting Morrell at the end of April. Disney’s PR is now being run by Kristina Schake, who handled communications for Michelle Obama while she was First Lady and worked for Hillary Clinton during her failed 2016 presidential run.

Before that she ran an LA-based PR group with Chad Hunter Griffin, who had a stint as head of Human Rights Campaign, the group behind the letter condemning anti-LGBTQ legislation. Schake and Griffin had also worked on the successful effort to overturn California’s Proposition 8, which banned same-sex marriage.

Chapek embarked on a “listening tour” that took him to the headquarters of Pixar, ESPN, Disney World and other divisions. He created an LGBTQ task force at Disney — a group of 30 executives who are examining the company’s content and its internal culture — and met with small groups of LGBTQ employees who shared stories about facing discrimination.



“He knows that trust was broken, and we have spent the past few months trying to build it back up,” says a member of the task force.

But Chapek also has his own position to worry about. With less than eight months left on his contract, he has to contend with a rattled workforce and a sagging share price — the stock is down nearly 50 per cent over the past year amid investor concerns about slowing growth in the streaming industry. Hollywood has been rife with speculation about whether he will last.

In early June, two moves were made to strengthen Chapek’s position. First was the revelation that he had sacked Peter Rice, Disney’s top TV executive. Rice is well-liked in the creative community and there had been open discussion in Hollywood that he might succeed Chapek.

Second, Disney’s board released a statement of support for Chapek. “Bob and his leadership team have the support and confidence of the board,” wrote the chair, Susan Arnold.

Chapek will need all the support he can get. With the midterm elections looming in November, issues including race, abortion, guns and LGBTQ rights will dominate the debate on the left and right. This means the image of “woke” Disney is likely to remain in the political spotlight, says Anthony Kreis, a law professor at Georgia State University.

“The issues around Disney are going to get litigated ad nauseam” during the campaign, says Kreis, who writes about civil rights and politics. “There’s no winning strategy here for them.”

Additional reporting by Kiran Stacey

Bankers are preparing for a disruption to summer holiday plans to make up for a lacklustre start to 2022 in capital markets, as they hope for business to pick up in the second half of the year.

Markets have been shaken by war in Ukraine, the impact of China’s zero Covid policy on the world economy, the threat of global recession and snarled supply chains in 2022.

Tricky economic conditions have led to a 30 per cent drop in borrowing by European companies in 2022 compared to the first half of 2021, while there has been a precipitous fall in initial public offerings and secondary issues of shares, down more than 90 and 70 per cent respectively, according to data from the London Stock Exchange Group.

As a result of cooler trading conditions, UBS is expecting higher than usual workload in summer months to prepare for more debt issuance. “We’re going to have to work all the way through the summer,” said Barry Donlon, head of debt capital markets Emea at UBS.

“Banks haven’t fallen behind in issuance plans despite the slowdown but market windows have been less frequent and shorter due to volatility, so banks will issue when markets are there,” he said.

“The traditional idea of a quiet August won’t happen this year.”

It will follow a “highly unusual” period of subdued activity, Donlon said. The difficult conditions mean bankers could spend more time at desks this summer, as they seek to take advantage of any calm periods to issue debt.

A senior banker at another European lender added: “If there’s work to be done, there’ll be people to do it, no question. We’ll service clients throughout the year — whether it’s August or December.

“If [clients are ready to issue] I’ll be here; we’re all more flexible in terms of where and how we work.”

Liquidity is at its worst level across markets since the early days of the coronavirus pandemic in 2020, investors and US banks told the Financial Times this month.

Guy Stear, head of fixed income research at French bank Société Générale, said there was pent-up demand from issuers to sell bonds.

“We might well see a busier than normal August, assuming the market stabilises by then,” he said, but added: “The real problem is whether the bear market has run its course by then, and I’m afraid it is unlikely to have done so.”

Working into the summer would cap a difficult few months and prolong the upheaval to working conditions caused by the pandemic, according to Alison Harding-Jones, head of M&A Emea at Citigroup, who said bankers were “exhausted” and “looking forward to a long-overdue holiday”.

“If things happen over the summer, we will always be flexible and make sure stuff gets done,” she said. “But this has been an incredibly hard few months, coming off the back of an exhausting 2021 and Covid.” 

Citi is in the process of setting up an investment banking hub in Malaga for junior staff that in future years could help relieve some of the summer workload. But it will not open until later this summer, so will not be ready to aid more senior bankers in August.

The head of Japan’s biggest discount store has vowed to defend its price tag of ¥100 ($0.75) per item despite an existential threat to the business from global inflation and the plunging yen.

Seiji Yano, the president of Daiso Industries, said in his first-ever interview with media that the store was reviewing its product mix to ensure its survival.

“Of course, our profits are squeezed,” said Yano, adding that he was prepared to ride out the storm. “We have not raised our prices. We will protect the price of ¥100.”

For the past 30 years, ¥100 stores — which have exploited the yen’s buying power for cheap goods in China and south-east Asia — have steadily increased market share in a society where consumers have a deeply entrenched belief that prices will keep falling.

The rapid expansion of the discount stores has become a symbol of Japan’s decades of deflation, with the shops carving out a $7bn corner of the retail market.

Japan now has more than 8,400 ¥100 stores, with about 6 per cent of those opened since the outbreak of Covid-19, according to business information company Teikoku Databank.

However trade disruption caused by the pandemic, the weak yen and the war in Ukraine have exposed the fragility of the ¥100 store business model.

The yen’s rapid fall of more than 20 per cent against the dollar in the past 12 months has been particularly painful since a bulk of Daiso’s products are imported from overseas plants.

“The question is how we make the best total balance [in product mix] while maintaining strict conditions that customers only pay ¥100 per item,” said Yano, who took over the company from his father in 2018.

The disruption caused by China’s zero-Covid policy continues to have an impact on Daiso’s operations, said Yano. “Although the supply chain has mostly normalised today, excluding logistics cost, the delay in delivery is still ongoing to some extent,” he said. Logistics costs were double in comparison with pre-pandemic levels, he added.

As part of its strategy shift, the company is also investing deeply in two brands focused on generating sales mostly from ¥300 goods. Daiso is expected to open 520 new stores in Japan and overseas this fiscal year through February 2023, more than 30 per cent of which will be under the two brand names.

Yano’s other tactic is to shift more production back to Japan. Daiso has been gradually bringing manufacturing capacity to the country as costs for production abroad and logistics rise.

About 65 per cent of its products are now produced overseas, down from 70 per cent five years ago, said Yano. Daiso, which has its own factories in Thailand and Vietnam, is in negotiations with landowners to build another plant in western Japan expected to be open in 2028.

Daisuke Iijima, analyst at Teikoku Databank, said a business model that increases revenue with a fixed price of ¥100 could be a “significant long-term burden on growth” since a profit squeeze is expected to hinder investment.

“But customers won’t come unless ¥100 items are on shelves,” Iijima said.

Despite a series of headwinds, Yano said he would not compromise on Daiso’s quality.

“It’s totally unacceptable to say that ‘because it’s ¥100, it’s fine like this with a bit of twist’,” Yano said. “That is why we feel that consumers in Japan and also in other parts of the world buy Daiso.”

Companies will be forced to keep making acquisitions despite the threat of a global recession due to the relentless pressure from new technologies, according to one of Wall Street’s top investment bankers.

Soaring inflation, rising interest rates, geopolitical tensions and the continuing Covid-19 pandemic mean many on Wall Street fear that corporate management teams will be more reluctant to make big bets through mergers and acquisitions.

However, Blair Effron, co-founder and partner at Centerview Partners, one of the largest boutique investment banks, said a need for companies to keep pace with innovation and add new products and services has made the M&A industry “less cyclical”.

“Disruption in any industry, the idea that companies have gotten better about thinking about acquisitions generally, they think about how to build capabilities, not just new products, they think about every company considering itself in some ways a technology company,” Effron said in an interview with the Financial Times.

“There’s a reason the last year [had] $5tn [in M&A] activity globally. The average before that for the past five years was $4tn. My bet is you end up, whether it’s between $3.8tn or $4tn, that’s where we end up again in 2022,” added Effron, who founded Centerview with Robert Pruzan in 2006.

Last year was a record year for investment banking fees for companies such as Centerview, which earns fees on transactions being completed. Centerview, which as a private company is not required to disclose earnings, earned more than $1.5bn in revenue last year, a record for the bank, according to people familiar with the matter.

In the first five months of 2022, global M&A volumes of pending and completed deals totalled $1.88bn, down from $2.92bn in 2021 but still ahead of the $1.57bn at that point in 2019, according to Refinitiv data. Part of that activity, though, is coming from the completion of transactions which were announced last year.

“If we remain in an uncertain environment, and we’re deep into the [autumn], it will absolutely have an impact on 2023,” Effron said.

In addition to the uncertain economic backdrop, investment banks like Centerview are also grappling with how to get its workforce back to the office on a more regular basis following two years of largely remote work during the pandemic.

Effron said the bank wants “our people to be less efficient and less productive” as a result of the time spent commuting into the office, but believes being in the office will help employees be “more creative, more collaborative”.

“We encourage that you’re in the office four days a week. But we don’t mandate and we assume we’re doing our jobs well and making the office attractive and making it a campus,” he said.

“Without a lot of pushback, most people are in the office. And if you’re not then obviously you’re probably travelling for clients or doing something else. You’re not sitting on a Wednesday at home.”

Britain risks becoming a “rule taker” from Brussels after the government chose not to give the competition regulator powers to set codes of conduct for big internet groups such as Google and Facebook, the watchdog’s outgoing chief executive has warned.

Laws to empower a technology regulator within the Competition and Markets Authority were left out of the Queen’s Speech, putting the UK behind Brussels, which this year launched a landmark package of rules to rein in the dominance of Big Tech.

While the UK is now outside the EU and sets its own rules, Andrea Coscelli said that in practice companies were already investing to adapt to the laws set by Brussels, making it harder for the UK to diverge later because of the “undue cost” on corporates.

“As a country we are in a great place to set up smart, pro-business, pro-competitive rules of the road in a number of these areas . . . If we don’t, then in practice we become a rule taker because of the cost of divergence,” he said in an interview with the Financial Times.

“The . . . frustration is that we were [initially] ahead of the European legislation [in drafting the rules] . . . we’re now behind.”

The digital markets unit was set up in shadow form last year but cannot set bespoke rules for technology companies without legislation. Coscelli said its 70-odd staff would instead focus on its existing toolkit and probes such as an investigation into Google’s app store rules, and cases on Apple and Meta.

Coscelli, who moves on at the end of July, has overseen high-profile investigations in his six-year tenure, including probes into big pharma groups resulting in multimillion-pound fines and an £8mn payout for the NHS.

But he admitted the CMA had “underestimated” the complexity of its rising workload post-Brexit. The watchdog took on a string of complicated merger investigations once handled by Brussels as part of a beefed-up role.

It has gone from about 600 to 900 staff members and taken on new responsibilities, including an office of the internal market that assesses how well trade is working across the UK, and subsidy control, which replaced EU state aid.

“We probably underestimated just the size and the complexity of some of these [merger] cases,” Coscelli said. “For example something like [chipmaker Nvidia’s controversial takeover of Arm], which is probably bigger and more complicated than almost anything we did pre-Brexit. Now, at any point in time we have six or seven cases like that.”

The CMA has wide latitude to intervene in mergers because of the flexible tests it uses to determine whether it has jurisdiction. But the watchdog has called for greater powers to prevent so-called killer acquisitions in which a dominant technology company buys up a nascent competitor.

“We worry that these companies are so big and powerful that quite a few of their acquisitions are a problem,” Coscelli said. “We worry that five years from now we’re going to look back and say we’ve only intervened in three cases and maybe we should have looked at 15.”

The government has said it will give the watchdog the power to intervene in killer acquisitions as part of a long-awaited package of tools to boost its efficacy and enforcement abilities — elements of which were promised as long ago as 2019.

The tools would give the CMA the power to decide for itself when a company has breached consumer law and issue fines without getting bogged down in the courts.

Coscelli says this would have enabled the watchdog to take on “twice or three times as much” work during the Covid-19 crisis, when its dedicated task force fielded thousands of complaints each week and intervened in markets from PCR testing to package holidays.

The outgoing chief executive plans to return to the private sector and will hand over to general counsel Sarah Cardell, who was named interim chief executive on Friday. Her appointment comes after the selection of a new chair, former Boston Consulting Group senior partner Marcus Bokkerink. He replaced Andrew Tyrie, a Conservative politician, who was ousted in 2020 following a boardroom clash.

Coscelli said “there is a question about appointing former politicians to independent regulators”.

“It’s important that [the agencies] are close to the government . . . [But] there is a counter argument that these bodies really need to be quite independent and technocratic,” he said.

He added: “Someone like Marcus who doesn’t have political experience but does have extensive business experience is the ideal candidate.”

The UK government has announced plans to strengthen rules on buy now, pay later services, improving protection for users of the short-term credit.

The announcement on Monday, a response to a consultation which closed in January, comes after concerns around the model and consumer protection as the cost of living crisis deepens.

The government proposals, which will apply to other forms of short-term debt, will require lenders to carry out checks on consumers to ensure that they can afford to take out loans, and to be approved by the Financial Conduct Authority.

The plans will also amend financial promotion rules to ensure adverts are not misleading and allow consumers to take complaints to the Financial Ombudsman Service.

The move follows concerns around the BNPL model and whether users understand that they are taking on debt, and if providers are ensuring people’s ability to afford the products they purchase using the service.

“Buy now pay later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place,” said John Glen, economic secretary to the Treasury.

“By holding buy now pay later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”

BNPL services, which allow users to pay for their purchases in several smaller instalments, were beneficiaries of the ecommerce boom of the Covid pandemic. Researchers estimated that the UK BNPL market was worth £5.7bn in 2021, more than double the figure calculated by the Financial Conduct Authority for 2020.

The lack of regulation means that the approach taken by BNPL providers has varied. Some players have begun voluntarily providing information to UK credit agencies, with Klarna beginning to do so from June.

The government said that it expects to publish a consultation on the draft legislation towards the end of the year and aims to lay secondary legislation by the middle of 2023. Following this, the FCA would consult on rules for the sector.

The announcement is separate to Thursday’s commitment by the government to reform the Consumer Credit Act, which overseas personal loans including BNPL products.

Martin Lewis, the founder of Money Saving Expert, said he welcomed the consultation, but regretted that the legislation would not be in place “for the financially bleak winter coming”.

“Buy now, pay later is often insidiously marketed as a simple payment option, or worse, a lifestyle choice. It’s not. It’s a debt, with all the dangers of debts,” he said.

“It perverts purchasing decision-making, leaving many in a continuous loop of ‘owe-owe-owe’. Firms make money from it because people transact more via BNPL than they would otherwise.”

The sector is currently facing a trifecta of threats from falling discretionary spending, the likelihood of higher customer defaults and rising interest rates as the economic outlook worsens. Banks and Big Tech players such as Apple are also increasingly moving into the crowded BNPL market.

Klarna, which was valued at $46bn last June making it Europe’s most valuable private fintech, is trying to raise fresh cash at less than half that, according to people briefed about the matter.

Shares in Affirm, a US BNPL operator and partners with Amazon and Walmart, are down 80 per cent this year.

Additional reporting by Claer Barrett

A fierce and broad talent war in the asset management industry is driving a “great negotiation” as employers fight to retain and attract staff, according to the chief executive of JPMorgan Asset Management.

“We have to work more closely to keep people on board” because “people have more options,” said George Gatch in an interview. “I don’t call it the great resignation. I call it the great negotiation,” he added, referring to the elevated rate at which workers quit their jobs during the pandemic.

The breadth of competition for talent has widened beyond the mainstream asset management industry. As well as their traditional rivals, groups such as JPMorgan Asset Management, an active-management house that mostly sells to retail investors, are now competing with alternatives firms that are expanding their footprint in the retail market and are also going head to head with tech companies in the battle to lure engineers.

Gatch, who joined JPMorgan in 1986, said the firm was “working really hard” to appeal to “younger people and particularly tech savvy people”. JPMorgan Asset Management employs 1,500 technologists globally and spends $500mn on technology each year. Overall it has $2.5tn in assets under management.

“It’s about competitive compensation, but as important are the other things as well,” he added, pointing to factors such as a company’s culture, environment, people and opportunities on offer.

In the war for talent, Gatch said the asset management industry needs to do a better job of “conveying the purpose and the fulfilment that could come out of building products and services that are pretty fundamental to people’s lives. Helping people save for college, pay for your child’s wedding, your parents retirement, your own retirement.”

Last year JPMorgan Asset Management bought Campbell Global, an investment manager focused on timberland, to expand its position in alternatives. The previous year it acquired 55ip, a fintech company that allows financial advisers to deliver tax-smart investment strategies at scale.

Now the focus is on organic growth rather than deals. “I don’t really see a gap in our offering or any urgent strategic priorities,” said Gatch. “The hurdle is very high for us to do something. It’s very difficult to be successful integrating strong cultures and integrating two asset management firms. So where we have done acquisitions, we’ve been focused on incremental capabilities.”

Gatch said that while the wider asset management industry is still highly fragmented and scale has become increasingly important, he thinks that large, transformational deals are “less likely” in the current environment of tougher markets. He sees areas such as environmental, social and governance strategies, alternatives and exchange traded funds as the most likely target areas for industry deals, as firms look to tap into strong investor demand for these areas.

Market volatility, Gatch believes, means that “active [management] is back.” He said: “Fundamentals have been reset. And I think that is key for the role that active can play over the next cycle.”

Back in 2014 JPMorgan Asset Management launched its first actively managed ETF business, a type of investment that combines stockpicking normally associated with mutual funds with the convenience and tax benefits of ETFs. It has subsequently grown to almost $90bn in assets.

Gatch predicts that in the long term “ETFs will overtake mutual funds”. Increasingly, he believes, investors are seeing the ETF structure as superior to the mutual fund because of its tax efficiency, lower transaction costs and ease of use. “I think the active ETF industry is at a tipping point in the US and will grow rapidly.”

Milan was unseasonably warm last week: a sweltering 35 degrees that had locals complaining bitterly. The pathetic fallacy was not lost on the posse of European central bankers in town for a youth education conference: with Italian 10-year government bond yields hitting a near-decade high of more than 4 per cent, and the spread over German Bunds reaching levels not seen since the start of the pandemic, the heat was on.

The central bankers tried their best to cool concerns, playing down inflation risks and talking up eurozone unity. Banque de France boss François Villeroy de Galhau told his teenage audience that the “European dream” was alive and well.

But in the short-term, at least, the eurozone outlook is more nightmarish than dreamy — and that is particularly true of Italy and its banking sector. Like many western economies recovering from the pandemic and now confronting the disruptions caused by the war in Ukraine, the country faces high inflation and the prospect of recession. Markets are singling it out as the worst of a bad lot among eurozone nations.

Every country that has been hooked on ultra-loose monetary policy for the past decade will find it painful to normalise interest rates, unwind quantitative easing and head off rampant inflation. But like some other parts of the southern eurozone, Italy faces three particular stresses. First, after a strong bounceback from the pandemic with gross domestic product up 6.5 per cent last year, growth was already threatening to return to habitual anaemic rates, even without the war in Ukraine and notwithstanding nearly €200bn of EU recovery fund money.

Second, high government debt levels (151 per cent of GDP last year) have triggered investor fears about “fragmentation” of the bloc’s integrity as the ECB tightens its policies and states spend to cushion consumer energy inflation. And third, Italian banks may become part of the problem, caught up more directly than most with both the Ukraine conflict and the market’s bearishness about their government’s debt.

There are good reasons to dismiss lazy comparisons with the eurozone crisis of a decade ago. Then, investors concluded that high debt levels, low economic growth and weak banks were a poisonous cocktail for the southern eurozone. Fears of a “doom loop” of lenders and government weakening each other via banks’ large portfolios of Italian sovereign debt were a further drag.

This time round Italy’s banks have far stronger capital cushions, bad debts have been cleaned up and profitability has been bolstered. But optimism is fading fast. New inflation data show price rises were already running at 6.8 per cent in May, the highest for more than 30 years, with Russia’s recent cuts to gas deliveries set to compound the problem. Bank revenues will suffer, and costs will rise.

The “doom loop” risk remains too, thanks to banks taking advantage of an attractive “carry trade” that uses free money from the ECB to invest in sovereign debt with decent yields.

Italy’s banks should be nicely buoyed by higher interest rates, given their bias towards basic lending and deposit-taking. The higher rates should deliver better margins on that lending. But the cost of credit will also rise. Analysts at Mediobanca point out that a return of bad debts from their current low level to historic averages would wipe 20 per cent from earnings.

Italy’s big two banks were among the most vulnerable to the Russia-Ukraine crisis thanks to significant operations in the region. Earlier plans to return significant capital to shareholders — a key underpinning of the share prices of Intesa and UniCredit — no longer look credible, Mediobanca says. Both banks have lost about 37 per cent of their value since their February highs as investors latch on to the bear market thesis. That compares with around 27 per cent for the Euro Stoxx banks index.

Critics of the ECB say such pressures were unnecessarily compounded by botched communication and a wordy promise that “fragmentation will indeed be avoided” — a far cry from the punchy “whatever it takes” pledge of Mario Draghi, Christine Lagarde’s predecessor as ECB president.

Draghi, now serving as Italy’s prime minister, is both popular and credible in Italy and across the eurozone — and a welcome source of stability amid the country’s volatile political system. If, however, he leaves the job, potentially by next year, sceptical investors will have even more reason to be bearish on the prospects for the country and its banks.

Author's email: patrick.jenkins@ft.com

Dire forecasts of worsening food insecurity present opportunities and potential ethical problems for exchange traded fund investors who want to gain exposure to food, food production and agriculture.

A traditional way to invest in the sector has really paid off this year. The Teucrium Wheat Fund (WEAT), which invests in futures contracts, delivered returns of more than 48 per cent in the year to June 13, compared to -21 per cent for the $361bn SPDR S&P 500 ETF Trust, the largest ETF in the world.

But WEAT comes not only with the risk of exposure to an often volatile futures market and possible regulatory restraints on its sale and distribution, it also raises ethical questions. Although disputed by many academics, there remain fears that speculative investment in the futures market could drive up prices in the spot market and worsen global food insecurity.

“People could be asking themselves: ‘should we be profiting when there is going to be a shortage of food?’,” said Nikolai Roussanov, professor of finance at the University of Pennsylvania’s Wharton School of business. However, on the question of whether futures market pricing could spill over to the spot, he said: “In academic circles, it’s still not a settled question.”

Greg Davies, head of behavioural finance at Oxford Risk, agreed. “On being complicit in driving prices higher . . . for the same reasons I’m sceptical about investors doing much real good through ethical ETF investing I suspect it’s also unlikely ETFs are doing much active harm,” he said.

But for ETF investors who would nonetheless prefer to steer clear there are a handful of other ways to gain exposure to food and the food industry.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said outside China, home to the largest food ETF, there are just three that focus on the industry: the Europe-listed Rize Sustainable Future of Food Ucits ETF (FOOD), the VanEck Future of Food ETF (YUMY) and the Global X Ag Tech & Global Food Innovation ETF (KROP). Total assets in food ETFs globally at the end of first quarter were $1.8bn, according to Morningstar.

All three have lost more than 20 per cent of their value since the start of the year, TrackInsight data show.

“This is not a fund designed to gain exposure to food price inflation,” Rahul Bhushan, co-founder of Rize ETF, said of its FOOD vehicle.

“This year is actually a case in point. While many staple food stocks have rallied hard in the wake of food price inflation, our ETF has experienced negative returns,” Bhushan added, pointing out that the ETF was designed to focus on key areas of innovation that could deliver a sustainable food system and that all innovation stocks have been hit heavily this year. 

He argued that transitioning to a more resilient food production system would take many years, and would require decentralisation of agricultural production, ensuring fertiliser was synthesised closer to farmers and promoting a move towards a more plant-based diet.

In the short term, however, Bhushan said he feared that future food price insecurity was not all priced in. “Unfortunately we do believe more negative news is on the horizon,” he said.

Shawn Reynolds, portfolio manager for the natural resources equity strategies team at VanEck, agreed. 

“I think this story has not been entirely told,” Reynolds said. “It’s not entirely due to the Russian invasion of Ukraine. A lot of food prices were starting to move before the invasion.”

He pointed to global trends such as the migration from rural locations to urban centres and global growth of the middle class, which were also driving up the price of food.

Reynolds said future food security was one of the concepts that was embedded in YUMY.

Investors who decide to invest in the future of food might have a long wait before they see returns on their investment.

In the short term it might even be wise to think of the political and social implications of worsening food insecurity.

“The truth is we get a very narrow view from the west of the true extent of today’s global food crisis. The inconvenient truth is that many emerging markets face pretty ugly realities,” said Bhushan. “In food, we already have vast inequality right now and we would expect things to probably get worse before they eventually get better.”

January used to be a big month for Swiss bankers and their Russian clients. Many of the Moscow elite had made a tradition of coming to the Alps for the orthodox new year, skiing with their families, then catching up with their financial consiglieri.

In St Moritz, one banker recalls how he would book blocks of rooms for his clients. He would entertain them with snow polo, rolling out the charm as they clinked champagne glasses and watched horses charge across a frozen lake. This year he couldn’t tempt a single one.

For the best part of a decade, Russian money has coursed through the Swiss banking world. But, as Russia’s relationship with the west has soured in recent years, what was once a source of bumper new profits for Switzerland’s banks has become a financial and reputational risk.

In the run-up to Russia’s invasion of Ukraine in February, many wealthy Russians were moving to better safeguard their money from political interference, putting assets in the names of relatives or shifting them to less closely scrutinised jurisdictions, such as Dubai. In its wake, a vast sanitisation operation is under way at Swiss banks, to try and wind down relationships with sanctioned individuals. Neutral Switzerland has matched all of the EU’s punitive financial measures against Russia.



More than 1,100 of the Russian elite — including figures such as coal and fertiliser billionaire Andrey Melnichenko and banker Petr Aven, both regular visitors to Switzerland — have become financial personae non gratae in a country many had assumed would keep their fortunes safe. The biggest banks, such as the publicly listed trio of UBS, Credit Suisse and Julius Baer, have declared they will cease all new business in Russia. For critics, though these are weasel words. It is their existing Russian clients that are the problem. No one is expecting many new fortunes to be minted in Russia any time soon.

“Switzerland has a terrible history when it comes to Russian dirty money,” says Bill Browder, a longstanding Kremlin critic and a former Russian investor. He is sceptical of how much commitment there is among Swiss bankers to enforcing sanctions. “The Swiss want to be seen as doing something, but they don’t actually want to do anything,” he says.

The US Helsinki Commission, an independent US government agency that observes human rights and the rule of law in Europe, agrees. In a report issued in May, it labelled the alpine state and its banks “a leading enabler of Vladimir Putin and his cronies”. The Swiss government responded by calling US secretary of state Antony Blinken in protest. A spokesperson for the Swiss government said president Ignazio Cassis “rejected the [report] in the strongest possible terms”.



Like their counterpart in St Moritz, Swiss bankers the FT interviewed for this story all declined to be identified. Many more refused to speak at all. Switzerland’s banking secrecy laws are draconian — talking about clients can earn a lengthy jail term — and talking about Russian clients is even more taboo.

“When we were onboarding a lot of these clients [in the 2000s], the entire approach was just very different. And you can’t really say that publicly now,” says one former banker who handled eastern European and Russian clients until retiring two years ago. “These [Russians] were people who had earned so much money, so quickly, that they didn’t know what to do with it. They were basically ideal clients. As long as you had no questions about where that money had come from . . . and, basically, we didn’t.”

Quite how much Russian money there is in Switzerland is open to question. In March, the industry body representing Switzerland’s banks, the Swiss Bankers Association (SBA), caused a stir when it released details of a study estimating there was SFr150bn-SFr200bn ($154bn-$205bn) held in accounts for Russian citizens. At the end of last year, the total cash held on behalf of customers by Switzerland’s banks was SFr7,879bn, more half of which was wealth from abroad, according to the SBA.

The disclosure prompted hand-wringing in the Swiss media. Commentators, even at conservative outlets such as the newspaper Neue Zürcher Zeitung, asked whether Switzerland should do business with autocratic regimes anywhere in the world any more. But others in the country have defended its economic relationships with Russia. The outspoken finance director of the canton of Zug, an important low-tax centre, said in March it was not his job to “act like a detective” and make judgments on Russian assets. In April, he announced that Zug, home to 37,000 companies, had no sanctioned assets to report back to Bern.

Nevertheless, by April, the State Secretariat for Economic Affairs (SECO) announced that it had frozen SFr9.7bn of Russian assets. Authorities have insisted that the amount is proportionate to the scale of asset freezes in other leading financial centres. But Bern has been forced to row back in some cases, and in May it announced it was unfreezing SFr3.4bn of funds. Switzerland cannot freeze funds “without sufficient grounds”, says Erwin Bollinger, a SECO official, who adds that the government has received data on sanctioned accounts at more than 70 of the country’s banks. Direct disclosure by the banks has been patchy. Credit Suisse chief executive Thomas Gottstein told a conference in March that about 4 per cent of assets in his bank’s core wealth management business were Russian — a proportion that would equate to roughly SFr33bn.



Meanwhile, UBS, the world’s largest private wealth manager, has disclosed it has $22bn of assets of “Russian persons not entitled to residency in the European Economic Area or Switzerland”, leaving open the question of how much it holds overall. Some 16,500 Russians are permanently resident in Switzerland, and more Russians are accepted for Swiss citizenship than any other nationality, according to the State Secretariat for Migration.

Julius Baer has made no direct disclosure of the size or wealth of its Russian client base, though it has said, somewhat elliptically, that the value of assets held by its Moscow-based subsidiary is some SFr400mn. Information from the dozens of other smaller Swiss private banks is even scantier.

Even leading industry figures wonder what is being left unsaid. One executive, who for the past two decades has been a senior figure in the private banking world in Switzerland, says he has almost no doubt that the significance of many banks’ close working relationships with sanctioned individuals is being underplayed. “You don’t have dozens and dozens of people employed on your Russia desks if you are not making money in Russia,” he says.

Moreover, he adds, many Russian clients have done their business through Swiss banks’ subsidiaries abroad, such as those in Monaco, London or Asia. It is not clear to him whether all these assets have been caught by the Swiss rules. Swiss banks have a legal obligation to record the ultimate beneficial owners of all assets they handle worldwide, but doing so accurately can be tricky in jurisdictions where it is easy for third parties to mask who the owners are.

Switzerland’s banks have moved dramatically from the freewheeling approach of previous years, when there was “a run on Russia”, says Thomas Borer, a former leading Swiss diplomat turned consultant, who has worked with prominent Russian clients. He now supports Switzerland’s sanctions policy. “Being militarily neutral does not mean being economically indifferent,” he says.

But he argues that Swiss banking culture is still very different from elsewhere in the west. Even the biggest banks, he says, were clinging to relationships with Russian clients as the Ukraine crisis unfolded. The Financial Times revealed that, as late as March, Credit Suisse was asking investors to destroy documents that might expose Russian oligarchs it had done business with to legal risks.



One senior relationship manager at a Zurich-based bank agrees. Even as sanctions came in, he says, the dominant approach was to ask, “how can we make this work for the client?” rather than “how do we do this for the government?”. But he defends the approach, saying: “Doing everything you can for your client is a Swiss commitment to excellence. If I was a watchmaker I would want to make the best watches with many complications. And if I was a policeman, then maybe I would want to be the best at catching Russian criminals. But I’m a banker.”

There is still legal ambiguity in Switzerland over whether sanctions apply to family members and friends of listed individuals. This has provided a loophole bankers have helped at-risk clients to actively exploit in recent years. Swiss banks have seen “billions” of assets transferred to the names of spouses and children of Russian clients, in a trend that accelerated in the run-up to the war, says one banker.



One bank chief executive admitted recently to the FT that there were many “grey areas” in applying sanctions. Part of the problem, he said, was that bank legal departments were struggling to obtain clarity from Bern on which asset transfers were deemed to be evading sanctions and which were not.

Many who have been in the industry for a long time decry the new rules they must follow around taking new clients and being certain of the source of their wealth. “Know your customer used to mean just that: do you know the person? Now it is supposed to mean: do you know every little thing about their financial and private life?” says one Geneva-based banker.

Many Russians themselves knew the banks were no longer safe havens, particularly since 2018 when Swiss banks began making significant concessions to information sharing on client accounts with other governments. Swiss residency did not protect billionaire Viktor Vekselberg in 2018, for example, when he was targeted by US sanctions; both Credit Suisse and UBS moved to terminate loans with him.



The SBA says its members adhere to the highest international standards. Chief executive Jörg Gasser, argues Swiss banks have “no interest in funds of dubious origin” and have rigorous procedures in place to rapidly screen for sanctioned assets. “Swiss banks have been — and still are — very careful and diligent when it comes to accepting client funds,” he says, adding it is important to recognise the huge amount of legitimate business done with Russian entrepreneurs who are not subject to sanctions.

For Mark Pieth, emeritus professor of criminal law at the University of Basel and a specialist in white-collar crime, the real story of the past decade is how Switzerland’s lawyers, rather than its bankers, have become the facilitators of hidden foreign money. “Swiss bankers were extremely cosy with Russians in the past,” he says. “Alongside London, this country was the porch for Russians into the west . . . but now I wouldn’t say the problem is so much with the banks — it is all the other intermediaries.”



Swiss law gives remarkable sweep to attorney-client privilege, says Pieth, meaning lawyers can refuse to disclose almost anything to the authorities about their clients. The Swiss Bar Association strongly rejects this. “Professional secrecy does not protect against criminal acts,” it says. “Lawyers know the law and know what to do.”

One senior industry figure defends the banks’ position unapologetically. He says everybody now wants to know the origins of their luxury jackets. But 10 years ago nobody was asking where they were made, by whom and with what materials. In banking, as in fashion, things have changed, he says, but nobody is haranguing the fashion world in the same way they are criticising banks.

Fashion companies, though, have moved with the times and opened up, whereas Switzerland’s banks, for all their insistence on change and compliance, still want to maintain as much of the secrecy surrounding their clients as possible — even at a time of international crisis.

As he battled to save his job this month, Boris Johnson warned his MPs not to get into “some hellish, Groundhog Day debate about the merits of belonging to the single market”. Brexit, he warned his mutinous party in a sweaty House of Commons meeting room, was settled.

Later that day, Johnson limped to victory in a confidence vote, but only after 41 per cent of his MPs had voted to oust him from Downing Street. He is safe for now but the defining project of his premiership — Brexit — still hangs like a cloud over Britain’s fragile economy.

Johnson may not want his party “relitigating” Brexit but neither does Sir Keir Starmer, leader of the opposition Labour party, around a third of whose supporters voted Leave in the 2016 referendum. Nor does Andrew Bailey, governor of the Bank of England. Rishi Sunak, the chancellor, would rather talk about something else. Brexit has become the great British taboo.

But as the sixth anniversary of the UK’s vote to leave the EU approaches, economists are starting to quantify the damage caused by the erection of trade barriers with its biggest market, separating the “Brexit effect” from the damage caused by the Covid-19 pandemic. They conclude that the damage is real and it is not over yet.



The UK is lagging behind the rest of the G7 in terms of trade recovery after the pandemic; business investment, seen by Johnson and Sunak as the panacea to a poor growth rate, trails other industrialised countries, in spite of lavish Treasury tax breaks to try to drive it up. Next year, according to the OECD think-tank, the UK will have the lowest growth in the G20, apart from sanctioned Russia.

The Office for Budget Responsibility, the official British forecaster, has seen no reason to change its prediction, first made in March 2020, that Brexit would ultimately reduce productivity and UK gross domestic product by 4 per cent compared with a world where the country remained inside the EU. It says that a little over half of that damage has yet to occur.

That level of decline, worth about £100bn a year in lost output, would result in lost revenues for the Treasury of roughly £40bn a year. That is £40bn that might have been available to the beleaguered Johnson for the radical tax cuts demanded by the Tory right — the equivalent of 6p off the 20p in the pound basic rate of income tax.



Despite these sobering figures, Johnson’s complaints about the prospect of “relitigating” Brexit was exaggerated, intended to portray himself as the victim of a putative plot by pro-Remain MPs. In fact, British politicians — and the wider country — are still traumatised by the bitter Brexit saga, and deeply unwilling to revisit it.

Still, this month has seen the first stirrings of a debate that until now has been buried as the evidence of Brexit-induced economic self-harm starts to pile up. Few are talking about reversing Brexit altogether, but another question is being asked: should the UK start to explore with Brussels ways of softening its edges?

Show, don’t tell

Downing Street insisted this week it was “too early to pass judgment” on whether Brexit was having a negative impact on the economy, which could be heading into a recession. “The opportunities Brexit provides will be a boon to the UK economy in the long run,” Johnson’s spokesman said.

Both Johnson and Sunak insist that it is hard at this stage to separate Brexit’s economic impact from the shock of Covid. In the meantime, the prime minister promotes the “benefits of Brexit”, such as new trade agreements with Australia and New Zealand and the freedom for the UK to set its own rules.

Sunak has promised a reform of rules in the City of London, including reforming the EU’s Solvency II rules to allow insurers to spend more money on infrastructure projects. He has announced eight new freeports with special tax privileges.

But economists have not yet been able to find any significant positive impacts of these policies. Some, including Johnson’s patriotic promise to put a “crown stamp” on pint glasses in pubs and to allow traders to sell their wares in pounds and ounces, are primarily symbolic.



Critics of government Brexit policy are routinely derided. Suella Braverman, attorney-general, last week accused the ITV presenter Robert Peston of “Remainiac make-believe” after he challenged her over the government’s unilateral plan to rip up the Brexit treaty relating to Northern Ireland. Braverman claimed the so-called Northern Ireland protocol had left the region “lagging behind the rest of the UK”. In fact, Northern Ireland (the only area of the UK to remain in the EU’s single market for goods) is the best performing part of the country, apart from London.

When Bailey appeared before the House of Commons treasury committee in mid May, the BoE governor acknowledged that his predecessor Mark Carney had made himself “unpopular” for saying Brexit would have a negative effect on trade, but that the bank held to that view.

Kevin Hollinrake, a Tory member of the committee, says Bailey was trying to avoid becoming a political target and was “deliberately avoiding” talking about Brexit. “It’s a singular issue for the UK,” the MP says. “We have changed our immigration rules. It’s about non-tariff barriers. You’ve got to be willing to look at what’s happening on the ground.”



While some gloomy predictions have failed to materialise, such as former chancellor George Osborne’s 2016 warning of a recession immediately after a Leave vote, there is growing evidence that Brexit is causing more lasting damage to UK economic prospects.

Ministers are becoming more reluctant to proclaim the economic upsides of Brexit. Kwasi Kwarteng, business secretary, was asked last week at the FT Global Boardroom to list some Brexit benefits. He focused on the UK’s ability to respond swiftly to Russian aggression in Ukraine — “it has substantial benefits particularly in international policy” — rather than on business. Sunak’s allies say the chancellor’s approach is to “show, not tell” on Brexit, pushing through City regulatory reforms rather than giving boosterish speeches on its economic merits.

The fallout in data

The first and most obvious economic blow delivered by Brexit came when sterling fell almost 10 per cent after the referendum in June 2016, against currencies that match the UK’s pattern of imports. It did not recover. This sharp depreciation was not followed by a boom in exports as UK goods and services became cheaper on global markets, but it did raise the price of imports and pushed up inflation.

By June 2018, a team of academic economists at the Centre for Economic Policy Research calculated that there had been a Brexit inflation effect, raising consumer prices by 2.9 per cent, with no corresponding increase in wages.

Some households, such as those relying on state pensions, were compensated in higher benefits, but the CEPR team found no overall offset with higher incomes. “The Brexit vote delivered a swift negative shock to UK living standards,” they wrote.

While the UK was still in the EU and during the Brexit “transition phase”, there were no significant effects on trade flows. But this has changed since stricter border controls were introduced at the start of 2021, imposing no tariffs, but significant checks and controls at the formerly frictionless border.



Economists have used this point in time to contrast how the UK’s trade performance compares with those of other countries before and after the TCA’s imposition. The results have been increasingly ugly, especially for small companies trading with Europe.

Red tape caused a “steep decline” in the number of trading relationships after January 2021, according to a study by the Centre for Economic Performance at the London School of Economics. The number of buyer-seller relationships fell by almost one-third, it found.

The same group found food prices had risen as a result of Brexit. Comparing the prices of imported food such as pork, tomatoes and jam, which predominantly came from the EU, with those that came from further afield such as tuna and pineapples, it found a substantial Brexit effect. “Brexit increased average food prices by about 6 per cent over 2020 and 2021,” according to the research.

Summing up the effects on trade in which imports from the EU have fallen while exports have not risen, Adam Posen, head of the Peterson Institute of International Economics, says “everybody else sees a recovery in trade following Covid and the UK sits flat”.



The third visible effect of Brexit on the UK economy has been in discouraging business investment. In the first quarter of 2022, real business investment was 9.4 per cent lower than in the second quarter of 2016. That fall was mostly due to Covid, but it had flatlined since the referendum, ending a period of growth since 2010 and falling well short of the performance of other G7 countries.

Weak investment is a particular worry for Sunak, who sees business investment as the route to greater prosperity. Before departing the BoE in 2020, Carney told a House of Lords Committee that Brexit uncertainty was holding back business investment. Worse, he said, business planning for various Brexit scenarios was taking up a lot of management effort. “Time spent on contingency planning is time not spent on strategic initiatives,” he said.

Since then, negative perceptions of the UK have continued among business with the chancellor finding he had little bang for his £25bn buck of super deductions in corporation tax to encourage capital spending. As Bailey told MPs last month, the super-deductor was “not at the moment having the impact that was expected”.

Complaints about high immigration was one of the most contentious issues of the referendum, with a central promise of the Brexit campaign being tougher controls over the number of people entering the country. While net immigration from EU countries has stopped, with effectively no change apparent in the two years to the end of June 2021, net immigration from non EU countries has remained high, with 250,000 in the latest year.

Collateral damage

There is, as yet, little appetite among Britain’s political leaders for a return to the EU — even if the other 27 member states were prepared to open the door. Even the pro-EU Liberal Democrats admit reversing course is a long-term aspiration, rather than an immediate goal.

As part of his attempt to avert a coup, Johnson wrote to MPs this month that he had “created a new and friendly relationship with the EU”. The opposite is true. Brussels restarted legal action against the UK this week over the Northern Ireland protocol: relations are at rock bottom.

The EU has warned that British scientists will be excluded from the €95bn Horizon research programme as “collateral damage” in the row about Northern Ireland. The prospect of any kind of rapprochement at the moment, at least while Johnson remains prime minister, seems remote.

But in recent weeks, a tentative debate has started over whether the UK would be better off trying to reach accommodations with the EU to smooth trade in some areas, rather than launching a new front in the Brexit war with unilateral action over Northern Ireland.

In an article much-discussed at Westminster, the pro-Leave Times columnist Iain Martin wrote this month: “To deny the downsides of Brexit on trade with the EU is to deny reality.”

Tobias Ellwood, a former Tory defence minister, suggested Britain should rejoin the EU single market to soften the cost of living crisis, and said there was “an appetite” for a rethink and claimed polling indicated “this is not the Brexit most people imagined”. And Daniel Hannan, a leading Tory Brexiter, repeated his longstanding view that Britain should have stayed in the single market under a Norway-style relationship with the EU, while adding that to rejoin it now “would be madness”.



Anna McMorrin, Labour shadow minister, was recorded telling activists: “I hope eventually that we will get back into the single market and customs union.” She was forced to apologise by Starmer: such talk remains dangerous in political circles.

Even so, a Starmer-led future Labour government would change UK relations with the EU. The party’s mantra has become “make Brexit work”: rejoining the single market may be off the agenda, but Labour wants to find ways to improve on the bare-bones tariff-free trade agreement Johnson negotiated with the EU.

Rachel Reeves, the shadow chancellor, told the Financial Times last year that Labour wanted to strike a deal with the EU to reduce the most onerous paperwork and checks on food exports. The party also wants an agreement with Brussels on the mutual recognition of professional qualifications.

Even among the Eurosceptics in Johnson’s cabinet, there is now an acceptance that the UK should be seeking to rebuild economic relations with the EU, including in areas like the Horizon programme, to avoid exacerbating the looming cost of living crisis.

“Would I like to be in a better place on Brexit?” asked one pro-Brexit cabinet member. “Yes, absolutely. But we’ve got to find a way of doing it without it looking like we’re running up the white flag and we’re compromising on sovereignty.”

Additional reporting by Sebastian Payne in London

In quiet corners of suburban England lie two private companies that have skyrocketed to multi-billion-pound valuations in less than a decade, while barely registering in the public consciousness.

Belron and The Access Group are both long-established businesses that are far from the image of hot start-ups with revolutionary products. Located on the outskirts of Egham in the south-east, Belron repairs and replaces car windscreens; The Access Group, based just outside the Midlands town of Loughborough, sells back-office software.

Over the past six months, investors have given both companies valuations that place them among Britain’s biggest companies — €21bn for Belron and £9.2bn for The Access Group. Belron’s valuation has climbed 600 per cent since 2017 and The Access Group has risen an eye-watering 3,800 per cent since 2015.

Yet neither group has been exposed to the cut and thrust of public markets. Instead, their valuations were set in a new and controversial type of transaction that is fast becoming the private equity industry’s hottest trend in the US, UK and several other markets — deals in which a buyout group in effect sells a company to itself.

Such deals have partly been a consequence of the tidal wave of cash that has flooded private markets during the long era of low interest rates. As that era comes to an end and a downturn looms, these deals are set to become more attractive than ever for private equity groups with companies to sell.



The deals — a way for buyout groups to return cash to their original investors within a pre-agreed 10-year time period, without the need to list companies or find outside buyers — have been growing in popularity since the early days of the Covid-19 pandemic, when a market freeze prompted a search for new options.

But selling companies to themselves risks putting the industry on a collision course with a range of different groups.

Some of private equity’s own investors complain that the deals can in some cases serve to enrich buyout billionaires and multimillionaires at the expense of their pension fund clients by enabling them to keep levying fees. The Securities and Exchange Commission wants to reform the market, requiring more checks that valuations are fair.

Equity market investors are becoming increasingly vocal about how private markets value companies. Vincent Mortier, Amundi Asset Management’s chief investment officer, said this month that parts of the buyout business “look like a pyramid scheme” because of “circular” deals in which companies are sold between private owners at high valuations.

Speaking privately, some pension funds are frustrated. “This is wonderful for the [buyout groups]; it’s one of the best things they ever discovered,” says one pension fund’s head of private equity, who asked not to be named.

But “it’s one of the worst things” for their investors, he adds. “The pie is getting bigger” as private equity balloons in size, he says, but “more of the pie is going to the [private equity firm] and less is going to [its investors].”

A structural change

In the private equity industry, selling a company to yourself can take multiple forms, and dealmakers struggle to decide what to call the process. It is sometimes labelled a “continuation fund” or even, in the industry’s often-inscrutable jargon, a “GP-led secondary” or “adviser-led secondary”. A common feature is that a stake in one or more portfolio companies is sold from one fund to another, both of which are controlled by the same private equity firm.

Deals worth $65bn were carried out this way last year, up from $27bn in 2019, according to Raymond James’ Cebile Capital unit.

Industry figures expect that number to keep rising. “It’s a structural change, a structural addition to the private equity ecosystem, [and] it’s here to stay,” says Sebastien Burdel, a partner at Ares who focuses on the asset manager’s secondaries business.

“In an environment where exits [sales of portfolio companies] are going to slow for a period of time, having that extra tool . . . is going to be increasingly attractive.”



Windscreen repair and replacement company Belron, which operates internationally under brands including Autoglass and Safelite, was valued at €3bn in 2017, when US buyouts group Clayton, Dubilier & Rice agreed to buy a 40 per cent stake.

Since then, its core earnings had roughly trebled as margins had risen, in part because new technology had made windscreens more complex and more expensive, a person close to the company said.

In December last year, CD&R sold a minority of its holding to a trio of new investors, Hellman & Friedman, BlackRock’s private equity business and the Singaporean sovereign wealth fund GIC. The deal valued Belron at €21bn, almost 20 times its earnings, roughly twice the multiple that CD&R had originally paid, the person said. CD&R then sold the rest of its stake to its own special purpose vehicle, which it set up especially to own the Belron stake, at the same valuation.

The Access Group, whose clients include the Beatles Story tourist attraction in Liverpool and the Latymer public school in London, has been repeatedly sold between funds belonging to its private equity owners TA Associates and Hg, since TA first bought a stake in 2015 at a valuation of £231mn.

Deals in 2018, 2020 and June 2022 saw its valuation soar to £1bn, £3bn and £9bn, respectively. That leaves The Access Group, which has itself been on a dealmaking spree to snap up about 40 companies in the last five years, with a higher valuation than the FTSE 100 software provider Sage Group — a UK rival whose shares have tumbled this year.



The company’s owners “don’t feel any pressure to go out and list this business now or in the future,” says a person close to the deals. “There’s plenty of private capital available — they don’t need to go public in order to be able to generate returns for investors.”

Hg says its investors were always given the chance to block the deal completely, and that a third-party investor would set the price in any company it was selling between its own funds.

Flush with cash

In order to buy their own companies, private equity firms often raise money from a little-known group of specialist investors known as “secondary funds”. CD&R raised some of the $4bn it used to purchase its own Belron stake from this market, though The Access Group deals did not tap it.

Secondary funds raise cash from pension and sovereign wealth funds — the same institutions that invest in buyout funds. They are flush with cash, having raised $78bn in 2020 and $37bn in 2021, a jump from $24bn the previous year, according to the Raymond James data.

Many of these funds are in fact run by units of private equity firms themselves, with Blackstone, Ardian, Carlyle and Ares among those that have significant so-called secondaries businesses. The upshot is that these private equity groups are providing the funds that make it possible for other buyout groups to sell their own companies to themselves.

For these groups, “the idea is, you can create a greatest hits album” by buying into vehicles set up to own private equity’s best-performing companies, says Tony Colarusso, global head of private capital advisory at Morgan Stanley.



French buyout group Ardian has a $19bn secondaries fund and Blackstone was on course to raise about $20bn for its latest such vehicle, chief operating officer Jon Gray said on an earnings call in October.

Others have spent the last two years racing to either set up their own secondaries businesses, or acquire existing ones. Ares struck a deal last March to buy Landmark Partners, which finances continuation fund deals among other specialist transactions, and CVC Capital Partners agreed to buy Glendower Capital in September. Asset manager Franklin Templeton, better known for its mutual fund products, bought the secondaries specialist Lexington Partners for $1.75bn in November.

Brookfield chief executive Bruce Flatt said in 2020 that the private equity secondaries market “could be a $25bn to $50bn business for us” and was “a meaningful extension” for the firm, while Apollo recruited three senior BlackRock executives in April to lead its push into the market, and TPG has hired specialists from the Canada Pension Plan Investment Board, Pantheon and Landmark as it seeks to do the same.

Both sides of the deal

As the market grows, however, multiple concerns are being raised about how these deals work in practice.

The most frequently expressed and perhaps most obvious is the conflict of interest that occurs when the same buyout group is on both sides of a deal.

“When everything is said and done, it will either turn out to be a better deal for the buyer or for the seller,” says a senior executive at a major buyout group that has not sold any companies to itself. “We don’t want to get into that position.”

Unlike in the Belron case, private equity firms often arrange continuation fund deals without running a competitive sale process in which corporations or rival buyout groups are invited to bid.

In those deals, the pension plans and other investors in the older fund selling the company say they cannot be sure they are getting the highest-possible price.



Data on sale prices would appear to confirm their worries. Forty-two per cent of continuation fund deals value the underlying company at less than the private equity firm had told the investors it was worth, according to research by Raymond James. Half value the companies at the same amount the private equity firm had estimated it to be worth and only 8 per cent are sold at a premium.

“You should get honest price discovery for these [investors],” says Jeffrey Hooke, a lecturer at Johns Hopkins’ Carey Business School. Most pension funds “don’t have the guts or the resources to challenge these prices [but] they’re representing hundreds of thousands of retirees living on fixed incomes”.

Buyout groups respond that they give investors in their original fund a choice: they can become an investor in the continuation fund or walk away. But the idea of a real choice, with an option for the deal to be called off, “is a bit of a pink unicorn that never really exists”, according to a managing director at an investment firm that allocates cash to buyout groups. Several pension fund executives said they were given too little time to make the decision.

The SEC is now scrutinising the model, part of a wider review of disclosure in the private equity industry. It plans to require buyout groups to commission a fairness opinion when they sell companies to themselves, and to disclose any “material business relationships” it has with the company providing the opinion.

‘Super carry’ deals

Private equity firms and their dealmakers can reap great financial rewards from continuation funds— by charging their investors higher fees and taking a higher share of the profits.

“Capturing a larger share of the fee pool” is “economically interesting” for buyout groups and is one of the driving forces behind their use, says Bernhard Engelien, co-head of European private capital advisory at the investment bank Greenhill.

The complicated economics behind private equity funds can obscure how this works. In simple terms, standard buyout funds charge their investors, such as pension funds, an annual management fee of between 1.5 and 2 per cent of the money they have committed to the fund.

But once a fund has finished its so-called “investment period”, when it is buying companies — roughly its first four to six years — it stops charging fees as a percentage of the money committed. Instead it charges fees as a proportion of the money used to buy the companies that the fund has not yet sold. The effect is that buyout firms make far less in management fees in the later years of a fund’s 10-year life.

Selling companies in an older fund to a continuation fund lets the buyout group revive the flagging fee base. The new vehicle charges fees as a proportion of the amount it invested in a company — invariably a higher sum than the older fund paid.

Then there is the carried interest: the 20 per cent share of profits on successful deals that can provide lucrative, and tax-advantaged, payouts to buyout executives.

Dealmakers can receive those so-called “carry” payouts twice, once when a company is sold to the continuation fund and again when that vehicle later sells it, though they usually put most of the first payout back into the new vehicle.

Carried interest is typically only paid out after a private equity fund hands a pre-agreed return to its investors, often around 8 per cent. If a fund looks to be likely to miss that target but contains a star company from which dealmakers would otherwise have reaped a large profit share, shifting the high performer into a new fund enables dealmakers to receive the payouts.



Better still for the dealmakers, in some cases they can negotiate so-called “super carry” on the continuation fund. Some use a tiered carried interest model where, if the company in the new vehicle generates less than a 20 per cent return for investors, the dealmakers would receive less than the standard 20 per cent profit share. But if it generates more, they can receive much more.

In a survey of the specialist investors that finance continuation fund deals, sixty-eight per cent said they had funded at least one with a “super carry” provision, according to Raymond James. Those usually allow buyout executives to keep up to 25 per cent of the profits but in some cases stretch as high as 30 per cent.

“[As a buyout group] you set the price for your deal, you sell it to yourself, you crystallise a bunch of the carry, and now you’re charging more fees on the same company you already owned,” says the pension fund executive. “In the old days you would just keep managing this for a lower fee, without carry.”

Even the Institutional Limited Partners Association, which represents the investors whose money private equity firms manage and which is not known for punchy public criticism of the buyouts business, has spoken up.

“As LPs [investors] in the original funds . . . the secondary is often structured in such a way that the benefits disproportionately accrue to the adviser [the private equity firm],” it said in a submission to the Securities and Exchange Commission.

At the heart of the deals is a broader issue that is becoming more significant as stock markets tumble. Companies owned by private equity groups are facing the same pressures as their listed peers, as interest rates rise, supply chains struggle and an economic downturn looms.

Critics of the industry believe some of these deals could be a way of hiding from this reality.

“It is a myth that private equity investments are good investments to have in times of stock market turmoil,” says Eileen Appelbaum, co-director of the Center for Economic and Policy Research. Continuation funds mask “an unpleasant truth”, she says, by enabling the private equity industry to keep doing deals that shelter their companies from valuations in the public markets.

The question, she adds, is for how long that can continue.

Alex Matturri is the former chief executive of S&P Dow Jones Indices.

Earlier this week the Securities and Exchange Commission announced that it was exploring whether index providers should be regulated as “investment advisers” — just like any money manager. It was a bombshell that many have seen coming.

Here’s what SEC chair Gary Gensler said in the press release announcing a request for comment on the regulatory status of index companies, model portfolio providers and pricing services:



Index providers are the main target. Companies that produce financial indices like the S&P 500, the Russell 2000 or the MSCI World index have in the US avoided regulation by operating under the “Publishers’ Exemption”, which originally was intended to shield newspapers and newsletter writers.

After all, many index providers did start within publishing businesses or exchanges, as a fairly small information service to customers. The courts have therefore felt comfortable that index providers were not providing investment advice when they created benchmarks.

The benchmarks were supposed to merely reflect the market, rather than constitute a recommendation of what securities to buy, and were offered to a broad audience rather than directly to a client.

The regulatory philosophy in the US has therefore been to regulate the index product but not the index provider.

This approach has worked well for many years, but is this the case any more?

There are several factors which have led to the SEC reviewing whether index providers should be regulated. But the biggest is the tremendous growth of passive index-based investment products.

The Investment Company Institute now estimates that 16 per cent of the entire US stock market is held by index funds, outstripping the 14 per cent owned by traditional actively-managed funds.



Some recent academic research claims that this is beginning to warp the efficient functioning of markets.

There are many variations of this theme, such as index trades being ‘informationless’ and thus impacting price formation; indexed portfolios being trend-followers that just buy more of the winners regardless of company fundamentals; and that there is an ‘index effect’ which results from a stock being added to major indices such as the S&P 500 or Nasdaq 100.

I maintain that these fears are overblown. But one cannot argue with the fact that there have been an enormous shift into index-based products such as ETFs, index funds and structured products, along with elevated trading of index derivatives. Financial indices matter more than ever before.

One aspect the SEC is probably focused on is the growth of new custom, thematic, defined outcome and ESG indices used in the ever-growing number of investment products offered to investors. These indices have much more discretion in their design, and rather than just measuring a segment of the market based on market capitalisation are being developed to achieve a desired investment outcome.

This raises the question of whether index providers are providing some form of investment advice and should no longer operate under the Publisher Exemption.

While I feel an appropriate regulatory regime should be welcomed by index providers, the SEC needs to ensure that its scope allows for the investor benefits from cheap index-based investment products continue to blossom.



In Europe and other global jurisdictions, the regulatory process is well under way although the approach taken is quite different. After the Libor scandal, Europe took a legislative approach and enacted the EU Benchmark Regulation (BMR). This applies to almost all providers of indices, and all indices offered for use in Europe fall under the regulation. There is no distinction based on the type of index or, with a few exceptions, the product category.

One problem in the US is that not all investment products fall under SEC’s jurisdiction. The final result could be an unholy mess where some index providers are more heavily regulated while others escape entirely.

For example, it is possible that an index provider that offers an benchmark used for futures contract would not fall under the regulation — since futures are regulated by the CFTC — but when the same index used as the basis of an ETF it would be encompassed by any SEC regulation. The same problem would occur with an indexed bank collective trust, as these do not fall under the SEC’s purview, while a classic 40 Act fund does.

There are many other potential complications. While it is not clear exactly what the SEC is focused on, the press release references “whether, under particular facts and circumstances, information providers are acting as investment advisers”. But it seems that the Commission is interested in only certain types of indices, and is pretty comfortable with the way broad-based gauges such as the S&P 500 are maintained.

If the SEC’s focus is on bespoke and custom indices (they draw a distinction between the two) or narrower indices such as factors, thematics, defined outcome or an ESG benchmark, a major definitional issue arises. The problem with this approach is where do you draw the line between what types of indices result in the index provider having to be regulated?

It will not be easy to sort indices into regulated and unregulated buckets. Using the type of index as a deciding factor can lead to an uneven playing field, with some index providers falling under the regulatory scheme while others will not. The European approach of including all indices and all providers is more appropriate.

The fact that the SEC is looking at the regulation of index providers is a positive. It is one of the only segments of the capital markets not regulated in the US. Given the swelling importance of index providers, regulatory oversight is necessary. But it needs to be equally applied.

Currently, the larger independent index providers operate very differently than many smaller ones, or internal benchmark providers at some asset managers. As they have a global business focus, the big providers have structured their operations and governance structures to adhere to IOSCO’s Principles for Financial Benchmarks, and are working to comply with the EU BMR.

Generally, these index providers have clear governance policies and strict procedures in place, which include publishing methodologies and public consultations before those methodologies are changed. The same cannot be said for all index providers.

The SEC review is a healthy step but any final regulation will be better served if it applies to all index providers and all indices.

This may be complicated as not all investment products fall under the SEC’s regulatory span. But taking a leaf out of Europe’s approach and aligning with its BMR will ensure index providers continue to serve the capital markets in the best possible way.

Democratic lawmakers are urging the top US antitrust enforcer to scrutinise a proposed sale of Reckitt Benckiser’s baby formula unit to a private equity group, warning that it “could shallow out” the market during a national supply shortage.

US senators Elizabeth Warren, Cory Booker and Bernie Sanders, along with House representative Katie Porter, sent a letter on Tuesday asking Jonathan Kanter, head of the US Department of Justice’s antitrust unit, to probe the attempt to sell Reckitt’s infant formula business, whose brands include Enfamil.

Clayton, Dubilier & Rice is reported to be among the private equity groups that have submitted bids for the unit, which UK-based Reckitt put on the block earlier this year. The sale is expected to bring in about $7bn.

The lawmakers urged Kanter to “closely examine whether such a transaction would likely harm competition or prolong the [baby formula] crisis” and sue to block the transaction if necessary.

The letter said the deal would likely burden the manufacturer with increased debt, weakening the second-largest infant formula maker in the US as families rushed to secure the product. They also said an acquisition could lessen competition in an industry that is already heavily consolidated.

“If private equity investors take over a key infant formula manufacturer with the intent to further consolidate and merge operations when the market is already failing families and their children, matters will be even worse for consumers,” said the letter, seen by the Financial Times.

Warren said in a statement: “Private equity firms have a well-documented history of hollowing out companies and jeopardising product safety.”

Reckitt said in response that it had been operating plants around the clock and working closely with the government to boost manufacturing inputs and capacity. Ensuring “safe, high-quality formula is in the hands of families that need it” continued to be a top priority, it added in a statement.

CD&R and the DoJ declined to comment.

The US said last month that it would increase imports of baby formula to tackle growing shortages after some parents reported being unable to feed their infants. Supplies of the products had been under strain for months amid disruptions in labour markets and global supply chains in the wake of the Covid-19 pandemic.

Making matters worse, producer Abbott then recalled three of its products after four babies who consumed them became sick, and two died. Abbott subsequently closed its manufacturing facility at Sturgis, Michigan, while inspectors from the Food and Drug Administration conducted an investigation.

Reckitt is looking to sell the remainder of its baby formula business after disposing of the Chinese arm last year. The planned sale would unwind the 2017 acquisition of Mead Johnson, one of its largest ever, which was made under former chief executive Rakesh Kapoor.

The letter comes as senior US antitrust officials including Kanter and Lina Khan, chair of the US Federal Trade Commission, have pledged to heighten scrutiny of deals involving private equity. Kanter last month warned of a forthcoming crackdown, arguing that buyout groups’ business model was “often very much at odds with the law and very much at odds with the competition we’re trying to protect”.

Khan just weeks later said she would take a more “muscular” approach to overseeing private equity transactions, pointing to “life and death consequences” when buyouts place large sections of the economy under the control of Wall Street.

The lawmakers urged Kanter to take a close look at any buyout, including those beyond the baby formula market. “The ruinous model of private equity does not promote long-term competition; it reduces quality and safety and drives vulnerable target companies out of business,” they said.

As Genocea ran low on cash in 2018, investors offered the US biotech a lifeline that allowed it to shift focus from developing a vaccine for genital herpes to targeting cancer treatments. There was no such safety net in May, when another cash crunch forced the 16-year-old group to fold.

“A year ago Genocea probably could have raised enough cash to stay afloat until it could finish trials on its personalised cancer medicines,” said Daina Graybosch, analyst at SVB Leerink. Now, however, “the world has changed for biotech companies”.

The fate of Genocea captures the stark predicament facing a biotech sector accustomed to record-low interest rates, a bull run in equity markets and freewheeling investors. While the rupture with the era of easy money has hit almost every sector, few are as exposed as the early-stage drug companies that rely on capital markets to fund long and risky development cycles.

Almost 200 listed biotechs globally are trading below the value of their cash reserves, according to investment bank Torreya Capital, and more are now swallowing draconian deals to survive as the funding drought in public markets deepens.



Just nine biotech companies have listed in the US this year, raising a total of $1bn, according to LifeSci Capital, a boutique investment bank. Almost 60 companies did so in the same period last year, tapping investors for $7.4bn.

“For many public company biotech CEOs looking to raise capital, it may feel like they are caught in the Sahara desert. There is no money to be found,” said Torreya managing director Tim Opler.

San Diego-based Belite Bio was one of the few to pull off an initial public offering. The company, which develops drugs targeting age related diseases such as diabetes, raised $41mn in April and its stock has surged after US regulators fast tracked one of its treatments. But chief executive Tom Lin said he only had the confidence to push ahead with the listing because its largest shareholder was prepared to back it.

“We were actually quite nervous. The bankers tried to prepare us, letting us know we might not get enough investors or a good price,” Lin said. “[But] the most important thing was our existing shareholders are very confident about our pipeline . . . they participated in the IPO as well with $15mn investment, and that gave confidence for new investors.”

For listed biotechs unable to lean on existing investors, the remaining choices include raising equity at huge discounts, taking out risky loans, monetising future royalty streams and partnering with or being bought out by big pharma.

“What we’ve seen in the few follow-ons that are getting done are draconian pricing terms, warrant deals coming back and low valuations,” said Mark Charest, a portfolio manager at LifeSci Fund Management.

More than half of the listed companies that have completed follow-on fundraisings this quarter offered investors incentives to back their deals.

Others have turned to debt providers despite lacking the revenues to repay loans. Madrigal Pharmaceuticals last month secured a debt facility worth up to $250mn to help commercialise its most advanced drug candidate and finance a clinical development programme for another.

The abrupt change in the funding climate is not without winners, including companies like Royalty Pharma, which lends to biotechs in exchange for a share of future revenues.

While the Nasdaq Biotechnology index has tumbled 26 per cent this year and the broader S&P 500 is down 23 per cent, Royalty’s shares are flat. Last month Royalty lifted from $1.5bn to $2.5bn the amount it intends to deploy annually for the next five years, in part to capitalise on the deteriorating outlook for many biotechs.



For some companies, however, even the most expensive funding options will prove elusive, and more are likely to follow Genocea into collapse.

“Quality [of biotechs on public markets] is lower in part because of the promiscuous capital markets” of the past two years, said Charest of LifeSci.

Many went public before reaching key development milestones that would have given a clearer indication of their chances of ultimate success, leading to a string of disappointing clinical readouts that have made it even harder to raise cash.

“If you fund the five best ideas out there the majority will probably do pretty well. If you fund 500, the number that don’t do well will be substantially higher,” he added.

Biotechs endured testing periods during the bull run that followed the 2008 financial crisis. The S&P Biotech index went into correction — a more than 10 per cent decline from recent highs — in 2015 and 2018, but industry executives say this slowdown is far more severe.

“This is the worst level of distress I have seen in the industry for the past 25 years,” said Pierre Jacquet, managing director of LEK Consulting’s healthcare division.

“It’s a perfect storm and it is likely that tens of companies will just return cash to investors. I just don’t see any alternative exit for some of these companies.” 

Last week Zosano, a California-based group developing a migraine drug delivery patch, filed for bankruptcy protection. In another sign of the stresses, the top shareholder in Forte Biosciences, which develops drugs targeting autoimmune diseases such as alopecia, called for management to wind up the company and return its cash.

Early-stage drug companies are particularly vulnerable to the market turmoil because there are few easy ways for them to generate revenue or cut costs while conducting expensive clinical trials. The sector’s woes also provide a glimpse of the pressures that could face more companies if the strains do not ease.

Senior bankers and lawyers are divided over whether stock markets will calm enough for IPOs to return en masse this year, but even the more sanguine do not expect to see a significant uptick in activity before the traditionally quiet midsummer period.

“Part of the discussion [with IPO candidates] now is ‘what’s your bridge if the IPO timeline doesn’t work?” said a senior capital markets lawyer. “A year ago if a company said they wanted to list ‘right now’ you could aim to be public in three to six months. Now you have to ask ‘what’s your cash bridge for the next year?’”

Conditions are slightly less onerous for those biotechs yet to go public, giving them at least the option of trying to tap interest from a private equity industry still flush with funds. The appetite was underlined by buyout firm Apollo Management’s purchase last month of a stake in Sofinnova Partners, a European venture capital firm specialising in life sciences.

“It is quite striking that Blackstone, Carlyle and Apollo have all gotten into biotech and I’m sure there’ll be plenty more coming. It really reflects the mainstreaming of biotech as an asset class,” says Opler of Torreya.

There have been about 120 private fundraisings worth $9bn this year, according to LifeSci, down roughly 30 per cent from the comparable period last year.

This month Mineralys Therapeutics raised $118mn, led by European private equity firm Andera Partners and RA Capital Management, a Boston-based investment manager. The Philadelphia-based biotech is developing a novel treatment for high blood pressure, a condition that affects nearly half of all US adults, meaning a breakthrough treatment could prove a blockbuster drug.

“There is still finance available for companies, which have good assets, can generate short-term news flow or are capitalised well enough to get to the next de-risking event,” said LEK’s Jacquet.

Some have also drawn the attention of Big Pharma, which SVB Leerink estimates has up to $500bn to deploy on M&A due to the windfall from the coronavirus pandemic.

Bristol-Myers Squibb earlier this month agreed to buy Turning Point Therapeutics, which is developing a new cancer drug, for $4.1bn.

Nevertheless, most deals have been linked to promising drug pipelines rather than rescue of cash-strapped start-ups. There is little evidence that the steep drop in valuations is set to reignite M&A in a sector where dealmaking sank to its lowest level in a decade in 2021.

“We always follow the science,” said Eliav Barr, global head of clinical development and chief medical officer at Merck, pointing out that the appeal of a target lies with the drug or treatment it is working on, not the collapse in its share price.

“If you go down to the bargain basement, to the ‘for sale’ rack for a discount of 50 per cent — well there may be a reason why that is so,” said Barr. “Just because it is cheap does not mean it is good for the company.”

Willie Walsh probably meant to deliver an upbeat message to aviation executives in Doha this week for the annual meeting of the International Air Transport Association. In fact, IATA’s director-general may have unwittingly sent a nervous shiver through the room when he said that air traffic could “exceed pre-pandemic levels” next year.

Having made the commitment in October to achieve net zero emissions by 2050, the industry is quietly panicking about how to reach that target. While carriers will be delighted with the recovery, how much harder will it be to get to net zero if demand is rising far faster than expected?

The aviation industry also has a record of overpromising. A recent report by climate charity Possible found that airlines and aviation bodies have met only one of 50 climate targets in 20 years. Why should this time be any different?

Some leading airline executives are already casting doubt on the target. Akbar Al Baker, chief executive of Qatar Airways, said in Doha this week that it would be “very challenging”. Tony Douglas, chief executive of Etihad, has suggested that some executives have signed up to the 2050 goal knowing they would be gone when the target was missed.

To be fair, the aviation industry is not in control of its own destiny. To get to net zero, airlines need vast amounts of sustainable aviation fuel (SAF). Energy companies are producing less than 0.1 per cent of aviation’s needs. But even that will not be enough, as SAF is at best 80 per cent more carbon efficient than normal jet fuel — and only over its lifetime. It still emits carbon when burnt.

So the industry has pinned its hopes on technological miracles to take it to net zero.

Iata’s own net zero pledge depends on a 13 per cent emissions reduction from new propulsion technologies, including aircraft powered by green hydrogen. Produced by the electrolysis of water, this does not emit CO₂ when burnt as a fuel.

The UK government-backed FlyZero study concluded that to meet net zero commitments, hydrogen-powered, midsized jets carrying close to 300 passengers would have to be in service by 2035, with zero-emitting narrow-bodies flying by 2037. Moreover, 50 per cent of the global commercial fleet would have to be hydrogen powered by 2050. It also added that six revolutionary technology breakthroughs would be required to get those aircraft flying. That is a big ask in any scenario.

Privately, industry executives are very sceptical. Substantial obstacles remain to storing hydrogen on aircraft, and the ranges they can fly will be far shorter. And let’s not forget the lengthy process of safety certification. Then, trillions will have to be invested in a wholesale revamp of aircraft design, fleets and infrastructure. “The 2035 deadline is not realistic,” a well known aviation executive told me. At best, use of hydrogen will be incremental by 2050.

It is not just about the technology. Martin Lambert, senior research fellow and head of hydrogen research at the Oxford Institute for Energy Studies, estimates green hydrogen — which requires vast quantities of renewable energy to manufacture — accounts for less than 0.1 per cent of global energy consumption today. Meeting Europe’s overall target for 20mn tonnes of green hydrogen in 2030 would require double the amount of renewable energy the bloc produced in 2019, he said.

Last week DNV, a technical adviser to the oil and gas industry, estimated hydrogen will only account for 5 per cent of global energy demand by 2050. It is open to debate whether aviation will be the first port of call for this green hydrogen. The first in the queue are likely to be those industries that already use the grey version — produced from fossil fuels — such as the fertiliser sector or refineries. After that, vital basic industries such as food production or steel would arguably take priority.

Green hydrogen will be a scarce commodity. Instead of spending billions on subsidising hydrogen aircraft development, governments would do better to incentivise the expansion of sustainable fuels. These could be used by existing aircraft, making an immediate impact on aviation emissions.

Even delivering enough SAF will not get aviation to net zero. Ultimately, the only way to guarantee that aviation will not emit is to not fly, or to make flying so expensive that people make far fewer trips. Perhaps the world needs to learn that flying is not a human right. It is a choice and some choices are more costly than others.

Author's email: peggy.hollinger@ft.com

Once upon a time, in the jargon of private equity, a “secondary” would have meant one master of the universe selling to another. Now, it could easily refer to a buyout fund flogging assets to itself.

In the twilight years of the pre-crisis credit boom, the growth of secondary buyouts prompted concerns about dwindling investment opportunities, ailing returns and valuations detached from the strictures of public markets.

As another cycle falters — one where ultra-low interest rates facilitated debt-fuelled deals and sucked money into ever-larger funds — the emergence of so-called GP-led secondaries where a group effectively sells to itself raises similar questions. It is presented as a win-win for private equity shops, known as general partners, and their investors. It won’t be.

This debate, typically, is muddled by a variety of terms that are used to refer to various different deal structures. But the general idea is that passing assets, either singly or in a portfolio, from one fund to another within the same group is just another tool in the toolkit, alongside selling to a strategic buyer, another buyout firm or pursuing a listing.

Investors in the original fund, known as limited partners, are given the option to cash out or to roll into the new fund. Third-party money, sometimes from investors like sovereign wealth funds or other private equity groups but often from the “secondaries” market where LP stakes can be traded, is brought in to fill the gap (and set a price).

The theory is that investors get more flexibility. Funds get to capture the remaining upside in what are usually presented as prize assets, rather than handing it over to someone else.

For a start, it is a bit rich for the sector to promote the “optionality” this gives its customers. Buyout funds have historically been sniffy about investors selling stakes in the secondaries market, which they have now co-opted for their own ends. As sell-to-yourself deals have surged, these GP-led transactions now account for over half the market, according to Jefferies.

Investors, meanwhile, signed up for a find, fix, flog model that turns assets round within the life of a 10-year fund. True, some single-asset deals may involve gems that merit treasuring. But on a basic level, these deals reflect that something has gone wrong, or at the very least not delivered in the promised timeframe.

There will be more of them. Market convulsions make attractive exits harder to find. These deals, say industry figures, are best used where there is another leg of the growth plan, or a need for fresh funds, to make the most of a good asset. In reality, some concede, the quality of assets and the rigour of deal governance varies considerably.

Pricing is the obvious issue. Concerns about the cosy juicing of private valuations led Amundi’s chief investment officer to comment that parts of the industry look like a pyramid scheme. But original investors could equally lose out where an asset is transferred at a lower price than its full market value.

The US regulator’s proposal to require an independent fairness opinion is inadequate. But its consultation has pierced the industry omertà, exposing divisions. The sector lobby group in its response bemoaned “burdensome requirements” reducing returns. The body representing investors commented that “the most meaningful shift in market practice would be to address the conflicts of interest . . . more broadly.”

One issue is asymmetry of information and experience: deal-savvy private equity groups can be asking thinly staffed investment offices unaccustomed to these types of transactions to make unreasonably quick decisions on the basis of limited information.

Another is the recutting of terms. Logically, that should benefit existing investors. Instead, it can introduce “super-carry” or other changes to the advantage of the buyout fund. These are bespoke, negotiated deals. But terms are often proposed by new investors bidding to take part: as more money has chased after deals, “GPs have taken advantage of what has been a very competitive market”, says one adviser.

Private equity’s time horizons were already straining at the confines of the 10-year fund, a vehicle designed for the recycling of capital and extraction of profits. The explosion of sell-to-yourself deals should mean pressure to diversify investment structures to better suit what’s now being delivered. Meanwhile, others should contemplate what another lever for keeping assets in private hands for longer could mean for public markets and those like pension funds that still predominantly invest in them. This self-sale innovation poses questions for everyone.

Author's email: helen.thomas@ft.com

Mars, the intensely private chocolate and pet-care group, has revealed annual sales of almost $45bn - higher than Coca-Cola’s - as chief executive Grant Reid stepped down.

Reid, who took Mars into veterinary services and healthier snacks, is leaving after eight years of what the family-owned US company called “unprecedented” growth.

Poul Weihrauch, who currently runs Mars Petcare, will take over as CEO at the end of September, the company announced on Wednesday, with Reid retiring at the end of the year.

The Virginia-based group marked the succession with a partial glimpse into its financial metrics, saying its annual sales had grown more than 50 per cent in Reid’s tenure, from more than $28bn to almost $45bn.

That would put Mars’ revenue ahead of Coca-Cola and would far outstrip the revenue growth reported by other global consumer goods companies such as Nestlé, Unilever or Mondelez over the same period.

Some groups have responded to the challenge of delivering consistent organic sales growth by shedding parts of their portfolios, such as Kraft Heinz’s sale of its Planters peanuts brand, or by breaking up, as Kellogg proposed this week.

Mars also hinted at the faster growth in petcare that had led it to hand the reins to that division’s head at a time when a shift to healthier snacking has led to lacklustre growth in global confectionery sales.



Weihrauch, originally from Denmark, had doubled petcare sales since being put in charge of the division behind Iams and Whiskas in 2014, the group said, establishing it as the industry’s largest company and lifting the share of revenues coming from services from 5 per cent to 20 per cent.

Some of that growth has come from acquisitions. Mars has owned pet food brands since 1935, but Reid and Weihrauch oversaw a major expansion of its veterinary business, including 2017’s $9.1bn purchase of VCA, a group of 800 petcare hospitals, and pushed the business into Europe. Half of the group’s 140,000 associates, or employees, now work for the veterinary business.

Reid’s impending retirement elicited very rare public comments from two remaining members of the Mars family’s third generation, who described the Scottish-born outgoing CEO as a friend who had made necessary changes to the business.

“His values and character align so well with the family, and he has a wonderful sense of humour that helped carry us through some difficult challenges,” said Jacqueline Mars, 82. John Mars, 86, hailed his “healthy dissatisfaction for the status quo”.

Forbes puts the Mars family’s wealth at $94bn, estimating that it is America’s third-wealthiest dynasty after the Waltons and the Kochs.

Despite a long history of secrecy, Mars has sought to be more communicative under fourth-generation family members including Victoria Mars and Stephen Badger.

As CEO, Reid looked to galvanise other business leaders to tackle the effects of climate change. Mars pledged last year to achieve net zero emissions by 2050.

His tenure also included the US group losing executives to JAB Holding, the Luxembourg-based private investment group, causing tensions that briefly spilled into the open in 2020 when Mars sued JAB and one of the executives over an alleged theft of petcare trade secrets. JAB denied the claims and the case was eventually referred to arbitration.

Bill Ackman was at home in the Hamptons, killing time on a Saturday morning in December 2020, when a New York Times article caught his eye. He read it on his phone, got angry, re-read it and logged on to Twitter to express his outrage. Then, the 56-year-old billionaire started plotting the downfall of America’s best-known porn site.

Moments like this often trigger Ackman’s sibling, Jeanne, to send an email of sisterly guidance: Bill, what on earth are you doing? Why are you weighing in on this topic? You’re a hedge fund manager. What makes you an expert? And Ackman usually ploughs ahead anyway. His métier is meddling in other people’s business, ideally without an invitation.

Ackman is the founder and CEO of Pershing Square Capital Management, an activist fund that uses its billions to buy stakes in publicly traded companies and goad them into changing their business practices or, at the very least, increasing their stock price.

Before the pandemic, Ackman was best known for a quixotic and bitter campaign against Herbalife, a purveyor of health supplements he accused of being a covert pyramid scheme. (It wasn’t entirely successful, and Pershing lost nearly half a billion dollars.) In 2020, he became the talk of Wall Street again with a trade that turned a $27mn hedge on Covid-19 uncertainty into a $2.6bn windfall, all within a month. “I’ve been called the most persistent person in America,” he says. “And I take that as a compliment.”

Now Ackman had found a new target in the pages of the Times: Pornhub, the most-visited website of the world’s biggest porn company, MindGeek. Nicholas Kristof’s column that week included testimony from victims of abusive videos, spy-cams and revenge porn and argued the site was “infested with rape videos”, from which it was profiting. (Pornhub denied the allegations, insisting it had better moderation than most social media platforms.)



While Ackman is not against pornography per se, the “appalling accounts of exploitation” just “hit a nerve”. “The problem with the topic is people don’t want to talk about it,” he says, which is why he took a public position with his tweets.

What he did next was more consequential. Ackman texted Ajay Banga, who was then the chief executive of Mastercard, writing “Ajay, please read the above” and sharing Kristof’s piece. Ackman wrote that Mastercard was “facilitating sex trafficking” and should immediately stop working with Pornhub. “Call to discuss if you disagree,” he concluded, with delicious passive aggression. Not long after Banga replied: “On it.”



Ackman knew Banga from the tennis circuit; they share a passion for the sport. He also understood the power Mastercard and Visa wielded over Pornhub’s parent company. Most videos on the site are free to watch, but MindGeek offered subscriptions and took credit card payments from small advertisers. Roughly half of the company’s overall revenues, which peaked at about $460mn in 2018, came from paid-for porn.

Within days of Kristof’s piece and Ackman’s message, the payments giants cut Pornhub off. The effect on MindGeek was debilitating. The company’s cash flow dried up. It broke the conditions of its loans, prompting a notice of default from its lenders. And the pressure kept building, as Visa considered making its temporary suspension permanent.

So MindGeek buckled. Almost overnight, the company removed most of the porn available on its flagship site. Pornhub went from hosting 13 million videos to about four million. Millions of videos uploaded by “unverified” providers disappeared. It was probably the biggest takedown of content in internet history.

Mastercard and Visa hardly ever shut out a big merchant. ­Ackman’s text wasn’t the main reason they did so in late 2020, but it is not hard to imagine it helped tip the balance. While governments might be slow and bureaucratic, Ackman realised that payment companies, when they want to, can act decisively. “They have to be de facto regulators of what’s permissible content and what’s not,” he says.

What Ackman didn’t realise is that Visa and Mastercard have increasingly been doing that job for close to 20 years. The biggest and third-biggest financial companies in the world now exercise more control over the global porn business than any government.

They wield this power in total discomfort and do so by relying on a cadre of satraps responsible for making precise and occasionally bizarre distinctions — what distinguishes a performer dressed as an alien from bestiality, what are the conditions of acceptable vampire sex — that determine exactly what you can and cannot see.

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The moving picture has stoked fears of moral depravity from the start. In the 1930s, Hollywood developed and adopted the Hays Code, a regime of self-censorship intended to affirm the industry’s rectitude. The provisions — no lustful kissing, no interracial relationships, no sexual perversion, whatever that meant — applied to most major films released for about three decades.

Porn’s Hays equivalent isn’t maintained by the industry, but by an ecosystem of payments companies, banks, billers and service providers ultimately overseen by Mastercard and Visa. It is a vast domain. Porn accounts for close to 8 per cent of all internet traffic, according to data provider SimilarWeb, and generates 18.5 billion visits a month or a total of 158 billion page views.

As part of a year-long FT investigation into the adult industry for our Hot Money podcast, a door to this world was opened to us when a porn executive mentioned, almost in passing, some oddities in production guidelines, the dos and don’ts for making porn. We asked her to dig up a hard copy, and she shared a short document of “best practices” compiled by a Florida-based company called MobiusPay.

It was just a page. But it was packed with unacceptable terms, definitions of extreme content and bans on everything from weapons to depictions of real harm, implied rape or incest. There were also a few puzzling provisions on hypnosis and mind control. Its author is Jonathan Corona, a softly spoken, bespectacled 39-year-old executive. We met in Los Angeles on the margins of Xbiz, a porn-industry conference where performers mixed with fans, payment companies and tech geeks, as delegates nursed hangovers from the previous evening’s “lingerie and pyjama” party.

Companies like MobiusPay provide essential services to the adult industry. As one executive put it, “The story of the porn industry is the story of trying to take payments.” For a business to charge credit cards, it needs a merchant account from a sponsor in the Visa and Mastercard network. MobiusPay helps sort that out, acting as a bridge between higher-risk businesses — legal cannabis sales, gambling, porn — and credit card companies. That access comes with conditions in the form of content standards.

Corona, MobiusPay’s chief operating officer, explained the almost ­Talmudic way in which these standards are derived. Visa and Mastercard set down rules for the payments community on porn, essentially core principles and goals. Then banks and payment processors like MobiusPay make fine distinctions on what these mean in practice, often with informal help from Visa and Mastercard. The result is lists. Many lists.

Mastercard’s core rules take up 436 pages but only devote one paragraph to porn, rule 5.12.7.2, found in the “illegal or brand-damaging transactions” section. It states that the company is against the sale of any image or service that is “patently offensive” or lacks “serious artistic value”. It bans nonconsensual sexual behaviour, sexual exploitation of a minor, nonconsensual mutilation of a person or body part and bestiality. Mastercard, it states, is also against “any other material that the Corporation deems unacceptable”.

From this ambiguous guidance — not even 10 commandments — people like Corona must flesh out a regime of specific regulation. Since mutilation is off limits, MobiusPay interprets that to mean all blood is prohibited. In a section on “creatures”, the company helpfully clarifies that aliens, whether real or ersatz, are given the same protection as animals when it comes to porn.



For a censor, outright bans are routine; it’s nuance that is difficult. Corona read us a sample of “concern words” matter-of-factly, “twink, nymph, nymphet, teen”, and explained how these terms are not banned but “tend to create problems”, specifically with Visa and Mastercard. The conversation turned to the question of twinks, slang for young, hairless gay men. Presumably working this all out, categorising words and behaviours, must require conversations with Visa and Mastercard? “Absolutely,” Corona said. “It’s self-censorship and self-policing. Ultimately, if you want to accept Visa and Mastercard, then you have to follow their rules.”

Seen in its totality, the system looks very much like an apparatus of control. There are rules. Registration requirements for adult merchants. Enforcement responsibilities, delegated to banks and processors and service providers. See-through powers allow Visa and Mastercard to inspect any site at any time. ­Penalties, fines and even the threat of being cut off, as MindGeek discovered. There are conferences and seminars and interpretative communiqués. It is a highly regulated market, without any government regulators.

Both Visa and Mastercard declined interview requests. In statements the companies stressed their priorities are supporting legal commerce, even when a transaction is objectionable or morally dubious. The main test is legality. Mastercard explicitly justified its 2020 action against MindGeek on the grounds it had identified “unlawful” content on Pornhub.

Visa and Mastercard play an important role in policing highly regulated, high-risk commerce such as gambling or pharmaceuticals, or other sectors prone to fraud. But when they do intervene, the credit card companies do so carefully and cleave to the law, since their success stems from their ubiquity.

Porn is the exception. Both companies play the role with reluctance but, on a day-to-day basis, they do restrict access to porn that is, strictly speaking, legal. These curbs are justified on the basis that condoning such content, even implicitly, could hurt their brand. Some are clear-cut prohibitions; others are standards that evolve and change with the sexual culture. That means behaviour that might be fine on Netflix may be unacceptable on a porn site taking credit cards.

We asked Corona why his list forbids, for example, depictions of hypnosis and sex while someone appears to be asleep or under the influence of mind control. “Of course they are acting,” he said. “But being asleep . . . or hypnotising someone removes the ability to render consent.” Which might, in other words, damage Mastercard or Visa.

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Jessica Stoya is a career pornographer, model and author. We met in her modest, three-room Brooklyn apartment. Outside the streets were white with fresh snow. Jessica’s origins, and the inspiration for her stage name Stoya, are Serbian. She was wearing a baggy top, her black hair pulled back. Fifteen years after being signed as a “contract star” for Digital Playground, a prolific hardcore studio, Stoya, 36, is still recognised on the street while wearing a Covid mask, just from “her eyes and eyebrows”.

She is a porn star who has written for The New York Times and Slate and authored a book of essays called Philosophy, Pussycats & Porn. Fans of her live shows would not be surprised by the odd reference to the French intellectual Georges Bataille.

But in these performances, on so-called camsites or paid social media platforms such as OnlyFans, there are some more straightforward things that must go unsaid. Everyday words that cannot be spoken. Phrases that payment companies decide are beyond the pale.

“I’m in lingerie. And people tip me. And I take my bra off or pull the cups down and I jiggle my shoulders while saying, ‘T-h-a-n-k-y-o-u,’” she says, making her voice go jittery and giving a brief shimmy. “It’s very cute. When I get my period, I have cramps and really don’t want to be vigorously jiggling. But I also want people to know, like, don’t be disappointed. It would be nice to be able to say — ‘It’s because I have my period’— but I cannot,” she says. “It is a banned word.” She cannot type “period” into the chatbox of her porn platform. Stoya says when it comes to porn, Visa and Mastercard have more power than the Pope.

Visa and Mastercard have no explicit rule against blood. But most payment companies and banks in the Visa and Mastercard networks associate blood with violence or mutilation, which is prohibited. So blood is banned, even blood obviously made of ketchup. This is a disaster for vampire porn, which is akin to a forbidden good on the internet. And it puts special constraints on female performers like Stoya. “We’re raising people who are becoming sexual in a culture where menstruation is completely erased,” she says.

Out of curiosity, about five years ago Stoya contacted CCBill, one of the biggest payment companies specialising in porn. Rather than the “acceptable use” policy on its website, she asked if she could see their full guidance. The detailed list. The one that precisely laid out the limits of what CCBill believed Visa and ­Mastercard would tolerate.

The four pages of rules shared with her are written in a lawyerly tone and are, in parts, totally bizarre. A section on furries, an online subculture interested in anthropomorphic animal characters with human personalities, reads “content that depicts furries and humans engaged in sexual acts are not permitted across the board. Content that depicts furry engaged in sexual acts with another furry is acceptable across the board.” Lest that leave any room for misinterpretation: “Please note, per Visa ­regulations a furry that contains human-like characteristics is not permitted.” So, no half-man, half-furry.

The codification is patchy and inconsistent though. Most tube sites, where free porn is accessible to anyone who clicks on a link, including children, have lighter restrictions than subscription porn or live video platforms, which depend on credit cards and are harder for kids to access. Visa and Mastercard do not want to be seen taking the lead, so payment providers and the porn sites are left to look for subtle signals that a boundary has changed.

“Golden showers”, for instance, were long banned from most commercial porn sites. Urinating on others was deemed inappropriate. Then, in 2016, the kink shot to prominence when Donald Trump denied rumours he had taken part in the practice, declaring: “I’m not into golden showers.” Before long, the term started to appear on more commercial porn sites, without problems.

In their approach to adult content, credit card company executives see themselves as showing restraint, only going beyond the law in limited cases to maintain basic standards. But for operators in the payments network, it is like guessing the wishes of an all-powerful monarch. You only know you’re wrong when you are punished. “Instead of the government defining what is and is not considered sexually acceptable, it is a corporation, a credit card company,” says Stoya.

Yet unlike most governments, there is no process of regulation. No consultation. Few public explanations. No names. No sense of who the arbiters of acceptable porn might be. “You know, it is not like I can go down to the Mastercard office and be like: ‘Hello, I would like to have a civil dialogue about this.’ That’s not going to happen,” she says. “Who is the arbiter of what can be done with sexual media? I have no idea who they are. Did they take a philosophy class? Do they have a degree in women’s studies?”

During the course of making our podcast series, we did meet some of these people. None were philosophers, but there was one sociologist and a few lawyers. Most considered themselves to be payments professionals, managers of risk, facilitators of commerce. Not porn cops. But is that any surprise? Pornography is deeply uncomfortable to talk about, let alone acknowledging its place in our culture or in our lives online. Perhaps it’s only to be expected that our porn regulators feel the same.

Patricia Nilsson is an FT consumer industries reporter. Alex Barker is the FT’s global media editor.

“Hot Money”, a new investigative series produced by the Financial Times and Pushkin Industries, is available wherever you listen to podcasts

When Christine Ross inherited a new client from a colleague heading off into retirement, the customer made clear he had only one concern when it came to the question of fees — and it was not about how the wealth manager’s charges stacked up against rivals.

“He wanted to know that he did not have an inferior charging structure to any of our other clients with a similar amount invested,” says Ross, client director at Handelsbanken Wealth and Asset Management.

With a long career in wealth management, Ross has seen a full range of attitudes to fees and charges among well-heeled clients. Some are more concerned with market performance than variations in cost structures, while others will be determined from the outset to drive a hard bargain on fees.

But the current conditions of high inflation, economic uncertainty and the paucity of safe havens amid the market turmoil bring heightened concerns over one of the few elements of a relationship that clients can influence, and one that can make a material difference to long-term returns.

“People do look at fees and increasingly so, because they know that they’ve got to make this money work. It is absolutely a discussion,” she says.

By far the most common charging model for investment management services is “ad valorem”, an annual percentage fee of the client’s assets. When the manager makes the right choices or the market booms, this means they and the client benefit. When things take a turn for the worse, the fee income pulled in by the manager falls along with the shrinking value of the portfolio.

The industry template is the “tiered fee”, under which managers offer lower fees for those with bigger sums to invest. A 1 per cent charge on portfolios of up to £1mn, for instance, might fall to 0.75 per cent for assets between £1mn and £2mn, and 0.6 per cent above £2mn. 

There are also usually differences in fee structure for investment management advice depending on whether a client chooses so-called “discretionary” services, where the wealth manager has licence to make changes to the portfolio without getting permission, and “advisory” portfolios, where the manager must seek the client’s agreement for every move. Advisory arrangements can be as much as 0.25 to 0.5 percentage points dearer.

Clients with less to invest may have little room for negotiation. But with new low-cost competitors coming into the market and regulators demanding greater transparency on charges, wealth manager fees have declined overall in recent years, especially for larger clients with £3mn or more.

According to a survey of wealth managers, both discretionary and advisory, by Savanta, wealth managers are more concerned about the general pressure of competition than specifically about losing clients to low-cost, alternative providers.

Only 43 per cent of those polled said they were “slightly” or “very” concerned that they would lose out to the low-cost rivals. But nearly 70 per cent of businesses said they were “slightly” or “very” concerned about the growing competition in a tougher, more price-conscious market.

For those approaching a wealth manager for the first time, it is important to understand that the headline fee quoted by the manager for their services may not include all the costs. When a manager chooses an external fund as part of the investment portfolio, for instance, there will be an associated annual fee. Fund fees have dropped in the past decade or more, but may still be material.

Financial planning may also be part of overall fee, or not. Some firms charge a percentage of assets to provide advice on things like inheritance planning or pension reviews; others will charge a flat fee for advice.

Lee Goggin, founder of Findawealthmanager.com, a matchmaking site acquired last year by wealth manager 7IM, says that in addition to a basic management fee of between 0.5 per cent and 1 per cent, other charges may include financial planning (around 0.2 per cent); underlying fund fees and custody fees; and transaction fees for changes to the portfolio.

He says that these fees may be easily justified by a combination of good planning and smart investment but clients need to know up front what they can expect to pay. A key question he recommends asking before signing up is: “What is the total expense ratio — the total amount of money that I am going to pay for the service in its entirety?”

Over the past year he has noticed an influx of people suffering from “investment vertigo”. Having put money into the stock market during the pandemic, many have done very well, perhaps doubling their funds since March 2020. But this can also bring problems.

“There may be tax implications, or rebalancing needs, and getting the right advice in these circumstances can more than pay for itself . . . paying 1.5 or 2 per cent to someone who optimises your portfolio will easily pay for itself,” he says. “If you’re a DIY investment warrior and you’ve had a good run, you may have neglected to look at the planning aspects. If you’ve taken some decent risks, you’ve made a lot of money and you’re of a certain vintage, do you still need to be taking those risks?” 

Others in the industry downplay the role of fees among clients’ biggest worries when so much uncertainty is roiling markets.

Ian Sackfield, managing director of investment management services at Charles Stanley, says fees may be an important part of the “value proposition”, but adds: “In our experience it is certainly not what clients are talking about at the moment. What they are talking about is how to preserve their capital and prevent its value being eroded by inflationary pressures, immunising their portfolios against volatile markets, and ensuring the legacy they leave their loved ones remains intact.”

For Ross of Handelsbanken, fee negotiations are always more likely to crop up with certain types of client, such as business owners or entrepreneurs for whom dealmaking is second nature. “I have been told to sharpen my pencil by potential clients. For me, it probably happens about 20 per cent of the time. At the end of the day people will say — is that the best you can do?”

Goggin cautions that the natural tendency to focus on fees, performance and service level — the “cornerstones” of wealth management — can lead people to neglect the fourth, more intangible, factor: how you feel about the person offering their services.

“Do you like the man or woman who is going to be your wealth manager for possibly the next 10, 15 or 20 years? There’s logical thinking involved in making the decision. But ‘gut feel’ is really important too.”

US-based Tesla fans are never short of excuses for smugness, but they were handed a peach this week with the latest edition of the Cars.com American-Made index.

The study, which ranks vehicles’ American-ness on criteria such as assembly location, component origins and manufacturing workforce, placed all four Tesla models in the top 20, with the Model Y and Model 3 in the top two slots. Drowned by the whooping of Teslaholics, though, was Honda’s altogether cheekier colonisation (once you include the Acura brand) of an unbeatable seven of the top 20 places.

For close followers of Honda’s long-term offshoring strategy — and those of other large Japanese manufacturers — this came as little surprise. But it provides a timely reminder, perhaps, of why the current historic cheapness of the yen — now bobbing around a 24-year low — is not producing the effects that many investors might have come to expect.

Historically, there was a good reason why traders in Tokyo nicknamed the dollar-yen exchange rate “the paymaster”: the profitability and competitiveness of large parts of corporate Japan once had a high sensitivity to its level, and the performance of equity markets had a high correlation with its swings.

Certain aspects of the paymaster’s influence have shifted over time, but its overall capacity to set the tone around the Japanese stock market has never felt like something that would vanish overnight. For most of the period since the 2008 global financial crisis, extended spasms of yen weakness have pretty consistently juiced stocks higher, on the logic that this is good for exports, and exports are where Japanese corporate profits are made.

But that link, says Shrikant Kale, a quantitative analyst at Jefferies, is looking decisively broken and the sensitivity of the Japanese market to the yen has fallen sharply. During the period between 2012 and 2015, when the yen sank most dramatically, the MSCI Japan index had a consistently high correlation of about 0.7 with the dollar-yen rate.

The direct translation of yen weakness to widespread earnings upgrades was, in reality, patchy, but the overall narrative (around Abenomics reforms and stimulus) drove stocks higher: the yen fell almost 60 per cent over that period, and the MSCI Japan rose 128 per cent.

But the correlation began to slip in 2019 and has since plunged more severely. It now stands, says Kale, at just 0.14. Sectors such as autos, insurance, tech hardware and consumer durables, which were clear beneficiaries of yen weakness in that earlier phase of yen devaluation, are emphatically not benefiting this time around.

Other analysts have reached the same conclusion through different routes. For example, when the brokerage CLSA looked at the share prices of companies that had declared the highest positive impact on operating profits of a downward move in the yen, they showed almost no correlation with the currency over the past three months, during which time the yen fell almost 10 per cent.

The cause of this breakdown, many analysts argue, is illustrated by the deep Americanness of the cars Honda sells in the US. The ratio of Japanese manufacturers’ overseas production ratios have been rising for three decades, and have now plateaued at 22.4 per cent, desensitising those companies to big moves in dollar-yen.

Government surveys suggest that, for automakers and their supply chains, that ratio is due another phase of increase. These offshoring decisions are not being made, as they might have been in the past, to chase lower labour costs, but because ever larger parts of corporate Japan are deciding to build their products closer to their customers. That is structural and, in all probability, irreversible. As is the dwindling influence of the paymaster.

The era of cheap money is ending. The property market shows signs of cooling. But the keen appetite of mortgage lenders has created fierce competition to buy UK specialist lender Kensington Mortgages from private equity owners Blackstone and Sixth Street. Winner Barclays will pay a hefty £2.3bn.

As a listed company in the noughties, Kensington was a subprime lender. But the company has evolved from the struggling business sold to South African bank Investec for £283mn in 2007. The private equity groups that bought it for over a third less in 2015 then nearly quadrupled its mortgage origination.

Kensington insists its borrowers are not especially risky, but merely complex to assess. It offers loans to the self-employed and contractors as well as buy-to-let landlords, which account for nearly a third of its portfolio.

Barclays has offered a premium on a £2bn portfolio of loans and a business that generates meagre profits. Its outlay will cost it a dozen basis points of common equity tier one capital, tiddly against its 13.8 per cent buffer.

Kensington’s average loan-to-value at origination is relatively high at 77 per cent, well over Barclays’ mortgage book at roughly half. Its 90-day arrears rate is about 2.5 per cent compared with 0.1 per cent for Barclays. But its credit record is good: only 19 of its loans have gone into default since 2010. Barclays clearly values Kensington’s proprietary software and ability to assess the quality of borrowers overlooked by high street lenders.

Barclays is not alone in taking an interest in specialist lending. HSBC wants a bigger share of the buy-to-let mortgages market. An intensely competitive mainstream mortgage market incentivises lenders to seek more lucrative niches. Barclays will expand into an unconventional part of the mortgage market late in the cycle. At least the deal is a small one — its shareholders will hope the long term rewards outweigh the risks.

In Revlon’s 1980s heyday, supermodels Cindy Crawford and Claudia Schiffer appeared in television and magazine advertising that promised to make women “unforgettable” with the brand’s bright red lipsticks.

Today, consumers scout out cosmetics on social media and a flood of buzzy independent brands fronted by celebrities like singer Rihanna and influencer Kylie Jenner that have sidelined the likes of Revlon. Saddled by high debts, the 90-year-old US group, which is majority owned by billionaire Ron Perelman, filed for bankruptcy last week.

The high-profile casualty shows how competitive and fast-paced the beauty sector has become, requiring heavy investment in digital marketing and product innovation to prevent brands from fading into irrelevance. Unlike other staples like food or household products where brands can survive decades with minimal tweaks, consumers’ desires in beauty evolve rapidly, often under the influence of culture, fashion and art.

“The indie brands are constantly taking risks and starting trends,” said Stephanie Wissink, an analyst at Jefferies. “It is as if the big established beauty companies are like a tortoise, who is racing not against one hare, but against hundreds of them.” 



Industry leaders L’Oréal, Estee Lauder and Shiseido have learned to thrive in this new landscape by playing on their global reach and scientific knowhow, and snapping up the most promising indie brands to stay relevant.

But the likes of Revlon and Coty have struggled because their cosmetics are more mass-market and they lacked scale in the fastest-growing category and market — skincare and China. Both were constrained by debts racked up from acquisitions, although Coty has made progress in paying it down so analysts say it is unlikely to suffer Revlon’s fate.

The Covid-19 pandemic pushed the less agile companies further on to the back foot, as lockdowns and mask wearing hit demand for beauty products while also sending more consumers online. Supply chains for everything from plastic to pigments have been snarled, another advantage for the bigger companies that carry more sway with suppliers.

Global make-up sales have not yet recovered to their 2019 levels, although some categories like skincare and luxury fragrances have done so, according to McKinsey data.

The strongest players L’Oréal and Estee Lauder have already exceeded their pre-pandemic sales, helped by their large presence in the booming Chinese market and strength in skincare with brands like Lancôme and La Mer. L’Oréal has predicted that its revenue growth will outpace the 4 to 5 per cent expansion of the global beauty market this year.

In contrast, sales at Revlon, Coty and Shiseido are still languishing at pre-pandemic levels.

Even the beauty industry’s winners have had a bad run on the stock market this year, as a combination of Covid-19 restrictions in China and fears of a global recession alarm investors. Estee Lauder is down 30 per cent, L’Oréal has fallen 22 per cent and Shiseido is off 18 per cent — all underperforming Dow Jones Industrial Average and global consumer staples indices. Coty has fallen 30 per cent this year, and Revlon has tumbled 38 per cent.



Although China has proved a boon over the past decade for some beauty companies, Beijing’s zero-Covid policy has curbed its attraction this year.

Estee Lauder in particular has been hard hit by recent lockdowns in China, triggering a profit warning in May. China accounts for about one-third of its sales and its main distribution centre is in Shanghai, the epicentre of the recent Covid-19 outbreak, leaving it unable to supply the rest of the country.

Given China’s role as the second-biggest cosmetics market after the US, Wissink of Jefferies said that China would continue to hang over the sector unless authorities shift away their strict Covid-19 policy.

But in Paris, a destination for Chinese tourists when travel was easier, there was little sign of a slowdown at the city’s high-end Bon Marché department stores this week where indie brands like Charlotte Tilbury vie for attention alongside mainstays Dior and Chanel.



A sales clerk who declined to be named said that it had been busy since international tourists were back and the wedding season was in full swing. “People want to indulge, so they’ve been snapping up beauty products that make them feel good,” the person said.

Elena Boulard said she had come to the store on the hunt for new lipstick and bronzer since she planned to go to the office more this summer after a long stretch working from home. “I haven’t bought make-up in a while and there is so much new stuff,” she said.

High-end beauty products have fared better emerging from the pandemic than cheaper brands. In the US, the “prestige beauty” market, which includes products sold via specialists like Ulta and department stores, grew robustly last year to $22 bln, or 7 per cent above 2019 levels, according to market researcher NPD.

Luxury fragrances, including new brands that offer bespoke blends for an individual, have also enjoyed a renaissance. “Consumers are trading up to treat themselves to a $300 bottle of perfume instead of the $80 one,” said NPD’s Larissa Jensen.

For Revlon, the nascent recovery has come too late. But its problems stretch back far longer: sales stagnated for much of the past two decades save for a bump in 2016 when Revlon bought Elizabeth Arden and it has posted losses for the past six years.

Analysts said Revlon’s brands did not keep up with changing consumers’ tastes, which began to emphasise self-expression and embracing flaws over unattainable beauty norms. Revlon’s weakness in skincare also meant it failed to benefit from that category’s boom.

A stretched balance sheet left the group unable to acquire indie brands to refresh its product lines. Following its bankruptcy court filing, the company will continue trading while it works out a creditor repayment plan.



The way beauty’s indie brands often emerge from unexpected places underlines the scale of the challenges a flat-footed Revon faced.

Take Half Magic, a brand started in May by Doniella Davy, a make-up artist who shot to fame by creating “emotional glam” looks for the actresses on the hit US television teen drama Euphoria. On TikTok, the hashtag #EuphoriaMakeUp, where people post videos of themselves putting on brightly coloured eye shadow, glitter, and neon face gems inspired by the show, has racked up 2.1bn views.

While Half Magic may well fizzle out, it is emblematic of how new brands and trends flourish on social media. To monitor the changes, big beauty companies have increased their spending on digital marketing both to advertise their brands and seize on trends when they emerge.

“If you want to run a successful cosmetics business nowadays, you have to pay an army of 20 somethings to be on TikTok and Instagram all day to monitor trends and engage with people about your brands,” said Iain Simpson, an analyst at Barclays. “It’s not a business you can run lean and mean with a lot of debt on it.” 

Coty chief executive Sue Y Nabi said in an interview that the group had “made a lot of progress” on using social media to renew its storied mass-market brands, which include CoverGirl and Max Factor. “Staying relevant is the most important thing,” she said, including jumping on consumers’ desire for so-called “clean beauty” products that strip out harsh chemicals or by using TikTok to attract Gen Z consumers.

An example of how Coty tries to refresh older names came with a recent launch of a new mascara under its Rimmel brand. It enlisted a UK TikTok influencer Olivia Neill to help design and promote the product called Thrill Seeker.

“It’s the first time we’ve done something like this,” said Nabi. “Companies like ours have learned how to create viral products just as the indie brands do.”

The Chinese memory chip producer Yangtze Memory Technologies plans to bring online a second plant in its home city of Wuhan as early as the end of this year, sources familiar with the matter say, in a move that could further close the company’s technology and output gap with global leaders such as Samsung of South Korea and Micron Technology of the US.

The company, also known as YMTC, needs to expand production after a growth spurt that put it on the world’s semiconductor map and delivered a notable success in Beijing’s attempt to reduce China’s reliance on imported chips.

Its original plant has been running near capacity and churned out 100,000 wafers a month at the end of 2021, two people told Nikkei Asia.

YMTC held a global market share of nearly 5 per cent last year, according to analyst and industry estimates. It has become the world’s sixth-largest Nand flash memory maker behind Samsung, SK Hynix, Kioxia, Western Digital and Micron, and the only one from China.

About 40 per cent of its output at present is 128-layer 3D Nand flash memory, the most advanced produced so far by a Chinese chipmaker. But that is one or two generations behind global leaders Samsung, SK Hynix and Micron. The rest of YMTC’s output is of older 64-layer 3D Nand flash memory.

The new plant would first build mainly 128-layer flash memory and could later shift to even more cutting-edge chips, such as 196-layer or 232-layer 3D Nand flash memory, assuming development goes smoothly in 2023 and 2024.

Apple has been testing YMTC’s flash memory products since last year and could place its first order for “limited quantities” as soon as this year, two people familiar with the matter told Nikkei Asia. The US tech giant has been talking with the Chinese chipmaker since 2018 in hopes of finding a cost-effective source of storage components.

Securing a deal with Apple would be a milestone, highlighting the quality of Yangtze Memory’s chips, industry executives say. Apple’s Chinese suppliers, including those from Hong Kong, already outnumber those from Taiwan, making China the largest source of suppliers to the US company, according to a Nikkei Asia analysis. Apple also has close ties with several Chinese electronics manufacturers, including Luxshare, Goertek and BYD.

Yangtze Memory’s success is also viewed as a victory for China, as the world’s second-largest economy strives to localise semiconductor production and build industry champions. Yangtze Memory is backed by the China Integrated Circuit Industry Investment Fund, Beijing’s most important chip investment funding vehicle. And YMTC is bullish on its growth prospects, increasing its investment budget from $24bn in 2016 to the equivalent of $32.8bn this year.

The Chinese chipmaker is currently installing equipment at the new chip plant, a key step before it goes into production. The factory will eventually have twice the capacity of the first, several people briefed on the matter said. The total capacity for the two factories will reach 300,000 wafers per month and could help YMTC expand its market share to more than 10 per cent globally.



The company is split into two parallel teams composed of hundreds of top engineers tasked with developing 196-layer and 232-layer flash memory, one of the people said. Its aim is to catch up with foreign rivals.

The most advanced products on the market, which Samsung, Micron and SK Hynix have all succeeded in producing, are 176-layer 3D Nand flash memory chips. They are now racing to create chips composed of more than 200 layers. Kioxia and Western Digital said they will be making 162-layer 3D Nand flash memory by the end of the year.

The more layers a flash memory chip has, the more advanced the chips are — and the harder they are to develop and produce commercially. Nand flash memory is a vital storage component used in all kinds of electronic devices, from smartphones and PCs to data centre servers and connected cars.

Most YMTC flash memory is currently used to make consumer-grade solid-state drives (SSDs), mainly for the Chinese market. Its clients include leading storage makers Lenovo, Longsys and Kimtigo of China, as well as Adata of Taiwan. YMTC has also introduced its own brand, ZhiTai, to sell SSDs directly to consumers.

Its share of the global flash memory market has risen quickly from 1.3 per cent in 2019, when it first put 64-layer Nand flash memory into production, according to Counterpoint Research, which believes it could grab nearly 6 per cent of the market by 2023, up from 4.8 per cent in 2021.

Brady Wang, an analyst at Counterpoint, told Nikkei Asia that Yangtze Memory had been working on its technology even before the company was formally launched in 2016. It had demonstrated its capabilities and gradually become a viable global player after years of effort, Wang said. It had also more than doubled its payroll in four years, to about 8,000 employees currently.

“It recruits many engineers and veterans who have Chinese backgrounds but used to work for multinational tech and chip companies,” Wang said. “Managing a plant, however, is different from managing several plants at a massive scale. It remains to be seen if it [can] successfully ramp up production.”

Political tension between the US and China also increases uncertainties for Chinese companies like YMTC, Wang said.

Washington has slowed the advance of China’s semiconductor industry by adding the country’s top chipmaker, Semiconductor Manufacturing International Co, and the telecom equipment group Huawei, to a trade blacklist to restrict their use of American technology. Yangtze Memory has been among the most aggressive companies in pushing ahead with the development of domestic chipmaking equipment, but it continues to maintain good relationships with US and other foreign vendors to ensure its expansion plans come to fruition.

YMTC declined to comment for this story.

A version of this article was first published by Nikkei Asia on June 23, 2022. ©2022 Nikkei Inc. All rights reserved.

The explosive growth of index-tracking exchange traded funds has destabilised emerging economies, increasing their vulnerability to global shocks, according to economists at the Italian central bank.

Their analysis found that investment funds were far more likely than other sources of private sector funding, such as banks, insurance companies and pension funds, to withdraw funding from developing countries during global shocks.

Moreover, passive index-tracking funds are more reactive to shocks than actively managed ones, the research found. Within that, investment flows to emerging market-focused ETFs are even more sensitive to global financial conditions than those of the equivalent mutual funds, rendering ETF money the least reliable of all forms of funding.

“The reliance on investment funds, in particular those benchmark-driven, makes emerging markets more vulnerable to global shocks,” wrote Alessandro Moro and Alessandro Schiavone in their paper “The Role of Non-bank Financial Institutions in the Intermediation of Capital Flows to Emerging Markets”.

“The empirical evidence points to the systemic risks connected with the procyclicality, herding behaviour and highly correlated asset movements stemming from non-bank financial institutions,” they added.

Reforms enacted in the wake of the global financial crisis have forced banks to scale back non-core assets held on their balance sheets, such as emerging market securities. Investment funds expanded to fill the void as the low-yield environment led investors to chase higher-risk assets.



While the greater diversification of funding sources should reduce costs and liquidity risks for recipient countries “on the other hand, the rising role of investment funds has been associated with more volatile capital flows”, said the study authors.

“The Covid-19 crisis, when global financial conditions deteriorated abruptly, highlighted the destabilising role of investment funds for emerging economies. Asset sales by investment funds were the main driver behind the sudden stop EMs underwent during the first quarter of 2020,” they added.

The paper found the flakiness of portfolio flows was not confined to the onset of the Covid pandemic but has become the norm. “Redemption pressures are particularly severe for passive funds” during periods of global market stress, they found.

Moreover “the increased popularity of benchmark-driven investment funds, including ETFs, may increase similarity in the behaviours of asset managers, raising the potential for one-sided markets and large price fluctuations in EMs”.

Using data from the IMF, Bank for International Settlements and portfolio flows data provider EPFR, they found that a one standard deviation increase in the Vix volatility index leads to a 1.8 per cent reduction in active funds’ holdings of EM bonds but a 2.3 per cent decline for passive funds. The equivalent figures for equities were 1.2 per cent and 1.5 per cent, respectively.

For ETFs these figures rise still higher to 2.8 per cent for bonds and 1.6 per cent for equities.

“We conjecture that this result may be due to the fact that passive funds and ETFs investing in EM assets are more subject to redemption pressures during periods of market turbulence,” the authors said.

This is of growing importance, given that passive funds’ share of fund industry assets has risen from 20 to 30 per cent in the past decade, with ETFs’ share up from 14 to 21 per cent over the same period.



“This is money that can flip on a dime,” said Charles Robertson, chief economist at Renaissance Capital, an emerging market-focused investment bank, of retail investor-heavy passive investment.

“Retail investors get a bee in their bonnet about crypto or gold or US growth stocks and potentially emerging markets at times. When the confidence is there they pour in, but it’s an hour’s work to sell the ETF and get out again. This isn’t a reliable long-term source of investment that countries need,” Robertson added.

He cited the example of Egypt’s local currency bond market, which had just $70mn of foreign portfolio investment in 2016. By 2018 this had surged to $70bn, but “half of that left during the Turkey crisis of mid-2018 [when a debt and currency crisis erupted in Ankara]. Twelve months later it was all back again.”

Moro and Schiavone called for regulators to consider measures to mitigate the impact on financial systems and EM economies stemming from the growing importance of funds in the intermediation of capital flows.

“This implies the adoption of a macroprudential approach in the oversight of the asset management industry and a strengthened co-ordination among regulators and international organisations,” they said.

“In order to address the destabilising role of investment funds, reforms should be adopted to mitigate the risks associated with redemption pressures, procyclicality and herding behaviour.”

Robertson said one possible solution was for emerging countries to impose capital controls, denying entry to hot money in the first place and enhancing stability by reducing currency and interest rate volatility.

While that is “arguably the right stance”, he said, it carries its own downsides in that the absence of foreign capital probably means “higher interest rates, less capital for investment and lower growth”, as well as limiting the long-term foreign direct investment that countries crave for economic development.

UBS has begun courting large US investment houses to become top shareholders, as the Swiss lender attempts to improve its market value to be closer aligned with Wall Street peers.

New chair Colm Kelleher and chief executive Ralph Hamers have been holding a series of meetings with influential US fund managers in recent months to tempt them to increase their stakes in the bank, according to people with knowledge of the discussions.

The UBS board has grown frustrated that the business — which is the world’s biggest wealth manager — trades at a discount to Wall Street banks, which they believe is due to a negative perception of European and Swiss lenders.

Kelleher and Hamers have embarked on a roadshow to convince US investment heavyweights such as Capital Group, T Rowe Price, Wellington and Fidelity to ramp up their holdings in the group.

UBS declined to comment on the meetings.

UBS is one of Europe’s most valuable banks, with a price to book ratio — which compares its market value with its total assets — of 1, compared to 0.3 for Credit Suisse, Société Générale and Deutsche Bank, 0.4 for Barclays and 0.6 for HSBC.

By comparison, Wall Street lenders JPMorgan and Morgan Stanley each trade at 1.3, while Goldman Sachs and Wells Fargo are both on 1.

Given UBS’s business is heavily concentrated on higher margin wealth management rather than riskier investment banking, the bank’s board believes it has the potential to have a market capitalisation of twice its book value, according to people familiar with their thinking. They are trying to convince investors to see it as a global bank with Swiss roots, rather than a European institution.

“If we are a European bank with European investors, we will trade at one times book,” said one of the people. “The goal is two times.”

UBS is one of Europe’s best performing banks, not least since the beginning of the coronavirus pandemic two years ago when government stimulus measures helped boost the assets of its ultra-wealthy clients.

In 2021, the bank enjoyed its most profitable year since before the global financial crisis, with continued strong results in the first quarter of 2022 as its traders capitalised on volatile markets.

Under Hamers, who has been at the bank for just under two years, UBS has focused on growing its business in the US, while it has also made long-term investments in Asia in expectation that the market will open up once the impact of the pandemic recedes.

So far he has made one acquisition in the US, the $1.4bn deal for mass-affluent robo-adviser Wealthfront. It was the bank’s first major deal since the financial crisis and is intended as a statement of intent and a signal that UBS is poised to grow 14 years after its Swiss taxpayer bailout.

In April, Kelleher took over from Axel Weber as chair, having previously been president of Morgan Stanley, the bank that is a leader in the US wealth market.

While several US investment managers hold large stakes in UBS — including Dodge & Cox, MFS Investment Managers and Artisan Partners — the bank is hoping the biggest investment groups will match the size of their stakes in US lenders.

Wellington, for example, the Boston-headquartered investment group with $1.4tn of assets, holds a $5bn stake in JPMorgan, a $2.8bn stake in Morgan Stanley and a $900mn holding in UBS.

Elsewhere, Capital Group owns a $13.4bn stake in JPMorgan, a $3.9bn holding in Morgan Stanley, a $2.2bn stake in Wells Fargo and $1.2bn of Citigroup stock. By contrast, the secretive LA-based fund manager with $2.7tn of assets under management owns just $180mn of UBS stock.

UBS was one of several lenders that Capital cut its stakes in as part of a €7bn sell-off of European bank stocks this year. The Financial Times revealed last month that the disposals were the result of a single influential portfolio manager, Nick Grace, souring on the sector on the back of the war in Ukraine and the threat of a global recession.

Additional reporting by Laura Noonan

This article has been amended to correct the amount of assets managed by Capital Group

EY, the Big Four accounting firm, valued the secretive Israeli spyware company NSO Group at $2.3bn just months before it needed emergency funding in a cash crunch and its equity was deemed worthless.

The EY valuation, more than twice what NSO had been valued at two years earlier, was made by analysts in the firm’s Luxembourg office in July last year, according to documents seen by the Financial Times. The estimate of NSO’s enterprise value was made without visiting the company or verifying the information its analysts had been provided.

By contrast Berkeley Research Group, a consultancy that represents NSO’s private equity owners, said earlier this year that the company’s equity was “valueless”.

The EY valuation was also far higher than what an unnamed potential buyer had offered just weeks earlier, when it proposed to take a minority stake in a deal valuing NSO at $1.6bn, including $500mn in debt. That figure was presented to NSO’s investors at a July 2021 meeting, according to a separate document seen by the FT, though the deal did not go through.

EY’s valuation was made as reports of the abuse of NSO’s Pegasus cyberweapon against activists and journalists ricocheted around the world. Around the same time, NSO’s private equity owner was riven by infighting, while the spyware maker was being sued by Meta, parent group of Facebook, for hacking its secure messaging platform WhatsApp.

Investment bankers and defence officials are now trying to assess the firm’s worth once more, in a potential deal to spin off NSO’s core assets to L3Harris, a US defence contractor. That sale is designed to sidestep a US Commerce Department blacklisting in November 2021 that has further damaged the company’s reputation and operations.

In a 132-page report that valued NSO and the other companies owned by the private equity group Novalpina Capital, EY described NSO as a “market leader” even though its revenues had fallen 17 per cent in 2020 while its competitors had grown healthily.

Months later Berkeley Research Group, which was brought in to wind up the private equity fund, reached its conclusion that the equity in NSO — once the jewel of Israel’s surveillance export industry — was worth zero.

In October 2021, BRG would provide a $10mn emergency loan to a sister company to NSO to help it meet payroll.

EY and NSO declined to comment for this article.

While it is not uncommon for the private valuations of tech firms to gyrate between valuation rounds and in between acquisitions, the process by which such numbers are assigned — in behind-closed-doors agreements often signed off by large professional services firms but not made public — is under growing scrutiny as listed companies’ valuations tumble.

EY’s report came at a pivotal moment. It was formally commissioned just two days before an international consortium of newspapers brought renewed attention to how NSO clients, which have included Saudi Arabia, the UAE and other authoritarian countries, used Pegasus to surreptitiously pierce the encryption on phones and turn them into surveillance devices.

By August 6, when EY signed off on the valuation, the company had been on front pages for weeks, and new sales had started to shrivel.

Still, EY said it was only valuing the company as of June 30, without assessing the impact of “increased adverse media attention” after that date. Even as that attention forced the company’s chief executive to publicly pledge reforms, EY decided that measuring its impact was outside its remit, choosing to ignore any “social or governance” issues.

By November, NSO had been added to a US trade blacklist, a further blow to its operations. In December a group of NSO creditors said in a letter to its majority shareholders that the company was insolvent.

The swings in estimates of what NSO is worth are also particular to the company, which has operated in the shadows of Israel’s military and diplomatic outreach to Arab and Gulf neighbours, while trying to attract the premiums that investors were willing, until recently, to pay for Israel-based tech firms.

Because it straddled the classified world of spycraft and the limited disclosures of a private equity-backed cyberweapons manufacturer, NSO managers have participated in debt roadshows. Chief executive Shalev Hulio has told friends that the company’s peers include publicly traded surveillance giants such as Palantir and Verint, while also shielding crucial operational and financial information behind non-disclosure agreements.

Moody’s has tracked NSO’s $500mn in junk-rated debt since its issuance in 2019, but said this month that it was withdrawing its rating because of “inadequate” information.

At EY, the valuation came with a disclaimer — their complicated financial modelling was just a “desktop valuation”, which meant it had not visited the company. EY said it was “reliant on the accuracy and completeness of the underlying information supplied to us” and did not verify it or check its accuracy.

Even desktop valuations can have important implications, especially since they signal how much NSO officials might hope to receive in incentive payouts — worth a total of $54.3mn if targets were hit, the EY report shows.

EY’s assessment cast NSO as a thriving tech company, with revenues expected to leap some 60 per cent by 2023 to $400mn with sustained media focus on the abuse of its signature Pegasus spyware having little to no impact on future sales. A counter-drone business and data analytics business would supplement the sales of Pegasus.

That differs sharply from the view held by the officers at Berkeley Research Group, which was brought in by the original investors in Novalpina — including Yorkshire and Oregon pension funds — and now oversees the fund.

BRG argued, according to correspondence seen by the FT, that NSO’s business could only continue by selling to “elevated risk customers” — deals that BRG has declined to approve.

When Deutsche Bank listed its asset management arm DWS in 2018, it thought it had engineered a neat solution for a strategic problem.

Unshackled from its scandal-prone parent, the value of one of Europe’s biggest fund managers should become more visible. It would also raise capital for Deutsche without diluting its own shareholder base. And equipped with its own shares as a valuable acquisition currency, DWS could also lead the consolidation in global asset management.

Four years on, the disappointing record of DWS has fallen very far below that vision. Its chief executive has departed in the wake of a “greenwashing” scandal and its shares are trading 20 per cent below the flotation price.

That has left Deutsche open to scrutiny on the lender’s enduring influence over its subsidiary and whether the structure it chose for the listing befits what is meant to be a champion of shareholders’ rights in Europe.

Such concerns have been underlined by the rapid appointment of Deutsche Bank manager Stefan Hoops as DWS chief executive in early June. The 42-year-old former investment banker and longtime confidant of Deutsche Bank chief executive Christian Sewing was parachuted in to replace Asoka Wöhrmann, despite not having much of an asset management background.

Wöhrmann resigned hours after the company’s offices in Frankfurt were raided by police investigating claims it had misstated its record on investing on environmental, social and governance criteria — allegations that Deutsche and DWS continue to deny.

Unlike the process for public companies in other markets, Hoops was appointed chief executive without the need to seek approval from all shareholders because of the idiosyncratic German structure that Deutsche chose for the DWS listing, known as a KGaA. It combines elements of a limited partnership and a stock corporation. In effect, the influence of minority shareholders is small.

The supervisory board, which is elected by shareholders, has very limited power. In contrast to ordinary joint stock companies, it has no say in appointing and demoting executive board members and cannot block crucial corporate decisions such as on mergers. It is the “general partner” in the KGaA — Deutsche Bank in the DWS case — that can call the shots.

Deutsche Bank said the appointment of Hoops was the result of “a proper selection process”, which did involve a headhunter. However, it declined to disclose when the process started, who the headhunter was and if external candidates were considered. The lender said that Hoops was chosen because of his “outstanding capital market expertise, a deep understanding of customers and excellent leadership qualities”. 

Whether Hoops turns out to be the right man for the job at DWS, it was a demonstration of Deutsche’s control over its subsidiary.

Desiree Fixler, the former head of ESG at DWS who raised the greenwashing allegations at the fund manager, said the notion of the company’s independence from Deutsche was always “a mirage”. “In my experience, there was no separation at all between Deutsche Bank and DWS,” she told the Financial Times.

Deutsche Bank rejects the notion that it is having undue influence over DWS, arguing that the KGaA structure was “completely common” in the German corporate landscape. External investors and corporate governance experts, however, have long raised concerns over the governance set-up.

“We don’t like the KGaA structure from a corporate governance perspective,” Janne Werning, head of ESG Capital Markets & Stewardship at Union Investment, told the FT, adding that it “unduly restricts shareholders’ rights and makes it difficult for DWS to be perceived as a company in its own right”.

The structure makes issues such as corporate strategy or deciding on a chief executive particularly sensitive. In 2019, a mulled merger of DWS and the asset management arm of UBS fell apart partly because Deutsche was keen to keep control in the asset manager, according to people familiar with the discussions. Would minority shareholders in DWS have preferred a UBS deal or a chief executive with more asset management experience?

DWS has declared itself as a champion of shareholder rights and “transparently communicated succession planning”. It promises to hold “boards and directors accountable” over those issues, calling on them “to demonstrate how they are including relevant stakeholder views in their discussions and decisions”.

If DWS continues to perform poorly, the questions over whether the KGaA structure fits with those aims can only multiply.

Author's email: olaf.storbeck@ft.com

The writers are the chief executives of Nestlé and Unilever

Acute crises don’t magic away chronic ones. In fact, an exclusive focus on today’s pressures risks making those of tomorrow far worse.

Nestlé and Unilever are contending with some significant challenges right now: food and energy security and sharply rising commodity prices. Alongside these, the effects of climate change are rippling across our value chains. And the impact will only get worse. That is why we are committed to net zero carbon emissions.

The business upsides of solving these global challenges are clear: consumers are demanding more sustainable products, workers want to work at more sustainable businesses, and investors recognise the risk and opportunity.

In our own companies, we’ve turned our commitments into action, but we need to see more from the food, land and agriculture industries. The sector contributes 22 per cent of global emissions, and fully half of that comes from deforestation and land conversion to provide food, fibre and fuel.

We know this isn’t easy. Nestlé and Unilever’s efforts to eliminate deforestation from our supply chains, whether for cocoa or palm oil, have often been the subject of public debate. But unless we end deforestation, achieving net zero is impossible.

New analysis launched today by the UN’s Race to Zero in collaboration with the Science Based Targets initiative finds a fivefold increase in the number of major companies in the forest, land and agriculture sector that are committed to net zero.

But this encouraging momentum masks two concerns. Even though investors responsible for nearly $9tn in assets are looking to eliminate commodity-driven deforestation from their portfolios, a majority of companies critical to tackling tropical deforestation are yet to set a net zero target.

Moreover, of the 148 companies who have made such climate commitments, only 6 per cent have made strong progress on tackling deforestation to date, based on a review of their performance by the Global Canopy. This lack of progress risks derailing the net zero commitments of over 94 per cent of major food and land use companies.

That’s an issue for all of us. Four things must happen, urgently.

First, all companies with land-based emissions must demonstrate how their business models and value chains can be made consistent with a net zero world. To reiterate: there is no net zero without ending deforestation. A new methodology about to be launched by the Science Based Targets initiative offers the promise of transparent reporting on progress made by companies in the food, land use and agriculture sector.

Second, our sector must go beyond just managing deforestation risks in our supply chains if we are to help conserve and restore the world’s forests and natural ecosystems, while promoting sustainable livelihoods.

That means embracing regenerative agriculture to develop “nature positive” supply chains. It also means recognising the legitimate domestic interests of developing countries, specifically those of smallholders, indigenous peoples and local communities. Tropical forest countries often have to balance competing environmental and socio-economic priorities — development, jobs and livelihoods — so we need solutions that deliver all these objectives together.

Third, business must fully harness the potential of technology to track, improve and report on progress. There have been huge advances in increasing the visibility of what is happening to forests in real time. Much of this can now be delivered at low-cost.

Fourth, governments, multilateral institutions and development banks, with banks, investors and business, must help accelerate forest finance ahead of the COP27 summit in November. Nature-based solutions, including forests, could deliver over a third of the emissions reductions needed, but currently receive just $133bn of available climate finance. We need to repurpose $1.8tn of environmentally harmful subsidies so that available finance is commensurate with the size of the challenge and opportunity.

Unilever and Nestlé recognise that net zero is a central goal for the global economy. We are working to make our key commodity supply chains, considered to have the highest impact on deforestation and the conversion of natural ecosystems, deforestation-free within the next 24 months and to support the communities that protect them.

There is a fervent debate about the merits and methods of sustainable business. But action is what is now needed. Ending deforestation is a necessary condition of achieving net zero, delivering benefits for consumers, communities and companies alike.