Eskom and the power crisis remain in the spotlight:
Embattled utility state enterprise, Eskom has been allocated a whopping R250 million, spread over three years by minister, Enoch Godongwana. During his budget announcement held in Cape Town, the finance minister pointed out that the allocation to Eskom will enable government to take over a much larger portion of its debt. There’s a catch though to the massive bail out, as some of the power stations will have to be concessional to private players and restructuring.
Additional takeaways:
Public service wage bill tops R700 billion:
The public sector payroll is expected to balloon up to R701.2 billion, surpassing last year’s total of R690 billion. This level is expected to be breeched in 2025, thereby forcing treasury to upwardly revise their 2026 estimates to R760 billion in line with the forecasted annual increase rate. As expected, trade unions will voice their demands and negotiate with their employers leaning towards an above inflation salary increase. During his speech, the finance minister highlighted that there’s a need to strike a balance between fair compensation, fiscal sustainability and managing an already stuffed headcount.
Additional takeaways:
Beefing up security:
South Africa’s ongoing war against crime went a notch up as finance minister Godongwana vowed to avail funds to beef up security and prosecuting agencies. A tune of up to R7.8 billion will be rolled out in the next three years to increase the police count and fund the Financial Intelligence Centre, the Special Investigating Unit and tax collection agency. The National Prosecting Authority will receive a boost of an additional R1.3 billion to deal with specific complex crimes such as financial. This development comes at the wake of the imminent FATF decision and possible grey listing on South Africa.
Additional takeaways:
Tax reliefs to cushion from load shedding:
Finance minister Godongwana announced a much-needed tax incentive of around R13 billion to spur investment in the solar energy space. Under section 12B of the income tax act, government has made some wide-ranging changes to encourage the business sector to invest in renewable energy alternatives. Section 12B allows for a 100% 1st year write off for photovoltaic projects below 1 megawatt (MW). Business can deduct 50% of the costs in the 1st, 30% in the 2nd and 20% in the 3rd year for qualifying projects in solar, wind, biomass, photovoltaic (above 1 MW) and hydropower (below 30 MW).
Households have also been hit hard by the unending power cuts and they finally got some relief from the government. A rooftop solar incentive has been tabled for private individuals to invest in energy generating projects. R4 billion has been set aside to back this incentive as individuals will be able to receive a tax rebate up to the value of 25% of costs of any new and unused solar panels. However, the relief is only up to a maximum of R15,000 per individual and applicable for one year as it can be used to offset personal tax liability for the year 2023-24.
R4 billion has been conceded by the fiscal authorities due to forgoing an increase towards the general fuel levy. Global fuel prices have been on an upward trend and South Africa has not been spared from this due to a weaker rand, supply/demand imbalances and crude oil prices. The levy relief which was generally applied to primary industries has been extended across the board to accommodate manufactures of food products. This will soften the inflationary blow on consumers, as manufacturing cost to power generators etc. are transferred onto food prices.
Cheers erupted during the budget speech as the finance minister announced that there will be no tax increase for South Africans. Amid tightening economic conditions, the already hard-hit taxpayers were spared from tax increases as government made a trade off with taxpayers and an economy which is still reeling from macro and micro economic shocks. The decision was somehow backed by SARS expected gross revenue collection of R1.69 trillion for 2023, R93 billion higher than last year surpassing the 2022 estimates. However, a word of caution was thrown in by the minister as risks linger from fiscal indiscipline resulting for SOE bail outs, the replacement of the Covid-19 social grant with a permanent alternative and the ever-skyrocketing public service wage bill.
Additional takeaways:
The grim story of underperforming parastatals:
It was no surprise that problem children, South African Airways (SAA) and the Post Office would receive financial boosts from the 2023 budget. Minister Godongwana allocated R1 billion to the local airline and a further R2.4 billion was allocated to the state-owned postal services company. The SAA allocation is aimed at assisting with the airline’s business rescue process, along with helping to conclude outstanding historical debt obligations – additional conditional funding will be considered (sorry taxpayers). The R2.4 billon allocation to the Post Office is aimed to implement and speed up its turn-around strategy and reduce contingent liabilities.
The default ridden Land Bank showed signs of life since April 2020 when it failed to meet its debt responsibilities. As discussions with its lenders are currently ongoing, the remedial action plan which included addressing poorly performing investments and a reduction in administrative fees seems to be working as the FY2021/22 net profit amounted to R1.4 billion compared to the 2020/21 net loss of R747 million.
Under the 2020 Adjustment Appropriation Act, R2.9 billion was allocated to Transnet in a bid to cater for locomotive repairs and maintenance plus resuscitate infrastructure destroyed by the April 2022 KZN floods. Surprisingly, the railroad parastatal had been underinvested over the years and Minister Godongwana assured the nation that, capital will be injected to address maintenance backlogs, exploiting integrated commodity value chains, increasing capacity of existing infrastructure and increasing access to the rail network through accommodating the private sector.
Arms manufacturer Denel received a purse of R3.4 billion through the 2022 Special Appropriation Act. The strings on the purse will only be untied at the end of March 2023 under special conditions hinged to the implementation of its proposed turnaround strategy and when clarity is provided on its sustainable business model. The company remains in financial turmoil and to make matters worse it still hasn’t published its year end results.
Additional takeaways:
Overall additional take aways:
Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Peter Long, Co-founder of Capital International Group, has announced he is stepping down from the Group’s Board of Directors after dedicating 27 years of his career to the company.
Originally based in Castletown, Capital International opened for business in 1996 with just a handful of staff, mostly Peter’s own family – Anthony and Helen Long, Robert Floate and David Long - all of whom had moved to the Island lock stock and barrel from the UK.
The initial aim was to provide specialist investment and dealing services - with negligible settlement risk - to Isle of Man institutions who wished to transact business in overseas markets. Previously, almost all such business from the Island was channelled through London based brokers.
To achieve this, Capital International linked up with Pershing Securities who had earlier acquired employees from Peter’s previous partnership around the time of the City of London’s Big Bang. With two of Peter’s former partners working as Directors of Pershing and many senior staff being former colleagues, an agreement was put together whereby Pershing accepted all the legal and trade settlement risks. That agreement remains in place to this very day!
In Peter’s time as a director, the business has gone from strength to strength with continual development and expansion of its service offering. The stockbroking business Peter first launched has transformed into an open architecture, online trading platform. The Group has also built an outstanding Investment Management department and more recently it launched the Island’s first ever digital corporate bank.
Peter started the business with the mission of providing the best possible service to clients and today the Group continues to do just that, entrusted by over 10,000 clients to look after over $5bn of assets. In its 27 years in operation, the Group has grown significantly, now employing over 200 people across the Isle of Man and South Africa. The family members who launched the venture back in 1996 are still very much involved today: Anthony is Group Chairman; his wife, Helen, is a Senior Operations Manager; David is a Group Main Board Director and Chief Investment Officer; Robert is a Group Non-Executive Director and additionally Anthony and Helen’s eldest son and Peter’s grandson, Alex, has joined the business as an Investment Product Manager.
When reflecting on all this Peter, while expressing delight, emphasised that: “This kind of development and success can only be achieved with the backing of the highest qualified and motivated teams, and we are fortunate to have these in every aspect of our business. What is so thrilling for me, as I head for retirement, is the knowledge that, with such talented people all around - and continuing to join us - this kind of growth can continue for many years.” He added: “It is the fulfilment of a dream and, while perhaps no longer a family firm, we are all now part of a much wider Capital family – all of whom are true professionals.”
Peter’s retirement was announced at the Group’s recent event, The Playbook 2023. Capital International Group’s CEO, Greg Ellison, who hosted the event, said:
“The Group has lived and breathed Peter’s original core values of innovation, integrity, and excellence since day one and will continue to do so forever more. With many of our clients, intermediaries and friends assembled today, I wanted to take a moment to pay tribute to Peter and his beloved wife Heather to wish them all the best for their well-deserved retirement.”
The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Regulated investment and banking activities are carried out on behalf of Capital International Group by its licensed member companies. All subsidiary companies are represented under the Capital International Group brand.
Capital International Limited, Capital Financial Markets Limited, and Capital International Bank Limited, are licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. Capital International Bank Limited is a wholly owned subsidiary of Capital International Group Limited (www.capital-iom.com), a privately owned financial services group based in the Isle of Man and operates as a non-retail, restricted deposit taker under a Class 1 (2) licence. Deposits are not covered by the Isle of Man Depositors’ Compensation Scheme and terms and conditions apply.
CILSA Investments (PTY) Ltd (FSP No. 44894) and CILSA Solutions (PTY) Ltd (FSP No. 6650), t/a Capital International SA are licensed by the Financial Sector Conduct Authority in South Africa.
If you missed our online event, The Playbook 2023, the event recording is now available here.
Group CEO Greg Ellison hosts a panel discussion on the major macro factors likely to have an impact on businesses and investors in 2023. On the panel were experts from the world of politics, investments and energy who each share their insight into what 2023 could have in store. We hope you find the content useful.
Disclaimer: The views, thoughts and opinions expressed within this video are those of the speakers and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit
Welcome to the Quarterly Investment Review for Q4 2022.
Our Investment team have put together a range of resources to update you on what has happened in markets across the fourth quarter of 2022. Here you will find:
The graph below shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.
Hear from our team of Investment Managers as they each explore an important topic from the quarter.
Equity markets rallied from the lows again in the fourth quarter, with global equities reaching 15% gains before settling back closer to 10% as the quarter drew to a close. European equities ended the quarter rising 12.1%, with UK markets up 9.8% while the US achieved only 7.8%. The best performing equity market was Hong Kong, up over 15% with a swing of over 30% having fallen almost 15% during October.
Sentiment was ultimately driven by growing expectation that central banks will “pivot” away from monetary tightening and begin a new easing cycle. Cracks in global central bank hawkishness began to appear in October, with Canada and Australia delivering lower than expected interest rate rises. The ECB raised interest rates by 0.75% but toned down the commentary as Lagarde appeared increasingly accepting of a “looming” recession. After November’s sharper than anticipated decline in headline US inflation, Jerome Powell followed, indicating that the December’s meeting might be the time for moderating the pace of tightening.
The Federal Reserve’s final 2022 interest rate hike was smaller than the preceding four hikes, but it took the borrowing rate to its highest level in 15 years and there was little sign of change in tack, with the committee’s forecasts indicating no reduction in rates until 2024. As a result, equities lost some momentum into the year-end.
Bond prices have been correlated with equity prices through the quarter, with yields falling into the Fed’s December meeting, but have since begun to reverse. The Bank of Japan abruptly adjusted its yield curve control policy by raising the 10-year government bond yield cap and widening the range. Even though the 0% target was maintained, it signals a dramatic shift in a policy that has remained unchanged since 2016 and, with Governor Kuroda’s term due to expire in April, the stage could be set for Japan to join the ranks of other global central banks and enter a tightening cycle.
The Yen surged on the day but also strengthened over the quarter after an incredibly weak year. It has been a volatile year for currencies and the US dollar has weakened from its highs, down 7% against a basket of currencies.
The consensus outlook for 2023 is a shallow recession in the second half of the year. This thesis is largely driven by the fact that we are entering an inflation driven recession, not one caused by credit excess and, as such, the impact on corporate earnings will be much more modest. In addition, there are strong economic fundamentals: Robust labour market, strong balance sheets, resilient housing markets.
However, it is an incredible ask for central banks to execute such accurate policy, especially after reacting too slowly to inflation at the outset. We believe that central banks will be looking for coincident or even lagging indicators that inflation is being tamed before changing the course of their aggressive policy and therefore see potential risk to the downside. After losing control of the vehicle on the ice, we are now steering full lock in the other direction and, unsurprisingly, we still find ourselves swerving out of control. The use of a blunt, inaccurate tool to bear down on excess consumer cash balances is likely to cause greater collateral damage than the market is currently anticipating.
While corporate earnings have been resilient with companies able to raise prices in line with inflation, as aggregate demand pulls back we expect earnings to begin to suffer. We are becoming more cautious and adding to government debt with some inflation protection to balance risk. This should protect capital and provide capital for reinvestment into high quality companies at more attractive prices should the opportunity arise. Despite our slightly negative view, it is important to understand that this will be a policy induced recession and the economy remains structurally resilient.
Disclaimer: The views, thoughts and opinions expressed within this article and soundbites are those of the authors/ speakers and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit
Capital International Group recently commenced a three-month trial of free bus travel for its employees when travelling to and from their Isle of Man office. This has been achieved through the purchase of ‘Go Places’ and ‘Go Easy’ cards from Isle of Man Transport.
So far, almost 40 employees are using the scheme which aims to both lessen the financial burden of travelling to the office during the cost-of-living crisis, as well as reduce the emissions produced by the daily commute.
The Isle of Man Government recently capped bus journey prices at £2 to assist with the cost-of-living pressures. Whilst this represents a significant reduction in costs for many, the Group realised that employees who take the bus to and from work each day could still be spending more than £80 per month, if paying per journey, or £50 if using a monthly Go Easy card.
For those switching to free bus travel from driving their own car to the office, there will not only be cost savings but also a significant reduction in the carbon emissions produced.
As part of its sustainability measurements, Capital International Group includes Scope 3 emissions in its overall carbon calculation. These are the emissions that are indirectly caused by an organisation e.g. through the commute of employees.
Alongside Business Intelligence Manager Rhodes Brown, Graphic Designer Sammy Mathewson has been responsible for organising the scheme and is part of the Group’s Conscious Capital Forum, which drives forward sustainability initiatives. She said: “The Group has the ambitious goal of becoming carbon neutral by the end of 2025 and with 43% of its emissions coming from the employee commute, we hope that the free bus travel scheme will help bring the Group closer to meeting its 2025 target. It’s been great to see how many people have started taking the bus. Even if it’s only a couple of times a week, it all adds up! We hope that this initial trial period will be a success and that it is something we will continue long-term.”
Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.
There’s no doubt that employees are crucial building blocks to creating a successful business. They not only make sure the business ticks over and operates as it should, but they can also be an important source of competitive advantage.
It’s not just about attracting and selecting the right people. You have to make sure you get the best out of them by providing the right environment and culture. Success in creating an optimal work environment largely depends upon how well an organisation engages its employees.
It’s been proven time and time again that an engaged workforce is more likely to be high performing and lead to better business outcomes, but what are the characteristics of employee engagement? And how can a business improve employee engagement?
The characteristics of an engaged employee
Measuring how engaged employees are can be difficult as there are many ways to do it. Whether it’s looking at how many people attend a work organised event or using qualitative data, such as verbatim feedback from one-to-one checks in. The way businesses measure engagement is different from one to the next, but one simple method that anyone can try is to take a look around the office and observe employee behaviours. Engaged employees share a mindset, a set of behaviours that distinguish them from their disengaged colleagues. It is tangible and clear if you know what to look for…
“I love my job”
Engagement can be seen clearly from those who admit to “loving their job”. Whilst for some people this is an alien concept, engaged individuals enjoy their day-to-day responsibilities and are keen take up challenges. You will see them fulfilling their responsibilities with energy and consistently working to meet or even exceed expectations.
Dealing with obstacles
We see from engaged employees that they are much better when it comes to overcoming setbacks and do so with more optimism than defeat. They are a lot more resilient and able to handle change and uncertainty without becoming discouraged. This resilience is used when collaborating with others. When they see colleagues facing a challenge, they encourage them to refocus or try an alternative approach.
Dedication
Highly engaged employees are emotionally committed to their employer and genuinely want what is best for them. They can see how the success of the business is aligned with their own, so they go the extra mile. Projects are completed because they know what needs to be done. They are rarely the people who are packed away and ready to bolt out of the door once the clock strikes 5pm. This discretionary effort is an essential element for the good health and well-being of a company.
Continuous improvement
Engaged employees rarely rest on their laurels, they look for ways to improve processes and deliver better customer experiences. They will regularly be asking themselves and their colleagues how they can do things better with efficient use of existing resources.
Working with others
Collaboration is key for these individuals. They are usually excellent team members and will share ideas, insights and suggestions that benefit the whole team. There is a realisation that problems are solved by the active participation of a team, so engaged employees will seek out ways to leverage the knowledge and skills of others in order to get things done.
With collaboration comes effective communication. The style of communication from an engaged person will often be open, asking questions for clarity and listening to viewpoints. They will share, explain things to help others understand. What is wonderful to see and experience is engaged leaders, as they use effective communication to motivate, inspire and encourage those in their team.
Creating an employee engagement strategy
As fantastic as it would be for every employee to be 100% engaged, without the right environment, an organisation cannot expect to come close. Employers have a huge part to play in providing a culture that feeds positive engagement – it doesn’t happen on its own.
People however are inherently different, so how can you ensure that all of your people are engaged? Is it even a possibility? If you are looking for a place to start, there are three mainstays of employee engagement that apply to almost all personality types.
Communicate a clear mission
Often, particularly in larger organisations, employees may feel a disconnect between their role and the overall purpose of the company. This lack of clarity around mission and vision can lead to disengagement, with employees feeling that their day-to-day activities lack purpose. To boost engagement, measures can be put in place to ensure an organisation’s strategy is effectively and frequently communicated. This could be achieved through written internal communications or presentations from the leadership team. Sharing this information can lead to increased motivation and engagement as employees have a better understanding of how their efforts impact the bigger picture.
Trust
The base of any engagement is trust. Allowing people to complete their work without dictating how is a great way to engage people. They can perform their roles with mutual help and trust, feel like they have their own unique part to play and that they have accomplished something independently.
Job Satisfaction
Surprisingly, getting people to the stage of “loving their job” can be easily accomplished, one area to focus on is job and career satisfaction. There is a correlation between engagement and a commitment to learning and developing so having transparent career paths is important. As part of the overall employee experience, being able to see a clear growth trajectory can have a positive impact on people, leading to a sense of belonging within a business.
Those who are satisfied with their career and how it is developing remain with a business for longer than those who see no opportunities for growth. It is important for managers to spend time with their people to learn what motivates them and what their future career looks like. From here, implement a growth plan but remember that growth or development looks different for everyone, do not avoid the conversations because you assume it means they want to move into a role that is unavailable. Develop the skills and knowledge they will need ready for when the next opportunity arises, they will thank you for it!
Employee engagement happens in organisations that treat their people as their biggest asset and take care of their basic necessities and psychological needs. Ensure your people have enough challenge, trust, ownership, room for growth and opportunities to collaborate.
Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.
CREDIBILITY RESTORED, BUT HAS IT BEEN AT THE EXPENSE OF INVESTOR AND CONSUMER CONFIDENCE IN THE UK ECONOMY?
It seems scarcely believable that a mere fifty-five days separated this month’s Autumn Statement from its predecessor, the now notorious Truss/Kwarteng mini-budget.
The impulsive and reckless optimism that typified that initial financial package (garlanded with praise on the day after it was delivered by Conservative supporting newspapers and think-tanks as well as plenty of Party activists) contrasts with the sober discipline and restraint of the new Administration.
From a determination to go for growth at all costs in order to stave off the prospect of recession, UK economic policy has been so transformed within a few weeks that the current PM and chancellor's risk averse approach to the public finances means they seem prepared to live with the consequences even if recession results.
Much of the detail of frozen tax thresholds (a highly effective income raiser in an era of rising inflation); reduced in-work entitlements; corporation and capital gains tax tightening and the like had been leaked in advance in an attempt to manage - and perhaps manipulate - expectations, but also in recognition that official forecasting during these turbulent times has been erratic at best.
The sense that 'the grown-ups are back in charge' after the chaos of the latter months of the Boris Johnson premiership and the Truss interlude has certainly helped calm the markets. However, the economic outlook has also darkened markedly.
Indeed, the tax rises and spending cuts set out by Sunak and Hunt in recent days reflect that UK policymaking has become almost entirely dependent upon keeping the international markets on-side. Erring on the side of caution and respecting orthodoxy have once again become the name of the game. This should come as no surprise - after all, the national debt has more than tripled since the financial crisis of 2008, a situation that only appeared sustainable for so long as the cost of borrowing (interest rates) were kept to near zero levels.
At the turn of this year, inflationary pressures finally persuaded G20 central banks to start the long-march back to interest rate normality. As a consequence, highly indebted nations, companies and households have been required for the first time in over a decade to become sensitive to market conditions.
Orthodox economic theory, of course, points to a loosening of monetary and fiscal levers when recession is imminent. There is little sign of the UK economy overheating (the usual cause for aggressive interest rate raising); on the contrary cost of living pressures have been heightened by global supply chain bottlenecks in the Covid aftermath and violent energy price volatility following the invasion of Ukraine.
In all fairness to the Treasury, the Autumn Statement set out a series of departmental spending curbs most of which will not come into play until 2025. Whilst this enables a change of course if inflation were to be slain within that time frame, it also gives rise to suspicion that these plans are 'too clever by half' as the financial reckoning can is kicked yet further down the road.
Arguably they have been crafted in this way in order to put pressure on Opposition Parties either to endorse these arrangements or announce their own fully costed (and scrutinised) economic strategy before the next election. However, apparently clever political tactics risk further undermining international investor confidence in the UK, to say nothing of this package's impact on the household budgets of the working population who will face the cost of underwriting sharply increased borrowing (predicted to rise to £177bn or 7.1% of GDP over the next year) before the real curbs on public spending kick in.
When I speak with seasoned City observers their abiding concern is that the drama that played out over pension fund viability after the 23 September statement may turn out to be something of a canary in the mine. Deeper economic upheaval may lie ahead. After all, there remains a huge mountain of debt in the global financial system; we stand in the midst of a cycle of upward movements in interest rates on an accelerated scale that has caused widespread unease and alarm; meanwhile the opaqueness of debt instruments still underpinning the global financial eco-system has worrying parallels with the apparently benign conditions that apparently applied on the eve of the last financial crisis. Despite the risks to business confidence, maintaining market stability after recent events may have left the government with little choice but to introduce a new era of austerity.
This will be highly problematic. Even the backloaded public spending cuts announced by the chancellor this week will impose public sector pay awards set at levels well below inflation, reducing the real value of the take-home pay of nurses, teachers and the police, for example. Further industrial unrest is now on the cards.
The slashing of public infrastructure budgets is always low-hanging fruit for any departmental cuts. Whilst the government has reaffirmed its commitment to high profile and highly expensive projects such as Sizewell B (nuclear power) and HS2 (rail), a closer inspection of the Office of Budget Responsibility's workings show a significant reduction in medium term public investment which risks adversely impacting future productivity and growth. The importance attached after September's upheaval to maintaining credibility in the financial markets by over-compensating with clear pathways to a (more) balanced budget and rapidly tamed inflation makes a sharp, deep recession almost inevitable.
What of the political consequences of all this?
Recent UK electoral history points to the two contrasting outcomes that applied after a decade or so of Conservative government in 1992 and then five years later when the Party was finally ousted after eighteen years in office.
Rishi Sunak will be hoping to emulate the playbook of that earlier contest when, in the midst of a deep recession, the Conservatives were unexpectedly re-elected under a fresh leader, who persuaded the voters that a change of government was too risky.
One less observed consequence of the recent extreme market turbulence is that the overriding need to maintain financial stability will equally enforce economic orthodoxy on the Opposition Labour Party. On the one hand this presents its leadership with internal party management challenges, but on the other it provides reassurance against political accusations that the policy platform of an incoming government would destroy market credibility. Perhaps the abiding lesson of 2022 and beyond is that the entire UK political class is answerable to the whim of the markets these days.
The difficulty faced by the current administration is that the upheaval of the past nine months in particular may well have irreparably damaged the Conservative brand in the eyes of the electorate with the next general election now only two years away at most. The more PM Sunak acknowledges that 'mistakes were made' by the ill-fated Truss government, his own central role in the previous administration comes under greater scrutiny. His innovative furlough scheme introduced at impressive pace in 2020 when he was chancellor preserved countless jobs and business, but its costs have proved ruinous and a reckoning over fraudulent and unwarranted claims on the public purse may yet cause him political grief.
The lull in hostilities within the Conservative Party may also prove shortlived. Some MPs and many party members regard the events of recent months as little short of a coup against the hardline Brexit they craved. Many are as privately unreconciled as ever to a Sunak premiership and the re-emergence in government of some of his key supporters. Dissent in the ranks is already simmering at the more immediate prospect of the disproportionate impact on middle-earners of the substantial tax hikes that have stabilised the markets and underpin the Autumn Statement. Meanwhile the persistent failure to deal with illegal, small boat migration in the Channel and the deteriorating state of many public services will further test party unity.
The personality feuds that continue to beset the parliamentary party also risk being played out very publicly. The settling of old scores bubbling beneath the surface as one faction finds itself back at the ministerial helm and is undermined by the other clique now restless on the backbenches shows few signs of abating. In the meantime despite the change in leadership, the Party's opinion poll ratings have remained dire whilst each month brings the day of electoral reckoning closer...
The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Having brought the Island’s first ever digital bank to life back in 2021, Capital International Group is no stranger to managing major projects.
The launch of Capital International Bank was an enormous undertaking and with it came the adoption of a brand-new way of working for many. Initially taken up by the Technology department, ‘Agile’ methodology encourages teams to work simultaneously on different phases of a project and delivers a minimum viable product as quickly as possible, as opposed to following a more linear, step by step, Waterfall approach.
The Group has since seen Agile send ripples across the business, with several teams now benefitting from ‘sprint’ rhythms, ‘Kanban boards’ and holding daily ‘stand-ups’.
With Capital International Bank going live in 2021 and having operated successfully for over a year, the focus in terms of projects and improvements has now turned to the investment side of the business with a number of changes already underway. Capital’s Chief Investment Officer, David Long, tells us more:
How has Agile affected the Group from your perspective?
The Group has trebled in size over the last 5 years and we have taken on some massive projects – launching the Island’s first digital bank was no small undertaking and required a step change in our project management and development capability, not only in terms of people and resources but in our approach.
We quickly realised that traditional Waterfall approaches to project management were simply incapable of delivering projects of this scale and complexity in an efficient and timely manner. Even the most comprehensive plans tend to fall at the first contact with real life problems and you can end up rewriting specifications endlessly.
The use of Agile processes and management has been critical to making progress. You have to recognise that you simply do not know (and cannot know) the solutions to all the problems you face in such a complex project. The permutations are infinite, and progress is by necessity an iterative process of finding solutions to each problem that genuinely work, before moving onto the next.
It is of course vital to have a very clear vision of where you are headed, together with clear objectives for the success of any project. These keep you headed in the right direction and ensure you don’t lose perspective. Thereafter, flexibility becomes key. Define only the immediate problems that you can see clearly. Break it down into milestones and then further into small sprints with clear deliverables and regular reviews to provide a short feedback loop.
People often talk about ‘MVP’ or ‘minimum viable product’ and I cannot stress how important it is to ruthlessly cut through all the ‘nice-to-haves’ and superfluous specifications to arrive at the absolute bare minimum that you need to take that next step forward. Don’t reinvent wheels and don’t be tempted to take on too much in one go. I can assure you there is more than enough complexity in the MVP to deal with.
Of course, while each step may be small, the process is cumulative and the solutions to one problem help inform and solve the next. When you get this right it’s remarkable how rapidly progress can be made.
With the investment side of the business now having adopted the agile way of working, can you tell us what’s been achieved so far?
Over the past year, as the majority of the bank project was completed, our attention has shifted to the investment business, where we have big ambitions for the development of our investment platform and the tools we can offer our clients and advisers.
One such project has been our investment profiling application, which is truly ground-breaking in its capability. This digital tool has codified the methodology and process we use as an investment manager to identify and assess a client’s investment requirements and to match them to suitable investment strategies. The Profiler does this by modelling and projecting the spread of outcomes for all potential strategies and identifying those that best fit the client’s specific requirements.
The process is iterative and interactive, enabling a client and the adviser to effectively scenario plan into the future and develop strategies that are tailor made to meet their requirements, whist explicitly showing the client the range of possible outcomes so there are no surprises.
The MVP was delivered quickly after a 6-month build phase with fortnightly demos and feedback cycles. Since then, the internal teams have been using the Profiler and providing feedback. Being able iterate on the most basic form of the Profiler using real-world use cases has meant the result, in my view, is breath-taking. The beauty is that it’s so simple and completely intuitive to use and yet behind the charts and projections, every input triggers literally hundreds of thousands of calculations delivered instantly. In all, it has been an 18 month process to release the Profiler to our clients, but we have been using the Profiler internally for a year.
What are you working on currently?
One very recent project was an update to the look and feel of our Investment Portal to align it with the more modern UX design of our banking platform, VELTA. I’m really impressed with the new design as not only have we modernised the aesthetics of the portal, but the user experience has also been improved with an update to the navigation.
We are also working to make it possible for clients to carry out calculations within the Portal rather than having to export their data to manipulate it elsewhere. Having everything in one place will make managing accounts much easier for our clients.
You’re involved in overseeing a lot of this work but you’re also the Group’s Chief Investment Officer. Could you share your thoughts on the current market conditions?
2022 has been an incredibly turbulent year, which I would describe as the economic hangover from the extreme fiscal and monetary policies employed to see us through the COVID pandemic.
As COVID lockdowns closed large parts of the economy, the economic slack was taken up by a massive government spending financed through debt. Government debt in the UK has increased by a staggering 36%, or £600 billion since 2020.
Quantitative easing, or the printing of money, had been normalised as a central bank policy tool in the decade following the last financial crisis; however, in the wake of the pandemic, global central banks unleashed QE on an unprecedented scale. In the UK, the Bank of England’s balance sheet expanded by 86% as £500bn of QE flooded the financial markets. These extreme measures undoubtedly softened the immediate pandemic blow but they have come at a terrible longer-term cost, unleashing double digit inflation, the highest in 40 years. The speed and scale of the inflationary shock surprised markets and the turbulence we have seen is simply the market adjusting to this new environment.
How do you see your strategy evolving amongst all this turmoil?
The good news is that a sizeable adjustment has already taken place. Bond yields have risen by well over 3%. Investment grade corporate bonds offer a yield in excess of 6% and have become attractive again for perhaps the first time in a decade. Similarly, valuations of equities and other risk assets have fallen to much more reasonable and sustainable longer-term levels.
For investors, this means that expected returns looking forward have actually increased very materially over the past few months. Of course, there remain significant economic challenges ahead, with recessions almost certain in Europe and likely in the US, so further market turbulence is entirely possible. However, for long term investors this presents opportunities to acquire good quality stocks at relatively cheap valuations.
Do you have any big plans within the Investment Management department?
With support from the front office teams, we’ve recently been working to carve out a new investment identity that summarises our team’s approach in a way that our clients can easily get to grips with.
This isn’t about changing the way we invest but formalising a lot of the great work the team has already been doing. It’s only natural that our investment approach has evolved over time and this project has been about getting it down on paper in a format that’s easy to understand. The concept and messaging that we’ve arrived at, we believe, encapsulates our thinking well and clearly communicates our belief that sustainability and long-term profitability are not mutually exclusive ideas but go hand in hand. This project is still being worked on but we look forward to sharing more with you in the new year.
The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
Regulated investment and banking activities are carried out on behalf of Capital International Group by its licensed member companies. All subsidiary companies are represented under the Capital International Group brand.
Capital International Limited, Capital Financial Markets Limited, and Capital International Bank Limited, are licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. Capital International Bank Limited is a wholly owned subsidiary of Capital International Group Limited (www.capital-iom.com), a privately owned financial services group based in the Isle of Man and operates as a non-retail, restricted deposit taker under a Class 1 (2) licence. Deposits are not covered by the Isle of Man Depositors’ Compensation Scheme and terms and conditions apply.
CILSA Investments (PTY) Ltd (FSP No. 44894) and CILSA Solutions (PTY) Ltd (FSP No. 6650), t/a Capital International SA are licensed by the Financial Sector Conduct Authority in South Africa.
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