1. China’s Pollution Problems Could be a Huge Opportunity for Industrial Wastewater Treatment Companies

    The sheer scale of the Chinese economy, growing awareness among industries about water sustainability, and government regulations demanding

      to read | words

    The sheer scale of the Chinese economy, growing awareness among industries about water sustainability, and government regulations demanding sophisticated wastewater treatment are driving the wastewater treatment market in China, which offers tremendous opportunities for international players.

    It’s hardly a surprise that China — considered the world’s factory — is also the largest generator of industrial wastewater in the world.

    Compounding the situation is the fact that major Chinese cities and provinces face severe water scarcity, with per capita water availability far below the global average.

    The enormity of China's water crisis can be gauged by the fact that, while the country is home to 20% of the world’s population, it has just 7% of the world’s freshwater resources. Moreover, the availability of freshwater is marred by high pollution levels in China’s predominant freshwater sources, namely, rivers and groundwater. As per the 2015 State of Environment Report by China’s Ministry of Environment Protection, 60% of groundwater in China falls under the “bad” to “very bad” quality categories, whereas 28% of its river water has been cited as “unfit for human contact.”

    Although World Bank data says that China’s per capita freshwater availability in 2015 was 2039 cubic meters – well above the World Bank water scarcity definition of 1000 cubic meters per capita – the regional distribution is highly skewed among the provinces. As evident in the next illustration, 11 out of the 31 provinces in China fall under the (water) scarcity or extreme scarcity categories, with water availability below 1000 cubic meter per capita.

    Freshwater Availability in China

    More notably, nearly half of China’s GDP is earned among water-scarce regions.

    The 11 water-scarce provinces – the dry 11 – as they are called, contribute 38% of the total agricultural output in China. Moreover, these regions are bestowed with huge reserves of natural resources like coal. The Shanxi province, for example, accounts for 30% of China’s coal reserves and falls under the extreme water scarcity category.

    This dichotomy between the economic activity and water scarcity in these provinces, aggravated by the poor quality of freshwater, has forced the Chinese government to take several concrete steps to arrest water pollution. Against this backdrop, the importance of sophisticated wastewater treatment and recycling cannot be over-emphasized. 

    How Bad is China’s Wastewater Discharge Situation?

    China discharged 73.5 billion tons of wastewater in 2015, more than the annual flow of the Yellow River, the second largest river in China.

    As per the Ministry of Environment Statistics, China’s burgeoning industrial sector accounted for a quarter of this wastewater generated. It’s quite likely that these figures on industrial wastewater discharge are under-reported, as many polluting industries (such as textiles and tanneries) comprise SMEs where monitoring of wastewater data has not been up to the mark.

    Pulp and paper, chemicals, textile, and coal mining industries were China's biggest polluters in 2014. Apart from these, steel, metals, and power industries are responsible for a significant amount of wastewater discharge into China’s freshwater bodies. In addition to these point sources, additional sources such as agricultural runoff, precipitation, drainage, and seepage are also considerable contributors to China’s water pollution woes.

    The situation is dire enough that the Chinese government has to step in.

    What is the Chinese Government Doing to Address its Water Issues?

    Given the critical state of affairs, the Chinese government has undertaken several initiatives, from building water treatment plants and improving the water efficiency of industries to imposing strict wastewater discharge standards in terms of quality as well as quantity.

    The current regime is undertaking measures to move toward a “circular economy” that emphasizes reuse and recycling of all resources, minimizing environmental impact. Several laws and regulations promulgated over the past two years are clear indicators of the government’s willingness to compromise on economic growth in favor of environmental protection.

    The Chinese government has set some serious targets in the 13th Five Year Plan (FYP) (2015–20) in order to address water issues in China. The government has vowed to reduce water use per unit of GDP by 23% from current levels. The two indicators of water pollution – Chemical Oxygen Demand (COD) and ammonia nitrogen – will have to be reduced by 10% in the 13th FYP from their current levels. 

    In April 2015, the State Council of China issued the “Water Pollution Prevention and Control Action Plan,” also known as the “Water Ten Plan,” which aims to control pollution discharge, promote economic and industrial transformation, as well as save and recycle resources. This is an umbrella plan that requires various ministries such as the Ministry of Environmental Protection, Science and Technology, Urban Development, and Industries and Information Technology, to work in tandem in order for it to succeed.

    Increased penetration of wastewater treatment facilities among polluting industries is one of the key tenets of the Water Ten Plan.

    For instance, the plan mandates all industrial clusters equipped with central wastewater treatment facilities and online monitoring equipment by 2017. This initiative is expected to be implemented on an urgent basis in extremely water scarce and polluted regions, such as Beijing, Tianjin, Hebei, and the Pearl River and Yangtze River deltas. The Water Ten Plan lays down clear, time-bound mandates for various polluting industries, including pulp and paper, textiles, tanneries, and electroplating, to comply with the new wastewater discharge standards - or face the prospect of heavy penalties and closure.

    Ensuring clean water for all is a top priority for the Chinese government. The relevant ministries have already issued necessary laws to help minimize water pollution. China has an enviable record of clinical implementation of key policies and fast-track execution of infrastructure projects. The huge demand for adequate and clean freshwater, strong government support in the form of strict environmental laws, and enforcement of said laws is an ideal recipe for a thriving wastewater treatment industry in China.

    Could This be an Opportunity for Wastewater Treatment Companies?

    While opportunities abound across the spectrum for wastewater treatment companies in the Chinese market, there are certain industries or applications that could showcase significant prospects for technology suppliers.

    For instance, the Coal-to-Chemicals (CTX) industry is gaining significant ground in the coal-rich provinces of China, which also happen to be water stressed. Wastewater generated from the CTX industry is extremely contaminated with organic and inorganic pollutants. The government has mandated strict adherence to “Zero Liquid Discharge (ZLD)” where all the wastewater is recycled back into the process, and no wastewater flows out of the plant premises. ZLD is very technology intensive, and only a handful of international players have mastered it. Renowned international players, such as Aquatech International Corporation, Oasys, and GE Water have recently won orders for ZLD supply in the Chinese CTX market. The ZLD technology, however, is energy-intensive, and therefore, expensive. Cheaper alternatives that provide the same end result would be welcome in the Chinese market.

    Some industries, such as textiles, tanneries,pharmaceuticals, and coke production, generate wastewater that is difficult to treat using conventional treatment technologies. They contain organic pollutants that aren’t easily biodegradable (hard COD) and that can severely harm the environment if discharged untreated. Given strict government regulations, investment in hard COD removal technologies is expected to rise significantly over the next few years.

    Apart from technology supply, considerable opportunities lie in the financing of wastewater treatment assets. Technology companies may join hands with investors to offer wastewater treatment solutions on a Build-own-operate-transfer (BOOT) basis. Such models reduce the inconvenience of operating and maintaining the wastewater treatment plant significantly for end users, allowing them to focus on their core business instead. BOOT models are common in municipal or desalination plants in China but are yet to gain traction in the industrial wastewater treatment space, with applications such as industrial park wastewater treatment plants. There are over 3,300 industrial parks in China, and less than half of those have centralized wastewater treatment plants installed. This could well be a huge opportunity for wastewater treatment technology providers and investors.

    Will Foreign Players Find Ground in China’s Industrial Wastewater Treatment Space?

    International wastewater treatment companies need to have the right strategy in place to establish a presence in the Chinese market. Partnering with a Chinese player that has complementary competencies is a tried-and-tested strategy employed by many international players in the past. Chinese customers prefer a local presence of the technology provider that they’re contracting, particularly for after-sales service. Forming a joint venture with established Chinese players, absorbing equity from Chinese investors, or partnerships with the customers themselves, any of these strategies could help make headway in a relatively untapped Chinese market.

    While new and advanced wastewater treatment technologies are gaining ground in China, the market is still price-sensitive. International players need to have the right mix of design and procurement strategies in order to provide competitive pricing. Possible government regulations related to locally sourced materials/components may not augur well for international players that see China as an export destination. For instance, the Chinese State Council has a goal stipulating that 70% of equipment in a desalination plant should come from China. Although the same rule doesn’t apply to wastewater treatment facilities right now, it, and other such risks, cannot be ruled out.

    There’s also a significant lack of transparency in the procurement processes, especially among municipal wastewater treatment projects, in China, something that’s particularly concerning for international players operating in the mainland. The government has acknowledged these and similar concerns, however, and is taking steps to control it.

    Future Outlook

    China’s industrial wastewater treatment market has the numbers to warrant foreign investment in the sector.

    With the Chinese government coming down hard on polluting industries and strictly enforcing regulations, state-of-the-art technologies could be crucial if Chinese industries are to comply with increasingly stringent standards. With government-enforced closures or production cuts looming, polluting industries such as textiles, wood pulp and paper, and others that don’t meet emissions standards would be willing to experiment with innovative imported technologies.

    The Chinese government aims to build world-class industrial infrastructure while fixing the country’s environmental woes. This could be a treasure-trove of opportunities for international players in China’s industrial wastewater treatment market.

  2. Four Technological Advancements That Could Change the Medical Tourism Landscape as We Know It

    The next wave of medical tourism growth will be assisted by superior technological systems and services. Medical tourism

      to read | words

    The next wave of medical tourism growth will be assisted by superior technological systems and services.

    Medical tourism is not a recent phenomenon.

    From the time of the Sumerians (circa 4000 BC), who constructed the earliest known health complexes that were built around hot springs, to the 18th and 19th centuries when Europeans and Americans travelled to remote areas with health retreats to find cures for tuberculosis, quality healthcare – wherever it could be found — has been a common pursuit. 

    Fast-forward to 1997, when the Asian economic crisis and the collapse of Asian currencies prompted government officials in these nations to market premiere destinations for international healthcare, at a fraction of what Western countries could offer.

    Traditional models that depended on cost arbitrage, reduced waiting times, a highly skilled and English-speaking healthcare workforce, and interventional government policies have helped emerging Asian nations, as well as certain South American countries, such as Brazil and Mexico, to attract healthcare tourists from the United States, Canada and Europe.

    What will fuel the next wave of growth in medical travel?

    Technology-enabled healthcare practices.

    The global medical tourism market is estimated to reach USD32.51 billion by 2019, clocking a CAGR of 17.9 percent from 2013 to 2019. Technological advancements that improve patient outcomes, reduce costs, and increase the availability of self-regulating social reference and review platforms will become dominant health tech themes globally. Healthcare tourism destination countries, such as Thailand, China, Singapore, India, Brazil, the Philippines, and Malaysia, have already jumped on this bandwagon, investing heavily to merge technological advancements with healthcare services in order to increase their share of the global medical tourism market.

    Technological Advancements That Could Revolutionize Medical Tourism

    Electronic Heath Records (EHR)

    Cloud storage enables doctors and solution providers to access medical records of patients in real-time, no matter where they are located. Patient clinical notes, diagnostic scans, medical administrator records, and discharge summaries can be accessed in flexible digital formats that are far more comprehensive and easy to read. Digitization of healthcare records has led to increased efficiency in understanding patient data, thereby enhancing patient service and safety.

    Cloud-based EHR solutions have also helped to lower patient costs because case studies can be accessed and leveraged for similar medical problems. Additional benefits include identification of probable drug interactions, storage of diagnostic test results and after-care.

    The adoption of a standardized EHR system is likely to lead to an increase in the capabilities of foreign medical facilities in developing countries to attract more medical tourists from developed/industrialized countries. In a medical tourism environment, a standardized, interoperable electronic medical record (EMR) can be utilized to manage patient care across hospital systems and across multiple countries.


    Promoted by doctors and institutions to develop a doctor-patient relationship at the consultation level first, these technologies have drastically reduced treatment times, and given patients a plethora of options to choose from before they finalize on their medical travel destination.

    India’s Apollo Hospitals, for instance, developed Apollo Telehealth Services (ATHS) to set up global telemedicine centers and telehealth camps, undertake remote patient monitoring, and conduct virtual rounds. The Indian hospital chain currently derives approximately 15 percent of its annual revenues from medical tourism.

    In 2010, the National Health Security Office and Health System Management Institute, along with Prince of Songkla University (PSU), collaborated to develop a project for introducing telehealth in southern Thailand, with the expectation of revitalizing telemedicine in that country. The main goal of the program was to connect tertiary hospitals to other hospitals by video, including conferencing, tele-home care and web-based consultation and education.

    To better serve a geographically dispersed population, the University of Mississippi’s Medical Center developed a 141-patient pilot telemedicine pilot program that used remote video visits. Patients in the program received tablets and connected devices to check vital signs. Physicians contacted the patient if vital signs fell below a certain level or patients failed to check in.

    As a result of the program, medical adherence grew from 60 to 96 percent, and nine cases of diabetic retinopathy were detected that otherwise would have been missed. Programs such as this demonstrate how mobile technology is making healthcare delivery more efficient and effective.

    Mhealth or Mobile Health

    Around 52.4 percent of the global online population access the internet from their mobile devices, and more than half of the global population is estimated to go online using mobile devices by 2020. With the rise in social media sites and apps, digital technology is championing the cause of medical tourism. Mobile apps, such as Lybrate, HelpingDoc, and online portal Fairmed, allow patients to access doctors for a second opinion. Caremondo is the for medical travel

    Patients can choose, compare and book doctors, hospitals, and treatments across 22 countries while offering fringe benefits to access visa processing facilities, flight and hotel bookings, as well as translations.

    Apps are also being developed to improve physician accuracy of disease diagnostics and recommendation of treatment. For instance, Isabel, a differential diagnosis tool, enables physicians to confirm the patient diagnosis by covering over 6,000 disease presentations and symptoms.

    Medical Databanks

    There’s a staggering amount of healthcare data being generated every day. Governments are looking at creating digital healthcare databases meant to help hospitals and other stakeholders access information on a real-time basis from a global repository. Doctors can even view the information of their smartphones through encrypted data on the cloud and advise patients on-the-go.

    Governments across leading medical tourism markets have set up dedicated portals and apps to highlight services, list healthcare providers and facilitators, and assist in booking travel and lodging, among other things. Countries are participating in forums, such as World Medical Tourism & Global Health Congress and the Asia Medical Tourism Congress, with an increased focus on their advanced technological offerings. The recent Asia Medical Tourism Congress in India focused on telemedicine in the majority of its sessions: The Future of Telemedicine and Health, Using Medical Tourism Technology to Power your Healthcare Business, and so on.

    An entire ecosystem is being developed to ensure that inbound tourism, coupled with superior technology, resonates with medical tourists. Government and hospital portals are highlighting the availability of travel options, cheaper insurance (if permitted by law) and treatment costs, tariff options, and preparatory aspects required before visiting the country to ease the journey of inbound medical patients. Thailand, Korea and Taiwan have developed individual apps to offer similar facilities to potential medical tourists.

    Top Medical Tourism Hotspots

    Adoption of Disruptive Technologies Will Decide Who Wins Patients in the Future

    Rapid technological evolution will ensure that countries with sophisticated and highly competent technological infrastructure will gain the lion’s share of inbound medical tourists. Disruptive outcomes emerging from Internet of Things (IoT) — the inter-networking of physical devices, vehicles, buildings, and other items — 3D printing, and personalized apps will further enhance patient care and lure patients to countries that adopt them first.

    IoT will provide an array of data to hospitals, including patient socio-eco-demographic and cultural background, health status and medical history. This could be leveraged by hospitals to identify potential patient groups based on personal and social habits, and for sending reminders for annual follow-up visits or check-ups. Diagnostic test results, such as recordings of ECGs, digital images of X-rays, MRIs and CAT scans, could be used to create implants or replacement parts through 3D printing.

    The creation of personalized medicine using technology will be a potential game-changer, as well, because countries will highlight innovative treatment prescriptions customized for the individual. This could potentially lead to better “customer loyalty” among patients and increase revenues and market share.

    Artificial intelligence (AI) systems could also enhance the adoption of EHRs. They can scan through data from digital records and help medical practitioners provide better patient outcomes, reduce treatment costs, and simplify the workflow management of patient data. Hospitals will adopt these rapidly in order to reduce the per-hour time spent by doctors, and bring synergies across multiple hospital departments. Likewise, 3D printing systems could leverage AI networks to gather real-time data of the affected body part and create 3D printed parts or medical images.

    Medical destinations are eager to create the technologies or even buy them in order to enhance their medical service portfolio. Countries are eager to adopt technologies to drive medical tourism, but the protection of healthcare confidential information would be a complicated undertaking and will be the deciding factor. Countries have to overcome the various data protection hindrances like integration and intertwining of systems, data explosion and protection of confidential data without delaying and disrupting critical healthcare services.

    Looking ahead, any country vying for a spot among the world’s best medical tourism destinations must begin now by investing considerable time and resources in technology that will help them achieve their goals.


    This post first appeared on

  3. How to Mitigate the Impact of Brexit Through Sound Procurement Practices

    While uncertainty about the UK’s decision to leave the European Union may be abating, the slew of c

      to read | words

    While uncertainty about the UK’s decision to leave the European Union may be abating, the slew of changes it entails in everything from exchange rates and laws governing contracts to logistics and trade rules are forcing companies to reconsider their procurement strategies.

    Category managers and procurement officers that are still grappling with questions surrounding its impact on sourcing, pricing and supplier relationships need to make sure they’re on top of things for the changes ahead.

    Brexit’s Impact— Challenges Procurement Managers Must Contend With

    Europe will remain the UK’s largest trading partner in short to mid-term, even if the UK leaves the EU. However, procurement trends may change in the long run, and UK-based companies may begin procuring certain commodities from other low-cost destinations.

    It’s critical for procurement officers to account for the inevitable regulatory and foreign exchange changes, planning ahead with alternate strategies for purchasing in and out of the UK. Category managers are facing a lot of uncertainties related to Brexit, including:

    • Commodity Price Changes
      With the Brexit, the pound's value drastically dropped, falling from $1.48 in May 2016 to below $1.25 in Dec 2016. This put automotive part manufacturers, electrical equipment manufacturers, pharmaceutical businesses, as well as importers in a dilemma about whether or not to continue with current contacts/vendors, or perhaps begin engaging new opportunities. As currency fluctuations cause the cost of many imports to rise, companies may need to continuously monitor commodity prices in order to re-examine and renegotiate their contracts. Procurement managers are also expected to manage legal and regulatory exposure along with controlling expenses, while also providing valuable intelligence about future trends to key stakeholders.
    • Contract Monitoring
      Large automotive and pharmaceutical companies have a huge number of commercial contracts, particularly with companies in other EU-countries. After Brexit, these companies are undecided on how to perform an audit of these contracts, and where to begin assessing the effect that Brexit may have on their rights and obligations under these agreements. Companies want to assess every point to negotiate new commercial contracts, including the Territorial scope of agreements.
    • Trade Agreement Changes
      As a member of the EU, the UK gets access to preferential trading agreements with ~50 non-EU countries, and it can negotiate these agreements because of the large trade volume. After the Brexit however, these companies will likely opt out of these agreements. Re-negotiating trade terms with non-EU entities could take an average of two to three years for every country. Also, due to declining demand in the UK as compared to the EU, the terms of new trade agreements are likely to be less favorable and expected to put pressure on UK businesses that have established trade relations with non-EU countries.

    Although the Brexit will likely have a ripple effect throughout supply chains for several industries, it’ll certainly affect some more than others.

    Take the automotive components industry for instance.

    Most British automotive manufacturers have assembly plants within the UK, but they procure a sizable portion of their components abroad. The UK imports about 36 percent of their components from the EU and about 21 percent from the rest of the world, while 43 percent of their parts are sourced locally. For both OEM and Tier-1 purchasing, a majority of goods sourced are from EU countries that aren’t regarded as ‘low cost’, such as Germany & France. Trade advantages between the UK and other European countries will wane after the Brexit, spiking the prices of raw components in the long-term. UK manufacturers will have to either procure locally, or opt for low-cost centers such as China and India.

    British automotive parts suppliers will probably be hard-pressed if manufacturers opt for the local option, however.

    Local OEM suppliers are already running at peak production capacity, and scaling up will take some time to meet growing demand. It’s quite likely that, in the short term, British manufacturers will have to source most of their automotive parts from low-cost countries such as India, China, Brazil, Argentina, and so on.

    Indian auto components exports have increased at a CAGR of 11.3 percent, from $5.1 billion in 2009 to $10.8 billion in 2016. At 36 percent, Europe accounted for most of India’s automotive component exports in 2016, followed by Asia and North America at 25 percent, respectively. There are plenty of notable suppliers in India, including Sundaram Clayton Limited (SCL), Wheels India Ltd, JBM Group, Avtec Ltd, Minda Industries Limited (MIL), Sona Koyo Steering Systems Limited (SKSSL), The Amtek Group, and many more, all of who cater to local as well as global demand.

    The sector is also being shored up through substantial investments.

    $15.80 billion was invested in India’s automotive industry between April 2000 – September 2016 through Foreign Direct Investment (FDI) inflows, as per the Department of Industrial Policy and Promotion (DIPP) data. French auto parts maker Valeo is planning to invest $100 billion in India over next two to three years. Hyundai is investing $300 million for a new engine plant and metal pressing shop in India, and there are also plans afoot to open its second manufacturing plant in the state of Rajasthan. German auto component manufacturer ZF Friedrichshafen also plans to setup a Technical Centre in the state of Hyderabad.

    Additionally, China’s auto parts manufacturing industry has witnessed a growth of 14.98 percent between 2012-2016, driven by a strong local passenger vehicle market. The auto parts manufacturing industry in China has also benefitted from globalization. The key vendors dominating this market space include Beijing Hyundai Mobis Automotive Parts Co. Ltd., Shanghai Huizhong Automotive Manufacturing Co. Ltd., Wanxiang Group Corp., and United Automotive Electronic System Co. Ltd.

    With Indian and Chinese automotive components roughly 10-25 percent cheaper than their European and American counterparts, it could emerge as a key supplier to Britain’s automotive sector over the next few years.

    Procurement Best-practices to Mitigate or Reduce the Impact of Brexit

    Despite the uncertainty and ambiguity of current affairs, there are certain measures that large organizations can take in order to mitigate or reduce the Brexit’s impact on their procurement processes, some of which include the following.

    Spend Analysis

    In order to improve sourcing success, large organizations in the UK will need to monitor spend for every business unit/category, allowing them to increase operational effectiveness. Large organizations can generate cost savings of 5 percent to 15 percent through centralizing or consolidating purchases for categories with high volume or low variants.  Large organizations can use a 4-step approach that involves:

    • Gather and consolidate spend data from all sources into one spend sheet that includes category departments, plants, and operational business units.
    • Analyze the spend data to ensure that the client has negotiated the best contract/ deal with EU suppliers for every category, product or service.
    • Analyze the growth in supplier spend within each category across every EU country (post-Brexit).
    • Identify the un-optimized categories where the prices/spend have been increased substantially after Brexit, impacting the overall spend.    

    Identify the Best Cost Country Sourcing (BCCS) for Un-optimized Categories

    In order to minimize spend on un-optimized categories, large organizations should focus on identifying the list of other trading countries which could be more strategic than the current trading countries. Organizations need to identify a number of sourcing destinations (and the criteria that defines one, such as the availability of raw materials, local labor and utility costs, logistics costs, and so on) in order to decide best cost country for sourcing. Total potential cost reduction or savings may vary depending on category; however large companies can generate a savings of 10 percent to 30 percent. Large organizations are increasing their trade talks with Non-EU members such as Australia, Mexico, South Korea, Singapore and India to mitigate the impact of Brexit on sourcing commodities.

    Cost Model Analysis

    Identify and compare the production cost break-up covering both direct and indirect costs, such as raw material costs, energy costs, labor costs, overheads etc. for the identified low cost countries. Large organizations should negotiate with the large suppliers in these countries by understanding their cost base.

    Supplier Identification and Shortlisting

    Identify and engage with a new breed of professional suppliers in the best cost countries, seeking to deliver on quality and service aspects beyond just price. Large organizations can identify best-fit suppliers by developing deep-dive supplier profiling and capability analysis. Additionally, they can negotiate contracts with the new suppliers by identifying different SLA’s & KPI’s that help reduce supply risk.

    Commodity/Product Price Tracking and Forecasting

    Large organizations with multi-licensing needs, specific regional coverage, and other custom fields, need continuous price monitoring of all products in order to:

    • Track market trends after Brexit.
    • Gain global market intelligence.
    • Mitigate expected volatility by creating new engagement models/sourcing strategies.
    • Assess the value of existing and potential deals.    

    It’ll be imperative for companies to monitor prices of raw materials regularly across EU and other countries after the Brexit to contend with the possibility of a decline in exchange rates.




    This post first appeared on

  4. The Internet of Things (IoT) — Changing the Manufacturing Sector’s Landscape for Good

    Rising consumer demand, increasing technology penetration, and the advent of modern machines are disrupting traditional manufacturing processes, compelling

      to read | words

    Rising consumer demand, increasing technology penetration, and the advent of modern machines are disrupting traditional manufacturing processes, compelling the manufacturing sector to become more autonomous and self-driven.

    The “one-size-fits-all” paradigm has evolved to one of customization and personalization.

    Products have been transformed into services. Manufacturing is evolving from a traditional approach to a more advanced system, with enhanced technology penetration, connected devices, increasing levels of autonomy, and decreased human intervention. The Internet of Things (IoT) — which refers to a system of interconnected devices — has created opportunities to integrate the physical world with computer-based systems. This has enabled machine-to-machine (M2M) communication and machine-to-human communication, which has tremendously improved efficiency. IoT, when coupled with sensors and actuators, becomes a part of a cyber-physical system.

    The Industrial Revolution Timeline

    Manufacturing has evolved from the use of energy-generated water and steam in the early 18th Century to the use of electrical energy, assembly lines, and advanced IT systems in the 2000s. With the advent of IoT, the manufacturing sector — termed “Industry 4.0”  — capitalizes on the complex network of interconnected devices and data generated. 

    Leveraging Data Generated by IoT Systems Could Generate Serious ROI

    Depending on the user, the level of IoT adoption could be limited internally within the plant or may be extended in the form of collaborations with multiple suppliers and other logistics stakeholders. The higher the number of stakeholders and devices, the more complex the system. This would result in the need for faster networks, higher computing speeds, and energy-efficient systems.

    Multiple sensors present in a modern manufacturing facility generate large amounts of data (ranging from megabytes to petabytes). For example, a Boeing 737 engine generates 20 terabytes of data per hour. Cisco estimates the number of connected devices to reach 50 billion by 2020, accounting for 2.7% of devices (Things) in the world.

    To gain serious return on investment, it is important to analyze the generated data in real time or at the back-end, based on the application. After the data is analyzed, one could gain insights into the product and translate these insights into operational strategies, which could result in process optimization, increased productivity, and lower inventory costs, among other benefits. The analysis of the data could enable predictive maintenance, and help upgrade sales models and lead times. 

    Higher IoT Adoption and Changing Preferences Will Drive Investments

    Consumer preferences have, over time, gravitated toward customized and personalized products rather than general stocks. Manufacturers are leveraging advanced technologies to study consumers’ preferences, shopping needs, and habits. This is achieved by gathering data through users’ browsing histories on computers and phones, cookies, and geolocation information, along with other mediums. These measures enable manufacturers to offer products and services in line with consumers’ needs, sometimes even predicting demand, and quite often, provide an extended customer experience.

    Manufacturers have shifted from the “built-to-stock” to “build-to-order” model, leading to lower inventory and logistics costs.

    Estimated Global Investments in IoT by Manufacturing Firms

    Factors such as machine management, asset control, process optimization, and shorter lead times would continue to drive investments in IoT systems.

    Business Insider estimates that investments in IoT systems by manufacturers will increase at a CAGR of 18% to $ 70 billion between 2014–20. Due to rising costs of operations and diversifying consumer demand, manufacturers’ focus is likely to shift to reducing costs, overhead expenses, and generate more profit. With millions of sensors embedded on the factory floor, a manufacturer would be able to make an informed decision about operations, expansion, maintenance, and other strategic activities

    “The Fourth Industrial Revolution is still in its nascent state. But with the swift pace of change and disruption to business and society, the time to join in is now.”

    -- Gary Coleman, Global Industry and Senior Client Advisor, Deloitte Consulting

    The penetration of IoT is also likely to extend to logistics and warehousing in the value chain; this would aid in replenishing resources and optimizing the outbound network, resulting in reduced inventory and logistics costs. With the help of RFIDs, machines would be able to identify various products, destinations, lead times, and other parameters, thereby reducing human intervention and errors.

    Security, Talent, and System Standards Pose Challenges for IoT Adoption

    As with any new and evolving technology systems, IoT has its own set of challenges.

    Devices connected via a network, including those of external stakeholders, are vulnerable to security hacks. According to Gartner, the black market for fake sensors and video data is expected to exceed $5 billion by 2020, boosting criminal activity over the network. The need to address these concerns will likely result in a 20% increase in annual security budgets in the near future as compared to the nearly 1% rise in 2015. 

    “Data privacy is a big challenge. Who owns the data? Is it your data? Is it my data? And how can that be used against you? That is of deep concern.”

    --Mark Hatch, Cofounder and CEO, TechShop

    The lack of a skilled workforce could delay the deployment of IoT systems across industries as well.

    Most software developers lack in-depth knowledge of hardware and its integration with software. IoT, a blend of both hardware and software, requires developers to have a sound knowledge of a combination of these entities for the successful creation and deployment of IoT systems.

    IoT is fragmented in terms of usage of varied transport layers, protocols, and configuration options. The standards are yet to be defined, and an established ecosystem is missing. This makes it difficult to implement and expand IoT systems, and leverage their benefits.

    Integration of IoT Systems Will Give the Manufacturing Sector a Competitive Edge

    The manufacturing sector is witnessing drastic changes in terms of technology, economies of scale, consumer demand, and competition. The sector’s focus has shifted from mass-production to customization, with manufacturers willing to go that extra mile to provide customer satisfaction — a costly endeavor to be sure — and one that’s motivating them to adopt newer techniques in order to reduce costs and optimize processes.

    A constantly evolving business environment requires thorough understanding of factors that affect the business, both directly and indirectly. Increasing IoT penetration and the integration of IoT systems in existing infrastructure would offer real-time insights that could lead to problems being addressed before costs are incurred, even leveraging of third-party skills in the value chain, all of which will surely give players in the manufacturing sector a major competitive edge.

  5. Will Indian Generics Makers Target Niche Pharma Markets in the US?

    With growing interest in low-cost healthcare options, the US pharma market could be a more lucrative opportunity than

      to read | words

    With growing interest in low-cost healthcare options, the US pharma market could be a more lucrative opportunity than their domestic markets for Indian generic drug makers.

    Even though the Indian generic drugs industry is third-largest in terms of volume and 14th largest in terms of value globally, its long-term profitability and sustainability remains questionable due to low entry barriers that lead to fierce competition and slim margins in the industry. Additionally, the Drug Price Control Order (DPCO) issued by the Indian government in 2013 put a ceiling on the price levied by the companies in order to provide medicines to consumers at reasonable prices. This move has affected around 40% of the domestic pharmaceutical industry and is expected to erode margins significantly in the near future.

    As competition in the Indian generics market intensifies, many Indian drug makers see the US generics market as a lucrative alternative. 

    India’s Pharma Companies are Growing Beyond Generics

    Indian pharma companies currently supply 40% of generic drugs in the US. However, there’s been a pragmatic shift in the focus of these players from developing ‘me too’ generic drugs to specialized complex generics such as oncology injectables, nasal sprays, vaccines and transdermal patches. This is largely because these product segments have comparatively lower competitive intensity as well as offer long-term revenue streams and higher profitability.

    Indian companies are trying to penetrate these niche segments by tweaking popular drugs that have gone off patent. In order to take advantage of this opportunity, companies are aggressively filling for approvals with the US FDA.

    The US generics market, currently valued at $35 billion, is expected to double to $71.9 billion by 2018.

    About one-third of all the applications filed during the first three quarters of 2015 were by Indian pharmaceutical companies, a 19% year-on-year increase. In addition, Indian firms accounted for 20–25% of the first ANDA-approvals for a specific drug over the last few years, a definite indicator of their strong R&D capabilities. This is a key statistic, as first ANDA-approval gives them the exclusive rights to sell a generic version of patented drugs for the first 180 days after the patent’s expiry, a significant advantage in the generics industry. With a current backlog of 3,000 pending ANDA applications and the FDA’s intent to clear 90% of these by 2018, India’s generic players may see strong pipeline growth in the next few years. 

    Leading Indian Pharma Companies Have Ramped Up their R&D Expenses by 4x Within Five Years

    R&D has been a key focus area for the Indian generic manufacturers as they continue to move further up the value chain and become more competitive globally. Total R&D investments from leading Indian generic companies has witnessed an expansion to around 7% of sales in 2015 as compared to 4% in 2010; total R&D investment has more than quadrupled to $1.2 billion in 2015 from $0.25 billion in 2010.

    R&D Spends by Key Indian Generic Drug Makers (2015)

    Among the various Indian generic manufacturers making an entry into the US specialized generics market, Lupin Pharmaceuticals, Sun Pharmaceuticals, and Dr Reddy’s Laboratories are the most noteworthy.  

    • Lupin Pharmaceuticals
      In order to shift from mimicking of drugs to developing new drugs, Lupin surged its R&D expenditure by 17% to $168 million in FY2015. The company has further engaged in developing a new injection to treat some uncommon cancers, a nasal spray for pulmonary diseases, and an anti-allergic nasal spray Allernaze. Despite stiff competition to its branded generic drugs, Lupin managed to double its revenues over the last four years to $2.06 billion in 2014-15. US now accounts for 44% of Lupin’s consolidated revenues vis-à-vis 36% in 2010-11.

    • Sun Pharma
      Sun Pharma’s R&D expenditure has increased six-fold to $261 million in FY2015 from FY2011. In 2016, the company received approvals for an eye drop that’s used to prevent swelling and pain during cataract surgeries and a new injection formulation of the off-patent molecule decitabine (used to treat a rare blood disease known as myelodysplasia syndrome). With revenues of $2.2 billion in 2014-15, the company’s US business is expected to clock 13% CAGR to reach $4.3 billion by 2020. Nearly 18% of Sun Pharma’s revenues are expected to come from speciality business such as dermatology and ophthalmology, ~6% from branded drug business, and ~45% from the complex generics business including long-acting injectables and controlled substances.
    • Dr Reddy’s
      In 2016, Dr Reddy’s received an FDA approval for a spray for treating a skin condition called plaque psoriasis. The company also developed an injection for migraine at a cost of $25 million in less than five years. Developing the same from scratch would have resulted in 10 times the expenditure and three times the time taken. Dr Reddy’s eventually expects to gain revenues amounting $100 million from the spray and the injection. The company is also hedging the mainstream competition by expanding into ‘limited-competition drugs’ (generic drugs that are hard to manufacture or aren’t produced by a significant number of competitors) and ‘differentiated products’ (existing products with differences in dosage or its mechanism of administering). Drugs such as decitabine, azacitidine, divalproex, and donepezil  for instance boosted sales and profitability for Q2 FY2013, recording their highest ever net profits (more than $100 million) during the quarter. Moreover, the revenue from the American market has more than tripled to $960 million in 2014-15 from $280 million in 2010-11. North America’s share in the company’s consolidated revenues has jumped to almost 40% in 2014-15 from 25% in 2010-11.

    Indian Pharma Companies Can Leverage Existing Infra & Economies of Scale

    If the cost of developing niche drugs is factored, the amount ($100–200 million) is much higher than what it takes to develop for generic drugs ($1–5 million), with an additional $0.25–1 billion of manufacturing plant costs.

    Indian companies are at an advantage here as they already possess the required manufacturing capabilities, know-how, and infrastructure to attain economies of scale. In addition, owing to the high entry barriers, competition would be restricted to large companies that have adequate resources and capabilities.

    Market Challenges Will Spur Several Acquisitions by Indian Companies

    Indian companies that have already established a presence in the US have done well in the generics segment of one of the world’s largest pharma markets. Ramping up revenue in North America hasn’t been easy for Indian drug makers however, with the unfamiliar market posing its own set of challenges.

    For starters, it’s a challenge getting doctors to prescribe newly developed drugs. Companies continue to struggle with the nuances of marketing a specialized drug in the US, where a strong team of researchers, marketing, and sales force is necessary to build an appetite for low competition drugs.

    Another major setback is regulatory tightening by the US FDA, with an increasing number of surprise inspections catching pharma majors in questionable circumstances. For instance, a surprise inspection by the US FDA at Sun Pharma’s Halol plant disclosed cases of unofficial trials wherein samples were tested illicitly before official tests. In another case, an employee deleted raw data of the trial tests, as it did not conform to prescribed standards. Since then, imports from this particular facility have been halted in the US. Incidents like these have raised serious concerns over manufacturing practices in India.

    US regulations also stipulate that powerful opioids and other controlled substances be manufactured domestically. Indian companies would probably need to acquire American players in order to gain access to reputable production facilities and local licenses in order to manufacture more sophisticated products like painkillers.

    Indian companies have already invested about $1.5 billion to acquire some American companies in 2015 to gain access to manufacturing units or proprietary therapies, with an additional 31 deals in the works. One of the most prominent deals of 2015 was the acquisition of New Jersey-based GAVIS Pharmaceuticals and Novel Laboratories for $880 million by Lupin Pharma. The acquisition would not only enhance the company’s presence in the US generics market but also broaden its product pipeline in areas such as dermatology, controlled substance products, and other high-value or niche generics. The company, post-acquisition, has a 101 in-market products, 164 cumulative filings (98 from Lupin and 66 from GAVIS) that are pending approval, and plenty of other products in the works for the US.

    Challenges – Not Limited to Just Core Activities, but Across Value Chain

    A small set of buyers has dominated generics purchasing in the US:

    • McKesson Corp bought Celesio AG for about $5 billion in 2014 in order to gain influence in drug distribution.
    • CVS, through its partnership with Cardinal Health Inc.
    •  Walgreens Boots Alliance Inc., through its collaboration with AmerisourceBergen Corp.
    •  Wal-Mart Stores Inc.

    These alliances have made it challenging for new players to make efficient use of distribution channels for market penetration.

    Indian companies will also need to be cautious about public perception; things shouldn’t appear as if they’re gouging customers by developing niche drugs out of inexpensive generics. Involving American doctors in clinical stages will be another key step toward establishing a sustainable presence, as doctors who prescribe such niche drugs usually base their opinion on clinical studies and their peers.

    Indian Players Need to Tread Cautiously in a Wary Market

    Indian generic drug firms may be a force to reckon with in the US markets, backed the already successful forays into the US generics market, a largely under-penetrated but fast-growing healthcare market, and strong fundamentals. Despite challenges, they’ve been able to hold their own through FDA fillings and acquisitions. With continued efforts, they are likely to attain significant share in the US’ niche markets.

  6. Oil & Gas Players Need to Weather Serious Regulatory Reforms to Counter Climate Change

    2016 is going to be a year of reckoning for the Oil & Gas industry. In the middle of a “h

      to read | words

    2016 is going to be a year of reckoning for the Oil & Gas industry.

    In the middle of a “healthy” makeover right now, the oil & gas industry’s underlying market fundamentals have been transformed.

    Market leaders are hard-pressed at the moment, adapting strategies to changing geo-political relationships, trade dynamics, and regulatory landscapes that are in flux the world over. If that wasn’t enough to contend with, they’ve now got to account for a heightened focus on climate change accords as well as their political upheavals.

    The oil & gas industry isn’t what it used to be, and it’ll never be the same.

    The regulatory landscape in particular is going to see some interesting developments.

    Through continual dialogue between regulators across different regions, decision makers are likely to establish better global industry standards that ought to improve industrial productivity in the long term.

    Leading producers across the Americas, Europe, and Asia will have to tweak internal regulatory mandates if they’re going to stand any chance on a global playing field.   

    North America’s Aggressive Climate Change Agendas

    As its chapter nears closing, the Obama Administration has relentlessly pursued the establishment of an environmental legacy through the introduction of sweeping reforms.

    While pursuing an aggressive climate change agenda, the Administration has pushed the U.S. Environmental Protection Agency (EPA) and Department of the Interior (DOI) to draft, finalize, and roll out a host of new regulations that are expected to significantly impact upstream and mid-stream operators.

    Finalization of the New Source Performance Standards (NSPS) proposal for methane and volatile organic compounds, the introduction of new ozone standards, and rules governing the disclosure of chemicals used in hydraulic fracturing under the Toxic Substances Control Act (TSCA) are all likely to impact US-based operators. The EPA’s National Enforcement Initiatives for the FY 2017-19 are likely to reemphasize the need for compliance as well.

    Despite a change in the powers that be, these initiatives are likely to continue well into 2017.

    Given the market’s precariously stable conditions right now, the US oil & gas industry will need to prevail in a challenging operating environment.

    Canadian players on the other hand won’t be as harried by regulatory reforms.

    Resource development will be better in 2017, with the transference of governance of resources to Canada’s territorial governments proceeding as planned.  While the political framework is still hazy, the National Energy Board will likely continue to preside over oil & gas’ offshore exploration and production activities. As compared to the US, Canada’s regulatory landscape is expected to be more or less stable, perhaps simply reflective of developments in the locale.

    Europe’s Growing Regulatory Risks

    The June 23rd referendum made headlines across the globe this year, with the implications of a Brexit still a hot topic of debate for several industries.  

    The oil & gas industry is concerned as well, with companies across the region likely to weather significant regulatory risks over the next two years.

    Environmental standards set by the UK have been widely adopted across Europe, and any decision to diverge from these will have a direct impact on the European oil & gas market.

    A Brexit is likely to complicate tariffs and transfer pricing as well, two areas that were already a vexing concern for the diverse region.

    Developments across the Arctic region — particularly Norway and Russia — should keep things interesting as well.

    A unilateral adoption of the Polar Code is expected to bode well for all coastal states, and similar efforts toward harmonization of rules across shelves is likely to continue well into 2017.  Russia is expected to lead these efforts, as an increasing number of Russian companies and regulators are pushing hard for a more transparent and predictable regulatory regime. The only thing that could derail these efforts are sanctions imposed by the EU and US, which could prove to be a hindrance for the foreseeable future.

    Latin America is Still Stabilizing its Regulatory Regime

    The region has been abuzz with activity over the recent past, driven in most part by new rounds of licensing in Brazil.

    Deep-water operations will be a growing area to capitalize on in the near future. Technologically intensive operations like these could stumble however, hindered by regulations governing Local-content requirements.

    While the Brazilian government has taken initiatives to relax these norms, it still looks like a long way to go before the operating environment really becomes conducive to international operators. The regulatory regime is also likely to increase focus on improving compliance with safety and environmental best-practices.

    Asia’s Refined Thirst for Crude

    Asian countries — particularly India and China — have always been key drivers for sustained oil & gas consumption globally.  

    With G20 nations committing to the Paris climate agreement however, the pressure on both these countries to reduce emissions is increasing. While India has committed to a 30-35% reduction in carbon emissions by 2030, China is working toward phasing out fossil fuel subsidies by 2020. Such developments mark a significant change in the regulatory landscape of the oil & gas sector in these countries.

    Improving self-sufficiency and boosting demand for “cleaner” fuels has been an area of focus for both these nations.

    Chinese regulators recently introduced new rules governing the cost of transportation of natural gas. This move is likely to lower natural gas prices in the country, thus boosting demand. Such changes underscore efforts to boost slowing demand for natural gas, and cut greenhouse gas emissions. China’s regulatory regime has also encouraged private independent oil refiners to import crude oil, shoring up the country’s reserves and fuel quality while lowering domestic fuel prices. These developments are making global markets jittery about a glut however, with global oil suppliers keeping a wary eye on China and its growing oil reserves.

    India is enacting steady reforms as well, working toward new mandates for reducing emissions. India’s government recently announced a leap from existing Euro IV emission norms to the Euro VI standard, accelerating the process of upgradation in one of the world’s fastest growing nations.

    2016 has been a year of consolidation for the oil & gas industry.

    Regulatory agencies across the globe are working toward a unified governance framework that’s likely to be the industry’s definitive guideline for years to come.

    2017 will be the year of revelation.

    The momentum of reforms ought to show fruition by 2017, allowing us to gauge whether these radical reforms are sustainable enough to outweigh volatility in oil prices, inevitably fueling (or faltering) our collective drive to reduce climate change.

  7. 4 Tasks in Facilities Management That IoT Could Take Over

    Recent advances and innovation in the industry pale in comparison to what’s arguably its next big thing -

      to read | words

    Recent advances and innovation in the industry pale in comparison to what’s arguably its next big thing - IoT enablement.

    The Facility Management (FM) sector witnessed several advances and innovation over the past three years, enabling the FM community to serve and enable clients like never before.

    Recent trends include the application of big data and analytics to intuit needs, automated housekeeping and inventory management, voice-enabled helpdesks, as well as the integration of facilities data with business data. 

    The biggest transformation in FM however, and most facility managers in the know concur, will be the widespread use of Internet of Things (IoT) technologies in Facility Management.

    IoT in Facilities Management?

    In its simplest forms, IoT could be deployed as a centralized network and control scheme for what used to be disconnected systems and dumb devices such as:

    • Lighting
    • Refrigeration
    • Smart Meters
    • Fire Suppression Systems
    • Security and Safety Alarms
    • Appliances with Embedded Sensors/Software
    • Central Heating Ventilation and Air-Conditioning (HVAC)

    Some other facets of IoT deployment could also include:

    • Managing Energy Consumption
    • Data-driven Decision-making
    • Operational Cost-optimization
    • Remote Monitoring of Facilities
    • Determining the Exact Square-foot Utilization of Office Space

    Smart networks and intelligent systems to automate facilities management could not only reduce the need for human intervention (and staffing!), but also improve real-time response to breakdowns and other untoward situations, driving down operational overhead by leaps and bounds.


    Deployable IoT Applications in Facility Management Right Now


    Sensors Embedded in Buildings and Devices

    Sensors can be connected to HVAC systems, lights, doors, windows and buildings, and data from such sensors/devices can be integrated and analyzed to understand how the utilization of each device could be optimized. Installations could benefit from up to 25% energy savings through proactive energy management programs for example.

    ISS, a leading FM service provider, decided to use IBM’s Watson IoT platform to manage its portfolio of 25,000 buildings worldwide. ISS and IBM would integrate and analyze data from the devices and sensors embedded into buildings, including doors, windows, chairs, meeting rooms, dispensers, and air conditioning systems.

    Sensors in doors and entrance areas, for example, could identify the number of people in a building at any given time, allowing the cafeteria to better guess the number of likely orders for the day, thereby avoiding food wastage.


    Room Reservations and Scheduling

    Optimum utilization of meeting rooms using intelligent scheduling tools is a popular IoT application right now.

    Employees can now see — in real-time — which rooms are booked or in use, view a scheduling calendar, invite attendees, and avoid double-booking of meeting rooms.

    Crestron’s enables managers and employees to book rooms, view the status of meetings, release a room if a meeting is cancelled, and automatically allocate a room based on the type of meeting or a workers’ locations.


    Monitor Stocks and Usage of Supplies in Restrooms

    Sensors and software applications can be used to monitor the usage of restrooms and supplies, making supplies management more efficient, scheduling cleaning activities, reducing overheads,  as well as scheduling the requisition and approval supplies. Sensors in restrooms can also help in water management and preventive maintenance of fittings and pipes.

    Kimberly-Clark recently developed an application using IBM’s IoT platform (Bluemix) that allows facility managers to receive data and alerts from numerous devices in restrooms. The app helps reduce tenant churn, lower costs, and enhance the customer experience. Initial tests helped clients reduce their consumption of restroom supplies by up to 20%.


    Safety and Security Systems

    Another crucial application area for IoT in facilities management is the remote monitoring of alarms, smoke detectors, and other life-safety systems. Manufacturers can use IoT to provide real-time information about a crisis or fire emergency in office premises by feeding data from heat detectors and other safety devices to Building Automation System(BAS).

    Such applications are particularly useful in remote (sometimes fully-automated) facilities, especially fire-prone areas such as factories and mills. In addition, applications in tandem with smartphones can be used for emergency evacuation by tracking employees who haven’t reported in to a refuge area.


    There’s plenty of scope for customizable IoT deployment in the facilities management space as well as allied concerns from parking and natural disaster management to counter-terrorism. 

    What we’re witnessing right now is just the beginning of the Internet of Things era, with a world of opportunities for digital technologies limited only by our imaginations.

    By 2020, intelligent technologies such as Near Field Communication (NFC) sensors, smart surveillance, security applications and smart robots will automate  a number of FM activities and increase business efficiency.

    While overhauling existing infrastructure and deploying automation systems for “connected buildings” could be a costly proposition right now, it’s important to remember the long-term rewards and ROI from a structure that’s sure to be around for a decade or longer.

  8. Why Aren’t Negative Interest Rates Feasible For Developing Economies?

    Developed nations are fast adopting the Negative Interest Rates to boost economic growth and shake off money-hoarding. The

      to read | words

    Developed nations are fast adopting the Negative Interest Rates to boost economic growth and shake off money-hoarding. The trickle-down effect of the slowdown in the developed world is impacting the developing economies.

    Naturally, we ask, “Is the unconventional policy really feasible for the developing economies?”

    In the early 20th century, Silvio Gesell imagined living in a world of “free money”. 

    Often referred to as a neglected prophet of economics, Gesell dreamt of a world where taxes prevented money-hoarding and discouraged money languishing in bank accounts. All, with the idea that spending cash will spur demand and avoid deflation in the market.

    The world had conveniently forgotten about this Gesell tax, till the five major central banks in the developed economies adopted Negative Interest Rates to boost inflation and economic growth, and to keep the underlying currency devalued. Japan, the EU, Switzerland, Sweden and Denmark now have negative interest rates. This policy shift started with Denmark to protect currency appreciation from the inflow of money. In March 2016, the National Bank of Hungary became the latest country to cut its overnight deposit rate to negative (-0.05%) to boost growth and inflation. Central banks are cutting interest rates to enforce the growth engine and manage the disinflationary pressures observed in developed countries.

    Developed Economies - Average CPI Inflation (%)

    Post the Brexit referendum, the Bank of England is under pressure to cut interest rates, which are already zero-bound. Looming recession fears and a slump in corporate confidence are major concerns for the UK. The Brexit risk could promulgate to other parts of developed economies such as Canada. In addition, other countries such as Singapore, New Zealand and Australia are on the verge of an economic slowdown and are dwindling with low inflation, raising the prospects of an unconventional policy to expand in other parts of the developed world.

    The trickle-down effect of the slowdown in the developed world impacted the developing economies. Naturally, the questions to ask are pretty straightforward: Will such an extreme monetary policy have any implication for developing economies? Will such a scenario pose a real threat?

    That is a possibility when we look at global trends. Commodity prices declined drastically over 2015 and business confidence is very low coupled with anemic demand. Further, developing countries are facing slower growth post the financial crisis of 2008. The overall scenario is quite bleak for developing economies to keep the policy rates high. If this situation persists, the prospect of unconventional monetary policy measures could increase.

    Disinflationary Pressure on Developing Economies

    Price stability as the main target of the monetary policy of different central banks underpins the need to maintain stability in currency and inflation levels. Developing economies tend to have a spillover or spill-back effect from external events in developed countries. Inflation in emerging economies declined over the past four years due to the commodity price drop. The global deflationary pressure (world inflation declined to 1.4% in 2015 from 3.9% in 2012) weighs on domestic growth in developing economies, impacting the overall GDP growth.

    Developing Economies - Average CPI Inflation (%)

    In developing economies, inflation is relatively high compared to the developed world. However, developing economies with large exports are affected by foreign investment flows. Any potential shock in the developed world would have an impact on developing economies growth prospects.

    For example, China is facing weakness due to a slowdown in global trade and is moving toward a consumption-driven economy. To address deflationary pressures and financial stability concerns, the People’s Bank of China cut interest rates five times during 2015. Moreover, China depreciated its currency (renminbi) to avoid the economic turmoil, which elicited challenges for its trade partners. China may even face the prospect of interest rates in sub-zero levels, if the economy continues to feel the strain from global headwinds.

    Rising Debt Levels, Declined Investment Activity and Low Productivity Growth

    Japan, with a huge debt, is trying to keep the debt load sustainable through zero-bound rates and by providing enough corpus for running the economy. The premises of negative interest rates in the developed world have been lackluster growth and falling inflation. Although developing economies have lower debt levels compared to some developed countries, the rapid expansion in debt is quite alarming.

    Gross Debt as % of GDP

    Developing economies, particularly in Asia and Latin America, witnessed growth in debt levels. India stands tall with a debt-to-GDP ratio of more than 65%. Moreover, China, Mexico and South Africa witnessed a rise in debt levels. Developing economies, struggling with slow growth prospects, increased the burden of high government debt, which will categorically diminish the economic growth achieved before the 2008 crisis.

    Developing Economies - Gross Investment

    The global economy is battling with declined productivity growth. Based on the neoclassical growth theory, long-term macroeconomic growth can be ascribed to productivity and population growth and investment. A decline in total factor productivity in developing economies (measures the level of technological progress of an economy) over the last few years is likely to influence real interest rates over the long term. Moreover, the decline in productivity overall has implications for long-term growth prospects.

    Despite the large pool of young working people, the lack of productivity and employment opportunities will affect competitiveness and growth of developing economies. The declining investment trend in developing economies indicates that business expansion and infrastructure investments have been put on hold due to low business confidence. Under such scenario, developing economies might have to reduce rates further to facilitate investment activity.

    The Impact of Exchange Rate Movement

    Commodity export-driven developing economies often experience exchange rate depreciations and spikes in inflation, which result in the interest rate hike. Countries such as South Africa, Turkey, Russia and Brazil are vulnerable to a fall in currency prices and continue with a high interest rate policy, regardless of slower growth prospects.

    In developing economies, inflation often runs high above the target rate and price stability is a major concern. Moreover, developing economies have low single-digit growth rates and an undervalued currency. Hence, the impact from lowering interest rates would have a counterintuitive effect on developing economies exchange rates. To combat exchange rate volatility, developing economies are less likely to go into the negative interest rate zone.

    Under such circumstances, the negative interest rate policy will not be feasible in the near future. However, a prolonged slow growth rate, weak global trade and capital flows, and a potential recession could change the stance of the monetary policy in developing economies. Central banks in developing economies can employ unconventional monetary policy measures, which are currently implemented by the developed world.


    Telltale Signs

    To avoid treading along the NIRP path, the developing economies would need to closely watch four critical parameters: low inflation, weak economic growth, unwanted currency appreciation, and lack of market liquidity.

    It is undoubtedly critical for the developing world to track persistent low inflation levels (global deflationary trends) including commodity price down cycle, and deflationary pressures due to the structure of the economy.

    Similarly slowdown in economic growth can be tracked by watching subdued global demand, a drastic decline in exports, and a rapid increase in unemployment rates. Further, they need to observe if demand is unable to pick up, and there is an evident low business confidence, a decline in industrial or private sector investment activity, and lack of liquidity.


    How Can Developing Economies Avoid Negative Interest Rates?

    There are multitudes of lessons learnt from the developed economies that have adopted the Negative Interest Rates. Obviously as NIRP isn’t really a feasible option for developing economies, here are the critical lessons that can help the developing economies skip the rope.

    • To boost inflation, developing economies need to offer space for the goods and services industry, with few regulations, and tax incentives.
    • In case of lackluster demand in the market, developing economies should propel the domestic economy through infrastructure investments and promote foreign direct/indirect investments.
    • The developing economies should undertake structural reforms to boost the monetary policy transmission mechanism.
    • The developing economies should diversify revenue source to non-commodity sectors.
    • The developing economies have a large young population and the governments need to reinforce labor market participation for economic growth.
    • The developing economies need to manage vulnerabilities in the economy to tackle currency volatility and external headwinds..
    • During expansionary monetary policy, developing economies need to monitor investment flows in risky assets and potential asset price bubble.

  9. 5 Flaws and Fixes in P2P Lending That Could Make Banking Obsolete

    Online marketplace lending platforms — aka P2P platforms — could be a real threat to the banking

      to read | words

    Online marketplace lending platforms — aka P2P platforms — could be a real threat to the banking sector if they get these things right.

    An odd blend of crowdsourcing and crowdfunding, peer-to-peer lending has grown steadily over the past decade, garnering interest (pun intended) from investors and borrowers alike.

    They’re certainly going head-to-head with traditional banks.

    Spoilt for choice at a time when 10-year government bond yields have turned negative, most investors are looking for better returns. Marketplace platforms have thrived as the banking sector weathered regulations and the withering effects of a cold, almost unforgivingly grim economic climate. Marketplace lending platforms offer better returns than traditional banks right now, and they’re attracting investors like ants to a picnic.

    Institutional Investors in Marketplace LendingSource: Desk Research

    They’re a pretty good deal for both sides of the table too.

    By allowing lenders to bid competitively, borrowers end up with the lowest interest rates possible. P2P lending platforms are perfect for underserved customers that wouldn’t usually get a decent line of credit from a bank, allowing entrepreneurs and small businesses (that are otherwise deemed too risky) easy access to loans, flexible terms, and low interest rates.

    Marketplace lending grew exponentially in the US, the UK, and China due to growing demand for consumer credit, property loans, and SME finance.  These platforms have grown rapidly through the adoption of new technology such as big data analytics, expanding their loan product offerings, and running off the cloud with minimal overhead.

    According to industry experts, the global online lending market is projected to reach $290 billion by 2020.  

    Despite its strong growth however, marketplace lending is still a fledgling sector as compared to traditional bank lending. Growth will be driven by the US and the UK, primarily because digital infrastructure in most other countries still has some catching up to do. If online lending platforms want to be the future of banking, they’ll need to iron out a few kinks before they’re really a force to reckon with.

    Problem #1 — Inherent Risks from Credit Rating Approach

    Marketplace platforms generate revenue from loan origination fees (1–4% of the loan amount) and servicing fees. Such platforms do not face direct credit risks, as they do not hold loans or retain interest like banks. Investors are still vulnerable however, at risk from the numerous credit rating approaches that different lending platforms follow.

    Right now, marketplace platforms incorporate credit scoring models using data on social media connections, ratings from business directories, education, employment, income, and license.  Moreover, these credit scoring models have been in play in an overall low-interest environment, which means they’ve still to prove themselves in a serious market stress-test. Investors in marketplace platforms should definitely look into the credit rating risks associated with their loans.


    Solution — Follow a Standardized Credit Rating Approach

    Marketplace lending platforms could improve credit risk management using data-driven algorithms and advanced analytics to evaluate their borrowers’ risk profiles. While assessing credit risks using social data, marketplace lending platforms could also integrate credit assessment practices followed by private lending institutions.  Moreover, companies offering online credit scores, such as TypeScore, Aire, VantageScore, and Zestfinance, could provide improved credit risk models and risk analytics to lending platforms. A standardized credit rating system and timely scrutiny of the credit scoring approach used can play a critical role in protecting investors’ interests.

    Problem #2 — Reputational Risk and Vulnerability Issues

    A recent debacle at LendingClub forced its CEO Reynaud Laplanche to resign after he failed to disclose an investment in one of LendingClub’s customers, leading to a steep decline in the company’s share value. LendingClub’s post-IPO stock performance has been weak since, with stocks falling sharply to $5 levels.

    Investor enthusiasm can easily decline due to slower than expected growth and such governance issues. The diminishing value of such platforms poses a significant challenge to the reputation of marketplace lending as a whole, raising concerns about further investors and growth momentum.


    Solution — Build a Sterling Reputation and Attract Private Investors

    A greater number of private funds and investment trusts would allow more investors to access the marketplace lending market in an environment where banks are reducing lending.

    To sustain growth, marketplace lending platforms need to establish a reputation for managing risks, securing a stable flow of funds from investment trusts and other sources.

    Problem #3 — Volatile Market Expectations

    Borrowers certainly benefit from the transparency that marketplace platforms provide in terms of fees and charges. That could all change however. Growing economic uncertainty and investors’ push for profitability could affect transparency and spike interest rates. RateSetter recently increased its expected losses by about 24.4% due to economic uncertainty. A rise in defaults from borrowers or higher interest rates could severely damage lending platforms.


    Solution — Target New Customer and Loan Segments

    Marketplace lending has, thus far, focused primarily on unsecured consumer credit, SMEs, and real estate. Roping in a more diverse clientele could mitigate the overall risks, allowing P2P lending platforms to grow unabated. SoFi started focusing on student loans last year, quickly becoming the largest provider of student loan refinancing. Similarly, other platforms need to adopt a strategy that expands services to more diversified customer segments.

    Marketplace lending could also branch out into other consumer loan segments, such as e-commerce, digital electronics, and automotive finance. Although marketplace lending is limited to US and UK customers right now, with time and technology, these platforms could expand services to untapped regions such as Europe and developed Asia.

    Problem #4 — Federal Regulation Could Ruin Investor Appetite

    The lower cost of borrowing has been a big lure for P2P lending, and it’s grown faster than anyone bargained for over the last couple of years.  Marketplace lending platforms witnessed stellar growth as they attracted large private investors amid expectations of low market returns, with institutional investors such as venture funds, private equity funds, and other investment funds investing in these platforms.

    Any change in the US Fed policy on interest rates could seriously curb investment flows to marketplace platforms however. Most funds currently lending to the sector would shift their investments to other financial instruments for better returns.


    Solution — Overcome Regulatory Barriers in Marketplace Lending

    As certain lending segments scale up, regulators are likely to undertake high-level scrutiny and enforce tighter regulations.

    An autonomous regulatory oversight should be in place, with an emphasis on fair lending activities and effectively managed operations that safeguard the interests of stakeholders. To effectively prepare for regulatory scrutiny, lending platforms should collaborate and establish a set of “industry best practices” autonomously, in good faith. Major marketplace platform associations such as P2PFA and the Marketplace Lending Association are capable of promoting good governance and operating standards. These associations have the potential to foster innovation while creating a healthy environment for lending platforms.

    Problem #5 — Participating Investment Trusts and Funds Could Complexify the Marketplace

    Investment trusts and closed-end funds are a big source of capital for marketplace lending platforms. These funds provide low-cost and short-duration access to investors, providing them better yields across multiple platforms. Major investment trusts listed on the London Stock Exchange include P2P Global Investments (£725 Million), VPC Specialty Lending (£308 Million), Ranger Direct Lending (£153 Million), and GLI Alternative Finance (£95 Million). Private funds such as Rozes Invest, Ranger Specialty Income, and Van Eck Overland also offer lucrative investment opportunities. Moreover, platforms such as Funding Circle launched a ‘P2P Investment Trust’ to focus on SME loans in the US and Europe.

    These different investment vehicles carry their own intrinsic hazards of liquidity and market risks.


    Solution — Implement Fail-safe Mechanisms

    Marketplace lending platforms currently endure minimal regulatory supervision. While regulation could possibly deter marketplace lending and shift focus on margins rather than growth, some agreed-upon standard risk management protocols in the industry will be essential for these platforms to thrive. Further, marketplace platforms should keep a track of investment flows and maintain sufficient buffer to defend against market risk.    



    Constant innovation and an agile ability to engage the next generation of digital customers is an obvious evolution of banking and finance as we know it.

    If they can reliably offer new and better products and services, marketplace lending platforms could be an integral wing in the future of FinTech.

  10. Taking Indian Carriers International - Relaxing the 5/20 Rule

    The Indian travel and tourism industry has witnessed sustained growth in the volume of both inbound and outbound

      to read | words

    The Indian travel and tourism industry has witnessed sustained growth in the volume of both inbound and outbound international traffic.

    International traffic handled by Indian carriers increased by 12.0% y/y (17mn) over 2015. Foreign carriers witnessed a similar trend, with international traffic growing by 15.4% y/y (32mn) over 2015. While traffic has increased, Indian carriers cater to a relatively small percentage of the overall international traffic in and out of India.

    International Travel - trends

    This trend is indicative of the Indian airline industry’s inability to capitalize on growing traffic volumes, as they’re constrained by the Indian government’s 5/20 rule for the industry. According to this rule, an Indian airline can fly passengers to international destinations or vice-versa only if they:

    • Have been running domestic routes for a period not less than five years
    • Have a fleet size of not less than 20 aircraft

    Some private players in India fail to meet one or both of these criteria.

    Major Indian Private Airlines

    Airline Name Year When Operations Began Years Since Operations Began Fleet Size
    Indigo 2006 10 101 (+ 14 On Order/Planned)
    SpiceJet 2005 11 42
    Jet Airways 1993 23 95
    Go Air 2005 11 19 (+ 1 On Order/Planned)
    AirAsia India 2014 2 6
    Vistara 2015 1 9

    The Government’s New Proposal

    While the Ministry of Civil Aviation has hinted at changing the rule, there is still some ambiguity about what the change entails and how it’ll be brought about.

    According to ministry sources, the draft being debated by the ministry includes pointers related to the utilization of credits earned by airlines. For example, an airline would require 300 Domestic Flying Credits (DFC) before commencing flights to SAARC countries and countries with territories located beyond a 5,000 km radius from New Delhi. For locations other than that, airlines would need to accumulate 600 DFC before commencing flights. An aircraft can earn 30-35 credits a year by following the route dispersal guidelines. So, an airline with a fleet of 10 aircrafts could take a year before it becomes eligible to offer international flights.

    The proposal indications also suggest that all domestic airlines would need to earn at least 300 DFCs per annum after commencing international operations in order to retain their international flying status.

    It still remains to be seen whether the 5/20 rule is modified or tweaked to say 3/10, 0/10, or even 0/20.

    What Could Change if the 5/20 Rule is Modified?

    We believe the rationale behind these changes is clearly to prop the Indian airline industry, which has grappled with diminishing profitability on account of greater competition, low load factors, and increasing fuel expenses.

    We see the following implications if and when such favorable changes come into play:

    • Ease of Doing Business - The new mandate would be a shot in the arm for new airlines such as Air Asia & Vistara, who could fly on international routes and leverage growing traffic and load factors.
    • Regional Connectivity - An indirect consequence of the loose reins could be greater regional connectivity. Airlines flying to remote destinations may spur better airport infrastructure at intermittent stopover locations.
    • Lower Fares - A growing number of airlines flying to international destinations would certainly mean competitive pricing. That could make air travel a viable option for travelers who’d otherwise consider flying to domestic destinations an expensive indulgence.
  1. Plastics Reshaping Wearable Medical Devices

    Metals and ceramics are prevalent in the medical industry. However, the unique properties of polymeric materials and their

      to read | words

    Metals and ceramics are prevalent in the medical industry. However, the unique properties of polymeric materials and their blends exhibit potential as better replacements for conventional materials.

    Developments in medical technology have increased the demand for advanced materials and their use in various applications in the medical industry in everything from packaging liquids and solids to replacing biological structures in humans. Key drivers for increased demand for medical devices include growing and aging population, advanced medical procedures involving electronics and complicated/contagious diseases.

    Here are some of the prominent areas for the application of plastic materials in medicine:

    • General Medical Supplies: bandages, gloves, blood bags, catheters, syringes, IV kits and tubing.
    • Diagnostic and Surgical Equipment: MRI machines, ECG monitors, and surgical equipment.
    • ENT: hearing aids.
    • Orthopedics: Prosthesis for joints such as shoulder, elbow, hip, knee have seen substantial adoption.
    • Drug Delivery Systems: As the name suggests this includes implants which can deliver drugs to the determined target. This has recently seen keen interest with demand towards the controlled release of drugs into the body.
    • Dental: Teeth and gums are prone to decay/destruction by bacteria. In such cases, dental implants are useful.
    • Cardiovascular Applications: Valves and arteries tend to loose shape or get blocked due to fat deposits or other reasons. Replacement or unblocking devices can be incorporated to treat the affected areas.

    Other applications such as intraocular lenses can be used to treat disability related to eyes.

    Why Plastics?

    Various materials cater to the medical devices industry. These include metals, composites, and polymers. Early implementation of medical devices for treating humans included materials such as metals and ceramics. 

    Here are some of the materials and their applications in the medical industry:


    Stainless Steel

    Stents, Surgical Instruments.

    Titanium and its alloys

    Joint/bone replacements, dental implants, orthodontic wires, stents and pacemakers.


    Joint replacements, dental implants.                                     


    Dental restoration.


    Joint replacement, bags, bandages, sutures, prosthesis, soft tissue replacements, drug-delivery systems, blood contacting devices, tubing, and dental implants.

    Metals and ceramics are prevalent in the medical industry; however, the unique properties of polymeric materials and their blends exhibit potential as better replacements for conventional materials.

    Below is a qualitative comparison between various materials used in the industry:Plastics in Medicals

    Key Properties that are Essential in Medical Devices

    Properties Essential for Medical Devices

    Evolution of Plastics in Medical Applications

    Polymeric systems find applications in a variety of segments, and they're potential replacements for other materials due to their unique properties. For example, metal catheters, which were commonly used since the early 18th century were replaced by disposable catheters in the 1940s. 

    Here's an illustration of how various polymeric materials have been used in medical applications over the past century:

    Evolution of Polymers in Medical Applications

    Note: Above chart depicts a high-level trend of polymers in medical applications

    Materials prevalent here include:

    PMMA: Poly methyl methacrylate 

    PDMS: Polydimethylsiloxane 

    PTFE: Polytetrafluoroethylene/Teflon                       

    PEG: Polyethylene glycol 

    EVA: Ethylene vinyl acetate 

    PBT: Polybutylene terephthalate

    PE: Polyethylene 

    PA: Polyamide/Nylon 

    PU: Polyurethane 

    PVC: Polyvinyl Chloride 

    PC: Polycarbonate 

    FR-PS/PEEK: Fiber reinforced – polystyrene or Polyether ether ketone

    Technology Emphasis — Wearable Medical Devices

    Recent developments in the smart devices enabled bio-medical devices resulted in improved convenience to the consumers/patients. This has led to remote/active diagnosis, therapeutics, and indication. Chronic conditions such as heart failure may cause immediate death; this is mainly due to lack/failure of detecting/analyzing the symptoms. Heart disease per say is a progressive disease. Symptoms of potential heart failure are:

    • Fatigue
    • Swelling
    • Shoulder pain, and
    • Abnormal heart rates

    To analyze these conditions visiting a diagnostic center is essential. But, thanks to smart wearable devices, technology grew to a stage where the simplest of temperature/heartbeat could be tested till active drug administration or recommending therapies.

    Similar products are already available in the market. Beside is an illustration of LifeVest wearable defibrillator by Zoll technologies. This wearable device not only monitors patterns of cardiac conditions, but it also delivers a shock treatment to restore normal heart rates.

    Similar technologies are being researched for diagnosing/treating various fitness/medical parameters including:

    • Heart rate
    • BMI calculator
    • Arthritis
    • Sensing aids
    • Pain management
    • Temperature
    • Body posture
    • Glucose monitoring, and
    • Digestion monitoring

    Various polymeric materials contribute to the useful and inexpensive wearable devices.  Here’s an indicative list of polymers used in wearable medical devices:

    • Polyurethane: Elastomeric/foam made wearable devices.
    • Adhesives (Hydrocolloid polymer, epoxy, polyurethane, acrylic): Adhesives for sticking patches.
    • Polydimethylsiloxane: Flexible materials where transparency and energy conservation is essential.
    • Polyimides/Polyesters: Structural materials where films, non-woven or textiles, used in flexible electronics for example.
    • Polypyrrole/polythiopene/Polyaniline: Conducting polymers replacing metals.
    • Single-walled nanotubes: Electronic skin.
    • Cationic self-assembled polymers: Impact measurement and drug delivery systems.
    • Polyethylene glycol gel: Addition of colorants can be used as visual indicators in objects such as diapers.

    Other structural polymers include commodity/engineering polymers, such as:

    • Polyethylene
    • Polypropylene
    • Polycarbonate
    • Polyamides
    • Polyvinyl Chloride
    • Polyvinyl Alcohol
    • Polyesters, and
    • Polyamides

    Notable material suppliers include:

    • DuPont: PE872, PE772, PE410, PE773
    • BASF: HyGentic®, Ultraform®
    • Dow Chemicals: Health+, ASPUN, DOWLEX
    • INEOS: Eltex®
    • Covestro: DUREFLEX , PATILON
    • Bayer: Makroblend®, Makrolon®, Apec®, Texin®
    • Henkel: Loctite®, Indigo®, Flashcure®, Nuva-Sil®

    The selection of material also depends on the class of medical application, such as:

    • Permanent implantation
    • Temporary implantation
    • Minimal contact with human tissues or fluids


    Use of Polymers in Various Wearable Medical Devices

    • Companies such as BlackBox Biometrics have developed wearable concussion sensors, which include a printed circuit board covered with plastics/polymers. This sensor is primarily used for measuring traumatic brain injuries of athletes and soldiers.
    • Advanced innovative products such as Vitaliti™ are used to monitor more than 15 medical conditions. Vitaliti has been developed by CloudDx. To create such lightweight and safe devices, various polymers are used in components such as body and circuits.
    • MIT has developed a cross-linkable silicone-based polymer that can be applied to skin as a cream and is cured via a catalyst liquid. The polymer forms an artificial layer over the skin and can be used for both therapeutic and cosmetic applications.
    • Soft-sensing suits are being made from nylon strips, such as Ecoflex® rubbers, which contain sensors made from flexible circuits. This suit can be used to monitor hip, knee, and ankle sagittal plane joint angles.
    • Wearable patches/pods are already available in the market and are extensively used for drug delivery in treating conditions such as diabetes, tobacco abuse, and hormonal imbalance. Insulet Corp is a key manufacturer of wearable patches.
    • The US FDA has approved wrist bands such as Pulsewave®, which provides real-time non-invasive readings, including heart rate, blood pressure, and respiration rates. These devices use conductive elastic polymers, such as polydimethylsiloxane, and other elastomers.
    • Extensive research studies are being carried out for monitoring joints. These studies include monitoring of knee angle and pain sensors for active monitoring. Such devices are either worn as a patch or embedded in a strap made from materials such as nylon.
    • Footwear and clothing applications include monitoring strain and compression patterns. These products are made of materials such as polyurethane, polydiacetylene, and other electrospun polymers.
    • Color-changing compositions are being used in diapers and medical dressings; compositions that change color when they come in contact human liquids or blood. Polymer/ co-polymers of olefin-based materials are used in these products.
    • Adhesives/sealants play a crucial role in holding medical components near the human body. Gentle adhesives, such as MEDIFIX Solutions™, HydroSoft™ adhesive, and AR SoftWear™, are available in market.


    Applications of plastics/polymers have gained importance over the past in various applications due to their unique properties. Polymeric materials when combined with unique sensing/detecting properties of electronics can be used in advanced applications such as wearable medical devices. Research has progressed in using polymers in both structural and functional roles. These devices can be used to diagnose, treat, indicate and perform remote monitoring. With increased research focus towards wearable medical devices, it is interesting to observe the latest developments in functional materials.




    This post first appeared on .

  2. 3D Printing of Human Organs — Future Perspective & IP Scenario

    Thousands of patients are waiting for a lifesaving transplant today. Some of these are critical cases, and mortality

      to read | words

    Thousands of patients are waiting for a lifesaving transplant today. Some of these are critical cases, and mortality in those patients is high due to a dearth of suitable donors.

    3D-Printed organs may emerge as a life-saver for such patients.

    A science writer and journalist, Jenny Morber, had shared a moving story in her blog about a three-year old boy’s ordeal to get a new heart. This was about eight years ago, when Troupe Trice was diagnosed with a rare and life-threatening condition where the heart is unable to relax between heartbeats. With no cure and very few treatments for restrictive cardiomyopathy, Troupe had to go for heart transplant. But that’s where his nightmare didn’t end.

    The Trice family had to wait for two agonizing months to get a new heart. And, within a month, Troupe’s heart began malfunctioning, asking for emergency surgery for its replacement. Troupe survived with the second organ transplant. But by the time he celebrated his tenth birthday, his parents had to experience such harrowing time all over again with their younger child Henry suffering from the same disease. Thankfully, Henry also received his match quickly. Not every child is as lucky, though. The United Network for Organ Sharing (UNOS) states that an average wait for a child’s heart is about six months. And, the average wait time for a child of Henry’s size is about a year.

    As per the UNOS, over 120,700 people are awaiting lifesaving organ transplants in the US, of which over 77,000 are active wait-list candidates. The mortality rate among such patients is quite high primarily due to non-availability of suitable donors. Morber’s blog quotes Howard Nathan, the president and CEO of an NGO called Gift of Life, stating that about 2.4 million people die in the United States every year. The problem of delay is pretty straightforward – currently only a human body can grow a complex human organ. Creating usable large complex organs within animals haven’t been as successful. This translates to one simple fact—many patients may never receive a match.

    And those who successfully receive organs, along with their families, usually bear guilt and grief on benefiting from someone else’s pain. This makes the exercise more emotionally complex and taxing. Here, 3D printing in healthcare is fast appearing as a plausible option and quite a promising idea. 3D printing in the healthcare segment recorded robust sales in last couple of years, and is projected to expand at a CAGR of 19% to exceed $1.8 billion by 2020.

    3D printing definitely has a potential to stem the rising metrics of unfulfilled demand for organs. But it may also fuel regulatory and patenting concerns in addition to several other challenges.

    In this article, we’ll understand the development and current state of the 3D organ printing technology, and decipher the commercialization scenarios for the market segments, applications and materials to be used. We’d also talk about the major technology sub-segments, and discuss potential hurdles in safeguarding the 3D printing technology.

    Development and Current State of 3D Printed Organ Technology

    3D printing is the process of making three dimensional objects from digital files; it includes creating a virtual 3D model that’s transferred to a printing device which creates "image slices" by depositing successive layers of materials in order to create a desired structure.

    3D printing has been used in various industries to create customized and on-demand components, healthcare being a rapidly growing application area.

    3D printing of organs (also known as bio-printing) is a process of creating scaffolds, human tissue, and organs in controlled environments by layered deposition of materials. It also comprises of broader variations such as the functionalization of organs with living cells, grafting of tissue, and processes to create such systems.

    Bio-printing is currently used for research, drug development & testing, and organ transplant purposes.

    The overall principle of bio-printing is similar to generic 3D printing technology, except for modifications to the ink used and post-deposition functionalization of the 3D printed tissue.

    Commercialization Scenario – Market & Technology Sub-segments

    The technology required for bio-printing can be broadly classified as follows:

    • Software Components
      Used to scan a target object and convert it into a computer model, and ultimately, into a blueprint.
    • 3D Printing Equipment
      Which are mechanical/hardware components used to store and deposit ink on the printing platform through sequential layers in order to form a desired solid structure or scaffold. It further includes the equipment required for post-processing, such as solidification and incubation of organs.
    • Biomaterials
      Used as the ink to deposit and create your desired structure, it may or may not comprise of living cells at the time of printing.
      Biomaterials can be further divided (based on printing approach) into:
      • Scaffold-based structures
      • Scaffold-free (direct) structures

      Scaffold-based structures are functionalized with cells during post-processing steps, whereas in direct printing, live cells are deposited onto a platform to give desired functionality.

    Similarly, the bio-printing market can be broadly classified as follows:

    • Printing Methods: Such as magnetic levitation, inkjet, laser, and syringe based methods.
    • Applications: Such as medical, dental, biosensors, consumer/personal product testing, and food and animal product bio-printing.
    • Medical Sub Segments: Such as tissue and organ generation, medical pills, prosthetics and implants printing.

    Geographic Market Share and Major Players

    The global 3D printing market is expected to reach US$8.6 billion by 2020, whereas the healthcare segment is projected to reach US$1.2 billion with a CAGR of 19%.

    The healthcare and aerospace sectors will be major proponents of this progress.

    Global 3D Printing Market

    The US holds around 40% of the healthcare 3D market, followed by Europe.

    Asia-Pacific’s (APAC’s) market is relatively small at this stage, but expected to grow at higher pace than the American market in the near future due to growing demand, lower costs, and government policies.

    3D Systems and Stratasys are major market players in healthcare 3D printing.

    Other market players include Digilab, EnvisionTEC, Invetech, MicroFab Technologies, nScrypt and TeVido BioDevices.

    Healthcare product segments encompass implants (including dental), surgical guides, hearing aids, and tissue engineered 3D printed organs. However, implants occupy the largest share of the market currently, and tissue engineered application will grow at highest CAGR of 26% over forecast period.

    Recently, researchers have successfully demonstrated the advantage and feasibility of 3D printed organs in clinical case studies to treat congenital cardiac and ear defects as well as in skin grafting for burn patients.

    Over 120,700 people are registered for lifesaving transplants according to the United Network for Organ Sharing organization’s estimates. Mortality is high among those patients due to incompatibility with donors as a result of underlying elements. Bio-printed tissue and engineered organs may emerge as a promising option for such patients. Although this technology has the potential to address current needs, it may raise ethical and patenting issues along with other challenges.

    Tissue and Organ Regeneration Applications

    Research in this area has been growing, as evident from the following graph:

    Research Trends in Bio-printing

    These include areas such as:

    • Blood Vessel Regeneration
      Lawrence Livermore National Lab has created functional 3D-printed blood vessels by combining biomaterial with living cells. These scaffolds help small blood vessels to develop on their own.
    • Dental Implants and Artificial Enamel
      Printed using ceramic materials with precursor amyloblastic cells.
    • Pancreatic Tissue
      The University of Virginia bioengineering lab has successfully printed artificial pancreatic tissue, which could help to find cures for chronic diabetic patients. Researchers also hope to fabricate muscle tissue that can be used to treat craniofacial defects such as cleft palates.
    • Skeletal Reconstruction
      EpiBone, a biomedical startup, has demonstrated the successful bio-printing of bone tissue, which can be used for skeletal reconstruction.
    • Cartilage Fabrication
      Scientists from Texas Technical University are currently developing a 3D printed cartilage tissue that could replace commonly torn or injured knee meniscus.
    • Skin Imprinting
      Organovo and L’Oreal have collaborated in the development of advanced cell technology for growing artificial skin. This is done under laboratory conditions using Organovo’s NovoGen bioprinter. A recent tie up between BASF and Poietis is focusing on a bioactive material called Mimeskin that’s used to test cosmetics and skin care applications.
    • Neural Tissue Regeneration
      University of Melbourne researchers have grown cortical tissue from stem cells to treat neural disease such as schizophrenia and autism.
    • Liver Tissue Printing
      Indian researchers and Organovo are working on a technology to produce artificial liver tissue in labs using a 3D printed matrix loaded with hydrogel comprising of glucose, proteins, and living cells.
    • Eyelids
      Researchers from the University of Pennsylvania have experimented with small plastic chips that have defined microfluidic channels which act as scaffolds and stimulate human cell growth, aiming to construct artificial eyelids; this approach is termed as ‘Eye-on-a-chip’ technology.

    Major Technologies Used in 3D Printing Living Tissue

    • Stereolithography
    • Selective laser sintering
    • Electron beam melting
    • Fused deposition modeling
    • Laminated object manufacturing

    Commonly Used Methods & Materials

    Standard 3D printing equipment uses laser techniques such as selective laser sintering and its offshoots, electron beam melting, fused deposition modeling, laminated object manufacturing, and stereolithography processes to deposit the material on a printing platform in order to form solid structures. But when it comes to printing 3D human organs, techniques such as inkjet printing, pressure-assisted bio-printing, laser bio-printing, solenoid valve-based printing and acoustic-based printing techniques are used.

    “Material” constitutes the ink portion of the bio-printing process. Materials used for printing are either powder type, gel-based biomaterials, or photocurable materials based on the organ requirement, which may or may not contain live cells. The commonly used materials for 3D printing of healthcare products are plastics, metals, ceramics, donor cells, bone cement, biomaterials, and so on.

    Plastic materials are more commonly used due to their low cost and ease of manufacturing. Ceramics are a close second, but use of other cell-based materials ought to increase in the future.

    IP Scenario in 3D Printing Human Organs

    Major 3D Printing Technology Sub-segments

    3D printing of human organs comprises the printing equipment, printing materials, design and modeling software, as well as services and/or processes to manufacture functional materials. Each component, needless to say, comes with its own unique IP perspectives and challenges.

    3D Printing Software

    3D organ printing involves complex steps to handle living materials — before they’re deposited on a printing platform, and beyond deposition — in order to stimulate the functioning of living cells in physiological manners.

    These complex processes require stringent parametric control, which involves regulating factors such as temperature, pH, wetness as well as oxygenation and nutrient concentrations. Creation, storage and deposition require precision during processing as well, which chiefly involves condition-based algorithms. Such control algorithms are protectable by patents or copyrights.

    Copyright protection covers source code from proprietary applications and programming, but provides competitors the freedom to develop equivalent software by using independently formulated coding techniques.

    Patents on the other hand, protect the functionality of printing equipment and the sequential execution schema of working. It covers specific settings and working conditions that require specific chemical reaction parameters in order to perform the deposition steps in their broader sense.

    Similarly, software for creating 3D models from scanned images can also be considered as protected IP. The current US patent regime affords protection to such software and computer programs, whereas a few jurisdictions allow such patents if the software in question meets certain innovation criteria.

    Software algorithms used to create live tissue/cells required for 3D printing involve steps such as harvesting live cells, storage subject to specific parameters, and processing to accelerate their functionality as natural cells. Such recipes definitely have complex thought processes invested in them, and it includes non-obvious technical contributions and implementations to solve particular problems as well. This makes them patentable in most jurisdictions including the US and EP.

    3D Printing Equipment

    The functional components of a typical 3D printer include hardware and embedded software components that perform sequential tasks in order to deposit layers on a printing platform.

    Hardware here comprises of scanners that scan the topographical details of a target organ, reservoirs to store the bio-ink material, and extruders that spray the printing material in precise patterns. These components have been patentable inventions for years, but new modifications in existing systems for cell printing require capabilities such as creation, storage, processing, and preservation of live cells before they are deposited.

    The creation and operation of these hardware components require complex intellectual expertise, and ingenuity, which is patentable under current US and most international patent regimes.

    3D Printing Materials

    The materials used for 3D printing of organs differ for scaffold and direct print approach.

    In the scaffold approach, a machine does not print live cells in order to create a human organ. It first creates a support structure for implanting functioning cells using the 3D printing process. Subsequently, live cultured cells are adsorbed on the surface of the scaffold using various proteins that render the organ functional once cells divide and form tissue, soon followed by the formative scaffold’s degradation.

    Current provisions support patents for non-living material compositions for plastic, ceramic and metals without any cell components in it, non-living material deposition techniques, as well as methods for synthesizing those materials.

    Living cells as they appear in their natural environment cannot be patented. Neither can arrangements of living cells, cultured natural cells, or incubated tissue materials. Man-made cellular materials or sub-components that require human intervention or alterations to produce however, can be patented.

    Another approach for direct printing with live cells involves incubating naturally occurring cells in reservoirs and depositing them on a print surface in order to product functional tissue. This process cannot be patented however, as there’s nothing particularly inventive about it, and it doesn’t meet the basic criteria of novelty.

    Possible Hurdles and Current School of Thought in Protecting 3D Printed Organ Technology

    Patenting human organs is prohibited under section 101 of US patent law in order to prevent monopolization of something that occurs naturally.

    While there are changes afoot due to the advent of tissue engineering that have added exceptions and limitations to current patent laws, the US patent court strictly prohibits any intellectual protection on natural human body parts.

    Even the America Invents Act prohibits claims around the “human organism”, which basically restricts any patents towards naturally occurring tissue, organs, and the body. By this definition, bioengineered tissue and cells are still human organisms; they’ve originated from human stem cells and perform the same functions that naturally occurring cells would (e.g. bioengineered beta cells of pancreas will secrete insulin peptide similar to a naturally-occurring peptide). Further, similarity in the end product and functions may render them non-patentable.

    There are others who view genetically engineered and human modified organisms and tissues as “man-made” and different from naturally occurring cells, and therefore, they can be patented.

    Tissue engineered cells that are modified — and discernibly different from natural cells — can be patented under this assumption if they contain any human intellectual intervention, as established during the Diamond vs Chakraborty case.

    In such a scenario, 3D printed organs are produced by harvesting stem cells and processing/growing them under specific conditions, and in addition, printing on a customized surface — activities that clearly require human/manual intervention —thus making 3D printed organs patentable.

    Considering this aspect of bio-printing technology, current patent systems need to be more cohesive in order to address this ambiguity and prevent future issues.

    Key Patent Assignees and Their IP Coverage

    Patent protection for 3D printing technology has begun in early 1980s, but significant patent activity was witnessed during the late 80’s when 3D systems adopted aggressive strategy to cover stereolithographic techniques and 3D object construction using film layers.

    Patent filing increased thereafter due to technological advancements and the entry of new players such as Materialise, Stratasys and Microtec, who explored medical model construction and deposition techniques.

    The following graph indicates patent filing trends over the past three decades:

    3D Printing Patent Filing Trends_Article_3D Printing of Human Organs

    The key IP players in 3D printing technology are 3D Systems, Stratasys, Microtec and Materialise, which provide the required 3D modeling software and material extruding assemblies to print 3D models.

    In addition to Materialise and Stratasys, Voxeljet, EnvisionTEC (among others) hold key IP in the bio-printing domain, as evident in the following graphs:

    Key Patent Assignees in 3D Printing_Article_3D Printing of Human Organs

    • Stratasys
      Its portfolio primarily comprises of the hardware components that make up 3D printing systems, along with materials and other accessories required in bio-printing. They include electrophotography based systems, polymer extrusion assembly, and liquefiers. Recent patent filings cover concepts in electrophotography-based additive manufacturing, selective sintering techniques, and cross-layer patterning methods.
    • Materialise
      Its portfolio primarily comprises of design and construction methods for 3D models. These include image acquisition, processing and 3D prototyping algorithms/software. The company’s focus has been primarily on rapid prototype printing techniques, in particular for prosthetic devices, and surgical equipment meant for orthopedic and dental applications.
    • Voxeljet
      Its portfolio primarily comprises of devices and methods for multi-step printing, binder materials, atomized material transfer to layered assemblies, and self-hardening materials.

    The patent portfolio of niche players such as Organovo is predominantly focused on 3D construct printing. Luxexcel is focusing on printing optical structures, while MakerBot’s focus is on replicators, scanners, and printing accessories. Ingo Ederer, William Swanson, and Samuel Batchelder are key inventors in the bio-printing technology space.

    Although North America is currently leading market for the bio-printed devices, Europe and the Asia-Pacific region are predicted to grow at higher CAGR in future.

    Most companies have adopted a strategy to protect their IP in the US jurisdiction, considering its predominant market attraction and revenue share.

    Contrary to that, IP protection in other jurisdictions is weaker due to the nascent stage of the technology, lower market shares, and a dilemma about the defensibility of IP in 3D printed organs.

    The following graph depicts the jurisdictional coverage (in %) for INPADOC patent families:

    Geographic Bio-printing IP Coverage_Article_3D Printing of Human Organs

    Future Prospects, Conclusions, and Remarks

    Organ failure mortality is among the most preventable causes of death, and it could be addressed using artificial organs printed using 3D printing technology. Current research has successfully demonstrated the benefits and feasibility of this technology in clinical settings on a long-term basis to treat cardiac, ear, and skin defects.

    Bio-printing involves the process of creating the scaffold, then forming human tissue and organs through layer-by-layer deposition of living or non-living materials. Although this technology has the potential to address current needs, it may raise ethical and patenting issues along with other challenges.

    The key components of a typical bio-printing machine include software, hardware, methods/processes, and the materials used in formulating the object’s layers. From an IP standpoint, the algorithms for creating 3D models from scanned bio images and creating live tissue/cells required for 3D printing will definitely require complex thought processes. It includes non-obvious technical contributions and implementations to solve specific problems, and hence, makes them patentable in most jurisdictions including the US and EP.

    The hardware components required for depositing and the post-processing of scaffolds and solid organs require complex intellectual expertise to build and operate. It goes well beyond the mere arrangement of a naturally available subject (in this case, living cells) as it occurs. This makes them patentable not only in the US, but also among most international patent regimes.

    Non-living material compositions as well as methods for their synthesis and deposition can be patented under current patent systems.

    Living cells as they appear in their natural environment cannot be patented; neither can the mere arrangement of living cells, cultured natural cells, or incubated tissue materials.

    Man-made cellular materials or subcomponents that require human intervention or alterations to produce however, can be patented.

    Thus, if bio-printing of human organs involves human intervention and manual processes (such as harvesting stem cells, processing/culturing them under specific conditions, building human tissue/organs layer-by-layer) then they can, and will be, patented.

  3. The Cisco-BlackBerry Deal – 9 Months On, Who Gained More?

    On June 23, the cross-licensing deal between Cisco and BlackBerry was announced. The agreement was a no-brainer when one

      to read | words

    On June 23, the cross-licensing deal between Cisco and BlackBerry was announced. The agreement was a no-brainer when one considered the current market position of BlackBerry, and how the Canadian technology giant wanted to make full use of its assets. However, the deal did raise a few eyebrows when one considered that it was only Cisco who would pay a licensing fee to BlackBerry, and not the other way around.

    With the deal now a quarter shy of being a year old, let’s understand who stood to gain more from the deal – Cisco or BlackBerry?

    Cisco, recently, has been struggling on many fronts. Declining revenues, losing market share in major product segments, inability to capture the emerging markets, and many other aspects have contributed to Cisco’s woes. In July, 2015, Cisco had announced that it is selling off its customer-premises equipment business to Paris-based Technicolor. In 2Q15, Cisco’s core switching business saw a 4% year-over year decline in sales, while its datacenter business dropped 3% year-over-year.

    Naturally, Cisco began working long-term revival plans and hinged its growth on the newest fancy in town: Internet of Things. John Chambers, ex- CEO of Cisco, highlighted that the Internet-of-Things movement was going to be Cisco’s trump card and key to revenue growth.

    While considering such requirements for the implementation of IoT, John Chambers had said in 2014, “You’re going to see a brutal, brutal consolidation of the IT industry.”

    To be a leader in the new world of technologies, the companies usually consider industry collaboration a key solution to market challenges. Such collaborations are more essential now because IoT as an ecosystem cannot operate as a single technology or innovation—from communication protocols, to data security, to resource management, to routing algorithms, to information retrieval and much more.

    Cisco has also followed the same path. It is reflected in its recent acquisitions and business strategy. The multi-billion dollar acquisitions of Sourcefire (a network security company), Meraki (cloud-based enterprise company) OpenDNS (cloud-based security company), and more recently Jasper (cloud-based IoT platform provider) suggest how Cisco has been strongly focusing on developing a good IoT ecosystem around its products and services. Although Cisco had done many deals in the past, the company has to continue the streak of strategic alliance till they get to the roots of the IoT implementation.

    Moving along the same path, the Cisco-BlackBerry deal comes to the fray.

    The Deal Recap

    In the early 2000s, the e-mail tagline “Sent via BlackBerry” was a status symbol. However, the company has been struggling now to be in the market. For affecting a turnaround, BlackBerry had been focusing on enterprise business solutions, multi-platform BBM messenger, and QNX software outside mobile space.

    In 2013, BlackBerry had announced that the company was exploring some strategic options to bail it out of its current moribund financial state. The strategic options included joint ventures where possible, partnerships, and outright sale of the company.

    On June 23, the cross-licensing deal between Cisco and BlackBerry was announced. As part of the deal, BlackBerry would receive a license fee from Cisco. This agreement came on the heels of a long period of speculation wherein news was rife that Cisco may acquire BlackBerry.

    The agreement was a no-brainer when one considered the current market position of BlackBerry, and how the Canadian technology giant wanted to make full use of its assets. However, the deal did raise a few eyebrows when one considered that it was only Cisco who would pay a licensing fee to BlackBerry, and not the other way around. In fact, the very concept of a licensing fee in a cross-licensing deal seemed intriguing.

    A Good Deal of Patents

    In the quest to innovate in IoT, Cisco has created a new term – “Fog computing” that refers to extending cloud computing to the edge of an enterprise's network. Cisco had also hosted the world IoT forum, and further plans to invest $1 billion in the Cisco Cloud Services to create global inter-clouds using the OpenStack platform by forging alliances with service providers across the world.

    Cisco had earlier announced its Digital Ceiling Framework for creating smart homes. It also partnered with Cree, a leading LED manufacturer, to implement this framework. Cisco has also teamed up with University of New South Wales (UNSW) for exploring implementation of IoT in agriculture. Further, Cisco has collaborated with SK Telecom to develop new IoT solutions.

    Clearly, in similar run, Cisco would have gained a lot from BlackBerry’s portfolio as it could leverage BlackBerry’s technology expertise to forward its IoT plans.

    In order to understand the synergic advantages for Cisco, we analyzed patent portfolios of both the companies with respect to specific IoT aspects:

    • Modulated data carrier systems including communication protocols (IPC class - H04 29)
    • Device security (IPC class - G06F 21)
    • Access restriction (IPC class - H04W 48)

    Cisco defines security (both cyber and physical) as an integral part of IoT ecosystem. General security in IoT has two basic aspects - protocols related to message/data communication and security of devices, components, and sensors. For a company to establish a strong foot-hold in IoT security domain, it needs good expertise in both data communication protocols and device security technologies. Furthermore, patents disclosing communication protocols that complement device security technologies can be more advantageous.

    Let us breakdown Cisco and BlackBerry’s portfolios with respect to the earlier mentioned technologies.

    Modulated Data Carrier Systems (IPC Class - H04 29)

    Modulated Data Carrier Systems (IPC Class - H04 29)

    Both Cisco and BlackBerry have nearly same number of patents. Though Cisco started researching well-before BlackBerry, from 2006 onwards BlackBerry has filed greater number of patents than Cisco. Patent filing activity of BlackBerry has declined only recently which can be attributed to its poor financial conditions. In the period 2008-2012, BlackBerry has filed almost twice the number of patents filed by Cisco.

    BlackBerry seems to have better patent portfolio (in terms of patents filed in last 7 years). Further, BlackBerry has strong research presence in Europe. Out of 431 patents, 221 patents of BlackBerry have originated in Europe. On the other hand, Cisco has only 13 patents out of Europe. Moreover, BlackBerry has 68 SEPs in this category, whereas Cisco has none.

    Clearly, BlackBerry’s portfolio in this technology can complement Cisco's future IoT plans pretty well.

    Device Security (IPC Class - G06F 21)

    Device Security (IPC Class - G06F 21)

    In case of device security mechanisms such as user identifier, device IDs, public keys and more, Cisco started researching much earlier than BlackBerry. Since 2004, however, BlackBerry has overtaken Cisco and currently holds almost double the number of Cisco patents. Cisco can definitely take advantage of BlackBerry's strong portfolio here. Also, like in the previous case, BlackBerry has 87 EP-originated patents, whereas Cisco has only 6. Further, BlackBerry has 1 SEP here, while Cisco has none.

    It is evident that Cisco can gain significant benefits from BlackBerry in this technology.

    Access Restriction (IPC Class - H04W 48)

    Cisco stands nowhere in the comparison of the patent portfolios for this particular technology. BlackBerry has 285 patents with 96 SEPs, whereas Cisco has only 1 patent here.

    Combination of ‘Device security’ (IPC class - G06F 21) and ‘Modulated data carrier systems including communication protocols’ (IPC class - H04 29)

    Combination of ‘Device security’ (IPC class - G06F 21) and ‘Modulated data carrier systems including communication protocols’ (IPC class - H04 29)

    This is indeed an important aspect, as we are examining patents that overlap in both the categories. These sets of patents are crucial to implement network and device security in IoT or in general.

    Here, BlackBerry leads Cisco by a good margin. In fact, BlackBerry has increased patent filing activity in the recent years. Also, BlackBerry has 32 EP-originated patents in comparison to Cisco’s 1 patent.

    If we look at the security aspect of IoT, it seems evident that BlackBerry’s strong patent portfolio can be of great help to Cisco. In fact, Cisco knows the importance of the IoT security as it has earlier announced its plans to acquire a cloud-based security company, OpenDNS, for $635 million.

    From the portfolio analysis with respect to specific technologies, it can be clearly inferred that Cisco has a lot to gain from BlackBerry’s portfolio. It can use the portfolio to scale up its IoT and network security services and solutions.

    In fact, reports suggest that in recent times Cisco has been able to upgrade its security segment. In the fiscal 2Q16 results, Cisco’s security segment was the biggest contributor in increased product revenue of the company. Moreover, at the recent MWC 2016, Cisco unveiled its new network-functions virtualization (NFV) infrastructure solutions with improved security features.

    Fast-tracking Cisco’s Innovations

    Much evidently, Cisco can use BlackBerry’s broad patent portfolio to enhance its products and services to churn out new product-line in the enterprise technology space.

    • BlackBerry’s telepresence technologies can be a boost to Cisco’s enterprise and social video offerings. Further, Cisco can revamp its flip video camera unit through BlackBerry’s flip digital camera technology. It is noteworthy that in 2011, Cisco had discontinued its flip video camera products.
    • Cisco can leverage BlackBerry’s mobile voice system technology to enhance its voice-over-Wi-fi calling capability. In fact, Cisco has been trying to integrate its Unified Communications services to the mobile space, and it has added voice-over-Wi-Fi capabilities to its existing iPhone app.
    • Cisco can also make use of BlackBerry’s desktop manager technology to create a new multimedia service.
    • Cisco can use BlackBerry’s portfolio in enhancing its enterprise mobility offerings such as – Cisco Bring Your Own Device (BYOD).

    Lesser Litigation Risk From SEPs

    BlackBerry’s patent portfolio includes about 2000 standard-essential patents (SEPs). With both companies working in similar domains off-late, it is of greater advantage to Cisco as it significantly reduces litigation risks from the SEPs. In fact, if one looks at the top patent filers in IoT domain, the emergence of NPEs like Interdigital and ETRI indicates high probability of licensing activities. With BlackBerry’s SEP-rich portfolio by its side, Cisco can mitigate the licensing risks to a great extent.

    Boosting Cisco’s European Expansion Plan

    In the recent times, Cisco has shown a significant interest in the European market. Currently, it is in the process of working on a $500m (£318m) partnership with the UK government, according to reports. Cisco plans to test new products, train technical staff and invest in start-ups in UK. A similar investment is being planned in Germany as well. Further, Cisco recently made a similar $100m investment in France through which it plans to work with the government to train 200,000 people in digital networks in the coming three years.

    Going by these recent developments, evidently Cisco has set its targets for European market and soon we may see new products and services being launched in Europe. Now, to sustain the upcoming products and services, a good European (EP) patent is quintessential. Here, Cisco can leverage BlackBerry’s patent portfolio. If we compare the patent research hubs (origin country of a patent) of both the portfolios, we can see that BlackBerry has much better European stronghold than Cisco.

    Recently, Cisco acquired Portcullis Computer Security, a privately held UK-based consultancy that provides cyber-security services. This indicates that Cisco is planning to expand its services in Europe backed by strong EP patent portfolio.

    Global Patents

    What’s In It For BlackBerry?

    As already stated, BlackBerry has decided not to compete with Apple and Samsung in the smartphone domain, but rather concentrate on the enterprise business solutions. Its CEO John Chen maintains, “You can be an iPhone or Android customer, and also a BlackBerry customer.”

    As BlackBerry ventures more into the mobile enterprise and security markets, Cisco’s patent portfolio can be of help. Cisco, being a pioneer in networking and enterprise solutions, relatively has a good patent portfolio in the domain. BlackBerry can surely leverage the benefits and avoid litigation risks.


    When one compares the synergic advantages that are to be gained by both Cisco and BlackBerry, it is evident that Cisco is the one who is to reap rich dividends off the deal. Although, the deal will also help in BlackBerry’s recovery, implications for BlackBerry are difficult to comprehend. More so, with its vague future strategy roadmap.

    There’s a theory doing the rounds that BlackBerry might have intended to legally threaten Cisco’s products, and therefore Cisco had to pay the required fees. But considering the current state of BlackBerry, it might not risk running into a high-level patent litigation with a big firm like Cisco.

    In our opinion, for Cisco the deal is evidently a huge add-on to its IP resources, which can contribute significantly to its future plans, just as we have analyzed for IoT. Clearly Cisco had more to gain from the deal. Naturally, it ended up paying a licensing fee to BlackBerry.

  4. Four Ways To Get More Out Of Your Patent Landscape Studies

    Simon Sinek, in his TED Talk ‘How Great Leaders Inspire Action’, makes a prudent point. Interestingly, this very poi

      to read | words

    Simon Sinek, in his TED Talk ‘How Great Leaders Inspire Action’, makes a prudent point. Interestingly, this very point makes a significant impact on R&D and IP professionals.

    Sinek proposes an important yet simple three-step process for all strategic decision-making—start by asking ‘Why’ to either determine reasons to exist or challenge the status quo before establishing the ‘How’ and ‘What’ of the plan. Leading organizations, such as Apple, have figured to ask the existential question first before setting out to create products and solutions that eventually find millions of customers worldwide.

    Taking a page out of Sinek’s approach, we believe, R&D and IP professionals can derive far-reaching impact if they approach technology or patent landscape studies from a more strategic perspective..

    Let’s begin by asking why.

    1. Dig Deep

    Every year, R&D and IP professionals commission thousands of patent or technology landscape reports, analysing millions of patents filed or granted over the last few decades.

    The science of analysing and presenting huge volumes of patent data has witnessed considerable innovation over the years including:

    • Software tools to classify patents
    • New ways to present data
    • Introduction of heat maps
    • Hundreds of chart variants
    • Slice-and-dice views that provide a snapshot of the specific technology in question.

    Ironically such elaborate exercises fail to go beyond impressive graphs and pretty charts if they are broad-based, and not spend enough time and effort on figuring out why we need such studies and what we expect to find.

    For example, a few years ago a large multinational company commissioned Aranca to look at the packaging landscape for a specific beverage type. His objective was to study the landscape and find if and where there are significant innovations. The question indeed was quite generic. And, so was the finding; no significant innovation has happened in the domain over the recent years.

    While not finding anything is also a finding, our philosophy is that the more detailed and focused questions we have to research and analyze, the more insightful and fruitful observations and results we can deliver, offering a higher client ROI. For example, one of the queries could have been to observe a wider beverage segment, and figure if an existing idea in that segment seemed relevant and could be adopted in this client’s scenario.

    Hence, it makes a lot of sense to just spend a few minutes to dig deep and ask ‘Why’.

    2. ‘Why’ Matters

    Landscaping reports in many situations are done as a routine exercise at predefined timeframes with ‘we wanted to see what is happening or changing in this domain’ being the raison d'être.

    In a few cases, there may be specific situations like an acquisition or evaluation of a new technology domain that may be the driver for landscape analysis. In either case, ensuring that you can get more of the need-to-know insights rather than the good-to-know trends is where answering the ‘Why am I getting this landscape done’ question is important.

    It is all about getting the objectives or hypothesis right, and here is an illustrative list of ‘Why’ questions that you may consider:

    • What problems are researchers solving? Implications on future product or process design?
    • How exactly are our peers driving competitive advantage through R&D efforts or current patent portfolio?
    • Is technology evolving rapidly in the end-markets or applications that we currently play in?
    • How can we monetize our patents or know how in other technology domains?
    • Where should we focus our R&D efforts in a given domain?
    • What is the quality of our patent portfolio within a given technology domain?

    Here is an example.

    Let’s say you are keen to study the landscape of mobile phone batteries. Here, generally, you would have commissioned a report to study technology patents in the field and determine if your competition has a time to market or technology advantage.

    Once again, generic questions shall yield generic results. Hence, a connecting question is far more important - it’s not about what technology patents exist, but rather their business implications, and whether such research would find a way back into product design.

    Simply put, you should begin with the question, “what is bothering you?

    However, if you are really unsure of the “why”, then begin with a broad-based, basic landscape study. Then, depending on the results, delve deeper for the level two exercise. This works best for emerging areas such as bio-sensors or wearable devices, where the research ecosystem is constantly evolving with multiple industry participants driving research in all directions.

    An easier approach, if you are unsure of the ‘Why’ when you begin, evaluate (for example) patents for the last five years and observe what others have done. This might just tell you what the ‘Why’ is, and help you frame the detailed questions.

    Naturally, it’s pertinent to get the right answer to the “Why”, as it lays the foundation of “how” the research would be planned and executed.

    3. Work The ‘How’

    Typically, executing most patent landscape projects is about defining taxonomies, putting together relevant search strings, compiling patents into a database, classifying patents and generating loads of dashboards and charts. That’s perfectly fine as a scientific process, and works well when you do not have a clear ‘Why’ in mind.

    Now, if you intend to find answers to your question on competitive advantages—as in the earlier example—will the standard process of developing 20 charts on company-wide trends or map of competitor patent filings organized around the taxonomy give you the necessary insights? Probably not!

    This is where the art of using landscaping for a strategic purpose comes in. For instance, the focus of landscape research shifts to observing specific data points, developing an understanding of where a specific competitor is focusing his R&D efforts, product-patent mapping, and most importantly the impact in terms of new product introductions or higher market share.

    With a clear objective in mind, you will have to look at the design of the landscape research process differently from a search, organize, mining and data analysis perspective. Or better still, work with the research partner who knows how to exactly realign the research approaches depending on the specifics of the questions being asked.

    4. ‘So, What?’

    Evidently, Sinek’s framework of ‘Why-How-What’ applies aptly on the patent landscaping research exercises to derive maximum value. However, in our opinion, there’s one critical aspect that would differ from Sinek’s approach. Instead of asking “What”, we should ask, “So, what!.

    Let’s take the same mobile batteries example. Just because your competition may have been working on certain brilliant technology, you need not be worried about it because the technology itself and manufacturing may be so complex that there might be no commercial feasibility.

    We strongly recommend that the moment you hear your competitors have a lot more patents in a particular sub-technology domain—both in terms of the breadth and depth—you need to boldly ask, “So, what?”. Immediately ask your research partner to study whether these patents are helping your competitor derive better advantages, and are they able to use any of these patents in products? If eventually the answer is no and the competitor doesn’t enjoy significant market share, their patents wouldn’t impact the market at all. Here, in such an exercise, we may respond that your competitor may take at least 5 more years to commercialize the patents, or unless production ramps to a million units a day, the battery is going to cost at least $50 to $100 in the market.

    Once you determine how the players in the landscape are deriving advantages through R&D efforts, we recommend, go beyond and deeper than the general scope of patent landscape research. Here, depending on what exactly you want to know, research partners like Aranca can focus on only the relevant patents to determine product-to-patent mapping and market information to effectively answer your questions. And, not waste resources on studying the universe of patents unnecessarily.

    Clearly, it is pretty evident that if we apply Sinek’s approach—albeit with a tweak to the segment of ‘What’ to the patent landscape research, customers can better define tactical and strategic plans for their organization.

    All by articulating your ‘Why’ properly to get the ‘How’ executed well, and determine the ‘So, what’ as your strategic tool to gain the fruitful insights into maximizing your competitive advantage. And while you are at it, don’t forget to thank Sinek for that.

  5. Deodorants and Antiperspirants Market is on the Rise

    A deodorant is a personal hygiene product applied to the body to prevent body odour. Antiperspirant prevents sweating

      to read | words

    A deodorant is a personal hygiene product applied to the body to prevent body odour. Antiperspirant prevents sweating by reducing moisture on the skin where perspiration-causing bacteria thrive. Deodorants and antiperspirants are available in market in different forms such as aerosols or sprays, roll-on sticks and creams. The global market for deodorants and antiperspirants was US$15.59 billion in 2012. The market is expected to grow at a CAGR of 6.2% to US$21.08 billion in 2017. Growth in this market is mainly driven by young population in in growing economies such as India and China, supported by rising consumer income and modernised daily grooming routines.

    As competition is intensifying, most of the companies are launching products having enhanced qualities. Increasing consumer preference for the use of natural products is forcing companies to change their R&D strategies. More than 1,200 patents are filed every year in this segment.

    Consistent Patent Filing Activity in the Last Six Years

    Patent filing has constantly increased from 2009 to 2014, with the highest number of filings reported in 2012.

    Patent Filing Deodrants

    Patent Filing Deodrant - Countries

    China and the US dominate the research space, with approximately 27% and 21% of overall patents filed, respectively, over the last six years. The high number of patent filings in China can be attributed to strong domestic market for personal care owing to the increasing use of hygiene products.

    Top Companies Focus on Different Aspects of Deodorants and Antiperspirants

    In order to tap the lucrative market, several companies such as L’Oréal, Procter & Gamble, Unilever, Colgate Palmolive and Firmenich have entered the segment. In terms of patents filed, L’Oréal leads with 184 patents filed in the last five years, followed by Procter & Gamble.

    Company Number patents filed (2008 onwards) Key Focus Areas
    Loreal 184 Methods for treating human perspiration, and cosmetic products for topical application with antiperspirant properties
    Procter & Gamble Co 173 Personal care products with antiperspirant compositions
    Unilever 153 Skin care products with antiperspirants, and methods for applying compositions such as dispensers for spraying deodorants
    Colgate Palmolive Co 124 Personal care compositions with antiperspirant properties, and apparatus for applying such compositions
    Firmenich 124 Perfume ingredients for use in cosmetic preparations to enhance their properties

    Source: Aranca analysis based on Thomson Innovation Data

    Future Research to Focus on Deodorants and Antiperspirants

    The global deodorant and antiperspirant market comprises a variety of products such as sprays, stick & solid forms, roll-ons, creams, wipes and gels. The global sale in the hair care market was US$16.6 billion in 2013, and is expected to rise with developments in western and BRICS economies. In order to tap this lucrative opportunity of global expansion, companies are working on advanced research and technologies to launch superior products in the market.

    Our analysis shows that future research in this area would focus on the specificity of compositions for the preparation of deodorants and antiperspirants. Some of the specific solutions will include the following:

    • Easily applicable and instantly drying deodorant sprays
    • Compositions having multiple benifits such as moisturizing, skin whitening, and others.
    • Compositions originating from natural and organic sources.
  6. Heat-Resistant Paints Market on Exciting Growth Path

    Heat-resistant paints or coatings are specially manufactured to withstand extremely high temperatures for longer durations. These paints do

      to read | words

    Heat-resistant paints or coatings are specially manufactured to withstand extremely high temperatures for longer durations. These paints do not degrade quickly compared to their normal counterparts and are resistant to high temperature, heat and thermal variations. These paints are different from fire-retarded coatings, which are usually used to protect metal surfaces. Heat-resistant paints have various industrial applications, including coatings on barbecues, pipes, lab benches and walls, petrochemical tanks, water tanks, mufflers, silencers, boiler fronts, data server rooms, ducts, chimney stacks, and furnaces and their piping structures.

    The market for heat-resistant paints or coatings is rapidly growing as these paints provide higher protection to walls, prevent corrosion and rust formations, resist high temperatures and offer protection from irreparable damages. Growth in this market is mainly driven by increasing demand in Western countries, which is supported by rising consumer incomes and availability of state-of-the-art facilities in all sectors.

    With increasing competition, major companies are launching quality products. Increasing consumer preference for better products is forcing companies to change R&D strategies. More than 1,000 patents are filed each year in this segment.

    Consistent Patent Filing Activity in the Last Six Years

    Patent filing has constantly increased from 2009 to 2014, with the highest number of filings reported in 2012.

    Patent Filing Heat Resistant Paint
    Patent Filing in last six years - Countries

    China and Japan dominate the research space, with approximately 52% and 15% of overall patents filed, respectively, over the last six years. The large number of patent applications in China can be attributed to a strong, booming rise in different industries.

    Top Companies Focus on Different Aspects of Heat-Resistant Paints

    To tap the lucrative market for heat-resistant paints, several companies, such as Mitsubishi Corp., Sumitomo Chemical Co., Shin Etsu Chemical Co., Hitachi Chemical Co. Ltd., Panzhihua Iron & Steel Res, and Dainippon Printing Co. Ltd., have entered the segment. In terms of the number of patents filed, Mitsubishi Corp. leads with 130 patent applications in the last five years, followed by Sumitomo Chemical Co.

    Company Number patents filed (2008 onwards) Key Focus Areas
    Mistubishi Corp 130 Coating metal surfaces with heat-resistant films and forming a heat-resistant layer
    Sumitomo Chemical Co 86 Increasing resistance of outer layer of surface coating to be used in cutting tools and combining it with superior wear resistance and lubricity
    Shin Etsu Chemical Co 75 Forming porous heat-resistant layer on electrode or semi-conductor surfaces
    Hitachi Chemical Co Ltd 71 Preparations of polyamide-imide resin insulating paints with low permittivity and high partial discharge inception voltage while maintaining excellent heat resistance, mechanical characteristics and oil resistance
    Panzhihua Iron & Steel Res 52 Preparations of high-temperature protective coating and its application methods

    Source: Aranca analysis based on Thomson Innovation Data

    Future Focus of Research in Heat-Resistant Paints

    The global market for heat-resistant paints includes a variety of applications such as coatings on pipes, lab benches and walls, petrochemical tanks, water tanks, mufflers, silencers, boiler fronts, data server rooms, furnaces and their piping structures. Global sales in this market are expected to rise in line with the developments in Western and BRICS economies. To tap the lucrative opportunity of global expansion, companies are working on advanced research and technologies to launch superior products.

    Our analysis shows that future research in this area would focus on higher chemical stability of the paints with state-of-the-art chemical processing facilities. Some specific solutions would include the following:

    • Simplified preparation methods of heat-resistant coatings
    • Preparations with additional properties along with increased resistance (such as resistance to wear and tear, and more mechanical resilience)
    • Compositions for improving heat resistance and methods of applications
  7. Hair Care Preparations

    Hair care encompasses the overall maintenance of the health and hygiene of hair. Rising consumer income and changing

      to read | words

    Hair care encompasses the overall maintenance of the health and hygiene of hair. Rising consumer income and changing lifestyle drive growth in the hair care market. The hair care market was estimated at $66 billion in 2010, and is expected to increase going forward. Growth in this market is mainly driven by the ageing population in western countries, supported by rising consumer income and changing lifestyle in developing nations.

    As competition intensifies, major companies are launching superior products. Increasing consumer preference for the use of natural products is forcing major companies to change their R&D strategies. More than 1,500 patents are filed every year in this segment.

    Consistent Patent Filing Activity in the Last Six Years

    Patent filing has constantly increased from 2009 to 2014, with the highest number of filing reported in 2013. The United States dominated the research space, with approximately 14,470 patents, followed by Europe. A total of 14,472 patent applications have been filed via the PCT route.

    Patent Filing in last six years
    Patent Filing Hair Care

    Large companies operating in this segment include L’Oréal, Henkel, Kao Corp, Procter and Gamble, and Unilever. In terms of patent filings in the last five years, L’Oréal leads the space, with 975 patent applications, followed by Henkel.

    The US and Europe dominate the research space with approximately 30% and 13% of overall patents filed, respectively, over last six years. High number of patent filings in the US can be attributed to strong domestic market for hair care products, owing to the increasing use of salon services.

    Top Companies are Focusing on Different Aspects of Hair Care Preparations

    To tap this lucrative market, several companies such as L’Oréal, Henkel, Kao Corp, Procter and Gamble and Unilever have entered the segment. In terms of patents, L’Oréal leads with 975 patents filed in the last five years followed by Henkel.

    Company Number patents filed (2008 onwards) Key Focus Areas
    Loreal 975 Hair care composition along with products for dyeing and/or conditioning of hair
    Henkel 509 Preparations containing conditioners and dyes for hair
    Kao Corp 312 Developing products for dyeing and conditioning of hair. The company is also working on products for cleaning of hair
    Procter and Gamble 180 Cosmetic and toilet preparations, followed by preparations for dyeing and conditioning of hair
    Unilever 154 Compositions of treatment for hair and scalp

    Source: Aranca analysis based on Thomson Innovation Data

    Future Research to Focus on Hair Treatment Techniques

    The global hair care market comprises hair colorants, conditioners, styling agents and shampoos. The global sale of the hair care market was $66 billion in 2010, and is expected to rise with developments in western and BRICS economies. Companies are working on advanced research and technologies to bring superior products into the market to tap this lucrative opportunity of global expansion.

    Our analysis shows that future research in this area will be focused on the preparations for hair weaving, hair straightening, hair bleaching, hair oil, anti-dandruff shampoo, and peptide-containing products for hair growth. Some of the specific solutions will include:

    • Hair dyeing and/or conditioning (hair dyes are used for colouring hair, whereas conditioners are used for softening of hair)
    • Permanent hair weaving or hair straightening composition
    • Hair cleaning composition (e.g. shampoo with antidandruff components, active herbal ingredients and peptides for strengthening of hair roots)
  8. Vitamins as Animal Feed Additive – Booster for Health and Nourishment

    Animal feed additives are pharmaceutical or nutritional supplements that are not natural feedstuff. These are added to prepared

      to read | words

    Animal feed additives are pharmaceutical or nutritional supplements that are not natural feedstuff. These are added to prepared and stored feeds. Vitamins are organic substances necessary for normal metabolic processes in animals. A deficiency or complete lack of one or more vitamins may lead to metabolic disorders, resulting in depressed performance, growth retardation, fertility problems or diseases. Global animal feed additive market stood at $14 billion in 2012 and is expected to grow at a CAGR of 4% to $19 billion by 2020. Vitamins accounted for 8.9% share of the animal feed additive market in 2013, and are likely to see a steady demand.

    Vitamins as animal feed additives have attracted significant investments in research and development. More than 500 patents in this domain are filed every year.

    Consistent Patent Filing Activity in the Last Six Years

    Patent filing has constantly increased from 2009 to 2014, with the highest number of filing reported in 2013. China dominated the research space, with approximately 3,964 patents, followed by the United States of America. A total of 3,699 patent applications have been filed via the PCT route.

    Patent Filing Animal Feed

    High number of patent filings in China can be attributed to its emergence as a manufacturing hub for APIs, Pharmaceuticals and other ingredients used in food and medicinal products.

    Top Companies are Focusing on Vitamins as Animal Feed Additive

    To tap this lucrative market, several companies such as Nestec Inc., Shandong Liuhe Group, DSM IP Assets, Novozymes and Hills Pet Nutrition Inc. have entered the segment. In terms of patents, Nestec Inc. leads with 108 patents filed in the last five years followed by Shandong Liuhe Group.

    Company Number patents filed (2008 onwards) Key Focus Areas
    Nestle (Nestec Inc.) 108 Animal feed containing vitamins to reduce oxidative stress in animals.
    Shandong Liuhe Group 100 Vitamins-containing feed for poultry and pigs to improve the meat quality and flavour.
    DSM IP Assets 98 Animal feed compositions for combating metabolic challenges and disorders such as ascites-related mortality in chickens.
    Novozymes 56 Animal feed compositions for aiding protein absorption and strengthening immunity.
    Hills Pet Nutrition Inc. 47 To improve metabolic function as well as photo-protection of skin.

    Source: Aranca analysis based on Thomson Innovation Data

    Future Research to Focus on Development Additives for Animal Feed

    The research focus is on the development of animal feed containing vitamins to boost immunity and improve metabolic challenges and disorders such as ascites-related mortality in chickens, and for aiding protein absorption and strengthening immunity.

    Our analysis shows that future research in this area will be focused on fulfilling the nutritional needs of animals, resulting in longer lifespan and better meat quality and yield of animal feed. Some of the specific areas will include:

    • Improved nutritive egg quality with addition of Vitamin A, D, E and C to the feed
    • Improvement in immunity by addition of vitamins, along with certain amino acids, minerals and plant extracts such as carotenoids in animal feed.
    • Better meat quality by use of vitamins such as Vitamin E which helps reduce oxidation of fat in meat, preventing unpleasant odour and flavour.
  9. Seismic Exploration - Shift in Research towards Improved Data Quality and Reliability

    Seismic exploration is the process of estimating the properties of earth’s subsurface using reflected seismic waves released t

      to read | words

    Seismic exploration is the process of estimating the properties of earth’s subsurface using reflected seismic waves released through sources such as air guns, vibrators, and dynamites. These seismic waves reflect from the subsurface rock formations and are recorded by seismic sensors such as geophones or hydrophones. The method is useful in detecting potential regions/areas of crude oil, natural gas, and mineral deposits.

    In 2011, the global spending on seismic exploration was estimated to be 7 billion USD and was expected to increase by 30% annually. Overall, the global E&P spending is expected to reach 700 billion USD in the current year, up 6% from 2013 thus indicating increased activity in the domain.

    Consistent Patent Filing Activity in Last Five Years

    The research and development activity has witnessed growth over the years. Almost 800+ patents have been filed every year over the last five years. The research is focused towards advanced seismic exploration technologies - digital computer processing, improved energy sources, advanced acoustic receivers having multi-component sensor configurations and compositions, and three-dimensional (3D) and four-dimensional (4D) time-lapse seismic surveys. These technologies have raised the success rate of exploration efforts by up to 50% by ensuring more accurate placement of drill sites, ultimately resulting in more productive wells.

    Seismic Patent Filing

    The US dominates the research space with approximately 2500+ patents filed in the past five years. China and Great Britain have also witnessed an increasing patent protection primarily due to large gas reserves in the two countries.

    Top companies focusing on efficient control of equipment and in improving the quality of data

    WesternGeco - Schlumberger Technology is the leader in the technology space with 824 patents filed in the past five years. The focus of the company has been towards seismic data processing methods, removal of ghost noises from the seismic data received, controlling the position of the seismic data equipment, methods and apparatuses to conduct 3D and 4D seismic surveys. The other companies have focused its research on the same lines.

    Company Number patents filed (2008 onwards) Key Focus Areas
    WESTERNGECO - SCHLUMBEGER HOLDINGS 824 Seismic equipment control
    CHINA NAT PETROLEUM CORP 381 Improved connections of seismic equipment

    Source: Aranca analysis based on Thomson Innovation Data

    Increasing research towards obtaining high quality & reliable data

    Though seismic equipment control which includes use of streamer positioning devices and improved connections of seismic equipment by the use two or more seismic vessels are the key focus areas of the companies, higher emphasis is laid on the data quality. The quality of data is improved by attenuating the ghost signals – reducing noise received by seismic receivers.

    Some of the innovations for reducing ghost signals include:

    • Improvements in seismic source designs
    • Use of advanced common mid-point (CMP) methods for data gathering
    • Development of seismic sensors
  10. Biofuel from Algae – Energy Security for the Future

    Biofuel is any fuel that can be obtained from organic matter through the process of biological carbon fixation.

      to read | words

    Biofuel is any fuel that can be obtained from organic matter through the process of biological carbon fixation. Algae is as an efficient resource for extraction of crude oil, which can further be processed into biofuel. If cultivated in an orderly manner, algal cells can develop up to 80% oil content. Hence, biofuel produced from algae could be useful in the coming years as a major renewable energy resource for sustainable development.

    The global biofuel production reached 500 million barrels in 2012 and is expected to grow at a CAGR of 16% to 1.6 billion barrels by 2020.

    Consistent Patent Filing Activity in Last Five Years

    There is significant research focus in developing technologies to cultivate algae as a sustainable resource to meet fuel requirements and for various processes to extract oil from algae. The maximum number of patents (2,245) was filed in 2012.

    Biofuels Patent Filing in last six years

    The US and Australia dominate the research space, accounting for approximately 25% and 21% of overall patents filed, respectively, over the last six years. A significant number of patents were filed in Australia largely due to the arid region in Western Australia, which provides for an ideal condition for algal growth.

    Top Companies Focus on Different Aspects of Biofuel Production

    Several biotech companies, such DSM, Novozymes and Roche Ltd, operate in the biofuel segment. In terms of patent filings, Novozymes is the leader, with 300 patents in the last five years, followed by BASF Group.

    Company Number patents filed (2008 onwards) Key Focus Areas
    Novozymes Inc 300 Compositions of materials used to extract oil from algae.
    BASF Group 226 Specialized fermentation processes used to extract fuel.
    Roche Ltd 209 Methods of enhancing yield-related traits in plants by modulating nucleic acid expressions.
    Exxonmobil Corp. 113 Hydro-treatment of bio component feeds to produce usable forms of biofuel
    DSM Company 87 Methods and processes used to extract oil from algae

    Source: Aranca analysis based on Thomson Innovation Data

    Future Research to Focus on Efficient Extraction of Biofuel and Methods Thereof

    Research is focused on livestock processes used to treat and purify crude oil and materials used in the extraction process. In recent times, research has shifted toward the developing chemical compositions for the extraction of oil from algal livestock.

    Our analysis indicates future research in this area would be focused on improving the efficiency of the catalysts used to extract oil from algae and also on methods of extracting oil from algae. Some specific solutions include:

    • Chemicals, such as polypeptides or enzymes, used for faster digestion of cellulose to extract oil from algae.
    • Optimizing temperature, pressure, and process time to synthesize usable forms of biofuel.
    • Surface agents, such as arylated methyl esters of fatty acids or a mixture of fatty acids, for efficient extraction of crude oil.
  11. Gene Therapy – Promising Method to Cure Diseases

    Gene therapy is ‘the use of genes as medicines’, which involves the transfer of a therapeutic gene into spe

      to read | words

    Gene therapy is ‘the use of genes as medicines’, which involves the transfer of a therapeutic gene into specific cells of an individual to repair an unhealthy gene. This therapy includes a set of strategies that involves the administration of DNA or RNA to modify the expression of genes or correct abnormal genes. Gene therapy is widely used in curing diseases such as thalassemia, hemophilia B, SCID-X1, Parkinson's disease, adrenoleukodystrophy, acute lymphocytic leukemia, multiple myeloma, and HIV.

    As the gene therapy research to cure several diseases (including the life-threatening ones), the global market for gene therapy is expected to increase at a CAGR of 70.2% to US$794 Million by 2017.

    More than 1,300 Patents Filed Every Year

    Gene Therapy Patent Filing

    Patent filing has been increasing exponentially since 2010, with a significant rise observed during 2011–12. The increase in filings is ascribed to unmet medical needs for diseases such as cancer, coupled with the large size of its market. Many biotech firms have started investing in and researching on gene therapy due to its promising effects.

    The US has dominated the gene therapy research space with approximately 6,104 patents. Asian countries, such as China and Japan, have significant number of filings in the gene therapy domain, indicating the growing interest of companies in the research and development space.

    Top Companies are Focusing on Different Aspects of Delivery of Gene Therapy

    Large pharma/biotech giants, such as Novartis, Abbott, Genentech, Sanofi, Roche, and Amgen, operate in the gene therapy domain. Thus far, academia was the main promoter of gene therapy; however, currently, academic and industry partnerships are driving new gene therapy research. Examples of recent collaborations include partnerships between Novartis and University of Pennsylvania, GSK and the San Raffaele Telethon Institute for Gene Therapy (TIGET), and BioMarin and University College London.

    Numerous research projects on gene therapy are being carried out in US-based universities. University of California, University of Texas, University of Pennsylvania, and Johns Hopkins University are among the top universities with patents related to gene therapy.

    Companies such as Novartis, Roche, Genentech, ISIS Pharmaceuticals, and Amgen have several patents in the gene therapy domain. In addition, the French National Institute of Health and Medical Research (INSERM), a public scientific and technological institute, has a considerable number of patents.

    Company Number patents filed (2008 onwards) Key Focus Areas
    University of California 93 Delivery of ‘correct’ genes with the help of specific vectors
    DuPont 91 Gene therapy for cancer
    Roche Ltd 62 Viral vectors which can be used in gene therapy
    INSERM 58 Viral vectors which can be used in gene therapy for treatment of non-monogenic retinal diseases
    Novartis 54 Improving gene transfer vector production platforms Target complex diseases for treatment using gene therapy

    Source: Aranca analysis based on Thomson Innovation Data

    Future Research to target complex diseases such as Cancer and HIV

    Initially, gene therapy was received with a lot of pessimism as people considered it unethical to use humans as subjects for clinical trials related to gene therapy. However, with time, gene therapy has proved to be a useful method for curing several diseases. The initial studies of gene therapy were conducted primarily on monogenetic diseases; however, at present, research projects focus on complex diseases such as cancer and HIV.

    There are various disadvantages associated with gene therapy, such as insertion of a new gene in the wrong location in the DNA, delivery of other genes (apart from the gene of interest) to the cells, toxicity and inflammatory response of viral vectors, vector viruses infecting more than one type of cell, over-expression of the protein, and complications of the immune system. There is strong research focus to address these problems and most of the recent patents are focused on:

    • Genetic manipulation of viral vectors for efficient delivery;
    • New viral vectors for delivery; and
    • Various routes of administration and dosage range for new diseases.
  12. Dental Implant: Inter-Disciplinary Research to Improve Patient Experience

    Dental implants are inert materials embedded in the bone of the jaw or skull (i.e., maxilla and

      to read | words

    Dental implants are inert materials embedded in the bone of the jaw or skull (i.e., maxilla and/or mandible) to manage tooth loss, and aid replacement of lost oral and facial structures caused by trauma, periodontal diseases, injury, or other reasons. The global dental implant market reached $15 billion in 2011 and is expected to grow at at a CAGR of 7% to $24 billion by 2018. The growth would be attributed to better acceptance by patients because of increase in overall quality of implants and advancements in implant techniques, which is leading to higher success rates.

    Consistent Patent Filing Activity in the Last Six Years

    The market has attracted significant investments in research and development to develop technologies for the preparation of inert material for dental implants, devices for insertion and removal of implants, and regenerative medicine for dental implant procedures. On an average 1,400 patents have been filed annually during the last six years in the dental implant domain, with a maximum of 2,004 patents filed in 2012.

    Dental Implant Patent Filing Trend

    The US and China dominate the research space with approximately 50% and 30% of overall patents filed, respectively, over last six years. High number of patent filings in China can be attributed to strong domestic market for dental implants, owing to the increasing percentage of old age population.

    Top Companies are Focusing on Different Aspects of Dental Implant Delivery

    To tap this lucrative market, several companies such as 3M Innovations Technology, Warsaw Orthopedic Inc, and Biomet Orthopedics have entered the segment. In terms of patents, Chongqing Runze Pharmaceutical leads with 146 patents filed in the last five years, followed by Straumann Holding AG.

    Company Number patents filed (2008 onwards) Key Focus Areas
    Chongqing Runze Company 146 Dental implant procedure and improving the structural aspects of prosthetics specifically the planting shoulder, screw and the groove.
    Straumann Holding AG 99 Surgical techniques and tools and overall design and texture of implants
    Nobel Bio-care (acquired by Danaher Group in Sep 2014) 79 Screw and groove structure to facilitate accurate positioning and insertion of dental implants
    Warsaw Orthopedic Inc 61 Implants and aspects focusing on fixation of implants
    3M Innovations 56 Compositions and materials for preparing dental implants

    Source: Aranca analysis based on Thomson Innovation Data

    Future Research to Focus on Advanced Implantation Procedures and Design of Dental Implants

    The research focus is on development of a wide range of inter-disciplinary areas such as topography and surface engineering of dental implants, materials for dental implants, and implant stability. In the recent times, the research has shifted towards improving the aesthetics of implant and improving the patient experience in undergoing various procedures.

    Our analysis shows that future research in this area will be focused on improving the patient experience in the overall procedure, related to fixing of dental implants and also on improving the design and aesthetics of the implants. Some of the specific solutions will include:

    • Surface-engineered dental implants to optimize the ratio of bone-to-implant contact and to improve the texture.
    • Advancements in drilling and implantation devices to make the procedure easier and less painful for patients. In addition, these advancements will help improve the accuracy of the implantation procedure.
    • Focus on materials to enhance the stability of implant support bridges to ensure that they are able to resist lateral displacement forces.
  13. Edible Vaccines – A Research Area Waiting to Explode

    Advantages Ease of administration and patient compliant due to oral delivery No requirement of sterile conditions for storing

      to read | words


    • Ease of administration and patient compliant due to oral delivery
    • No requirement of sterile conditions for storing vaccines
    • Elimination of contamination risk with animal pathogens
    • Economical in production, easy production scale up and lower cost of product compared with conventional vaccines
    • Heat stable and eliminates the need for refrigeration
    • Delivery of multiple antigens is possible
    • Plant-derived antigens assemble spontaneously into oligomers and virus-like particles


    • High probability of development of immune tolerance
    • Consistency of dosage form varies according to the type of plant and generation
    • Dose evaluation is tedious
    • Cooking plants such as potato with vaccine properties might weaken its strength

    Figure 1: Filing Trend

    Edible Vaccines Patent Filing Trend

    Source: (Aranca Analysis based on Thomson Innovation data)

    Edible vaccine technology is a niche domain with limited patent filings over the last five years. Patent filing has remained almost constant. This could be attributed to lack of investor confidence in return on investments on genetically modified foods. In addition, at present, recombinant vaccines against diphtheria, tetanus and others are very economical; thus, there would be little incentive to develop edible vaccines for these diseases.

    Most edible vaccines researched by leading companies are in the clinical trial stage; thus, the success of edible vaccines cannot be established. However, a breakthrough edible vaccine would not only increase research activity in the edible vaccine domain but also enhance licensing between vaccine innovators and leading pharmaceutical/biotechnology companies, primarily due to manufacturing ease, patient compliance and lower cost of the product.

    Figure 2: Origin of Invention & Jurisdiction Spread

    Origin of Invention Edible Vaccines

    Source: (Aranca Analysis based on Thomson Innovation data)

    Most studies on edible vaccines have been undertaken in China, the US and Europe. This could be attributed to the fact that these countries have been pioneers in pharmaceutical and biotechnological sciences.

    Figure 3: Competitive Landscape

    Competitive Landscape for Edible Vaccines patent

    Source: (Aranca Analysis based on Thomson Innovation data)

    The majority of the studies on edible vaccines are conducted by food and biotechnology companies, with AC Immune being the top researcher. The research focus of most patents is to develop safe and effective edible vaccines, whose dosage do not change for different types of fruits and generations. In addition, the research is focused towards modifying plants that are edible in the raw state and do not require cooking, such as banana and tomato. Therapeutic areas that are of high interest for the development of edible vaccines include diseases like diarrhoea, malaria, cholera, measles, rabies and hepatitis B. Moreover, edible vaccines are being developed for animals such as rabbits, pigs and cows. Furthermore, edible vaccine technology is being analysed for passive immunisation, wherein crops are genetically modified to deliver antibodies to the target species.

    About Edible Vaccines

    About Edible Vaccines

    Edible vaccines are antigenic proteins incorporated in consumable crops using genetic engineering. An immune response against a specific pathogen is elicited when the digestion of a plant with antigenic proteins in the GIT leads to release and absorption of these proteins into the blood stream, thereby stimulating humoral and mucosal immunity. Edible vaccines were first experimented in 1990 when Curtiss and Cardineau expressed the Streptococcus mutants surface protein antigen A (SpaA) in tobacco. However, the first edible vaccine to enter clinical trials was in 1997. A vaccine-containing potato was developed by the Boyce Thompson Institute for Plant Research to protect against travellers’ diarrhoea.

    Most of the earlier studies on edible vaccines were performed on tobacco, a non-edible plant. However, current researches are focused on developing edible vaccines based on lettuce, tomato, potato and banana. Plants like banana and tomato remains are considered a preferred choice of crops since they need not necessarily be cooked and can be consumed raw.

  14. Biofuels – Hot Attraction among Alternative Energy Patent Seekers

    The biofuel sector has attracted a considerable amount of research, with more than 2,500 patents filed every year since

      to read | words

    • The biofuel sector has attracted a considerable amount of research, with more than 2,500 patents filed every year since the past five years.
    • Numerous experiments have been performed for production of various types of biofuels such as bioethanol, biodiesel, biogas, syngas, bioethers and the technology related to their efficient utilisation.
    • It appears that research activity may increase in future due to the growing need of alternative energy sources to fulfil the energy demand among consumers and as a new diversion for economic growth.

    Figure 1 depicts the filing trend for the past five years. As is clear from the filing trend, more or less equal number of patents was filed in this field of technology from 2008 to 2013.

    Biofuels Patent Filing Trend

    Figure 1: Filing Trend (Source: Aranca analysis based on Thomson Innovation data)

    The most active assignees in this domain are Gen Electric, Shell Oil, China Petroleum and Chemical, Air Liquide, Korea Research Institute Chemical Technology, and BASF, followed by University Kunming Science and Technology, Celanese, University California, Great Point Energy, Sony, UOP, Siemens, University Tsinghua, University Nanjing and others as depicted in Figure 2 below.

    Top Assignees Bio Fuel

    Figure 2: Top assignees in the domain (Source: Aranca analysis based on Thomson Innovation data)

    Some of the interesting research sectors explored by the top assignees in this domain are:

    • Gasification and liquefaction of solid waste: Involves conversion of carbon and hydrogen containing materials into biogas and other types of liquid biofuels
    • Method and apparatus for biogas and natural gas generation: Developing efficient fermentation tank and delivery device for biogas production
    • Use of cellulosic and lignocellulosic materials for biofuel production

    In terms of preferred geographies for patent protection, China, USA, Denmark, Japan, Korea, Europe and others have been the key markets. China has been dominating the research space with approximately 4,405 inventions originating from the country.

    Figure 3 showcases the distribution.

    Origin of Invention & Jurisdiction Spread

    Figure 3: Origin of invention – Jurisdiction spread (Source: Aranca Analysis based on Thomson Innovation data)

    About Biofuels

    About BiofuelsBiofuels are derived from renewable materials such as waste plant and animal matters. Use of biofuels leads to emission of less greenhouse gases compared to fossil fuels; therefore, it is a neat alternative to conventional fossil fuels. Different types of biofuels are bioethanol, biodiesel, bioethers, biogas, syngas, and green diesel.

  15. Smart Clothing – Apparels That Can Sense, React & Adapt to Stimuli

    The increasing trend of patent filing in smart clothing over the last five years is indicative of the

      to read | words

    • The increasing trend of patent filing in smart clothing over the last five years is indicative of the extensive research undertaken in the design and fabrication of smart apparel.
    • The extensive research in smart clothing is ascribed to its widespread application areas, with research attention mainly directed towards its use in the healthcare and fitness domain.
    • The smart clothing domain is still at a nascent stage of development, with modest adoption in various end user market sectors, more specifically healthcare, fitness, medical monitoring, and defence.
    • The varied application areas, together with improved technology in design & fabrication of smart clothing, will play a vital role in fuelling its implementation worldwide.

    Figure 1: Filing Trend

    Smart Clothing Patent Filing Trend

    Source: (Aranca Analysis based on Thomson Innovation data)

    Figure 2: Origin of Invention & Jurisdiction Spread

    Origin of Invention Smart Clothing Apparels

    Source: (Aranca Analysis based on Thomson Innovation data)

    Research for smart clothing mostly originates from China, the US, Japan, Korea, and Europe—the major research hubs in electronics space. Additionally, these countries are poised to be major markets for smart apparels due to better consumer awareness, which would result in early mass adoption of the same. Also, most of the research activity in smart clothing is focused on health and fitness application, which is of high priority in these countries and, hence, would drive its market.

    Figure 3: Competitive Landscape

    Competitive Landscape Apparels

    Source: (Aranca Analysis based on Thomson Innovation data)

    Patents in the smart clothing domain are filed by the textile manufacturing and electronics companies as well as research organisations and universities. Philips, an electronics company, tops the list with most number of filings. Additionally, it has been observed that universities and research organisations undertake significant research in smart clothing. This is evident from the fact that four of the top 10 assignees are either universities or research organisations.

    Most smart clothing developers research on improving aesthetics, compactness, durability, safety and user-friendliness, together with broadening the functionality of the apparel. These improvements are brought by modifying the arrangement of the conducting material (multiple layers) or modifying the chemical or electric properties of the clothing fabric.

    About Smart Clothing

    About Smart Clothing

    Smart clothing is next generation clothing that integrates fabric technology with digital technology to design smart or intelligent apparels that can sense, react and adapt to stimuli. Smart clothing finds potential application across various sectors, including healthcare, sports, military, leisure wear and communication. Few examples of smart clothing are LED-integrated jackets that can ensure better visibility to bicyclists at night and heart rate monitoring sensors integrated with apparels. Although the research in smart clothing is underway since the 1980s in the US and Europe, its acceptance in mass market has been low. This can be ascribed to limited awareness, high cost and less attention on consumer needs in terms of design, aesthetics and comfort.

  16. Researchers Focus on Manufacturing Wind Turbine Blades

    About 1,500 patent publications have been filed each year for the past 5 years. China, US and Europe are preferred

      to read | words

    • About 1,500 patent publications have been filed each year for the past 5 years. China, US and Europe are preferred geographies for patent protection
    • Research focus has been on method of manufacturing wind turbine blades
    • Research has been consistently expanding due to global factors such as alternative energy sources, high demand for power, and the need to develop high-performance wind mills

    Since the past five years, about 1,500 patent publications have been filed each year. Interestingly, research has been constant and increasing. The chart below depicts the filing trend for the last five years.

    Wind Turbine Blades Patent Filing Trend

    Researchers primarily focus on the method of manufacturing wind turbine blades, with more emphasis on composite and light-weight materials. General Electric, Vestas, Mitsubishi and Siemens top the list in this scenario, with approximately 100 to 400 patents filed in the last five years.

    Wind Tubine Blades Patent filed

    Specifically, the research of the top assignees focuses on addressing problems as given below:

    • Ice formation on blades: Cold climate increases ice formation on the surface of wind turbines, thus affecting its performance. Anti-icing or de-icing techniques have been developed to address this issue. Furthermore, blade heating technologies have also come up to ensure de-icing the turbine blade.
    • Noise: Wind turbine blades produce aerodynamic audible noise when the boundary layer interacts with the trailing edge. As a solution to this problem, various noise reduction techniques are developed including installation of noise reducers, control of tip speed, change in aerodynamic profile shape, etc.
    • Manufacturing difficulties: Companies are improving the manufacturing process of blades by using composite and light-weight materials. This would ensure precision in designing the complex curvature shapes of blades and take care of maintaining the weight and length of the wind turbine.

    In terms of preferred geographies for patent protection, China, US, and Europe are the key markets. China has been leading the research space with approximately 4,683 inventions. A graph showing the distribution is depicted below:

    Origin of Invention Wind Turbine blades

    In light of the above information, it appears that research on wind turbine blades is expanding. The increase can be attributed to global factors such as alternative energy sources, high demand for power, and the need to develop high-performance wind mills.

    About Wind Turbine Blades

    About Wind Turbine Blades

    Wind turbine blades are shaped like an airfoil and work on the principles of aerodynamics to capture wind energy effectively. In an airfoil, one surface of the blade is round, while the other is flat. When wind blows, air flows around the blade; thus, blades get subjected to aerodynamic forces that cause its rotation. Wind turbine blades experience two aerodynamic forces: lift and drag

    • Lift: The force acting perpendicular to the blade’s upper surface. It is directly proportional to wind flow.
    • Drag: The force acting parallel to wind flow and perpendicular to the lift.

    Wind turbine blades are built with wood, metal, and fiber glass. Composite and light-weight materials are used for modern wind turbine blades to create quick acceleration. Recent researches on wind turbine blades focus on materials, structural dynamics, active flow aerodynamic control, and manufacturing process


  17. Carbon Dioxide (CO2) Sequestration – Attracting Considerable Research!

    CO2 sequestration research area has attracted considerable research, with more than 1,000 patents filed every year (except 2013) over the

      to read | words

    • CO2 sequestration research area has attracted considerable research, with more than 1,000 patents filed every year (except 2013) over the past five years.
    • As is clear from the filing trend, more numbers of patents were filed in the chemical separation type of CO2 capture technology from 2008 to 2013.
    • Numerous experiments have been performed to find the applications of sequestered CO2 as an alternative renewable source of fuel and feedstock for synthesis of chemicals such as methanol, carbonates, etc.
    • Application of sequestered CO2 injection technology for enhanced oil recovery has been gaining importance.

    Figure 1 below depicts the filing trend for the past five years. As is clear from the filing trend, more or less equal number of patents was filed in this field of technology from 2008 to 2013.

    CO2 Sequestration Patent Filing Trend

    Figure 1: Filing Trend (Source: Aranca analysis based on Thomson Innovation data)

    During the past few years, much effort has been devoted to developing new technologies for CO2 capture. Based on the findings, the primary methods of CO2 capture can be categorised into:

    • CO2 capture by chemical separation
    • CO2 capture by use of adsorbent
    • CO2 capture by use of membrane and diffusion
    • CO2 capture by rectification and condensation
    • CO2 capture by biological separation

    Figure 2 below depicts the CO2 capture technology filing scenario over the past five years.

    CO2 Sequestration Technology filing Scenario

    Figure 2: Technology Filing Trend (Source: Aranca analysis based on Thomson Innovation data)

    The most active assignees in CO2 sequestration domain are Alstom Technology, General Electric, SHELL Oil, Air Liquide, Daewoo Shipbuilding & Marine Engineering, Hitachi, University of Zhejiang, and University of Southeast, followed by Calera, University of Tsinghua, Yingfan Zhang, and GreatPoint Energy, as depicted in Figure 3.

    CO2 Sequestration Top Assignee

    Figure 3: Top assignees in the domain (Source: Aranca analysis based on Thomson Innovation data)

    Some of the interesting research sectors explored by the top assignees in this domain are:

    • Use of absorbents, solvent systems and membranes for separation, purification and capturing of CO2
    • Use of captured CO2 for enhanced recovery of oil

    In terms of the preferred geographies for patent protection, the USA, China, Europe, Australia, Canada, Japan, Korea and few others are the key markets. The USA dominates the research space, with approximately 5,514 inventions originating from the country. Figure 4 exhibits the geographic distribution of inventions.

    Origin of Invention CO2 Sequestration

    Figure 4: Origin of invention – Jurisdiction spread (Source: Aranca Analysis based on Thomson Innovation data)

    CO2 injection into geological formations is one of the advance technologies for enhanced oil recovery (EOR). In 2000, 72 oil extraction projects out of 84 projects were operational all over the world using CO2 injection technology. Based on the above insights, research activity in sequestration of CO2 may strengthen in future due to the need to reduce concentration of greenhouse gases in the atmosphere, increase in the need for an alternative source of fuel, for enhanced oil extraction and many other applications that are yet to be explored.

    About CO2 Sequestration

    ABOUT Carbon dioxide sequestration

    Carbon dioxide sequestration is defined as capturing carbon dioxide (CO2) produced by power plants, industrial processes, and burning of fossil fuels before it is released to the atmosphere and storing it safely. The technology of CO2 capture and sequestration (CCS) is greatly advantageous for reducing CO2 emissions from new and existing coal & gas-fired power plants and industrial sources.

  18. Medical Ventilators – Witnessing Increased Patent Filing Trend In Recent Years

    Medical ventilator domain has witnessed increasing patent filing trend over the last five years Most of research origination

      to read | words

    • Medical ventilator domain has witnessed increasing patent filing trend over the last five years
    • Most of research origination in ventilator has been undertaken in USA, followed by China in past five years
    • Asia Pacific countries such as China, Korea and India became a preferable country for filing patents due to growing economy, insurance sector and health care awareness. A report by Global Industry Analysts says Asia-pacific ventilator market is growing at CAGR of over 9.5% from 2013 to 2019.

    Resmed, Philips, Nellcor Puritan Bennett (Covidien), Draeger, GE, Hamilton are global leading ventilator manufacturers. Ventilator market is rising at a CAGR of 6.6% and is expected to reach USD 4.2 Billion globally in 2019.The market in terms of revenue is dominated by United States.

    Medical Ventilators Patent Filing Trend

    Image source: (Aranca Analysis based on Thomson Innovation data)

    Please Note: Patents filed in 2012-13 might not yet published

    The medical ventilator domain has witnessed increasing patent filing trend over the last five years. Research in ventilator is mainly driven by:

    • Algorithms for detecting patient’s condition and controlling ventilator settings based on them.
    • Display device for displaying vital pulmonary parameters of the patient such as respiratory waveforms, ventilation mode, alerts and ventilator control options.
    • Non-invasive techniques for sensing parameters to control ventilator such as impedance imaging tomography, pulse oximetry etc.
    • Single ventilator having compatibility with the patients of all age groups (neonatal, paediatrics and adults)

    Origin of Invention Medical Ventilators

    Image source: (Aranca Analysis based on Thomson Innovation data)

    Competitive landscape Medical Ventilators

    Image source: (Aranca Analysis based on Thomson Innovation data)

    Most of the research in ventilators is undertaken by ventilator manufacturing companies. University and research institutes are less involved in the domain.

    Critical care ventilators, Portable ventilators, transportable ventilators, neonatal ventilators are major broadly defined product segments for ventilator. Due to potential cost savings and more sophisticated functionality, portable ventilators

    In coming decade the ventilator will in greater synch with other medical devices such as ECG, pacemaker, MRI. Also with advancement in medical communication protocol, doctors will be able to monitor patient condition on their PDA, iphones and will be able to remotely control the life saving medical devices.

    About Medical Ventilator

    About Medical VentilatorsMedical Ventilator is a machine for mechanically providing and extracting air from the lungs. It is used for the patients who are unable to breath with their own efforts or have breathing insufficiency. According to US medical device classification system, ventilators are class III devices and require strict Premarket Approval and FDA clearance before commercial launch.

    Early in 18th century mechanical ventilators were colloquially referred as “Iron Lungs”. They work on the principle of negative ventilation, where the patient is placed in the machine’s air-tight cavity, and machine periodically applies negative pressure to suck air within the cavity. A door allows the head and neck to remain free. Application of negative pressure causes diaphragm to expand and patient inhales air from atmosphere, causing breathing action. Negative pressure ventilators are obsolete globally since 2004.

    Modern ventilators are computer controlled positive pressure ventilators. They sense the quantity of air required by the patient, air saturation in the blood and other physiological parameters in real time. They have algorithms, which control the internal valves, to provide air with different gas proportions, volume and pressure depending on the patient’s age and disease type.

  19. Edible Packaging

    An edible film or coating is a thin continuous layer of generally recognised as safe (GRAS)-certified edible

      to read | words

    An edible film or coating is a thin continuous layer of generally recognised as safe (GRAS)-certified edible material placed on food or between food components that can be eaten as a part of the whole food product.

    Edible packaging is a useful alternative to conventional packaging as it reduces environmental waste (such as paper and plastic). Use of comestible packages is a novel method for improving product stability, quality and safety by preventing loss of necessary volatiles, moisture, undesirable reactions and mould growth. Furthermore, it helps in keeping the food free from contamination, improving the appearance (example, gloss) and increasing convenience for consumers.

    Edible packages are engineered to carry various flavours, colours, antioxidants, antimicrobial, and anti-browning agents to improve food safety, appeal, organoleptic properties and shelf life.

    Edible films for packaging foods have attracted considerable research with close to 500 patents filed every year since the past five years. The figure below depicts the filing trend during the same period. As evident from the graph, more or less equal number of patents was filed in this technological domain over 2008–2012.

    Filing Trend

    Edible Packaging Patent Filing Trend

    Figure 1: Filing Trend (Source: Aranca analysis based on Thomson Innovation data)

    Numerous experiments have been conducted for encasing foods such as ice-cream, yoghurt, cheese, sandwiches and confectionary in edible wrappers. Furthermore, significant research has been undertaken to design good quality and safe edible films for packaging different foodstuffs. The most active assignees in this domain are Kraft Foods, Nestec, PepsiCo and Mars, followed by Wrigley, Conopco and General Mills. Figure 2 depicts the top assignees active in this research domain.

    Top Assignee

    Top Assignee Edible Packaging

    Figure 2: Top assignees in the domain (Source: Aranca analysis based on Thomson Innovation data)

    Some interesting research sectors explored by top assignees in this domain are mentioned below:

    • High resolution images on edibles provide a customisable process for printing;
    • Open-ended edible containers for foodstuffs such as frozen confectionary and edible casing for foodstuffs such as sandwiches;
    • Edible packages preventing moisture transfer from the environment to the food product or between different components of a food product; and
    • Edible packages with antibacterial and antioxidant properties.

    In terms of preferred geographies for patent protection, China, US, Korea, Europe, Japan and Denmark have been the key markets. China dominates the research space with approximately 678 inventions. Figure 3 illustrates this distribution.

    Origin of Invention Edible Packaging

    Figure 3: Origin of Invention – Jurisdiction Spread (Source: Aranca analysis based on Thomson Innovation data)

    In light of the insights mentioned above, research activity is expected to increase due to growing environmental awareness among consumers. Factors such as appeal, ease-to-eat and multi-functionality of edible packages are boosting research in this domain.

  20. Nanocapsules

    Nanocapsules are submicroscopic colloidal drug carrier systems made up of an oily or an aqueous core in-turn surrounded

      to read | words

    Nanocapsules are submicroscopic colloidal drug carrier systems made up of an oily or an aqueous core in-turn surrounded by a thin polymer membrane. Nanocapsules can be made by two technologies; either the interfacial polymerization of a monomer or the interfacial nanodeposition of a preformed polymer. Anti-cancer drug delivery embedded in nanocapsules is on high demand in the present pharmaceutical front owing to various advantages:

    • Improved stability of active substances
    • Biocompatible with tissue and cells when synthesized from materials that are either biocompatible or biodegradable
    • High drug encapsulation efficiency due to optimized drug solubility in the core
    • Low polymer content compared to other nanoparticulated systems such as nanospheres
    • Exhibits drug polymeric shell protection against degradation factors like pH and light
    • Reduced tissue irritation due to the presence of polymeric shell

    Nanocapsules Patent Filing Trend

    Approximately 1500 unique patents in the field of nanocapsular medicinal preparations were applied for the said time period. There is a constant filing trend in the area of nanocapsular drug delivery.

    University of California, Fujifilm holdings, Elan pharma, Central Nat Rech Scient, Iceutica, Abraxis and Flamel technologies are the major organizations that are investing in the technology development of nanocapsular medicinal preparations.

    Nanocapsules Top Assignee

    The patent origination in United States and Japan ranked high. This shows that the said geographies are those major sources of research inputs in the field of medicinal preparations using nanocapsules.

    Origin of Invention Nanocapsules

    Image source: Aranca Analysis based on Thomson Innovation data

    Some of the problems addressed by the recent technologies are:

    • The transport of active agents encapsulated in droplets to the skin and their bioavailability in the epidermis is low: Recent development in technology provides a penetrating colloidal carrier system enabling an increased encapsulation of lipophilic agents which can be produced in a simple manner.
    • Site specific delivery of therapeutic agents: Site specific delivery of various active agents or pharmaceutical agents; in case of treating complex diseases like cancer and other pulmonary diseases has been achieved using nanocapsules.
    • Greater therapeutic efficiency for poorly water soluble drugs: Various methods for preparing poorly water soluble drug particles; having an average particle diameter in nanometer scale is achieved by recent technologies.

    The number of patent publications in this field shows high technology advancement in the field. This refers to the fact that the field of nanocapsular medicinal preparations is still in the growth phase.

    Number of patent filings by the major players listed above indicates the high competition in this field. University of California holds a good number of recent patented technologies in the field. Elan pharmaceuticals, Abraxis and Flamel are the other big pharmaceuticals in this competitive field.

  21. Oral Insulin

    Diabetes is a type of metabolic disorder caused by an insulin imbalance in the body either due to

      to read | words

    Diabetes is a type of metabolic disorder caused by an insulin imbalance in the body either due to insufficient production of insulin by the pancreas or due to body cells not responding to the insulin that is produced. This leads to high blood sugar levels that, in turn, result in polyuria, polydipsia and polyphagia.

    Diabetes is controlled using insulin with or without a combination of oral hypoglycaemic agents such as Metformin. Insulin is currently administered into the body via a subcutaneous or an intramuscular injection. These delivery routes are non-compliant with patients. In addition, the parenteral insulin targets peripheral tissues rather than the liver which disturbs the normal dynamics of endogenous insulin release. As a result, research was undertaken in oral administration as a route for insulin delivery. The research is in the experimental stage without any success due to stability problems of insulin in the gastrointestinal tract on oral administration.

    Figure 1: Filing Trend

    Oral Insulin Patent Filing Trend

    Source: (Aranca analysis based on Thomson Innovation data)

    The filing trend indicates more or less equal number of patents filed in the last five years. The trend suggests research on oral insulin is set to gather momentum as several pharmaceutical players would yearn for a successful product that can overpower the parenteral insulin market.

    Figure 2: Origin Of Invention & Jurisdiction Spread

    Origin of Invention Oral Insulin

    Source: (Aranca analysis based on Thomson Innovation data)

    Diabetes has become a worldwide epidemic due to lifestyle changes. The number of people suffering from diabetes is set to rise from 285 million in 2010 to 439 million by 2030. The highest prevalence has been observed in North America, Europe (mainly Germany and the UK), China, India and Japan. Consumption of insulin is high in these countries as it is the most preferred treatment modality. Due to the challenges of parenteral insulin, success of oral insulin will be a major breakthrough for diabetes. This could result in significant research and protection of innovation in oral insulin across lucrative markets such as the US, China, Japan, Europe and India by pharmaceutical firms.

    Figure 3: Competitive Landscape

    Oral Insulin Top Assignee

    Source: (Aranca analysis based on Thomson Innovation data)

    Large pharmaceutical players active in the diabetes sphere account for the most number of patents filed in oral insulin technology. Among these, Boehringer Ingelheim is the leader. Some molecules researched by these companies are under clinical phase trials. Also, some big firms invest in research initiated by speciality companies such as the partnership between Sanofi Aventis and Wellstat Therapeutics for oral insulin sensitizer PN2034.

    Most players undertake research to address issues associated with earlier failures of oral insulin, such as reduced bioavailability, stability problems in the gastrointestinal tract and storage stability, in clinical trials. These issues are mainly addressed by insulin modification by acylating the insulin protein or modifying the formulation to render it orally compatible.

  22. Engine Cooling System

    Cooling systems deployed around the periphery of the IC engines of vehicles play a vital role in safeguarding

      to read | words

    Cooling systems deployed around the periphery of the IC engines of vehicles play a vital role in safeguarding the engines from overheating. It involves the following components:

    • a. Fluid – Acts as a carrier for transferring heat from the engine
    • b. Hose Pipe – Contains the coolant
    • c. Pump – Forces the coolant to flow within the hose pipe to the periphery of the engine
    • d. Thermostat – Measures the temperature of the coolant/engine
    • e. Radiator – Located proximal to the engine and includes multiple pipes arranged in a specific manner for cooling the hot fluid
    • f. Fan – Assists the radiator in cooling the fluid

    The below diagram depicts a typical construction of the cooling system.

    typical construction-cooling system

    During operation, a coolant is circulated to the periphery of the engine parts through hose pipes. The coolant absorbs the heat from the engine parts and transfers it to the radiator. Within the radiator, the coolant flows through multiple pipes arranged in a specific manner. These pipes containing the coolant at higher temperature are cooled by a fan adjoining the radiator. The coolant is then circulated back to the engine parts and the cycle repeats.

    With an objective to effectively cool the IC engines, considerable research have been performed on the components of the cooling systems. Since the last five years, nearly 1,000 patent publications have been published every year. Interestingly, the research has been consistent and is slowly increasing. The chart below depicts the filing trend for the last five years.

    Engine Cooling System Filing trend

    The research focuses primarily on the design aspect of the cooling systems, with additional emphasis on developing the radiators. Most of the research has been performed by OEMs; Toyota and Honda motors top the list with approximately 500 and 200 patents filed in the last five years, respectively. Interestingly, Denso Corp, a component manufacturer, is actively filing patents within the domain.

    Competitive Landscape

    Specifically, the research by the top assignees has been toward addressing problems such as:

    • Temperature rise in multiple exhaust ports: With increasing number of turbocharger-based engines having two or more exhaust ports, considerable design modifications are made to effectively dissipate heat arising from these ports.
    • Temperature rise in non-formal engine structures: To optimize the efficiency of engines, the trend is toward varying the wall thickness of the cylinders. Therefore, it is essential to design accordingly the flow of the cooling systems, i.e., lesser amount of fluid in thick sections and high amount of fluid in less thick sections.
    • Complex structure of cooling systems: To reduce the manufacturing costs of the cooling systems and optimizing the space requirements, the companies are developing cooling systems with simplified structures.

    In terms of the preferred geographies for patent protection, Japan, the US, Germany, and China are the key markets. Japan dominates the research space with approximately 1,200 inventions originating from the region. The graph below depicts the distribution:

    Origin of Invention Engine cooling system

    In light of the above, the research activity is expected to rise further and there is a high probability of component manufacturers bringing in innovation into the area. The growth can be attributed to global factors such as cost optimization, need for powerful engines with higher cooling requirements, OEMs outsourcing the design to component manufacturers, and space optimization within the vehicles.

  23. Lithium Polymer Batteries

    Lithium polymer batteries, or LiPo batteries, are secondary cells that find application in mobile electronics, laptops and radio-controlled

      to read | words

    Lithium polymer batteries, or LiPo batteries, are secondary cells that find application in mobile electronics, laptops and radio-controlled equipment. With an increase in research focus, LiPo batteries are expected to power next-generation battery electric vehicles.

    LiPo batteries

    LiPo batteries are an advanced version of lithium-ion batteries. Although the chemical composition of the anode and cathode in both types of batteries is the same, the main difference is in terms of the separator used. Lithium-ion batteries use an inert substance with holes covered in electrolyte, while LiPo batteries use micro-porous polymer covered in an electrolytic gel as a separator. LiPo batteries offer several advantages over lithium ion batteries.

    • High energy density due to the use of a polymer as a separator that reduces energy barrier in the chemical reaction between the anode and cathode.
    • Batteries can be moulded into several shapes and can also be reduced to thin films due to the flexibility of the solid polymer.
    • LiPo batteries are fully charged at 4.2 volts and are considered fully discharged at 3.0 volts, thereby allowing a relatively flat voltage discharge curve and provide solid performance throughout the discharge cycle.
    • LiPo batteries have reduced self heating due to low internal impedance.
    • LiPo batteries enhance safety as the chances of an electrolyte leakage are lower due to a no-liquid electrolyte.

    Factors such as high manufacturing cost and less capacity over lithium-ion batteries pose a challenge for LiPo batteries.

    Figure 1: Filing Trend

    Lithium Polymer Batteries Filing trend

    Source: Aranca analysis based on Thomson Innovation data)

    LiPo battery is an attractive research area with more than 6000 patents filed in the last five years. The research has been primarily driven by the widespread application in the electronic sector, which is growing at an exponential rate every year.

    Figure 2: Origin Of Invention & Jurisdiction Spread

    Origin of Invention Lithium Polymer Batteries

    Source: Aranca analysis based on Thomson Innovation data)

    Japan, a forerunner in the battery business, ranks first in terms of research innovation in LiPo batteries followed by China, Korea and the US. Additionally, and Korea are the prime markets due to the presence of most large companies in the mobile phones, laptops and other electronics space.

    Figure 3: Competitive Landscape

    Lithium Polymer Batteries Competitive Landscape

    Source: Aranca analysis based on Thomson Innovation data)

    The competitive landscape indicates most electronic companies are leaders in the innovation of LiPo batteries due to its advantages vis-à-vis other conventional batteries. The most active assignees are Toyota, Samsung, LG, Hitachi and Panasonic. The research focus of these companies is mainly leading to an improvement in battery capacity, flexibility, safety and charging & discharging efficiency. Some approaches to develop these characteristics are:

    • Addition of an electrolyte material along with gelled polymer; for example, use of ceramic solid electrolyte;
    • Research related to effective polymers to improve the characteristics mentioned above; and
    • Innovations around the anode and cathode composition.
  24. 3D Printing

    BACKGROUND 3D printing is a process of creating solid objects, where consecutive layers of materials are set in

      to read | words


    3D printing is a process of creating solid objects, where consecutive layers of materials are set in three dimensions until the desired object is formed according to data fed in the modelling software or from the scan of an existing object. Most materials printers use digital technology for 3D printing.

    3D printing is achieved using the additive manufacturing (AM) or direct digital manufacturing (DDM) technology. This technology uses methods such as selective laser melting (SLM), fused deposition modelling (FDM), laminated object manufacturing (LOM), electron beam melting (EBM), and digital light processing (DLP) to create the 3D object.

    The number of application areas for 3D printing is increasing rapidly as new object development opens up new opportunities. The 3D printing technology mainly finds applications in rapid prototyping and mass production. Moreover, the technology has recently been utilized in the pharmaceutical, healthcare, automotive, aerospace, and consumer product sectors, among others.


    The graph below depicts the filing trends in patent families related to 3D printing technology. Patent filing in 3D printing is currently thriving. Vast application areas and applicability of the technology in mass manufacturing are some of the main reasons for the increase in patent filings. By one estimate, the global market reached $2.2 billion in 2012, up 28.6% from 2011.

    Filing Trends For Last 5 Years

    3D Printing IP Filing

    Source: Thomson Innovation and Aranca Analysis

    Note: data for 2012 and 2013 may not be accurate due to limitation of 18 month publication period

    The graph below shows the top assignees and their respective patent counts in 3D printing technology. The top players in 3D printing technology are companies mainly active in the printing domain. However, aerospace and consumer electronics players have also recently started filing patents. 3D Systems, Inc. developed the first 3D printer and currently features on the list of top assignees.

    Top Assignees In Last 5 Years

    3D Printing Top Assignees

    Source: Thomson Innovation and Aranca Analysis

    The graph below depicts the geographical distribution of patent families in 3D printing technology. Being established markets, the US and Europe witness a majority of patent filings. However, some of the patents filed in the Southeast Asian countries such as Japan and China, which are considered as mass manufacturing nations, also protect intellectual property rights in 3D printing technology. The universities in China, the US, and Europe have been publishing rigorously across a range of 3D printing technologies, which indicates the educational and R&D adaptability of the technology. Recently, the UK government granted funds totalling £500K to bring 3D printers to 60 schools.

    Market Distribution

    3D Printing Market Distribution

    Source: Aranca Analysis based on Thomson Innovation data


    The top players are addressing problems related to the material used in 3D printing of an object as well as its composition. Most top players are using selective laser sintering, stereolithography, and FDM technology for 3D printing, and are focusing on the related problems. With regard to the aerospace industry, aerospace companies such as Boeing are filing patents for the technology to manufacture aerospace parts, pressure intensifying tools, and solid freeform fabrication for object development.

  1. Fiscal Deficit Overview in the GCC

    A sustained slump in oil prices has eaten into the fiscal buffers that GCC countries built up over

      to read | words

    A sustained slump in oil prices has eaten into the fiscal buffers that GCC countries built up over years of plentiful oil revenues.

    While the region witnessed an acute deterioration in its external and fiscal balances over the past three years, GCC countries anticipate a relatively lower fiscal deficit in 2017 as compared to the previous year, likely due to a series of reforms within the region as well as a rally in oil prices due to production cuts. 

    GCC countries have always been highly dependent on oil, the largest revenue contributor to most of these countries’ economic growth. The region witnessed an acute deterioration in its external and fiscal balances over the past three years however, primarily due to weak oil prices. Although large fiscal buffers provided some cushion to GCC countries, sustained weakness in oil prices have forced the Gulf nations to adopt a series of reforms. GCC countries’ recent budget announcements included subsidy reforms and plans to diversify the economy to the non-oil sector and reduce wasteful expenditure. Moreover, anticipation of a modest recovery in oil prices due to the production cut announcement by OPEC and non-OPEC countries is likely to support GCC countries’ economic growth in the near future.

    Anticipation of Lower Deficit in 2017

    GCC countries anticipate a relatively lower fiscal deficit in 2017 compared to 2016 due to a potential increase in revenues. GCC countries estimate revenues from the oil and non-oil segments to increase in 2017. The region expects a recovery in oil prices to support oil revenues, while various government reforms such as divestment, plans to levy taxes, and subsidy cuts are likely to boost non-oil revenues. Oman and Qatar reduced their budgeted expenditure for 2017 by about 7.5% YoY and 2.0% YoY, respectively, while the UAE plans to maintain spending at the same level as 2016. However, Saudi Arabia and Kuwait are likely to increase their budgeted spending for 2017 by 7.9% YoY and 12.2% YoY, respectively.

    GCC Deficits Anticipated to Narrow in 2017

    According to Moody’s, real GDP in the GCC region is expected to average 1.6% in 2017–18. The average fiscal deficit for GCC is expected to reduce to 7.5% in 2017 from 8.8% in 2016. According to agency estimates, the UAE, Kuwait and Qatar would record relatively low deficits of 2.9%, 3.0% and 4.0%, respectively, in 2017, while Saudi Arabia and Oman are predicted to record deficits of 11.3% each. Bahrain would record a deficit of 11.6%.

    Recovery in Oil Prices to Support GCC Countries’ Growth in 2017

    OPEC members had reached an agreement in November 2016 to cut production by 1.2 mn barrels a day (b/d) for six months, starting January 2017 (reducing total output to 32.5mn b/d). This is the first agreement in eight years and indicates that OPEC will resume playing its role of balancing the markets. Moreover, in December 2016, non-OPEC oil-producing countries announced their decision to cut crude output by 6.0 mn b/d. Since these announcements, oil prices rebounded from their trough in early 2016, and are expected to recover at a moderate pace in the next two years.

    EIA Short term Energy Outlook, February 2017

    Brent oil prices stood at USD56.3/bbl (February 24, 2017), recovering from its lowest level of USD27.9/bbl registered in January 2016. According to EIA’s February 2017 report, Brent prices are estimated to increase 24.7% YoY and 4.8% YoY to USD54.5/bbl and USD57.2/bbl, respectively, in 2017E and 2018E, driven by lower inventory builds.

    EIA expects the oil market to be relatively balanced in 2017 and 2018, with inventory draws averaging 0.1 mn b/d in 2017 and builds averaging 0.2 mn b/d in 2018, lower than the estimate of 0.9 mn b/d in 2016. However, the increase in oil prices would encourage shale producers to restart operations, which could potentially limit oil prices in the coming years.

    EIA estimates that oil production globally would increase 0.8% YoY to 98.03 mn b/d in 2017 and 1.8% YoY to 99.76 mn b/d by 2018. Conversely, global oil consumption is expected to jump 1.7% YoY to 98.09 mn b/d in 2017 and 1.5% YoY to 99.55 mn b/d by 2018.

    We believe an increase in oil prices would have a profound impact on GCC countries’ external and fiscal position, given the region’s heavy reliance on oil exports for growth. Increasing oil revenues would lead to increased foreign earnings, which would help governments service their existing debt efficiently. Increased optimism from oil prices would improve the equity market’s performance and boost overall economic growth.

    Limited Reduction in Overall Expenditure Levels

    Over the years, GCC countries invested heavily in the infrastructure and social sectors. However, with oil prices dropping sharply, most GCC countries have cut their spending levels over the past three years. Oman and Qatar reduced their budgeted spending for 2017 by about 7.5% YoY and 2.0% YoY, respectively, compared to the actual expenditure in 2016. The UAE’s budgeted expenditure remained broadly flat (YoY). Policymakers of Saudi Arabia and Kuwait took bold steps to increase the countries’ budgeted spending for 2017 by 7.9% YoY and 12.2% YoY, respectively.

    Moderate Reduction in 2017 Expenditure

    Continued Investment in Key Sectors Over 2017

    Most GCC countries continued to focus their spending on key sectors such as education and healthcare, highlighting the governments’ efforts to prioritize spending on essential areas. Saudi Arabia allocated the lion’s share (36.0%) of the planned spending for the education, social and healthcare segments. The UAE, in its 2017 budget, allocated about 44.0% of planned expenditure toward sectors such as education, health, social development, and public services. Kuwait allocated more than half of the projected expenditure for Future Generation Fund (FGF) and the wages segment. Qatar estimated an expenditure of about 23% toward health and education, while Oman allocated about 38% of the total planned spending for education, health, social security, housing, and public services. 

    Increased Spending Towards Social Sectors

    We believe the education and healthcare sectors will remain resilient, despite weak oil prices, due to GCC countries’ focus on these key sectors. We believe spending on these key sectors will help uplift consumer sentiment in the region.

    Government Measures to Widen its Revenues

    The GCC region’s government, in their 2017 budget announcements, estimated higher revenues through diversification and an increase in oil revenues due to the anticipation of higher oil prices. Most GCC countries expect oil prices to average USD45-50/bbl in 2017.

    Expectations of a Moderate Rise in Revenues

    We believe greater economic diversification would unlock jobs and lead to sustainable growth, making the economy more resilient to future oil price shocks. GCC governments are taking various measures to increase non-oil revenue, such as divestment, the levy of taxes and fees, and the removal of subsidies from some sectors.

    Divestment Through Public-private Partnership (PPP)

    To boost the non-oil sector, some GCC countries are planning to run privatization schemes, which would include selling stakes in state-owned companies and public-private partnership projects. Saudi Arabia’s government agencies introduced about 85 projects for public private partnerships. The Kingdom is already planning to introduce an Initial Public Offer (IPO) for Saudi Arabian Oil Co. (Aramco), which could potentially become the world’s largest listed firm. Oman-based Electricity Holding Co. plans to divest its stake in Muscat Electricity Distribution Co. (MEDC) through an IPO. Qatar has indicated plans of privatizing sectors such as agriculture, education, healthcare, livestock, fishery, and tourism. In July, Kuwait’s Ministry of Finance announced plans to privatize the oil sector by offering a portion of its shares to the public in order to reduce deficit burden. However, the exact date for the underwriting has not been announced yet. Similar to Saudi Arabia, Kuwait plans to privatize its oil sector as part of its economic reforms. Khalifa Hamada, Undersecretary of the Ministry of Finance of Kuwait, stated that privatization would enable greater domestic and foreign participation in the Kuwaiti market. Furthermore, Bahrain plans to fully privatize some state-owned companies such as Gulf Air, Alba, Bahrain Airport Company, Batelco and the National Bank of Bahrain. Oman’s finance ministry has started transferring its holdings in listed and private companies to other state-owned corporations and sovereign funds. For example, the ministry's stake in Salalah Port Services Co. was transferred to Oman Global Logistics Group in September.

    Plans to Levy Taxes and Fees

    GCC countries plan to introduce a Value Added Tax (VAT) of 5% in January 2018 in a bid to increase government revenue. Companies with a turnover of more than USD100,000 would be taxable under the new law. According to IMF, revenue from VAT would contribute 2.1% to the UAE’s GDP. Qatar and Kuwait are expected to generate around 1.1% and 2% of the GDP, respectively, through the implementation of VAT.

    The introduction of VAT could lead to a drop in consumer spending, leading to lower revenues for GCC companies in the short term. We believe the introduction of VAT could improve the business climate across the region in the long-term and help governments create a reliable and stable income. Moreover, GCC countries have already agreed to implement selective taxes on tobacco, and soft and energy drinks during the current fiscal year.

    GCC to Adopt Subsidy Reforms

    Besides cutting down spending on wasteful expenditures, GCC nations have reduced the number of subsidies. According to IMF, GCC countries spent about USD175 bn in 2015 on post-tax subsidies, which accounted for about 10% of the region’s total GDP.


    Key Subsidy Reforms (from 2016 to date)
    Saudi Arabia
    • In July, the government approved the National Transformation Program, which is aimed at reducing public-sector wages and subsidies to 40% of the total spending by 2020 (from the current 45%).
    • In June, the Kingdom introduced a new white land tax of 2.5%, which is applicable to urban undeveloped land plots.
    • In October, there was a cut in the allowances for government employees and implementation of the municipal fees by the Ministry of Municipal and Rural Affairs (MOMRA).
    • In January 2016, the UAE’s Ministry of Energy increased Super 95 and E Plus-91 prices by 5.0% MoM and 12.3% MoM, respectively. Diesel prices increased 3.1% MoM, effective from February 2017. Earlier, in 2015, the UAE reformed its fuel policy and linked gasoline and diesel prices to international prices.
    • The UAE’s Energy minister scrapped subsidies on electricity and gas sold to power generators.
    • In January 2016, Bahrain raised retail prices of petrol by more than 56.3% for petroleum products. It is also expected to increases prices of other fuels such as diesel, kerosene and LPG, and electricity and water tariffs gradually by 2019.
    • In April 2016, Qatar linked gasoline and diesel prices to international prices.
    • In January 2016, Oman announced the de-regulation of refined petroleum prices to adjust them with international ones.
    • In March 2016, water tariffs for government, commercial, and industrial consumption were increased.

    Clearly, GCC countries signaled political willingness to address oil price volatility and deficit concerns. The price hikes are likely to increase revenues for the government. Rationalizing subsidies is expected to bring in fiscal savings and improve efficiency in the use of resources. It will also help governments channelize the funds toward broader fiscal diversification. However, some of the announced measures could face stronger resistance in countries with a low per capita income.

    Debts to Fund Budget Shortfall

    During the era of high crude oil prices, GCC countries earned huge foreign exchange reserves. However, the recent oil price volatility threatens the fiscal buffer in these countries now. The decline in oil prices has pushed GCC governments to issue bonds to fund deficits.

    Saudi Arabia raised around USD84bn in 2016, which was around 12.3% of its projected GDP. Of the total debt, the kingdom raised around USD27bn from international markets and the remaining USD57bn from the domestic market. In May 2016, Qatar raised USD9bn through the sale of Eurobonds and expects to fund the country’s deficit through new debt issuances.  In 2016, Oman raised about USD5.0bn through domestic and international bonds and plans to borrow USD6.5 bn from the international market, USD1.0bn from the local market and use USD1.3bn from its financial reserves.

    Kuwait plans to issue US-dollar-denominated sovereign bonds of USD9.6bn in FY17. This would be over its earlier announcement to raise about USD6.6bn through domestic bonds. Bahrain raised about USD1.0bn through private placements and international bonds. The Central Bank of Bahrain’s USD526.8mn bond was listed on the Bahrain Bourse on May 15, 2016. The bond was issued for five years, with a par value of USD1 each.

    Tight Liquidity Impacts GCC Banking Credit and Deposit Growth

    The GCC governments’ efforts to support deficit through debt issuance would also affect the liquidity available for private lending. Benchmark interest rates have been rising across the GCC region with the liquidity crunch.

    The slump in oil prices has brought about a slowdown in credit growth across the GCC region. Saudi Arabia and Kuwait saw the most reduction in credit growth in 2016. YoY, Saudi Arabia’s credit growth rate declined to 2.9% in 2016 from 8.4% in 2015, while Kuwait’s rate declined to 2.5% in 2016 from 7.9% in 2015. UAE, Oman and Qatar registered credit growth rates of 6.0% YoY, 7.6% and 12.6%, respectively, in 2016, down from 6.4%, 8.4% and 12.7% in 2015.

    Muted Credit and Deposit Growth in 2016

    Deposit growth would also suffer as the ongoing subsidy reforms would likely reduce real income and thereby the savings potential of domestic customers. Barring UAE and Kuwait, most GCC countries saw their deposit growth slowdown in 2016. Saudi Arabia, UAE, Kuwait and Oman’s deposit growth slowed down to 0.8%, 6.2%, .4% and 2.1% YoY, respectively, in 2016 while Qatar’s deposit  declined to -1.3% in 2016 from 1.9% in 2015.

    Budget Impact — Outlook on GCC Economies

    Budgets play an important role in driving any economy as these are the governments’ roadmap to spending on key sectors and generating revenue to support the economy growth. Although GCC countries anticipate higher revenue through various reforms, the actual implementation of these reforms would remain a key challenge for the region. While the recovery in oil prices and improvement in non-oil sectors provides some cushion, sustainability would remain a key concern.

    Recovery in Non-Oil Private Sector Growth

    Since October 2016, non-oil private sector growth improved in Saudi Arabia and UAE. According to the Emirates NBD Purchasing Managers’ Index (PMI), Saudi Arabia’s PMI rose to 56.7 in January 2017, the highest since August 2015, while UAE’s PMI also rose to 55.3 in January 2017, its highest reading since July 2016. The upward trend in PMI suggests improved output and new order growth. The volume of new businesses also increased during the period in both countries. However, we believe that the non-oil sector cannot maintain its resilience to oil price volatility over the long-term. While governments have made some progress, dependence on oil and gas for revenue would remain strong.

    GCC countries estimation of lower deficit in 2017 depends on two major factors: higher oil revenues through an increase in oil prices, and a reduction in wasteful expenditures. Moreover, increase in oil revenues would also reduce the need for raising more debt and boost investor confidence. However, the real test lies in implementation.

  2. 3 Consumer Staples Stocks You Need To Get In On

    Consumer Staples, prized for their slow but steady growth in investment portfolios, are generating higher alpha than ever

      to read | words

    Consumer Staples, prized for their slow but steady growth in investment portfolios, are generating higher alpha than ever before.

    They’ve not only been more resilient to the usual market headwinds but also have tremendous potential to grow, bolstered by technological disruptors and a growing consumer base among the world’s emerging market middle class.

    Legacy brands, plain vanilla business models, and not nearly as much excitement as the technology space; that pretty much sums up affairs in the consumer staples industry.

    The same traits, however, make consumer staples stocks a quintessential part of any portfolio manager’s collection. Higher returns, low volatility, and a less capital-intensive profile make consumer staples an especially attractive investment opportunity for the long-term.

    If we consider a 15-year historical trend, the MSCI world consumer staples index recorded its highest average annual returns of 7.2%, almost double the MSCI world average annualized returns of 3.4%. It also boasted the lowest volatility, 12.0% vs. the MSCI world average of 18.0%, which translates to far fewer fluctuations in the stocks’ pricing behavior. 

    MSCI Sector Indices

    Conversely, the Technology Hardware & Equipment sector recorded the highest volatility (+27.0%) among all other sector indices at an average annualized return of 2.0%, turbulence due mostly to the collapse of the tech-bubble. 

    Consumer Staples Are at an Interesting Phase Right Now — Performance Spread Widens While the Valuation Spread Narrows  

    Since 2000, the MSCI world consumer staples index’s outperformance versus the MSCI world index is noteworthy. The barometer has widened from 1.4x (Dec’07) at the beginning of our most recent period of recession to 1.9x (Apr’17) right now, way ahead of the historical median (1.6x).  

    MSCI World index vs. Consumer Staples Index

    Early 2016 was turbulent for the global equities market, driven by factors such as instability in Chinese equities markets, a slump in global oil prices, disappointing GDP numbers, and corrections in other sectors such as technology, automotive, and banking.

    Amid tough market conditions, consumer staples was the primary sector yielding positive returns, and investors flocked to what they’ve always considered a safe heaven. Accordingly, the spread between MSCI world consumer staples and MSCI world index, forward P/E peaked at 4.8x in Jan’2016 as investors rewarded consumer staples for its stable performance. 

    MSCI World Consumer Staples Index and MSCI World Index Forward P/EThe spread has further narrowed to 1.4x in Apr’17, far below the historical average of 2.2x, and we believe the current 1.4x valuation spread offers a noble entry point for long-term investors, as long as they pick the right names. 

    Consumer Staples Have Remained Resilient to Short-term Headwinds

    While the Brexit impacted short-term sales growth for global consumer staples; the overall industry is well shielded from such uncertainties. The outlook for consumer spending remains strong for the next couple of years, driven by growth from underpenetrated rural markets, premiumization, growing health awareness, and niche brands. BMI Research forecasts 5.4% annual sales growth for global food and non-alcoholic drinks in 2017 and an annualized average growth rate of 4.4% until 2020.

    Growth Potential for Consumer StaplesStructural trends such as population growth, burgeoning middle class, rising urbanization, increasing disposable incomes among working couples, and above all, a growing disposition among consumers for product and supply-chain innovations and digital disruption in the marketplace (through the emergence of E-commerce) offers multi-year growth potential for consumer staples, especially in the emerging markets vis-à-vis developed economies. 

    Which Companies are Generating the Most Alpha?

    Picking the right stocks is the key to capitalizing on the consumer staples theme.

    The two stocks that seem to strike the right cords regarding fundamental performance metrics, with positive revenue growth trajectory and strong profitability (above peer average EBIT margin %), are Altria Group and Anheuser-Busch Inbev. They’re among the MSCI World Consumer Staple Index’s top 10 constituents; other big names with decent top-line growth performance include Nestle, Wal-Mart, and CVS Health. 

    Fundamental Performance MetricsOn the valuation-return metrics, two stocks — Altria Group and BAT UK — are in the favorable zone right now, given their higher than peer average (31%) return on equity% on lower than peer average (20.x) 12-month forward P/E for 2017E among top 10 constituents of MSCI world consumer staple index.

    Forward P/E-ROE Metrics

    Future Outlook on the Top Three Consumer Staples Stocks Right Now

    Altria Group (a parent company to Philip Moris US) has a history of distributing generous shareholder returns, with the current dividend yield of 3.6% meaningfully above the MSCI world consumer staples dividend yield of 2.6%. The outlook remains poised for 2017, with expected full-year EPS growth in the 7.5%-9.5% range, in-line with historical precedence. The only thing that could hamper sales performance would be a newly imposed cigarette tax hike (USD 2 per pack) in California, the biggest market for Altria Group and its peers. Nevertheless, in terms of valuation, the stock currently trades at a 12-month forward P/E of 17.8x which is in line with its historical 5-year average P/E.

    Anheuser-Busch InBev won approval for a USD103bn takeover of SABMiller Plc. in September’2016, making AB InBev a brewing powerhouse, vending one out of every three beers sold in the global market. ‘Jefferies International’ estimates the deal to bring an annual cost savings of USD3bn on a revenue size of USD55bn for the combined entity, while consensus estimates an EBIT margin of 31% in 2017E, up from 29% in 2016. On the valuation front, the stock currently trades at a 12-month forward P/E of 24.8x, which is at a 29% premium to its historical 5-year average P/E of 19.3x, pricing in some synergies from SAB acquisition.

    The positive sales momentum in 2016 with an organic growth of 5% after two consecutive years of decline for British American Tobacco (BAT UK) is expected to continue, driven by a better price mix and below industry-average volume declines. Further, BAT UK has agreed to acquire the remaining 57.8% of Reynolds American Inc., a transaction expected to close in Q3 2017.The Street makes a note of this acquisition and expects EBIT margins to be up by 120 bps to 38.4% on revenues of Euro 17.6bn for 2017E.  On the valuation front, the stock currently trades at a 12-month forward P/E of 18.9x, a modest 6% premium to its historical 5-year average P/E of 17.8x. 


    Note: Data considered as of 10th Apr 2017

  3. Smart Beta — Innovation, Meet Opportunity

    The tech bubble wiped out an estimated $30 trillion of wealth. The credit crisis that followed soon after further

      to read | words

    The tech bubble wiped out an estimated $30 trillion of wealth. The credit crisis that followed soon after further shook investor confidence in the markets. As a result, investors shifted from active management and hedge funds to passive investments that were still seeing massive growth.

    In an attempt to reduce costs and boost returns, ETF providers dabbled in self-indexation to beat the market curve.

    Ideating, backtesting, constructing, and managing indices is a cumbersome endeavor however, demanding a lot of time and diligence if it’s to be done effectively. 

    Efforts to circumvent these drawbacks have gradually spawned a new breed of innovative ETFs — known as Smart Beta — that combine aspects of both active and passive management strategies.

    Ever since the first official index fund was launched in 1975, passive investments have grown significantly, accounting for transfers to the tune of half a trillion in 2016 — around 20% of the asset management industry. The gradual shift from active to passive investment options can be summarized as follows:  

    The next chart from Blackrock also shows that $3.5 trillion out of the $74 trillion traded through the asset management industry were Exchange Traded Products, a fast growing segment. Most of the ETF growth has been in the equity space, but fixed income and commodities and others are receiving greater interest from the investors.

    GLOBAL ETP ASSETSSource: BlackRock Advisors. 1 Data is as of March 31, 2017 for all regions. 

    With ETPs accounting for more than 50% of 2016’s total inflows, and the tremendous growth they’ve enjoyed over the past five years, it’s evident that investors are gravitating toward it. 

    What Limitations Among Active and Passive Led to Smart Beta Strategies?

    Traditional asset management refers to the active management of portfolios. 

    Active investments had a promise of creating Alpha based on the investment manager’s astuteness in selection and timing.

    Continued underperformance among active managers as well as higher costs however, forced investors to opt for passive investments that mimicked a known index benchmark. 

    Passive investments based on such traditional indices promised Beta from these investments. 

    Index funds and ETFs based on market cap weighted indices couldn’t produce better performance however, even though their costs were lower.  This prompted fund houses to blend the best of both concepts, thus coming up with portfolios based on smart beta strategies.

    The following illustration is a summary of the differences between active and passive strategies, and particularly, how smart beta investment could offset the limitations of both:

    We can also summarize the characteristics of different strategies as follows:

    Smart Beta





    Factor exposure




    Macro exposure




    Manager discretion




    Outperformance potential  



            Medium to High







          Medium to High

            Low to High

    Investment Capacity



            Low to High

    Portfolio Turnover



            Medium to High

    Fees & Costs


          Low to Medium


    Smart Beta strategies attempt to enhance performance, reduce risk — or both —  as compared to traditional market cap weighted indices. 

    Some of the limitations of market-cap weighted indexes’ include:

    • Concentration.
      In most cases, more than 63% of market-cap weighted index assets are held by the top 20% biggest names.
    • Weightage.
      The ever present problem of overweighting overvalued securities while underweighting undervalued stocks. 
    • Exposure.
      Underweighted stock’s exposure to other rewarded risks like value, size, etc.

    Thus, Index Funds and ETFs based on market cap weighted indices aren’t good enough for generating better risk-return tradeoffs. 

    Specific index ideas had to be created in order to satisfy the investor’s needs.  For example, a simple concept like dividend paying stocks based ETF could satisfy the requirement of investors who would prefer regular income. 

    Fundamentals weighted indices were thus created to offer ETFs. Single factor indices were created initially, and their success encouraged firms to bring multi-factor indices into play.  

    Factor Based Smart Beta Strategies

    Extensive academic and industry research over the years has identified specific factors such as size, dividend, momentum, low volatility, and Yield, which are primary drivers of investment returns. Several asset management companies have created ETFs based on these factors.

    Factors that are widely used in Smart Beta ETFs right now include:

    • Value
    • Small size
    • Low volatility
    • High (dividend) yield
    • Quality
    • Momentum
    • Equal Weight
    • High beta
    • Low beta
    • Buyback
    • Growth

    While these factors are essentially equity factors, some are well-known factors unique to the fixed income markets, factors such as:

    • Term - Bonds with longer maturities have earned higher returns than bonds with shorter maturities.
    • Credit - Bonds with lower credit quality have earned higher returns than bonds with higher credit quality.

    Index providers such as MSCI and Standard & Poor's use these factors to construct factor indexes, which form the basis for Smart Beta ETFs. MSCI currently offers factor indexes that target six of the most commonly used factors. The next table details these factors, their "capture" objective, and some common metrics used in the construction of the factor indexes.

    MSCI Factor Indexes

    Capture Objective    
    Selected Common Measures


    Excess returns from stocks priced below

    their fundamental value.                            

    Book to price, earnings to price, book value, sales, earnings, dividends, cash flow.

    Small Size (Small Cap)    

    Excess returns from small-cap firms.

    Market cap (full or free float).

    Low Volatility    

    Excess returns from stocks with below average volatility or beta.     

    Standard deviation, beta.

    High Yield

    Excess returns from stocks with above-average dividend yields.     

    Dividend yield.


    Excess returns from high-quality stocks characterized by low debt, stable earnings growth, and so on.     

    Return on equity, earnings stability, dividend growth stability, balance sheet strength, financial leverage.


    Excess returns from stocks with strong performance in the past.               

    3, 6, or 12 month relative returns, historical alpha.

    Though it is proven that these factors produce excess returns in the long-run, it could produce varying returns during different economic / market regimes.  As evident in the next table from Vanguard, it is clear that no single factor outperforms traditional benchmarks consistently.  

    As a result, ETF providers have started issuing multi-factor products, which is also consistent with multi-asset portfolio strategies that have gained traction recently. 

    Evidently, smart beta 2.0 is nothing but multi-factor ETFs.

    Issues in Smart Beta Product Offerings

    Because the cost of using standard benchmarks is quite high, and is usually a percentage of the assets under management, many ETF providers have opted for self-indexation. 

    Vanguard, one of the world’s largest passive fund managers, shifted from benchmark index provider MSCI in 2012, and began working with thriftier providers as well as Chicago University’s Center for Research in Security Prices (CRSP) in order to serve their 22 largest funds. 

    Plenty of smaller firms have created their own specialized indices, managing the cost of their smart beta ETFs in-house or with the help of smaller firms.

    Ideating, constructing, and managing these indices aren’t easy. 

    It also isn’t cost-effective to use the services of existing Index Providers. 

    Fund houses therefore needed to collect data, clean it up, decide on their filter rules, and backtest their idea. All corporate action adjustments need to be completed before the data can be used.  Most indices on which ETFs are introduced are calculated daily on an end of day basis, thus reducing the burden on their calculation engine, and the process in general. Such indices are usually rebalanced on a monthly or quarterly basis; benchmark indices are rebalanced at most on a quarterly basis.

    There are plenty of small players who have actively engaged in the smart beta ETF business due to the standardization and scalability of this research orientation. 

    Thus, the asset management industry has seen a significant democratization, but not commoditization. 

    Plenty of new ETFs are based on unique index ideas, thus creating a high level of customization.  If the research and backtesting isn’t thorough however, the results could be quite counterproductive.


  4. Regime Based Asset Allocation (RBAA) — Let the Data Talk

    The growth of multi-asset portfolios in recent years has created a need to look beyond traditional asset allocation

      to read | words

    The growth of multi-asset portfolios in recent years has created a need to look beyond traditional asset allocation strategies. Different economic regimes produce significant impact on various asset returns and risks, albeit at varying degrees. Dynamically rebalanced asset classes have an established track record of increasing returns while reducing risk. A formal regime based asset allocation strategy could therefore be the optimal option for investors banking on multiple investment possibilities.

    “When the facts change, I change my mind. What do you do, sir?
     -  John Maynard Keynes

    Asset allocation is among the most important decisions any investor or fund manager will make.  Typically, investors and fund managers examine the composition of their portfolio in terms of investments in equity, bonds, and cash.  Historically, stocks and bonds haven’t moved in the same direction for long periods, and clubbing these two should help investors achieve the benefits of good diversification and reduce risk.

    Traditionally, asset allocation techniques were based on the age and risk appetite of an investor.  Factors such as the age of a person affect the time horizon considered for the investment; assuming of course that they’re building a corpus fund over time in order to retire comfortably. Risk appetite provides an indication about how much they’re willing to lose in the short-term to achieve their long-term strategic goals, expecting higher growth in the corpus being built for retirement. An asset allocation rule of thumb is that an investor’s age should match the percentage of funds they’ve invested in bonds — so a 50 year old investor should invest at least 50% of his/her funds in bonds.

    Asset allocation strategies are formulated based on investment goals, risk tolerance, time frames, and diversification. The most common forms of asset allocation are: strategic, dynamic, tactical, and core-satellite.

    The emergence of multi-asset portfolios has allowed fund managers to look at Regime Based Asset Allocation (RBAA) strategies. There has been significant growth in multi-asset portfolios in the past few years, and it has sparked growing interest in the asset allocation practices that fund managers have developed to maximize their returns. 

    Regime Based Asset Allocation

    Multi asset strategy based investments amounted to around $2.8 trillion in 2015.  It’s expected to make up 10% of the global asset management industry, and represent 25% of the net new business over the next five years, according to BlackRock survey results. This has increased interest in multi-asset portfolios, enabling portfolio managers to look beyond just equity and bond markets

    Even within the equity and bond markets, international markets provide different risk-return trade-off, and hence, are a very good avenue for diversification.  Commodities, currency, and alternative assets such as real-estate, infrastructure, and so on, provide excellent opportunities for investments.  The performance of these asset classes varies at different stages of the business cycle, and hence, combining them could provide more sustainable returns while managing risks at lower levels.  Regime based asset allocation aims to optimize this opportunity by moving in and out of various asset classes through strategies based on models developed specifically for this purpose.

    Asset classes available for investments have been growing over the years, and their evolution can be roughly summarised as follows:Evolution of Asset Classes for InvestmentsThe addition of alternative investment opportunities helped the multi asset revolution.

    To implement RBAA, one needs to thoroughly research the various opportunities existing for the investor by collecting and analyzing the performance of the markets and asset classes.  Regimes could be defined on the basis of GDP growth and inflation

    The next illustration provides an idea about the possible regimes. One could split these regimes into finer points and create more than four regimes, if desired.Probability ModelA probability model needs to be developed in order to predict likely scenarios and regimes. Using these probability models, one could develop an optimization model and allocate resources to asset classes and markets. Constraints on the investment limits to asset classes, markets, sectors, and so on could be defined and implemented within the optimization problem. The complexity of probability models and optimization algorithms can be defined according to the fund manager’s specific requirements.

    Evidently, regime based asset allocation is completely data-driven and doesn’t follow standard rules.  It also doesn’t depend on the age, risk appetite, investment horizon, or diversification. The availability of new data prompts investors to look at rebalancing their portfolios. Constructing a regime based asset allocation strategy, and systematically following it, is a very productive investment activity in during current economic climes. One could reduce the cost of transactions and management by including ETFs and ETPs in the portfolio.

    All major asset management companies such as BNY Mellon and State Street uses different variations of the regime based asset allocation strategy.  With investors demanding higher returns and lower costs, more companies are devising customized versions of RBAA, and several funds would continue to move towards ETFs.

    For instance, BNY Mellon research uses a macro-based RBAA, and shows that multi asset based portfolio outperformed the standard institutional portfolio by 1.6% net of fees, while the risk is lower by 3.2%.  This clearly shows the potential of RBAA. It also showed that RBAA portfolio performs exceedingly well during the Hot and Cold regimes.

    State Street on the other hand uses a volatility-based regime definition that utilizes volatility clustering that’s observed in the market place. Their research shows that the RBAA based portfolio’s outperformed a traditional 60/40 portfolio by around 45bp, while risk is reduced by around 3%. The return/risk measure is 1.17 versus 0.70, and the drawdown is lower by more than 50%.

    Thorough research based on a large set of data is important while creating a custom solution for a portfolio manager who wants to successfully implement the strategy.

    A thoroughly curated list of asset classes and markets could be selected by the mandate and involvement of the managers; the following is an indicative list of what they’d likely consider:

    Asset Class




    US Stocks
     ·         Large Cap
     ·         Mid Cap
     ·         Small Cap
     ·         Sectors and Themes International Stocks
     ·         Developed Markets
     ·         Emerging Markets
     ·         Frontier Markets

    International Stocks
     ·         Developed Markets
     ·         Emerging Markets
     ·         Frontier Markets







    US Bonds
     ·         US Treasury - T Bills, Notes, Bonds
     ·         TIPS 
     ·         Investment Grade
     ·         High Yield
     ·         Municipal Bonds
     ·         Asset Backed, Mortgage Backed

    International Bonds
     ·         Treasury - T Bills, Notes, Bonds
     ·         Investment Grade
     ·         High Yield
     ·         Municipal Bonds
     ·         Asset Backed, Mortgage Backed


    Oil, Gold, Silver

    Other Metals

    Other commodities


    USD, Euro, JPY, GBP, etc.


    Real Estate, REITs, Infrastructure


    ETFs, ETPs


    Traded and OTC derivatives

    It is clear that the multi asset strategy could be very useful for active managers to outperform, while the investors are moving more and more funds to passive investments, particularly ETFs.  However, the definitions of regimes, quality of forecasting for the regime probabilities, and the performance of assets under the projected regime need to be well-defined. 

  5. Macau's Gaming Sector - It's a Good Time to Roll the Dice

    The preferred playground of the gambling world’s high rollers, Macau is aggressively expanding its hospitality and tourism s

      to read | words

    The preferred playground of the gambling world’s high rollers, Macau is aggressively expanding its hospitality and tourism sectors and is well on its way to becoming the premium global gaming and tourist destination by 2018.

    Macau — the only place in China where gambling is legal — has become a destination of choice for well-heeled gamers.

    In fact it’s the world’s hottest gaming destination right now.

    Macau overtook Las Vegas as the world’s biggest gaming destination during the late 2000s, and the gap has only grown wider since.

    Macau and Las Vegas gaming revenue (USD$ m)

    While it enjoyed a bull run initially, Macau’s gaming sector has been through some tough times recently, enduring the fallout from China’s economic slowdown as well as an anti-corruption campaign. However, we believe the industry is poised for a strong rebound.

    The gross gaming revenue (GGR) rose for the seventh consecutive month in February 2017, raking in MOP 23 billion, up from MOP 19.5 billion a year ago - its highest since January 2015.

    Gross gaming revenue (MOP b)

    Buoyed by new openings such as the Parisian, Wynn Palace, and other multi-billion dollar integrated resorts, the upturn in GGR has been strong and consistent. In addition to high stakes gamblers, these integrated resorts — through their family oriented wholesome offerings — attract a large number of recreational gamers and leisure tourists as well.

    Gaming companies are gradually shifting their focus from VIP segments to the mass-market.

    In order to attract families, companies are building resorts and expanding room capacity to help Macau emerge as the destination of choice for tourists worldwide.

    The shift has also received regulatory push by the Special Administrative Region’s (SAR) decision to issue gambling licenses based on a casino’s non-gambling activities. This has encouraged casino operators to expand their offerings, raising expectations of growth while providing more tailwinds to the sector’s strong recovery.

    Mass market GGR (MOP b)VIP gaming revenue (MOP b)

    Macau — An Emerging Shopping Destination

    Macau is becoming a preferred destination for luxury shopping, due in part to lower taxes on luxury goods as compared to China. The increasing presence of luxury brands has boosted spends on shopping as a proportion of tourist spending, which had increased from 40% in 1998 to 46% in 2015.

    Non-gaming expenditure of tourists in MacauThe lucrative opportunity is further affirmed by the fact that Macau records higher sales per square foot of retail space than anywhere in Las Vegas.


    New Infrastructure Projects and Favorable Policies Will Boost Tourism

    In its latest Five-Year Plan, the government has articulated its aim of diversifying Macau’s economy and reducing dependence on VIPs.  With this objective in mind, it has implemented a number of measures to enable swifter movement of tourists. The development of several infrastructure projects such as the Hong Kong-Zhuhai-Macau Bridge, the Macau Light Rail Transit (LRT), as well as an additional bridge to Taipa, have been prioritized. The improved connectivity and tourist-friendly measures such as extensions on transit visas and a delay on full-smoking ban are also expected to spur growth in Macau’s gaming industry.

    Cotai’s Development as a Gaming Hub Will Boost Growth as Well

    Casino operators in Macau have opened additional facilities in the Cotai strip of Macau during 2015 and 2016, and plan to further expand in 2017 and 2018. The number of hotel rooms in Macau is expected to increase by 39% over the next few years, with the majority of additional capacity coming up in Cotai. The recently opened Parisian Macau and Wynn Palace resorts have increased the region’s hotel room capacity by 15%, its biggest two month jump since 2009. They are also expected to significantly increase non-gaming recreational activities and drive Macau’s shift towards mass market revenues. 

    Future Outlook

    During its nascent stages of development (2003 – 2013), industry players in Macau’s gaming sector focused singularly on building casinos, paying little attention to infrastructure. They also banked heavily on high rollers, a near complete dependence on VIP gamblers.

    Since 2014, however, the industry has chosen to focus on recreational and family tourists, hoping to generate increasing revenue from retail, hotels, and mass-market gaming, eventually reducing its overall dependence on gambling revenues.

    In our view, Macau’s gaming sector has now entered a stage of significant growth in its life cycle.

    Given its current momentum, the sector is likely to peak by 2030, after which it’s expected to mature, a stage characterized by low but steady growth and high dividend payout.

    According to Macquarie Research, Macau’s Gross Gaming Revenue (GGR) is expected to grow over 8% in 2017, led by an approximate growth of 17% in the mass-market segment. 

    Gross gaming revenue estimates (MOP b)

    Going forward, the mass-market segment is expected to be the biggest driver of growth, contributing 65% of the GGR by 2020, up from 47% in 2016.

    “This is the best time for an investor to get in” believes David W. Williamson, Managing Director of AMC Wanhai Securities. “The growth stage is the optimum time for investment as there is lesser risk than the development stage, while receiving a high return on investment. The favorable risk-reward ratio makes the investment attractive for institutional and individual investors. With the gaming sector in Macau expected to register impressive growth during this phase, investors would be well advised to invest in it."  



    For more insights into Macau’s gaming sector, check out AMC Wanhai Securities report — MACAU HAS ENTERED ITS GROWTH STAGE, 2013-2030.

  6. Twitter — A Crystal Ball for Asset Managers?

    Crowdsourcing through social media could be the next big thing in an asset manager’s analytical arsenal.  N

      to read | words

    Crowdsourcing through social media could be the next big thing in an asset manager’s analytical arsenal. 

    Newly elected US President Donald Trump has made Twitter famous, again. The president often takes to the social media platform in order to express his views on policies and publically traded companies. In most cases, his 140 characters pack the power to move Wall Street in either direction. In January for instance, Toyota lost US$1.2 billion in value after @realDonaldTrump tweeted, “Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.”

    Other companies, including Lockheed Martin, Boeing, and General Motors, have been in the presidential Twitter feed’s line of fire, which caused panic among those who invested in them. Knowledge of such events before anyone else could help any investor form a winning trade strategy.   

    In today’s competitive world, quick access to information has become a key differentiating factor as investors and asset managers weigh information to arrive at investment decisions. Over the years, information sources have evolved from newspapers and newswires (traditional) to social media platforms and online networks (non-traditional). The possibility of predicting stock market trends by analyzing public emotions would have seemed farfetched a decade ago. However, in today’s constantly innovating world, the means to commoditize any emerging technology are quick and ample. In recent years, the world has witnessed a surge in big data analytics companies such as Dataminr and Eagle Alpha, which instantly analyze Twitter messages and other alternative information to provide valuable intelligence to fund managers

    What is Driving the Trend?

    The growing use of social media as a preferred means of communication is the major catalyst responsible for the transformation of real-time information into trade insights. Nowadays, people often use social media platforms, such as Twitter, Facebook, and YouTube, to express their feelings experiences, and events. As of December 2016, more than a quarter of the world’s population was active on Twitter and Facebook. In addition to sharing updates about friends and family, social platforms are becoming a powerful tool to disseminate and consume information. According to current estimates, approximately 350,000 tweets are sent per minute, amounting to 500 million tweets per day and around 200 billion tweets annually. This is an indication of the wealth of information available on these platforms.Number of Monthly Active Users (in million)

    Social Media is Disrupting Journalism as We Know It

    Social platforms have rapidly evolved as news sources. The digital and Internet revolution has caused an increasing number of people to ditch traditional information sources like TV and print media for the more engaging social and mobile platforms. According to Pews Research Center (2016), the majority of Twitter (63%) and Facebook (63%) users in the US utilize the platforms as news sources. This number rose significantly from 52% and 47% for Twitter and Facebook, respectively, in 2013.

    The uptake of social media platforms as real-time news sources is rising due to the growing phenomenon of “citizen journalism.” Citizen journalism refers to the collection and spreading of news by the general public. Led by the power of social media, this has enabled as-it-happens news broadcasts, sometimes even before the mainstream media:

    • In January 2009, Twitter user Jānis Krūms tweeted, “There's a plane in the Hudson. I'm on the ferry going to pick up the people. Crazy.” The news broke on Twitter and was picked up by the mainstream media only about 15 minutes later.
    • In 2011, Sohaib Athar, unknowingly, live-tweeted the US military raid that led to the death of Osama Bin Laden.
    • In 2013, Twitter chose its own platform over a traditional press release to announce its IPO.

    A number of such events continue to occur and be reported on social media platforms before any of major news agencies pick them up. This gives Twitter an edge when providing real-time coverage, proving more reliable for breaking news than agencies such as CNBC, Reuters, and Bloomberg — on which traders rely heavily. Findings by Pews Research Center indicate a larger proportion (59%) of users follow breaking news on Twitter as compared to Facebook (31%).

    Are Financial Markets and Public Sentiment Really Correlated?

    Yes. Studies have discovered a correlation between financial markets and public mood. In 2010 for instance, researchers at Indiana University released an academic paper titled “Twitter mood predicts the stock market.” Dr. Johan Bollen and his colleagues claimed it was possible to predict movement in the Dow Jones Industrial Average Index (DJIA) by analyzing Twitter feeds. Dr. Bollen used two mood tracking tools, Google Profile of Mood States (GPOMS) and OpinionFinder, to measure sentiment as expressed in six months of Twitter data.

    GPOMS assesses 6 distinct mood states, i.e., Calm, Alert, Sure, Vital, Kind, and Happy. Conversely, OpinionFinder uses a single mood indicator, i.e., positive versus negative.

    Using an algorithm, Dr. Bollen and his colleagues were able to predict the daily direction of the DJIA three days in advance, with 87.6% accuracy.

    A similar study was conducted by the European Central Bank (ECB). The bank analyzed daily tweets containing the words “bullish” or “bearish” to gauge investor sentiment about the market on a particular day and then correlated that with actual movement in the stock market. Higher Twitter bullishness indicated an uptick in daily returns on the following day. The ECB discovered that  “Twitter bullishness has a statistically and economically significant predictive value in respect of share prices in the United States, the United Kingdom, and Canada.”

    However, the ECB also pointed out that the Twitter indicator is able to predict only short-term movement, usually up to a single day. 

    Do Asset Management Firms Need to Rethink Their Strategies?

    The majority of news stories invariably impact the price of certain listed equities minutes after they break. The ability to accurately capture these events almost instantaneously, before the market, could provide a brilliant competitive edge to traders and asset managers.

    In March 2015, a trader made over US$2 million in an extremely well-timed trade. Within seconds after Dow Jones Newswires reported Intel was in talks to buy Altera, a trader (possibly through an automated trading program or a bot) purchased options for about 300,000 shares of Altera with a strike price of US$36 and mid-April expiry. At the time, Altera’s shares were trading at around US$34.76 per share, so the options were out of money and cost US$0.35 per piece. Twenty seconds later, Altera’s stock was halted. Two seconds after, a Wall Street Journal reporter tweeted the news of the potential merger. When the stock reopened, Altera surged and closed 28% higher. Consequently, the price of each option bought by the trader increased to around US$8.10, taking the collective value of options to about US$2.4 million, compared with US$110,000 at the time of purchase.

    In another instance, Social Market Analytics, a social media data analysis firm, alerted clients that the positive talk on Apple was percolating, just before legendary trader Carl Icahn tweeted he had purchased a large chunk of the stock.

    More recently, a Google engineer wrote computer code to capture the sentiment around US President Donald Trump’s tweets. The code is designed to assess whether Trump’s mention of a publicly traded company on Twitter is positive or negative, and then, autonomously trade stock in that company.  

    Social platforms are increasingly becoming hunting grounds for asset managers equipped with big data analytics to long or short equities faster than smaller investors. A number of companies such as Dataminr, EOTpro, and Eagle Alpha are riding big on this trend. These companies apply advanced analytics to millions of Twitter messages and other non-traditional data sources to detect events likely to move the market.

    Access to a complete Twitter stream is estimated to cost around US$30,000 per month, with fees based on usage, which could cost up to US$1.5 million a year. Dataminr emerged as one of the first companies to buy direct access to the entire stream of tweets. Currently, it is one of the few companies to have acquired such access following Twitter’s acquisition of GNIP in 2015 and its subsequent decision to cut off full feed for some companies. GNIP resells social media data to analytics businesses and other clients. Meanwhile, Eagle Alpha, formed by a former Morgan Stanley i-banker, provides alternative data-based macro and equity research to asset managers

    The World’s First Twitter-based Hedge Funds

    A few months after Dr. Bollen and his colleagues released their academic paper, the world’s first hedge fund was launched that based investment decisions on sentiment expressed on the social media platform. In July 2011, Derwent Capital Markets (DCM) set up a US$40 million hedge fund, popularly known as “The Twitter Fund,” which applied trading algorithms and sentiment analysis to about 10% of the 10 million tweets sent daily to decide where to invest. However, the fund was liquidated within a month as DCM failed to raise more than 60% of the initially committed investor fund since investors became risk averse following the US’s first ever downgrade to below AAA in August 2011. Nonetheless, The Twitter Fund outperformed the market during its one-month operation, returning 1.87%.   

    In 2014, DCM founder Paul Hawtin launched his second social media based fund, Cayman Atlantic. According to Hawtin, his systems are capable of analyzing and determining a tweet less than a second after a user has tweeted. He believes Twitter is more relevant to hedge fund managers for determining where to invest as tweets capture events in real time, while Facebook is more personal. In terms of fund performance, the Cayman Atlantic fund has continued to outperform the DJIA over the last two years. In 2015, the fund generated cumulative returns of 10.42%, compared with DJIA’s returns of -2.23%.Cumulative Returns of Cayman Atlantic Fund versus DJIA

    Is Banking on Collective Wisdom Wise for Financial Markets?

    In 1906, Statistician Francis Galton ran statistical tests on guesses from 800 participants who entered into a competition to guess the weight of an ox at a country fair. He found the average guess (1,197lb) was extremely close to the actual weight (1,198lb) of the ox.

    A large group of people may have been smarter than a few while guessing the weight of an ox, but the stock market is a whole other ballgame.

    Social media analytics firms may be the answer for asset managers’ attempting to finding a winning strategy. Although the industry is at a nascent stage, it certainly has potential.

    Eventually however, it always boils down to what’s the fastest when it comes to analyzing the market and executing transactions.

    Whether that’s man, machine, or a combination of the two, should be easily evident in the next few years.

  7. Saudi Labour Market Challenges

    In an effort to reduce unemployment, improve domestic workforce capabilities and participation, as well as boost productivity among

      to read | words

    In an effort to reduce unemployment, improve domestic workforce capabilities and participation, as well as boost productivity among SMEs and private sector players, Saudi Arabia is undergoing significant reforms as part of its shift toward a non-oil economy. This transformation will be some time in the making however, as the Kingdom has to overcome several challenges such as social dynamics of the labour market, wage disparity between Saudi nationals and migrant labourers, as well as an excessive dependence on foreign labour.

    Saudi Arabia has enjoyed a bountiful period attributed to the abundance of oil reserves and a powerful position in the powerful OPEC cartel. Home to Saudi Aramco, the Kingdom of Saudi Arabia has derived nearly 90 per cent of its export revenue from oil over the years.

    Household income was high and public spending was ever increasing. The country however, faced an issue of international labour mobility.

    Attracted by the prosperity in a land where oil was cheaper than water, migrant labourers from South Asia and neighbouring countries began flocking to Saudi Arabia, lured by prospects such as promising pay-scales and material remittances to send back home. However, growth took a turn for the worse when oil prices began to decline.

    The Kingdom of Saudi Arabia has endured some challenging climes over the past few years, including a budget deficit of $98 billion in 2015 and a fall in public spending thereafter. In the broad sense, the slump in the economy affects not only Saudi nationals, but also its vast migrant population.

    The country’s population in 2014 was around 31 mn as opposed to around 7 mn in 1975. The increase in population has been largely due to an influx of migrant labourers into the country. The population has grown by 2 per cent annually, while migrant labour numbers grew 4 per cent annually since 2000. Saudi Arabia’s population consists of immigrants from South Asia, primarily Nepal, Bangladesh and India.

    Population Growth - Saudis vs. Non Saudis

    According to the Labour Force Survey (Saudi Arabia), Q2 2016, the Saudi workforce comprises of 47.5% of Non-Saudi males and 6.7% of Non-Saudi females, exceeding the number of Saudi nationals in the workforce.

    Saudi Workforce Breakup

    Saudi Arabia isn’t facing a labour shortage, despite the economic slump. It has however, been grappling with sharp unemployment among Saudi nationals, even during its prosperous phase. Saudi Arabia’s overall unemployment rate is nearly 6 per cent. However, the unemployment rate among Saudi nationals touched nearly 12 per cent in May 2016.


    Diving into the Details of the Demographic Challenge 

    Low Labour Participation by Saudi Nationals

    The country faces a relatively low workforce participation rate of 53.6 per cent according to the Saudi Arabia Labour Market Report, 2016. This may be attributed to Saudi nationals’ aversion toward blue collar occupations.

    Most Saudi nationals do not take up jobs in the private sector or small & medium-sized enterprises (SMEs) as they aren’t held in high esteem and demand more working hours. Public-sector jobs, on the other hand, are considered more prestigious and offer a better pay.

    Foreign expatriates have capitalized on this quite readily, agreeing to work for lower-than-average wage rates as compared to Saudi nationals. The problem is aggravated further when industrial conglomerates prefer cheap (and readily available) labour to widen profit margins.

    Youth Participation Rate (15-24)

    High Percentage of Population Below the Age of 30 Spikes Unemployment

    About 55% of Saudi Arabia’s population is below the age of 29, with about 0.4 million Saudis entering the labour market annually. This would mean that Saudi Arabia will need to create roughly 6 million job opportunities by 2030. The unemployment among this age group was more than 39 per cent as in 2015, as per the Saudi Arabia Labour Market Report, 2016.

    Saudi nationals also tend to choose academic majors such as humanities and the arts, areas that offer fewer private-sector job prospects in the country. As a result, most educated youth choose to remain unemployed rather than take up opportunities in the private sector. Most non-Saudis are employed in the allied engineering field (36.7%), followed by the service sector (21.2%).

    Technical Skills Lacking Among Saudi Nationals

    By economic activity, 22.8% of non-Saudis work in the construction industry. A lack of technical skills among Saudi nationals and disinclination towards labour-intensive private sector jobs creates skewed demand for migrant labourers.

    Disparity of Wages Between Domestic and Foreign Workforce

    There is a stark difference in the minimum wages paid to Saudi nationals in the private sector as compared to migrant labourers on contract basis; a gap that industrial giants in the country have capitalized on. Saudi Arabia’s Labour Laws apply to all employees except expatriates in Saudi Arabia on business visas, temporary contract workers, and domestic servants.

    Average Monthly Wage Rate - Saudis Vs. Non-Saudis

    Low Presence of Women in the Workforce

     A major contributor to the problem of unemployment in Saudi Arabia is the low presence of women in the workforce, although they have been slowly and progressively increasing their presence. Currently, around 64 per cent of Saudi Arabia’s unemployed population comprises of women.

    Unemployment by Gender

    Saudi Arabia also faces a high Saudi male to Saudi female participation rate. One of the challenges an employer faces is the legal and cost implications of employing women, such as partitioned work areas and maternity leaves. Vision 2030 aims to increase women’s participation in the workforce from 22% to 30%

    Male/Female Participation Ratio

    Vision 2030 and Saudization of the Workforce

    "There is no doubt that unemployment is a looming spectra and we will take all measures, whether job creation, job substitution or even, if required, increasing the Saudization target," said Saudi Labour Minister Mufrej al-Haqbani in an interview with Reuters.

    Saudi Arabia has recognized the need to improve living conditions, minimum wages, and benefits in recent years. It has also adopted measures to curb unemployment among its nationals. It began the “Saudization” movement, locally known as “Nitaqat”. As per Saudization, employers are categorized into four zones: red, yellow, green or platinum based on the percentage of Saudi nationals employed in the company. This caused tension in the labour markets as most companies fell in the “red” zone and faced shut downs if Saudization was not carried out. Deportation laws were also modified which made it more difficult for migrant labourers to live and work in the country. The most recent movement involved 100 per cent Saudization of the telecom sector which led to a shutdown in several small-scale businesses in the sector.

    Vision 2030, as envisioned by Prince Mohammad Bin Salman, aligns well with the Saudization movement as it aims to job opportunities by expanding the country’s horizons beyond oil. The massively ambitious project involves privatization of several sectors such as healthcare, education, and tourism in order to absorb the growing employable population, especially those below the age of 30. It aims to improve the contribution of and professionalism in the small and medium-sized enterprises (SMEs) to attract more Saudi nationals in the private sector. Its ultimate goal is to lower the rate of unemployment to 7 per cent. Vision 2030 also aims to launch the National Labour Gateway (TAQAT) to determine the skills and training workers will need in each socio-economic sector.

    However, in the long run, Saudization should help reduce unemployment among Saudi nationals. As a short-term effect, the migrant labour supply will shrink, leading to an influx of unskilled Saudi labourers, which will in turn lower productivity. Once technical and vocational training is implemented however, human capital quality should steadily increase, leading to an increase in productivity.

    Privatization of education, in turn, should aid in improving human capital quality and therefore, solve the problem of lack of skilled and semi-skilled labour in the country. Saudi Arabia will no longer have to turn towards migrant labour to fill the gap between demand and available labourers with technical know-how (as a majority of them are employed in the allied engineering field). Saudi 2030 will aim to eliminate the mismatch between industrial requirements and technical skills.

    Socio-economic Makeover to Change the Face of Saudi Arabia as We Know it Today

    Vision 2030, on the whole, aims for a shift towards non-oil revenues. This can only be done with socio-economic cooperation and a creation of employment opportunities to efficiently absorb the influx of labour. The social dynamic of the Saudi labour market, wage disparity between Saudi nationals and migrant labourers, and excessive dependence on foreign labour are challenges that will not be resolved overnight. However, the Vision 2030 promises to take corrective measures and meet global economic expectations.

  8. Robo-Advisors — Innovation in a Time of ETFs

    Automated solutions can now provide investment advice at costs ranging between 0.15% - 0.50% as compared to the usual 1%

      to read | words

    Automated solutions can now provide investment advice at costs ranging between 0.15% - 0.50% as compared to the usual 1% fee that traditional investment advisors charge. What started off as experiments in providing low-cost investment advisory tools have spawned over a hundred Robo-advisory services worldwide. 

    Could they be the game-changers they’re made out to be?

    The launch of Betterment, an online-investment adviser, in 2010 was an important innovation in the investment management and advisory segment. The low-cost wealth advisory support got a lot of good press and a reasonable amount of patronage.  While Betterment is still among the largest independent Robo-advisors around that dole out financial advice based on mathematical rules or algorithms, established Asset Managers have begun to dabble in this class of financial advisory services as well. 

    While Robo-advisors are most common in the United States, they’re also gaining traction in other regions of the world such as Europe, Australia, India, and Canada. What started off as a quest for automated solutions now provide low-cost investment advisory that take care of the complete wealth management process, without any human intervention. It has further evolved under institutions like Vanguard and Charles Schwab, who added a human layer on top of this automated system. 

    There are over a hundred Robo-advisory services available worldwide right now,  with Vanguard at the top of a list of prominent Robo-advisor as of February 2017.  





          Charles Schwab









          Personal Capital







               U. K.








          Financial Guard



          Rebalance IRA



          Scalable Capital     



        Source: Wikipedia

    The assets under management of Robo-advisors are expected to reach $250 billion by 2020. 

    What are Robo-Advisors and How Did They Kick Off?

    Robo-advisors are a type of financial or wealth advisors that provide automated portfolio management solutions to investors online.  They may incorporate insights of:

    • The Modern Portfolio Theory — with a focus on diversification and asset allocation to attempt maximum portfolio return for an amount of given risk.
    • The Black-Litterman Model — to enable passive asset allocation by using world market capitalizations to attempt to estimate expected returns.
    • Behavioral Asset Management — which focuses on investor returns, and attempts to optimize the returns an investor achieves, including minimizing potential market-timing behavior.

    In the aftermath of a global credit crisis and market slumps, there has been significant movement toward passive investments, and the timing bode well for the launch of Robo-advisors. 

    Most investments happen in ETFs, and hence, the growing levels of automation bring the total cost of investments down drastically.  Vanguard owes its success to this, enjoying stellar success in just two years and with a starting AUM of $17 billion.  Vanguard’s hybrid service combines automated asset allocation and rebalancing, with access to human advisors via phone or videoconferencing, all of which brought down operational costs from 0.70% to 0.30% per annum.  This cost is obviously in addition to the expense ratios of their ETFs and mutual funds, where the investments are made.   They’ve also managed to reduce the minimum required investment from $500,000 to $50,000 for this scheme.

    Vanguard isn’t alone in offering a slew of unique services and advantages either; there are quite a few players in the game with their own advantages to boot:

    Best for
    Annual Fee
    Account Minimum


    Access to financial advisor

    Portfolios built on client-by-client basis with advisor.

    0.30% of account balance.



    Charles Schwab


    Trusted leader in financial services.


    n / a



    Overall, IRAs

    Goal-based tools help savings, guide asset allocation.

    0.25-0.50% of account balance.

    One month free management with $10,000 deposit.



    Overall and minimizing taxes

    Tax efficient direct indexing (accounts $100,000+).

    0.25% of account balance.

    $15,000 managed free.


    Personal Capital

    Access to financial advisor + Minimizing taxes

    Hybrid service; some tools free; individual securities ($100,000+).

    0.49-0.89% of account balance.



    Future Advisor


    Manages Fidelity 401(k)s for free.

    0.5% of balance; several services free.

    Three months free.

    $10,000 (premium service)


    Though Charles Schwab offers the service for free, they insist on having cash holdings between 6%-30%, and that’s where they derive revenue.  In addition, the investor pays trading commissions.

    Robo-advisors also support tax-loss harvesting, selling loss-making investments and moving to similar investments in order to optimally reduce your tax liability within existing tax regulations —very useful for investors with taxable investment returns. 

    Robo-Advisors — The Road Ahead

    Robo-advisors provide investment advisory service at costs ranging between 0.15% - 0.50% of the usual 1% fee charged by traditional investment advisors. They also try to invest in ETFs that have lower management fees, keeping overall costs well under control.  While these cost advantages created some hype in the market, several issues began to emerge; the inability of Robo-advisors to incorporate any suggestions into their model on the fly for instance, or their lack of emotional support when investors needed it, particularly during times of volatility.  As a result, some players introduced human advisors on top of Robo-advisors to address such issues.  While that drove up costs a bit, they were still far lower than traditional advisory services.

    The real value proposition of Robo-advisors however, lay in the quality of algorithms used. 

    Although there isn’t enough verifiable data available to confirm it, it’s likely that the performance of Robo-advisors vary considerably, even while the underlying risks remain more or less the same.   A Condor Capital study conducted over eight months in 2016 (using a 60/40 mix of stocks and bonds of five popular Robo-advisors) produced the following returns. 

    Net return (%)





    Schwab Intelligent Portfolios


    Vanguard Personal Advisor Services     




    *The Wealthfront portfolio was rebalanced on January 15 ‘17 to maintain 60/40 portfolio.   It should have produced 6.71% returns, had it not been rebalanced.

    This return comparison doesn’t take into account the total return producing capabilities however, including tax-loss harvesting.

    How do these developments augur for active managers, researchers from fund houses, and sell-side firms? 

    Well, it isn’t exactly good news.

    It wasn’t that different when funds moved from active to passive either, so there’s that. 

    Since most investments are in ETFs and passive funds, they were already beyond the reach of research teams and active managers.  Further, larger firms are already building human factors into otherwise robotic support.  This is in line with existing trends where active managers tried to merge active and passive characteristics in order to create Smart Beta — strategies that are proving quite successful.  Multi-asset investments and regime-based asset allocation are also likely to shift toward low-cost processes using technological innovations. 

    Will Robo-Advisors Stand the Test of Time?

    As with most new, innovative, sometimes disruptive changes, there are questions raised about the business model’s sustainability.

    With fees as low as they are and an inability to generate decent revenue from the cash part of the portfolio, Robo-advisors may not generate sustainable revenues.  Most independent Robo-advisors are backed by venture capitalists, and hence, needn’t worry about cash flows. Betterment for instance has received around $ 205 million of VC funding so far.  Larger firms have already begun forays into this area by taking over existing companies to gain entry rather than building their own from scratch.  LearnVest for instance, announced that it has been acquired by Northwestern Mutual for an undisclosed amount. Another company, FutureAdvisor, recently announced that it had been acquired by Blackrock.

    It’s probably safe to say that Robo-advisors are here to stay. 

  9. OPEC Expects an Equilibrium in the Global Oil Demand-Supply Equation

    Although oil prices remain volatile, the anticipation of improving global economic climes coupled with a 0.6 mn bpd cut

      to read | words

    Although oil prices remain volatile, the anticipation of improving global economic climes coupled with a 0.6 mn bpd cut in production by non-OPEC oil-producing countries could cushion oil prices in 2017.

    Brent oil prices climbed to USD51.7/bbl (March 14, 2017), recovering by 16.3% from its November levels. This improvement can be attributed to the OPEC decision to cut production by 1.2 mn barrels per day (bpd) for six months, starting January 2017 (reducing total output to 32.5 mn bpd).  

    Exhibit 1: Oil price movementBrent Crude Oil Prices

    Based on the OPEC monthly report released on March 14, 2017, the organization’s crude oil production has been constantly declining over the past three months. In February 2017, OPEC’s oil production declined by 140,000 bpd MoM to 31.96 mn bpd. Key countries such as Saudi Arabia, Iraq, UAE, and Angola have reduced production, while Nigeria posted the most increase in crude oil output. 

    OPEC Production (tb/d)





                    MoM changes (%)




































    Saudi Arabia




















    Iran, I.R.










    Total OPEC





    Source: Bloomberg , Aranca Research

    OPEC Estimates World Crude Demand to Improve in 2017

    OPEC expects the worldwide demand for oil to increase by 1.26 mn bpd to 96.3 mn bpd in 2017, driven by economic improvement in India, China, and OECD America. OPEC also revised its 2017 world oil demand forecast by 70,000 bpd.

    Exhibit 2: World oil demand to improve while OPEC continues to support oil productionImproving Global Oil Demand

    OPEC, in its monthly report, revised its crude demand estimates by 0.2 mn bpd to 32.4 mn bpd for 2017, a 2.3% YoY increase. The organization estimates that non-OPEC countries would fulfil about 60% of global oil demand, while the remaining 40% would be met by OPEC members. In 2016, worldwide oil demand stood at 93.7 mn bbl, while total global supply was 95.5 mn bbl, of which non-OPEC countries supplied about 58 mn bpd while OPEC members contributed the remaining 37.5 mn bpd. Although there was higher supply during 2016, OPEC anticipates a balance in the oil supply-demand dynamics in 2017.

    OPEC expects the oil market to achieve a relative balance in 2017 with cuts in oil production and a general global economic resurgence. However, any further increase in oil prices or an inability to maintain current levels remain key concerns, as higher oil prices would encourage shale producers to restart operations, potentially straining oil prices further. 

  10. 3 Reasons Why Most European Banks Will Recall Legacy Tier 1 Bonds in 2017

    Commerzbank and Standard Chartered surprised bondholders in November last year when they decided against exercising the call option

      to read | words

    Commerzbank and Standard Chartered surprised bondholders in November last year when they decided against exercising the call option on high-coupon fixed-rate legacy tier 1 bonds that are due in 2017.

    Their decision could be outliers rather than ominous however, driven largely by factors that aren’t likely to sway most other European banks.

    2017 is off to a tepid start for several European banks’ legacy tier 1 bondholders.

    Standard Chartered didn’t redeem US$750m worth of legacy tier 1 bonds in January 2017, and Commerzbank is likely to follow suit.

    Their decisions were largely driven by the positive economic impact of lower coupon costs and eligibility of the bonds to qualify as loss-absorbing capital.

    In a knee-jerk reaction to the non-call event, STANLN 6.409% 01/49 dropped about 14% and CMZB 6.352% 07/49 nearly 13%, suggesting the announcements took the market completely by surprise.

    Tier 1 Bond Prices

    We believe these banks likely won’t consider additional tier 1 (AT1) issuances in the near future either.

    Both Standard Chartered and Commerzbank don’t consider it necessary to issue additional AT1s as they’ve already met their regulatory requirements.

    As of Q3 2016, Standard Chartered has a T1 ratio of 1.4%, in line with their regulatory requirement of 1.5%. Commerzbank on the other hand has not issued any AT1 to date; the bank’s B3 FL CET1 ratio stands at 11.8% (2019 SREP requirement 11.8%), and it could utilize excess CET1 to meet its tier 1 requirements until 2019.


    Will Other European Banks Defer Their Tier 1 Bond Recalls?

    The European banking universe is generally debt investor friendly, as evident in the treatment of legacy tier 1 bonds that qualify as tier 1 capital up to 2022 under Basel III rules. These bonds are being progressively phased-out (i.e. losing their Tier 1 status) @ 10% p.a. beginning 2013 till 2022.

    These bonds are typically highly subordinated high coupon fixed-rate bonds, issued pre-crisis, with floating coupon resets after the first call date (5–10 years). LIBOR rates pre-crisis were hovering at 4–5% and are currently below 1%. It’s therefore more economical for banks to not call back these bonds, allowing lower coupon resets.

    Additionally, with current spreads wider than reset spreads, it would be more expensive for banks to call back these bonds and replace them with fresh issuances.

    Bonds with Call Dates in 2017, and Their Lower Coupon Resets





         ($ mn)


      Call Date





    BNP Paribas









    BNP Paribas









    Societe Generale









    Societe Generale









    Credit Agricole





      10 yrs


















      10 yrs













    Barclays Bank PLC









    Source: Bloomberg | Data as of 30th Jan, 2017 


    Despite these factors however, banks have been calling back bonds on their first call date.

    They take the hit so investors don’t have to; bearing the brunt of lower coupon resets after the first call date.

    Besides that underlying sentiment however, there are other compelling reasons why most other European banks will definitely call back their legacy tier 1 bonds.


    1. European Banks Have Significant Issuance Requirements

    As evident in the next table listing the CET1 and T1 ratio requirements for European banks, most European banks still have significant issuance requirements, driven by the impact of the Basel IV RWA inflation, higher leverage ratio requirements, and the upcoming call dates of T1 Contingent Convertible (CoCo) bonds.

    Barclays has T1 CoCo bonds of up to EUR 6bn, due to be called in 2018 and 2019. RBS and Barclays have internal AT1 targets of 2% and 2.2%, respectively. Credit Agricole is an exception to this as (based on their Q3 ‘16 earnings) the bank’s T1 1% target has already been met.



      B3 FL




       B3 FL


    BNP Paribas







    Societe Generale







    Credit Agricole SA







    Credit Agricole Group





















    Standard Chartered














    Source: Company Filings, Bloomberg | Data as of Q3 2016

    Given their significant issuance requirements, we believe antagonizing investors wouldn’t be in these banks’ best interests.


    2. European Banks Have Always Recalled Bonds, Regardless of the Economic Impact

    European banks have historically called back bonds on their first call dates despite materially lower coupon resets.

    The following table lists bonds that were called back over the past two years despite their lower coupon resets. RBS, which has been posting losses since 2008, also placed investor interest above cost concerns.






        o/s ($ mn)

        Called On


    BNP Paribas






    BNP Paribas






    Societe Generale






    Societe Generale






    Credit Agricole






























    Standard Chartered






    Source: Bloomberg | Data as of 30th Jan, 2017 


    3. French and British Banks Have Shown Strong Fundamental Performance

    Within the European Banking universe, French and British banks enjoy robust profitability, and hence, aren’t obligated to follow in the footsteps of Standard Chartered and Commerzbank.


    Despite the Norm, Could Any European Banks Opt for a Non-call in 2017?

    We believe that the majority of European banks will call back bonds due in 2017.

    RBS and Credit Agricole could be exceptions however.

    RBS is likely to incur hefty costs due to the ongoing US RMBS litigation and the Williams & Glyn divestment, forcing the bank to implement cost-cutting and deleveraging measures. Credit Agricole on the other hand doesn’t have any T1 issuance requirements.

    It’s therefore quite plausible that these banks may opt for the more economical option of a non-call.

    While they’re sure to do whatever they can to steady investor sentiment, European banks will, as they should, weigh the pros and cons of the economic impact, the eligibility of these instruments to qualify as loss absorbing capital, as well as the damage they’d cause to the investor community.

    Most banks will, in our opinion, recall bonds on their first call date.

    However this plays out, investors are probably keeping their fingers crossed hoping more European banks don’t buck the trend in 2017.


  11. EM Bond Markets – Thematic Relative Value Ideas for EM Credit Markets

    Emerging market bond indices have been highly volatile over the past couple of months, mainly due to investor

      to read | words

    Emerging market bond indices have been highly volatile over the past couple of months, mainly due to investor concerns over US elections, a UK slowdown, and weak Chinese data. A couple of defaults and instances of restructuring in markets like South Africa are some of the highlights on the short side of the spectrum.

    While EM bond markets have recovered from their lows in December 2016, we believe concerns over rate hikes and currency volatility have led to investors adopting a cautious approach.

    In this note, we analyse a few trends in EM bond indices and discuss our market expectations for 1H 2017.

    EM Spreads Continue to Contract from Q4 2016 Levels

    The Bloomberg USD Emerging Market Composite Bond Index continued to rise during January 2017, recovering from its steep decline in Q4 2016. The index is currently trading at an OAS of 287 bps, with a yield pick-up of around 4.8%. 

    Bloomberg Emerging Market Composite Bond Index

    BEM - BBG Emerging Market Composite Bond IndexSource: Bloomberg

    USD EM Sovereign Bonds Outperform Corporate Bonds in IG Asset Class While Reverse Trend Continues in HY Bonds

    Over the past three months, Sovereign EM bond markets have outperformed Corporate EM bond indices in the Investment Grade (IG) asset class. However, we observed an opposite trend in the High-yield (HY) asset class.

    We believe sovereign bonds outperformed non-sovereign bonds in the IG class mainly due to the former’s steep decline last year as well as investors’ cautious attitude towards HY sovereign bonds. The negative sentiment towards HY sovereign bonds is largely due to local sovereign fiscal imbalances, higher debt-to-GDP and increased volatility of sovereign bonds driven by change in US interest rates.

    HY Significantly Outperformed Generic Corporate Bond Indices Among EM Corporate Bonds Over the Past Year

    Most EM investors still find value in HY corporate bonds and have benefited from it, receiving attractive double-digit returns over the past one year (refer BEAC–Bloomberg USD High-Yield Emerging Market Bond Index and BEMC–Bloomberg USD Emerging Market Corporate Bond Index below).

    Bloomberg EM CORP vs. EM HY Index

    BEAC vs. BEMC (EM CORP vs. EM HY) - 1 YearSource: Bloomberg | Data as of the past 12 months.

    Returns Driven by Spread Movements Rather than Yield Changes, Implying Changing Risk Premium Among Investors

    In a majority of cases, we’ve observed that returns are a factor of tighter spreads, with yield playing an insignificant role in the return profile.

    In a couple of markets, the yield differential has resulted in negative returns, which have been partially offset by a declining risk premium (reflected in tighter spreads). The declining yield differential is also due to the tendency of some sovereigns to regularize their interest rates in order to maintain their currency’s competitiveness amid rising US interest rates.

    Bond Selection Still a Key Attribution Factor for Higher Returns, Particularly for HY Investments in EMs

    Bond selection continues to be the top theme in EM corporate bond markets, significantly contributing to the overall return attribution of portfolio managers. We believe, greater emphasis on bond selection on the corporate side will be a key focus area for EM portfolio managers during 2017.

    Russia, Brazil, and South Africa Have Outperformed Thus Far in 2017

    Brazil’s sovereign curve (2026) has performed exceptionally well, with the bond trading at a Z-spread of around 260 bps as compared to 320 bps it saw at the end of 2016.

    South Africa’s curve is trading wider relative to Russia, mainly due to domestic concerns and currency-related movements. South Africa is also facing a negative outlook and a downgrade risk to junk from one of the rating agencies.

    Brazil’s sovereign bonds appear cheaper than those of its EM counterparts, but concerns over slow growth, even after a couple of rate cuts, may limit significant compression in spreads.

    Brazil Z Spreads (bps)

    Brazil Z SpreadSource: Bloomberg

    Thematic Relative Value Idea — Long Corporate EM HY & Short Sovereign EM HY

    Broadly, we believe portfolio managers can relatively trade corporate and sovereign pairs with corresponding combinations of IG and HY bonds in emerging markets.

    Active bond selection in these pair-trade strategies will contribute to incremental alpha in our view. 

  12. MiFID II — Impact on the EU’s Research and Trading Desks

    The European Commission approved the Markets in Financial Instruments Directive II (MiFID II) in April last year, regulations

      to read | words

    The European Commission approved the Markets in Financial Instruments Directive II (MiFID II) in April last year, regulations that are slated for implementation by 3rd January, 2018.

    The directive requires complete unbundling of research costs from trading commissions in order to ensure efficient market performance and transparency, with significant implications for inducement-related considerations among both buy-side and sell-side firms.

    MiFID I reforms, which have been in force since November 2007, were meant to create a pan-European single market programme for financial services. This directive would address issues such as investor protection, Multi-lateral Trading (MTF), order concentration, and the suitability/appropriateness of services.

    MiFID II reforms, which will be rolled out over 2017, has a broader scope that includes inducement, position limits on commodities markets, transparency for fixed income products and derivatives, as well as product intervention and governance.

    This new wave of reforms will transform the way an asset manager pays for investment research services in the EU.

    Asset managers in the US and the EU usually pay brokers and independent equity research providers through Commission Sharing Agreements (CSAs), a fee that’s eventually recovered from investors. Similarly, research costs for fixed income asset managers are bundled into the spread, as there’s no trading commission.

    The present structure does not report research costs separately; it’s more like an exchange of services.

    With the new MiFID II reform in play however, asset managers would need a separate payment mechanism to process research costs.

    They will now have to pay for research requirements through their own P&L. 

    UK Commission Sharing Agreement (CSA) Structure

    Alternatively, they could set up a separate Research Payment Account (RPA) that’s funded through a predefined charge on behalf of their investors— essentially an  enhanced CSA — with additional disclosures, reporting, and audit requirements.

    In case they opt for an RPA, asset managers will have to set up their research budget at the beginning of the financial year, and the unbundling of research from regular service offerings may lead to a new set of compliance requirements and valuation tools.

    While there is considerable ambiguity among some EU jurisdictions about the future of CSAs, the UK’s Financial Conduct Authority (FCA) won’t bat an eyelid as long as the research in question isn’t linked to trading volume or value.

    Moreover, RPAs in their present form and process could be particularly complex for asset managers to tackle when you factor in the valuation of research that involves multiple brokers and bespoke budgets.

    In the face of looming change, asset managers could opt for modified versions of existing CSAs, a process that itself may be outsourced to vendors as well.


    Impact of MiFID II Unbundling on the Investment Research Industry

    MiFID II directives will have far-reaching effects on the investment research industry.

    Under MiFID II, the allocation of separate research costs to asset managers would lead to closer scrutiny of pricing as well as the underlying value of research.

    Because asset managers will have to justify their choice of research, they would be more judicious about the information they include, likely reducing their research coverage.

    Banks on the other hand may streamline their research desks, seeking sectors that generate the most opportunities, shifting focus to larger deals, and thereby constraining their research universe.

    Impact on Research Desks — Buy-Side

    In order to manage research costs, buy-side firms will gravitate toward bespoke billable research rather than dole out lump-sums for wider research arrays.

    Existing relationships would be completely revamped as well.

    Asset managers may now have to look beyond their usual suspects and seek out new research providers. Simply updating earning models and forecasts won’t cut it either, managers would prefer providers with more value-added data and analysis.

    Asset managers would also be more likely to tie up with outsourcing partners.

    Asset managers will now have to justify both the quality of research as well as its price when evaluating research providers, which translates to increased competition among research providers. Some asset managers may even prefer setting up essential research functions in-house, outsourcing non-core research functions in order to control costs — a definite boon for third-party research partners.

    Non-banking research providers are expecting a windfall due to these reforms.

    This could be a brilliant opportunity for independent research providers to compete with investment banks and brokers in a multi-billion-dollar equity/debt research market.


    Impact on Asset Managers  / Buy-side Firms



    Separate research budget requirements and upfront clarity in annual research budget.


    Some asset managers may set up research functions in-house.


    External vendors will be roped in for full or partial research/reporting requirements and cost management.


    Reduction in usage of sell-side reports.

    Cost Pressure Could Push Asset Managers Toward Alternative Means to Manage Research

    There’s a good chance that competitive pressure may deter asset managers from raising management fees meaningfully, opting instead to bear the research costs themselves.

    The severity of the impact however, just like an asset manager’s ability to absorb research costs, would depend on its scale.

    Smaller asset managers would definitely be hard-pressed to bear the cost internally, and a new reporting regime could prove costly for them. It’ll be interesting to see how small asset managers innovate and evolve within the given framework to compete with larger competitors.

    While partial industry consolidation cannot be ruled out, smaller asset managers may partner with technology and research outsourcing firms to manage research costs.

    Impact on Research and Trading Desks — Sell-Side

    While it’s still unclear if sell-side firms would fall under MiFID II’s purview in terms of unbundling services, Article 13(9) of MiFID suggests that EU brokers need to factor the price of research when providing services to EU asset managers.

    This isn’t mandatory for brokers providing information to non-EU asset managers however.

    Nonetheless, this may prompt non-EU asset managers to demand similar pricing from EU brokers, and sell-side could also collaborate with third-party research partners in order to reduce research costs.

    Impact on Trading / Sell-Side Firms



    Will have to invoice research separately in order to comply with full price transparency.


    Reduction Fixed Income bid/ask spread.


    Fixed Income Bid and Ask Spreads Could Tighten

    Unlike equity, where commissions are linked to trading, the cost of fixed income research is embedded within the bid/offer spreads.

    If, under the MiFID II regime, research costs for clients are either billed separately or paid directly through the asset manager’s account, those spreads can be narrowed to an extent dictated by the research component.

    Any resistance by brokers to narrowing the bid/ask spread — claiming it’s uncompetitive — will have to contend with regulatory pressure once the new regime comes into play. Heightened competition and pressure on profitability due to narrowing spreads could make the market inhospitable for quite a few small to medium brokers, hitting liquidity in the bond market

    As far as sell-side is concerned, efficient execution of large trades will be a pivotal performance parameter in an unbundled product.

    Impact on Independent 
    Research Providers (IRPs)

    New opportunities to compete with investment banks and brokers however IRPs need to further improve the quality of research to stand out in the market

    Will the MiFID II Directive Impact on Non-EU Regions and Vendors?

    Although non-EU regulators (in Asia, North America, etc.) haven’t issued similar directives, the MiFID II regime change in Europe is likely a harbinger of reforms globally.

    While there’s still a lack of complete clarity among large asset managers that handle operations globally, their EU operations, at least, must comply with the MiFID II regime. Some clarity is also expected from European Securities and Market Authority in terms of bringing in UCITS and AIFMD compliant firms in line with MiFID II provisions. 

    Client segregation according to regions, the valuation of cross-utilised research, and the management of regional commission sharing agreements are some of the challenges those asset managers can look forward to.

    The MiFID II (if not implemented globally) could put EU asset managers at a competitive disadvantage to their global counterparts however, as they’d have to pay separately for research.

    Impact on External Research Vendors (ERVs)



    New opportunities to partner with asset managers for research / reporting requirement solutions. Here firms with a proven track record of working with asset managers are likely to benefit more.


    Asset managers will use ERVs as virtual extensions of their research desks in order to manager their research functions in an optimally cost-efficient manner.


    ERVs have advantages over IRPs not only in research but also in other reporting requirements such as fund accounting, passive indexing, and so on.


    ERVs will gain cost advantages as well as a one-stop-shop appeal in terms of asset classes and reporting requirement solutions.

  13. Budget 2017–18: It is What You Make of It

    Preponed, progressive, and pervasive, the Indian Government’s Budget had a few unexpected turns that could hint at t

      to read | words

    Preponed, progressive, and pervasive, the Indian Government’s Budget had a few unexpected turns that could hint at things to come.

    India’s Budget 2017-18 is unique in many aspects.

    It came hot on the heels of the country’s sudden demonetization drive and will soon be overshadowed by the rolling out of a landmark uniform Goods and Services Tax (GST) regime.

    This was the first budget moved ahead by a month in order to give the government time to make headway and begin spending on day one of the new fiscal.

    This was also the first budget without a separate allocation for the country’s railways, and the archaic Plan and non-Plan expenditures replaced by a Scheme and non-Scheme expenditure.

    This was also the last budget with separate indirect tax estimates.

    What sets this budget apart isn’t its timing or any of the above factors however, but its subjectivity based on a reflection of your own perspectives.

    Someone with an optimistic outlook would see several reasons to cheer – the infrastructure status allotted to affordable housing and the government aiming for a market-place based development approach, fiscal discipline maintained, greater push toward digitization and formalization of the economy, integrated approach to infrastructure development, emphasis on inclusive growth with attention paid to farmers, women, backward classes and more such measures.

    For the skeptics, there were plenty of gaps to point out – uninhibited bias towards rural India vs. urban India, an absence of relief to the corporate sector, and in particular, the absence of any significant move towards lower corporate tax rate along with elimination of exemption-based approach, which was highlighted in previous budget, no significant reduction in personal taxes especially on back of demonetization, highly ambitious targets for tax collections coupled with lack of adequate clarity on tax math in light of GST, lack of substantial and much needed support to the banking sector which now needs to bear the additional burden of higher rural loan targets. While every budget would have its share of admirers and critics, this one could possibly be the one with near equal division between the two. 

    Union Budget 2017-18 Mantra — Transform, Energize and Clean India (TEC)

    The Union Budget 2017-18 was presented with ‘Transform, Energize and Clean India’ as the overarching theme.

    In terms of transformation, the budget aims to further the quality of governance and quality of life. Especially for farmers and rural residents, building rural homes, greater access to credit, job creation, rural infrastructure spending, and skill development found prominent allocations in the budget expenditure side. There’s special focus on underprivileged sections of the society such as women, scheduled castes and tribes was aimed at a more inclusive growth.

    The finance minister sought to energize the youth by offering better quality education system, incorporating modern dimensions to the learning process and sector specific skill development avenues. 

    The third theme – Clean India – was an extension of a more accountable and formalized economy, extending a process that began with demonetization and now steams ahead with a greater emphasis on wider tax compliance and bigger disincentives for tax evasion by pushing for a more digitized and accountable economy.

    A small but bold step toward more transparent political funding and accounting was taken by way of restricting cash donations as well as mandating the filing of tax returns for political parties. The government wants to go about its program by leveraging technology to its maximum wherever possible.


    The Ten Focus Areas of Budget 2017-18 Show the Government’s Broad Ambitions

    The Finance Minister has arranged the overall budget plan around ten focus areas, thereby giving structure and clarity on the government’s agenda for development. The ten areas widely encompass social strata, economic agenda, governance and fiscal priorities. 

    Key Focus Areas of Budget 2017–18



    Income security, adequate credit flow, crop insurance, irrigation funds and soil health cards to boost farm sector income.

    Rural Population


    100% village electrification, accelerating the pace of constructing roads, increased spending on skill development and improved sanitary measures to improve living standards of the rural populace.



    Quality education, skill acquisition and strengthening, online courses accessibility and establishment of national testing agency aim to energise youth.

    Poor & Underprivileged


    Empowering the girl child and women, affordable housing, promoting good health and conducive labour environment to uplift the poor and underprivileged.



    Increased spending on infrastructure, efficient network connectivity, strengthening energy sector, and focus on multi modal transport to result in quality of life and better infrastructure facilities.

    Finance Sector


    Substantive reforms in FDI policy, cyber security, recapitalization of banks, and priority lending to the unfunded are targeted to build stronger and safe institutions.

    Digital Economy


    BHIM app and Aadhar pay apps’ launch, strengthening grievance handling, and financial inclusion fund are all efforts toward eliminating corruption and black money in the country, improving transparency.

    Public Service


    Efficient defence travel and pension disbursement, penalize big time offenders, and creation of Government e-market place to result in better governance and public service.

    Fiscal Management


    Quality spending and higher tax realisations are aimed at achieving fiscal consolidation.

    Tax Administration


    Simplifying tax filing and easing tax liability for MSME and low income bracket assesses to lower the burden on honest and salaried tax payers.

    Source:, Aranca Research

    Commendable Feat of Beating Fiscal Deficit Targets for FY17, But the Jury is Out on FY18 Targets

    Despite a less-than-perfect economic year due to demonetization’s shock and coping with its fallout, it is commendable that the finance minister has not deviated from the straight and narrow path of fiscal consolidation. 

    It’s a resolve that strengthens India's fiscal fundamentals, giving the government greater room to maneuver in the wake of any global economic or financial crisis. 

    What is significant is that the government improved upon its own target of 3.5 per cent fiscal deficit as percentage of GDP, in spite of an increase in budgeted expenditure. Better than expected tax collections, in part by improving economic growth and by greater compliance efforts (tax amnesty scheme) could have helped the government finances tide over any effect on tax collections due to disruption in the economy post demonetization.

    Can the government repeat its feat in FY18?

    All bets are off in the first year of GST. 

    The caution in the Finance ministry is also evident in its modest target of 3.2 per cent for FY17-18, which is the same as FY16-17 level estimates. Nonetheless, India has come a long way from its peak of 7.8 per cent in FY09, and its inching closer to pre-financial crisis levels of 3.1 per cent in FY08.

    Fiscal Deficit as a Percentage of GDP

    Higher Excise Duty Collection Helped Shore Up Tax Revenue; Corporate Tax Boosts Will Do the Same in FY18   

    Net tax revenues to the Centre in FY16-17 are estimated to have increased 15%, thanks to greater than estimated excise duty collections. For FY18, the budget estimates 12.7 per cent growth in net revenue to the Centre, which could be viewed as optimistic, especially with the uncertainty of a looming GST.

    The underlying assumptions for better tax revenue are corporate tax collections, which are slated to increase by 9 per cent, fairly reasonable levels, while non-corporate taxes are to increase by 25 per cent, which appear ambitious. 

    It remains to be seen whether there will be another tax amnesty scheme like last year to shore up one-time tax collections. Despite high expectations that demonetization would unearth unaccounted for black money, nearly all the currency back in circulation is at pre-demonetization levels, and the income tax department would pursue high deposit account holders for tax compliance.

    Keep in mind that black money isn’t usually held in liquid cash, it’s more commonly locked up in tangible assets such as gold, real estate, and so on. You can expect more measures to account for such assets in the future, thereby leading to greater tax receipts. 

    Demonetization’s After-effects in the Budget Makes the Dire Need for Accountability Evident

    The gravity of the need for accountability in the nation’s economy was evident from data on large deposits that were made during the two months post demonetization.

    Between November 8, 2016 (demonetization announced) and  December 30, 2016 (last date for depositing old currency notes), 10.9 million accounts saw deposits made between Rs. 200,000 and Rs. 8 million, with  an average deposit size of Rs. 0.5 million. Even more staggering was the fact that deposits of more than Rs. 8 million were made in 148,000 accounts, with an average deposit size of Rs. 33.1 million.

    With data on account holders now available with the Finance Ministry, the Income Tax department is likely to go into overdrive during the last two months of the current fiscal, continuing their pursuit of large tax evaders well into the next fiscal. 

    Budget FY17-18 -- Key Segments

    Expenditure to Increase by About 6.6% in FY18; Allocation for Scheme Expenditure to Grow Faster           

    The government has announced a major change in expenditure classification, with the somewhat archaic Plan and non-Plan expenditure system giving way to Scheme and non-Scheme expenditure. 

    Each scheme will have a limited time duration and outcome assessment, thereby bringing more accountability and scrutiny to public spending. 

    Expenditure on capital account, although on 14 per cent of total expenditure, is expected to increase 10.7 per cent in FY17-18, while expenditure on revenue account is estimated to increase by a more controlled 5.9 per cent. 

    Among major expenditure items, Defense expenditure is expected to be nearly at same levels with a marginal 0.4 per cent decline. Pension expenditure is expected to increase 3.9 per cent, while subsidies are expected to decline marginally by 0.5 per cent. 

    Petroleum or fuel subsidy is expected to decrease by 5 per cent, which appears ambitious considering the revival in oil prices in the recent past.

    Breakdown of Income and Expenditure(FY 18)

    Other Budget Highlights

    Relief to Middle Class and MSME’s; GST Implementation on Schedule

    Budget 2017-18 provides relief to middle class along with simplifying tax administration. By bringing more people in the tax-net who are evading tax, the Government is trying to reduce the burden on existing tax payers. On the corporate side, though there has been no relief for large corporates, Micro, Small and Medium Enterprises (MSME) have something to cheer on account of reduction in tax rate.

    Some of the key points include:

    • Reduction in tax rate to 5 per cent from 10 per cent for Individual assesses falling within the Rs. 2.5 lakhs to Rs. 5 lakhs taxable income bracket.
    • Uniform benefit of Rs. 12,500 per person for other category of tax payers falling in the subsequent tax brackets.
    • Introduction of a simple one-page form to be filed as Income tax return for people falling in the lowest slab of Rs. 2.5 lakhs to Rs. 5 lakhs provided they do not have business income.
    • Levy of surcharge of 10 per cent on tax payable for Individual assesses falling within the Rs. 50 lakhs and Rs. 1 crore taxable income brackets. The existing surcharge of 15 per cent continues for people earning more than Rs. 1 crore.
    • Companies with annual turnover up to Rs. 5 crore to pay a reduced tax rate of 25 per cent.
    • There have not been many changes on the excise and service tax front as it will be replaced by GST soon. Extensive reach-out to trade and industry will begin from April 1, 2017 to make them aware of the new taxation system.

    Spotlight on Agriculture and Rural Economy

    Government focus on agriculture spends along with initiatives such as Crop Insurance, irrigation funds, and logistic solutions may give a boost to agriculture product sales in FY18. Further backing by the rural initiatives focus and increase in the disposable income by lowering the taxation in the sub Rs. 5 lakh bracket may boost 2-wheeler sales. Higher allocation to MGNREGA and Pradhan Mantri Gram Sadak Yojana will help boost rural income and improve consumption in rural-linked sectors.

    Some of the key points include:

    • Target set for Agri and Allied credit at Rs. 10 trillion.
    • Corpus of NABARD’s Long Term Irrigation fund doubled to Rs. 400 billion.
    • Allocation to Pradhan Mantri Krishi Sinchai Yojana is up by 71 percent at Rs. 34 billion.
    • A new micro irrigation fund will be set up with a corpus of Rs. 50 billion.
    • Allocation from Ministry of Rural Development increased by 10 per cent to Rs. 1.05 trillion.
    • Highest ever allocation to MGNREGA at Rs. 480 billion.

    Infrastructure Status Accorded to Affordable Housing

    The Union Budget 2017-18 will perhaps go down in history as the year when affordable housing was accorded the status of infrastructure.

    While doing so, the government appears to have taken a minimalist approach by aiming to create a hospitable environment for the sector. Besides increasing allocations to schemes like the Pradhan Mantri Awaas Yojana, the budget proposes changes in the definition of affordable housing, benefits to developers, and expanding the ambit of localities to be considered under affordable housing.

    Some of the key points include:

    • As proposed earlier, built up area of 30 sq m and 60 sq m will be replaced by Carpet Area for affordable housing.
    • Non Metro towns in a radius of 60 Kms to also be considered under affordable housing.
    • Holding Period for Capital gains tax for immovable property reduced to 2 years from 3 years previously.
    • Real Estate developers will get tax relief on unsold stock as liability.
    • Real Estate developers to pay capital gains only the year the project is completed.

    Is Budget 2018 a Prelude to a More Accountable Government? Should We Expect the Same from All Stakeholders?

    Several changes introduced in the Budget 2018, not to mention its timing, reflects the government’s zeal for accountability fiscal prudence.

    In the overarching theme of ‘Transform, Energize, Clean’, the budget appears to emphasize its push to be more accountable, and how it expects the same from the nation’s economy and its stakeholders.

    If the nation’s overnight demonetization is anything to go by, we could expect more measures from the government till the economy stabilizes and current gaps in terms of tax compliance are bridged.

    The idea of the government being a ‘custodian of public money’ will lend itself to not only the government following this itself but also expecting rest of the stakeholders in the economy to play their part. 

  14. KSA’s Petrochemical Earnings Improve in 2016, but Top Line Remains Muted

    Lower oil prices coupled with weak global demand continued to weigh on the kingdom’s petrochemical sector in 2016. G

      to read | words

    Lower oil prices coupled with weak global demand continued to weigh on the kingdom’s petrochemical sector in 2016. Gross margin expansion however, did support bottom-line growth.

    The petrochemical sector’s total net profit grew 8.0% YoY to SAR22.9 billion in 2016, recovering from the record low income reported in 2015.

    Expansion in gross margins on lower feedstock prices coupled with improving efficiency amid aggressive streamlining (and shutdowns in 2015) boosted earnings growth among petrochemical companies in 2016. 

    Positive earnings from Tasnee, Kayan, and Petro Rabigh during 2016 also supported this growth.

    Petrochemical Sector Stocks

            2016 Net Income
             (SAR mn)
              2015 Net Income
               (SAR mn)
                Increase/Decrease (%)

















    Saudi Kayan








































    Petro Rabigh




    Source: Tadawul, Aranca Research

    On the flip side, total petrochemical sales decreased 7.9% YoY to SAR213.7 billion due to weak selling prices, caused by waning global demand and prices.

    Based on Bloomberg data, benchmark prices of key petrochemical products declined 3–12% YoY in 2016, in line with Brent oil prices (down 18.1% YoY). 

    The sector recorded a gross margin of 26.0% in 2016, its highest since 2011.

    SABIC’s reported gross margin of 30.8% was its highest since 2011, while Kayan, Sahara, and Advanced experienced their highest gross margins on record.

    Saudi petrochemical giant SABIC on the other hand contributed 78.0% of the sector’s net income last year, lower than the 88.3% it boasted in 2015. This could be attributed to weak average selling prices as well as increased Zakat provision. One-off expenses such as the Ibn Rushd impairment (where SABIC holds a 45.2% stake) also hit its bottom line.

    Among the 14 stocks considered, Sahara and Yansab have shown the strongest earnings growth during 2016. Enhanced operational efficiency after a shutdown in FY15 as well as lower feedstock prices led to strong earnings growth. Moreover, recovering losses from Sahara’s associate and JV companies supported its bottom line growth.

    In Q4 FY16, the sector’s total net income grew 3.0 times YoY to SAR5.4 billion, driven by higher revenue growth and gross margin expansion. Revenues increased 9.8% YoY, supported by higher key petrochemical prices (up 2–22% YoY), tracking the oil price recovery (up 14.4% YoY). Gross margins stood at 24.4% in Q4 FY16 as compared to 21.0% in Q4 FY15.

    However, on QoQ basis, earnings declined 18.3% despite a 3.6% QoQ growth in revenue; likely due to a contraction in gross margins and higher OPEX. Moreover, Petrochem Co. reported a net loss of SAR127.1 million in Q4 FY16 as compared to their SAR191.2 million in Q3 FY16.

    Saudi Petrochemical Sector — 2017 Outlook

    The KSA petrochemical sector’s higher gross margin seems unsustainable when you factor in recovering oil prices; rising feedstock prices would outpace those of petrochemicals.

    Reduced global demand will further squelch any surge in petrochemical prices.

    Earnings could improve over the next few quarters however, aided as much by efforts to improve processing efficiency as by government support.

    The government’s announcement to defer a hike in feedstock prices until 2020E is definitely a shot in the arm for the Saudi petrochemical sector’s growth, and the sector will also receive SAR1.5 billion to develop value-added basic and downstream petrochemical products.

    The Saudi petrochemical sector is looking forward to a hardy 2017. 

  15. Demonetization’s Impact on the Indian Automotive Sector — Short-term Slump Will Subside Once Cash Flow Normalizes

    The Indian government’s bold move to invalidate large currency denominations in November has led to a severe l

      to read | words

    The Indian government’s bold move to invalidate large currency denominations in November has led to a severe liquidity crunch across the nation for over two months now. In an economy where dealing in hard cash is deeply entrenched, this has, invariably, resulted in a slowdown across several sectors.

    The automotive sector is among several other cash-starved sectors coping with India’s demonetization and slow transition to normalcy.

    While passenger vehicle (PV) sales won’t be impacted much, two-wheelers (2W), commercial vehicles (CV) and tractor sales will take a significant hit over the next few months.

    The following chart shows the year-on-year volume growth of various segments during April-October (before demonetization) as compared to November’s figures.

    Indian Automotive Sector Segments' Growth Comparison Before v.s. After Demonetization

    Two-wheelers, commercial vehicles, and tractor sales declined after demonetization, while passenger vehicle and private car sales were flat as compared to the months preceding November.

    Several manufacturers resorted to idling production lines in order to cope with the drop in footfalls and surplus inventory in December.

    Although there are signs that the initial negative impact on sentiment and sales is now abating, it’ll probably be several months (or a surge in cash supply, whichever comes first) before growth in India’s automotive market overcomes its current slump.

    Two-wheeler Segment Hit Hardest — Likely Just a Short-term Slump

    Almost 60-70% of two-wheeler sales in India are done in cash, and most of those transactions happen in rural India.

    Remonetization is happening at a far slower pace among India’s rural and semi-urban areas as compared to its larger cities, a situation that’s detrimental to several sectors — such as India’s two-wheeler market — that count on rural markets for a majority of their sales.

    Footfalls at dealerships soon after demonetization dropped anywhere from 15% to 50% of their October levels, and they’ve only just begun to climb back (to somewhat normal levels) after two months.

    Decline in rural demand is probably the biggest reason why India’s two-wheeler market is reeling right now.

    On the flip side though, the impact will most likely be short-term.

    The issue here isn’t a lack of demand due to unaccounted money; it’s a shortage of hard cash. Rural markets will warm up once the nation’s cash flow problem is resolved.


    Moderate Decline in Demand for Commercial Vehicles

    November was not good for the commercial vehicles and transport industry.

    Although sales in this segment are institutionally financed, trip expenses are almost entirely settled using cash. Large fleet operators simply weren’t ready for an overnight switch to a cashless way of life, and the severe shortage of cash compounded their woes.

    Haulage trucks were the hardest hit in the commercial vehicles segment.

    The decline in demand is likely due to consumption slowdown across the country immediately after demonetization. There’s also a marked decline in the used truck market as well, as second-hand truck sales are done almost entirely in cash.

    On the other hand however, the construction vehicles market showed signs of growth in November.  

    Once the cash situation normalizes and business activity picks up, the demand for commercial vehicles ought to be back to normal.


    Moderate Decline in Demand for Tractors — Likely Due to Cash Shortage

    Demand for tractors will be hit in the short-term, predominantly due to cash shortage in India’s rural areas.

    Farmers across the nation are facing problems while selling their crops, as nearly all their transactions are done using cash. Given the severe shortage of cash in the market, they’re either unable to sell, or are forced to sell at lower prices.

    Once sufficient cash is made available however, demand for tractors and other agricultural equipment will return to normal levels.


    Passenger Vehicle Segment Largely Unaffected by Demonetization

    Almost 70% of passenger vehicle sales are institutionally financed, and the sector remains mostly unaffected by India’s demonetization.

    There are however, ripples to contend with.

    Footfalls across dealerships fell 25-30% soon after demonetization. 

    With down-payments usually made in cash, customers may postpone their purchases due to the country’s current cash crunch. Car makers had to come up with schemes such as zero down-payments and 100% on-road financing in order to lure customers.

    Car manufacturers also had to slow or shut down production lines for anywhere between a week to 15 days in December, in an effort to correct surplus inventory levels in the wake of low demand.

    Second-hand car purchases have slowed down as well.

    All these will be short-term pains, with things likely to normalize soon after the nation resupplies its currency stocks.

    The luxury car segment may need more time to recover however.

    According to the President of the Federation of Automobile Dealers Association (FADA), luxury car sales were down 30-50% in the month just after demonetization. The majority of high-end luxury vehicles purchased in India are done using cash, likely the type of undeclared cash that its demonetization drive is targeting. Unless consumers convert their old currency stockpiles to legal tender, or transact electronically, it may be a while before the luxury car segment recovers.

    Demonetization won’t dent the passenger vehicle segment in India significantly however, and sales will likely normalize once the cash flow problem is dealt with.


    Indian Automotive Sector Should Pick Up by Q2 ‘17

    Demonetization’s impact on the Indian markets was as sudden as it was severe.

    It is just a short-term detriment for the automotive sector however, and sales should climb back to normal levels once new currency is infused into the cash-starved economy.

    The current slump could last till March 2017, and better availability of cash/liquidity — especially in rural markets — will help the automotive sector regain some of its lost momentum.

    While the industry won’t achieve the double-digit growth that it hoped for in FY17, the positive fallout from India’s demonetization — such as lower interest rates — could boost consumer spending, bolstering the industry for a hardy FY18.


  16. Saudi Arabia Budget 2017 — Expect Aggressive Deficit Reduction

    If its budget is anything to go by, Saudi Arabia sees 2017 as a glass half full. Assuming that

      to read | words

    If its budget is anything to go by, Saudi Arabia sees 2017 as a glass half full.
    Assuming that global oil prices rise and they manage fiscal fine-tuning effectively, can Saudi Arabia lower deficits without raising debt?

    Saudi Arabia announced its 2017 budget yesterday with estimated revenues of USD185 billion (31.1% YoY higher than 2016) and expenditures of USD237 billion (up 7.9% YoY).

    Saudi Arabia’s budget deficit is expected to decline to USD53 billion for 2017 (7.7% of the real GDP). This is significantly lower than the USD79 billion projected in 2016, and far lower than the USD98 billion reported in 2015.

    Saudi Arabia's Budget Deficit 2012-17

    Saudi Arabia plans to finance its 2017 deficit by issuing new debt instruments in addition to drawing from reserves.

    Its higher revenue and expenditure projections are based primarily on an increase in energy prices.

    Oil Revenue Expected to Grow in 2017 — Optimism Hints at Higher Oil Prices

    Saudi Arabia expects higher oil and non-oil revenues to drive the country’s revenue in 2017, with oil revenues alone expected to hit ~USD128 billion, 46% higher than previous 2016 projections.

    Considering that Saudi Arabia recently agreed to a cut in output, the higher oil revenues imply strong optimism about an oil price rally.

    Non-oil revenues are estimated to reach USD56 billion, a 6.5% increase over previous 2016 projections.

    Saudi Arabia Oil Revenue vs. Non Oil Revenue 2012-17

    Although the non-oil sector’s contribution has been growing steadily over the past few years, Saudi Arabia expects the oil sector to bring in greater revenue in 2017.

    The budget takes into account an average oil price of USD50.6 per barrel, a reasonable figure given the OPEC’s recent accord to cut oil production.

    Saudi Arabia to Spend More on Citizens’ Well-being in 2017

    Saudi Arabia plans to increase its budgeted expenditure on public programs as well as health and social development to USD237.0 billion (up 7.9% YoY).

    Actual expenditure for the same in 2016 is pegged at USD248.0 billion, although that includes USD28.0 billion of arrears from previous years.

    Allocations to different sectors are mostly in line with 2016 allocations.

    Saudi Arabia Budget 2017 — Projected Expenditure Allocation 

      Projected Expenditure Actual Expenditure Projected Expenditure % Allocation
      2016 2016 2017 2016 Actual 2017 Projected
    Public Administration 8 7 7 3.2% 3.0%
    Military 48 55 51 24.9% 21.4%
    Security & Regional Administration 27 27 26 12.2% 10.9%
    Municipality Services 9 7 13 3.0% 5.4%
    Education 55 55 53 24.9% 22.5%
    Health & Social Development 33 27 32 12.3% 13.5%
    Economic Resources 10 10 13 4.6% 5.3%
    Infrastructure and Transport 8 10 14 4.6% 5.9%
    Public Programs Unit 26 23 29 10.2% 12.1%
    Total 224 220 237    

    Source: Saudi Ministry of Finance

    Interestingly, the government reduced the total expenditure allocation to its Military and Security & Regional Administration sectors for 2017.

    Allocation to Health and Social Development as well as Infrastructure spending will also increase.

    Funding for Budget Deficit —  Saudi Arabia Raised Debt Through International Bonds for the First Time in 2016

    The Saudi government took various measures to finance its deficit over the last couple of years, including energy price reforms, changes to government employees’ salaries, and borrowing from local and international markets through bonds.

    During 2016, the country raised about USD84 billion in debt, which is 12.3% of its projected real GDP. 

    Saudi Arabia International Debt

    Of the total debt, about USD27 billion was raised through international bonds, while the rest was through domestic bonds.  Saudi Arabia estimates the cost of serving the national debt for 2016 at USD1.4 billion.  

    The total expenditure for serving domestic debt for 2017 is estimated at USD2.5 billion. Moreover, the Kingdom would continue to issue national and international bonds in the coming years, if required. Total debt however, wouldn’t exceed 30.0% of the GDP.

    Furthermore, Saudi Arabia’s government plans to balance its budget by 2020 through increasing non-oil revenues.

    Saudi Arabia’s Deficit Expected to Decrease as a Percentage of GDP in 2017

    Saudi Arabia expects budget deficits to decrease by 33.0% YoY in 2017, dropping from USD79.0 billion (expected) in 2016 to USD53.0 billion.

    The Kingdom is working on a National Transformation Plan (NTP) to diversify the economy and increase the non-oil revenues, hoping to  reach a balanced budget by 2020.

    Saudi Arabia - Deficit as % of GDP

    Saudi Arabia’s mammoth decrease in budget deficit primarily depends on two major outcomes —  an increase in oil prices, and a reduction in wasteful expenditures.

    The 2017 budget also hinges on higher oil revenues that would reduce the need to raise more debt, boosting investor confidence.

    The real trial by fire however, lies in its eventual implementation.

  17. Six Sectors That Could Boom During the Trump Administration

    Here’s where to put your money if the Trump administration sticks to its guns. Retail & Consumer Goods D

      to read | words

    Here’s where to put your money if the Trump administration sticks to its guns.

    Retail & Consumer Goods

    Donald Trump plans to give America its largest tax cut since the Reagan administration.

    Depending on how certain ambiguities in their plan are resolved, the Trump administration’s tax proposal could boost American taxpayers’ overall after-tax income by as much as 19.9%. People in the top 0.01%, with annual incomes upwards of $3.7 million, could save up to $1 million in taxes every year.

    Generous corporate tax cuts could also be on the table, possibly reversing tax inversions, perhaps even creating more high-paying jobs state-side. It’s also likely that ordinary income tax rates will apply to income from carried interest, a boon to hedge fund managers as well as individuals banking on investment income.

    Although the nation’s fiscal deficit could rise substantially — there’s no mention of spending reductions to offset the tax plan's $7 trillion increase in debt — bigger tax cuts and the subsequent increase in individual income could cause an uptick in consumer demand.

    Statistical data shows Americans save very little; it’s likely they'll spend their bigger after-tax paycheck on consumer goods and creature comforts.



    Donald Trump promised America better security, particularly against terrorism.

    During his campaign, Trump called for 90,000 more soldiers, a 350-ship navy, and 100 more fighter aircraft, while also pledging to strengthen American nuclear and missile defenses.

    Republicans and quite a few policymakers as well believe that defense spending is among the best stimuli for the American economy.

    U.S. defense stocks have risen after Donald Trump’s unexpected victory; they’re expecting the new administration to make good on his campaign promise to boost defense spending.


    Healthcare & Pharma

    Hillary Clinton had been a vociferous critic of inordinate hikes in drug pricing, increasing apprehensions that a Democrat administration could enforce new pricing rules on drugs, thinning pharma companies’ profit margins.

    Trump’s victory has allayed those fears.

    The healthcare sector will also benefit from Mr. Trump’s vow to overhaul the Affordable Care Act (also known as Obamacare), which has squeezed the margins of private insurers. Healthcare and pharma companies could have a lot to gain during the Trump administration, likely outperforming the broader stock market.



    During his victory speech, Mr. Trump said “We are going to rebuild our infrastructure, which will become, by the way, second to none”.

    Donald Trump has promised major investments in infrastructure, and firms in the U.S. are expecting a windfall due to fiscal spending initiatives in America’s infrastructure sector during the Trump presidency.


    Banking & Finance

    On a positive note, Trump is unlikely to saddle banks with more regulation.

    In the short-term, however, sell-off in global markets is expected.

    The Trump administration is also likely to deter a Fed rate hike in December amid fears it would further roil the already nervous markets. This could be bad news for banks as it would affect long-term borrowing costs and profitability. The Finance sector is expecting turbulent times during Trump’s term as well, dreading an expected market sell-off and delay in the Fed rate hikes that will impact banking.

    A lack of further regulations however, could have positive impact on sentiments, and a deregulated environment could be a shot in the arm for large banks. 



    Fossil-fuel companies that were treading lightly under the Obama administration could enjoy much more freedom under a Republican government.

    Trump has also made sweeping promises to make America energy independent, reviving domestic oil, shale, and clean coal production toward that goal.

    Renewable energy on the other hand could see its fortunes reversed.

    America, the world’s largest greenhouse gas emitter, could renegade on or dilute its climate treaty obligations. A reduction in government support for clean energy could significantly reduce the momentum of growth that the renewable energy sector built up in the recent past.

  18. OPEC Production Cuts Announced — Rebalancing Expected in 2017

    OPEC members agree to cut crude production to 32.5mn b/d until June 2017 — reducing global oil supplies

      to read | words

    OPEC members agree to cut crude production to 32.5mn b/d until June 2017 — reducing global oil supplies by about 1%.

    The agreement among all 14 member countries will be effective for six months starting January 2017, with a provision to extend the deal until December.

    In September this year, OPEC members announced plans to reduce crude production between 32.5 – 33mn b/d, with quotas supposed to be set later.

    The proposed reduction in supply created significant positive sentiment, with Brent oil prices rallying around 5.0% to US$48/bbl in November 2016.

    Brent Oil Prices (US$/bbl)

    While there was some pessimism about the likelihood of an amicable agreement between competing nations, OPEC members finally reached a consensus — their first since 2008 — on 30th November 2016, agreeing to cut production by 1.2mn b/d, thereby reducing overall output  to 32.5mn b/d.

    This reduction is equivalent to about 1% of the world’s oil supply.

    The largest cuts are expected of Saudi Arabia (0.49mn b/d), Iraq (0.21mn b/d), UAE (0.14mn b/d) and Kuwait (0.13mn b/d).

    Proposed Oil Production Cuts (tb/d)

    While, Libya and Nigeria have been exempted due to ongoing geo-political difficulties, Iran has been allowed to increase its output by 90,000 b/d, close to its pre-sanction levels. Indonesia has suspended its membership rather than agree to a production cut, likely due to the fact that it imports more crude than it exports.

    The agreement also includes a commitment from non-OPEC members to cut production by 0.6mn b/d, with Russia’s quota at 0.3mn b/d. 

    Short-term Cuts Will Reduce Surplus Stockpiles 

    The OPEC agreement will help re-balance the global oil market by normalizing surplus inventories.

    According to the EIA, global oil inventory builds averaged 0.6mn b/d between January–October 2016. EIA estimates global oil inventories builds to average 0.8mn b/d in 2016E and 0.5mn b/d in 2017E. The proposed 1.8mn b/d cut (including non-OPEC producers), if implemented, will help reduce the inventory buildup and expedite the oil market’s re-balancing.

    As evident in the next chart, oil prices generally rise during periods of excess demand, and vice versa. The oil market is expected to stabilize next year, driven by the proposed production cuts and a growing global demand for crude.

    Global Oil Inventory Build vs. Brent Oil Prices

    The success of the deal however, really hinges on whether participating nations adhere to their allocated quotas, something that’s proved elusive in the past.

    A violation of the agreed limits will once again put pressure on oil prices in the near to medium term.

    Saudi Arabia’s Cuts Are Well Within Manageable Limits

    Saudi Arabia’s proposed production cut of 0.486mn b/d is well within manageable limits.

    According to EIA data, Saudi crude oil production averaged 10.3mn b/d during 9M16. Assuming the 4Q16 production stays in line with 3Q16 levels of 10.6mn b/d, the average production for 2016 will be 10.4mn b/d, whereas the revised production target set for Saudi Arabia stands at 10.1mn b/d. The implied YoY reduction in Saudi production would therefore be just about 0.3mn b/d for 2017, a dip the likes of which Saudi Arabia has weathered in the past, as evident in the next chart.

    YoY Change in Saudi Crude Oil Production (mn b/d)

    The proposed cuts for Saudi Arabia, although the highest in the cartel, are achievable. 

    At current production levels and export volumes, every single dollar that oil prices climb will help Saudi Arabia increase monthly oil revenues by SR1bn. The overall production cuts, if implemented successfully, would help Saudi Arabia improve its fiscal position.


    American Shale Producers Could Reactivate Rigs, and Another Downslide

    American shale gas producers have significantly improved their productivity levels after grappling with weak oil prices for a while now, with the breakeven cost of producing a barrel of shale oil declining from US$79.0/bbl in 2014 to US$48.0/bbl in 2016. Oil prices above US$50/bbl could encourage shale producers to reactivate rigs, fuelling an increase in American production — a key downside risk to oil prices over the near to medium term.

    US Oil Rig Count vs. Brent Oil Prices

    Although execution risks and concerns over shale producers ramping up production persist, it’s likely that oil prices will hover between US$50-60/bbl in the near term.

    Whether OPEC members stick to their commitments and quotas — or not — remains to be seen.

    The agreement has nonetheless sparked optimism about a possible re-balancing of the oil market by 1H17.

  19. What Will a Trump Presidency Mean for Global Markets? — A Short and Long-term Overview

    The world's waiting with baited breath to see how hawkish the Trump presidency will really be. Markets dipped

      to read | words

    The world's waiting with baited breath to see how hawkish the Trump presidency will really be.

    Markets dipped in surprise when it looked like Donald Trump was taking the lead, but then did a volte-face and recovered.

    Sentiment may be subdued and cautious in the short-term though, predominantly due to uncertainties surrounding future policies after the Trump administration takes power.

    Although Donald Trump contradicted some of his own policy statements (based on his election website) what’s certain is that he will try to make good on his promises to negotiate hard on trade agreements. He’ll push back against countries like China, stemming — possibly even reversing — the flow of manufacturing jobs from the USA.

    While laudable, these policies could have a negative impact on global trade in the long-term.

    The Fed rate hike in December— which seemed all but certain before the election —is no longer so, something that could lead to volatility in fixed income markets as well.

    The Peso may remain weak as well, especially if Trump continues singling out Mexico for problems such as unemployment, crime, immigration, and so on.  In his first interview after winning the election, Trump indicated he’d push for the deportation of up to 3 million illegal immigrants, a majority of who could be from Mexico.

    On the plus side, the Republican Party now boasts the Presidency as well as a majority in both the Senate as well as the House of Representatives. This bodes well for fast-track legislative decisions over the next two years. It could mean speedy approval on necessary spending in areas like infrastructure, providing some much-needed fiscal stimulus to the US economy.


    Will Global Trade Suffer Because of a Protectionist American Trade Policy?

    Trump has asserted throughout his campaign that America suffers because of the concessions it provides to her trade partners; and he’d like to renegotiate hard for more favorable deals.

    A hard stance against America’s top two trade partners —China and Mexico —may hit both sides however, adversely impacting trade.

    The US is the world’s largest importer, with US$ 2. 3 trillion worth of goods imported in 2015.

    Imports from China and Mexico to the US over 2010-2015 have grown at a CAGR of 5.8% and 5.2% respectively, greater than America’s overall imports CAGR of 3.2%. China and Mexico accounted for 34.3% and 23.3% of US imports and exports respectively in 2015. 

    Similarly, exports to China and Mexico from the US over 2010-2015 have grown at 4.8% and 7.6% CAGR, also higher than their overall exports at 3.2% CAGR.

    Combined Share (%) of China and Mexico in US Imports and Exports

    Any falling out with these two trading partners will affect US trade, and consequently, global trade as well.

    It could cause disruptions among global trade channels, with major exporters to the US seeking out other markets and becoming more competitive. Other countries may also adopt a more aggressive currency depreciation route to support their exporters.


    Will Existing Agreements like NAFTA be Scrapped?
    What About the Transpacific Trade Pact that’s Still in Discussion?

    Undoubtedly, the United States under Trump will push hard for better deals in existing trade agreements.

    Countries like Canada and Mexico, that are part of NAFTA, may have no choice but to (reluctantly) negotiate with the US rather than cancel their agreements. Indeed, both countries have expressed their willingness to talk.

    The Transpacific Trade Pact will most likely be shelved in the face of opposition from both the Republicans and Democrats.  The Transatlantic Trade and Investment Partnership (TTIP) between the US and EU also remains uncertain.


    How Will Fixed Income Markets React?

    Fixed income markets fell as the election results were rolling out.

    The massive tax cuts that Donald Trump promised to reinvigorate the economy may not be offset by proportional spending cuts. There’s a high probability that more debt will be issued in order to meet the likely deficit, and Republicans may approve , justifying them as necessary short-term measures until tax cuts help revive the economy.

    It’s not unprecedented either; there was a similar sequence of events during the Reagan administration, where initial tax cuts were followed up with debt issuance and eventual tax increments.

    Fixed income markets will, in all likelihood, take their cues from realistic assessments of tax cuts. In the longer term, expansionist policies and increased spending could accelerate inflation expectations, hastening the pace of rate hikes by the US Fed.


    How Will Currency Markets and Gold React?

    The US Fed may lower (or delay) rate increases if they adopt a more cautious policy,  even though unemployment and inflation thresholds —their predetermined triggers for rate hikes —  have already been crossed.

    Consequently, the USD may weaken (or fail to dominate) against weaker currencies.

    If the Trump administration adopts an aggressively hawkish stance in global politics, it could spur a flight to safe havens such as the Japanese Yen and Swiss Franc, accompanied by a sell-off of weaker emerging market currencies.

    Similarly, frequent risk-off trades would keep gold in play as a defensive bet, from time to time. Hedge funds and long-term investors may shift part of their holdings to gold as a relatively safer asset to reduce portfolio volatility.


    How will a Trump Presidency Affect Trade Growth in Europe and Asia?

    Europe appears relatively delinked from developments in the US.

    Recovery in the EU has been slow, and fresh trouble seems to be brewing in Italy, especially in her banking sector. Barring Germany however, the EU does not appear to be very strongly linked to the US in terms of trade. In addition, the ECB has kept a watchful eye on economic growth, scaling up its efforts (in terms of stimulus) in the recent past.

    Risk in the European Union appears to be more political in nature.

    After a Brexit, the referendum in Italy may cost Prime Minister Renzi dearly, likely creating uncertainty that’ll be another step toward the EU fragmenting.

    China is still in the midst of re-balancing its economy, shifting from export-driven manufacturing to domestic consumption-led growth. Losing the US market may be a hurdle in its endeavor, but it’s unlikely to hamper momentum in the medium to long-term.

    Japan’s problems have been chronic and more domestic. As long as Trump doesn’t add Japan his list of target countries (Japan is 4th largest source of US imports) the country’s current momentum (or lack thereof) will be unabated.


    Will This Have Any Impact on Brexit?

    Brexit appears to be charting its own course now.

    The speed of severing ties between the UK and the EU will vary, but Trump winning does not appear to have any implications on Brexit.

    Trump’s win has encouraged various nativist right-wing political parties across EU however, proponents who will become more aggressive in their advocacy of an exit from the EU.


    Are There Specific Investments to Target, or Avoid?

    Investors may increase their exposure to US equities initially, anticipating tax cuts and a corresponding re-rating of stocks to catch up with the bump up in profits.

    In the long-term, investors are expected to shore up safe haven assets like gold in their portfolio.

    Selective exposure to US infrastructure companies may also be a viable option.

    US domestic consumption-linked stocks may be favorable as well, as decreasing unemployment, a recent 2%+ growth in wages, as well as a boost from tax cuts will be conducive to consumer spending.

    Investors are expected to re-examine their investments in US companies with export/import ties to China and Mexico, or companies that are exposed to the possible renegotiation of trade agreements, at least till the Trump administration’s course of action becomes clearer.

  20. OPEC Production Cuts Still Undecided — Oil Slides Again Due to Sagging Sentiment

    Iraq’s out, Trump’s in, and the oil market is writhing due to growing uncertainty. OPEC’s Septe

      to read | words

    Iraq’s out, Trump’s in, and the oil market is writhing due to growing uncertainty.

    OPEC’s September Meeting in Algiers Ended on the Right Note

    The OPEC’s meet last month generated quite a bit of positive sentiment, with participating members agreeing to cut oil production in order to boost prices.

    The production cut is expected to be around 700,000bpd bringing the production down to 32.5mbpd from the current levels of 33mbpd.

    At the time, only Iran, Libya and Nigeria were exempt from production cuts due to concessions; Iran resumed production after long-standing sanctions were lifted, while Libya and Nigeria are recouping after terrorist attacks on their oil facilities.


    Uncertainties About Eventual Execution is Damping Oil Markets

    While Algiers set the right tone for oil producers going forward, there’s been some uncertainty regarding the finer points of its eventual execution.

    While the next obvious step is to set specific production caps for individual oil-producing nations, it’ll be a complex bilateral decision that’ll need both OPEC and non-OPEC nations to co-operate without scruples until oil prices stabilize.

    Until the industry takes some concrete steps toward capping, oil prices are likely to stay volatile.

    Increasing US shale gas production and its growing oil reserves aren’t helping either.

    To make matters worse, it looks like Iraq — OPEC’s second-largest oil producer — is also looking for an exemption from any serious production caps. Iraqi Oil minister Jabar Ali al-Luaibi argued that the country is in need of the money to fight the Islamic State (ISIS).

    Iraq’s decision to opt out of the OPEC’s next meeting (to be held on 30th November) is threatening to reverse the positive sentiment (and trends) that boosted the market after Algiers.

    A Trump presidency hit sentiments further, with the market dropping over concerns that the new administration will call for an increase in shale gas production in the US, oversupplying an already overstocked market.

    OPEC Production Cuts Still Undecided

    Growing uncertainty about an actual actionable agreement after the OPEC’s next meet in November is making investors jittery.

    OPEC output for October rose to 33.64mbpd, up 240,000bpd from the previous month, and Brent Crude prices dropped as low as $45 per barrel on the 14th of November, 2016. 

    Until a proper plan for crude production cuts is on the table — and observed — oil prices will likely remain highly volatile.

  21. Indian Government Invalidates Large Currency Denominations — Could This Affect the Nation’s Liquidity and GDP?

    Remember remember The 8th of November A bid to foil terror was plot With scant hours to midnight

      to read | words

    Remember remember
    The 8th of November
    A bid to foil terror was plot
    With scant hours to midnight
    The government done did right
    A mortal blow to the shadow they wrought.

    A bold move by the country’s government to weed out fake currency in the interest of national security, the decision could have far-flung ramifications for the country’s ‘shadow economy’. 

    The government’s objective in invalidating existing Rs500 and Rs1000 denomination currency notes overnight seems like a bid to tackle both fake currency in circulation as well as the “black money” that’s out there. These denominations make up approximately 86% of the Rs17.8 trillion (hard currency) in circulation, and analysts estimate between one-third and half of that is money without a proper paper trail. That’s probably why there’s been a mad scramble overnight to convert older currency by way of jewelry purchases, filling up on fuel and advance payments of bills, among other things.

    The overnight overhaul limited citizens’ ability to convert their old notes into new ones en masse; it’ll also allow the government to track large deposits and identify unusual (read less than legal) concentrations of wealth. The new currency that will replace existing notes will also allow the government to easily track the ebb and flow of the country’s hard cash, resulting in a greater degree of accounting (and due tax revenues) during commercial transactions.

    India’s cash (or shadow) economy will be impacted significantly, at least immediately.


    How Much of India’s “Black Money” Will Surface Before December?

    The estimated size of India’s “parallel” economy varies widely, pegged anywhere between 20% to 50%+ of India’s GDP.

    Even conservative estimates of 20%-30% mean it’ll be worth anything between US$400–600 billion, at a gross domestic product (GDP) of US$2 trillion.

    Some of this off-grid economy should come clean over the next month.

    Even if ~10% of India’s shadowy parallel economy is eventually accounted for, it could mean the addition of ~US$40–60 billion to India’s GDP in the long term.


    Could Liquidity in India’s Monetary System Go Up?

    India’s money supply (M3) was US$1.86 trillion in October 2016.

    An additional US$40-60 billion would translate to a ~2-3% increase in the nation’s money supply.

    Most of this increase would be among savings and current accounts. The increase will most likely be a short term spike due to money (in the form of Rs500 and Rs1000 currency notes) being replaced and deposited in banks.

    Considering that the country’s money supply rate increased just ~1 per cent in October this year, the liquidity boost may spike India’s M3 supply.

    A more liquid market would also bring down wholesale money market rates in the short term, thereby providing relief to banks in terms of cost of funds. A receding tide due to withdrawals of deposits — most of which were likely due to obligatory procedures when exchanging invalid currency notes — could however, ebb the surge in liquidity.


    How Much Will This Impact India’s GDP?

    With a boost of US$400-600 billion India’s GDP could rise by 20%!

    Realistically however, even if 10% of India’s unaccounted for economy goes legit, the additional US$40-60 billion would boost the GDP growth rate by 2%-3% for a quarter or two.

    This will come later however; consumption will likely be hit in the near term.

    Apart from larger industries such as real estate, gems and jewelry, automobile (especially high-end vehicles), several other sectors such as offline retail, construction (ex-real estate), small and medium enterprises may be affected far more negatively.


    Is Demonetization the Final Play, or is There More to Come?

    After Tuesday’s surprise announcement by Prime Minister Narendra Modi, the government did a double tap with another significant announcement on Wednesday.

    If deposits made (by individuals) between November 10 and December 30 exceed Rs250,000, their finances will be scrutinized by the Indian Income Tax Office to ensure they’ve properly declared their income.

    Of course.

    We should have seen it coming.

    The government has been systematically setting up the building blocks of a cashless economy.

    Two years ago, the government rolled out the Jan Dhan Yojana, opening ~255 million new bank accounts since then, predominantly for the benefit of the economically weak stratas of society. The government had also issued 194 million RuPay cards by the end of October, 2016.

    In April this year, the then RBI governor Raghuram Rajan and Nandan Nilekani announced the “Unified Payment Interface”, or UPI, a platform that’ll allow any and all Indians to use mobile phones to transfer money and conduct small transactions using their bank accounts.

    India’s Prime Minister Narendra Modi persuaded listeners to stop using cash in a radio address to the nation in May.

    In July, a Special Investigative Team appointed by the Supreme Court boldly recommended that cash transactions above Rs3 lakhs (~US$4,500) be banned and no one should be allowed to hold more than Rs1.5 million in cash.

    The RBI has set up a joint committee with a directive to find ways to reduce the cost of transacting using credit cards (2% for each purchase right now) for consumers.

    The government announced the tax amnesty scheme (which closed in September) and unearthed ~ Rs 65,000 crore of undisclosed income, collecting ~ Rs 29,000 crore in taxes.

    All these steps, in context, seem to be firm steps toward an economy that’s more organized, transparent, and accountable.

    While current endeavors to purge the economy have already created quite some furor, there could be more in store.

    Another amnesty scheme perhaps, or more devious ways to unearth the country’s unscrupulous undisclosed assets.

  22. Nearly One-third of Saudi Stocks are Trading Below Book Value

    Despite some headway in reducing its reliance on oil, the Saudi economy and stock market is showing signs

      to read | words

    Despite some headway in reducing its reliance on oil, the Saudi economy and stock market is showing signs of stress in the face of declining oil prices.

    Saudi Arabia’s stock index, TASI, has declined 8.4% YTD, leading to around one-third of listed stocks trading below their book value.

    About 28% of all Saudi companies listed on Tadawul (excluding six suspended stocks) were trading below their book value when the market closed on the 8th of November 2016. Moreover, about 37% of these were trading at a P/B ratio of less than 1.2x.

    At a sectoral level, Building and Construction, Petrochemicals, and Industrial Investment have the highest number of companies that are trading below book value. This also reflects the stress on economy and capital intensive nature of these sectors.

    No. of Companies Trading Below Book Value by Sector

    The Saudi stock market comprises of 175 companies, with a total market cap of SR1.4trn.

    Banking and Petrochemicals are key sectors, contributing 26% and 25% to total market cap, respectively, followed by Telecom (10%) and Real Estate (7%).

    Market Cap Weights By Sector

    The total market cap of the companies trading below book value was equivalent to 9.5% of the TASI market cap.

    While 42% of total building and construction sector’s market cap was trading below book value, the proportion for Media and Cement was 27% and 23%, respectively.

    % Market Cap Trading Below Book Value by Sector

    It’s also worth noting that most of these sectors are trading at a Trailing Twelve Months (TTM) P/B ratio of less than their five year average. Retail and Hotels are trading at a significant discount to their five year average, followed by Cement and Media.

    Current P/B vs. 2011-15 Average by Sectors

    TASI Declined 8.4% YTD, but Went Up 12.5% QTD

    The TASI index declined 8.4% YTD owing to weak earnings (down 5.4% YoY in 9M16), on-going volatility in oil prices, slowdown in construction sector, tightening liquidity in the system, and overall slowdown of the economy.

    However, the index has increased 12.5% during this quarter.

    This increase is likely driven by positive investor sentiment following the government’s mega international bond sale worth US$17.5bn and visible attempts at streamlining in the form of salary cuts and similar measures.

    TASI Index

    Going forward, TASI’s performance will likely depend on several factors, including:

    • Any improvement in oil prices.
    • Better liquidity in the banking system, or any improvement in fiscal deficit.
    • The pace of recovery in the region’s construction sector.
    • Impact of recent government austerity measures on consumer spending.
    • The pace at which companies realize the benefits of reforms, including the NTP 2020, along with effective execution of the program itself.
    • The FED’s interest rate revisions in the US.

    Positive developments among these factors would bolster the TASI, leading to a re-rating of multiples. They could also be a boon to long-term investors contemplating an entry right now. Moreover, potential MSCI membership may renew investor interest as well as prove a shot in the arm for equities.

  23. International Beer Brands Are Betting Big on Africa’s Untapped Beer Market

    Surging urban populations and better economic tides are good news for a budding African breweries sector; localization and

      to read | words

    Surging urban populations and better economic tides are good news for a budding African breweries sector; localization and aggressive expansion likely as several international players vie for a slice of the pie.  

    Housing almost sixteen percent of the world’s population — expected to touch 20% by 2030 — Africa is a huge opportunity for multinational companies, promising untapped markets where consumers aren’t spoiled for choice. 

    Some have already begun forays into the continent.

    Changing Demographics Boost Uptake of International Beer Labels

    Africa boasts one of world’s largest working-age populations (45% of Tanzania’s total population is between 15 to 45 years of age for example) and it’s likely to increase over the next decade. Countries in sub-Saharan Africa are reporting a rise in urbanization as well, showing some of the highest GDP growth across the globe.

    Growth of African Cities (Population, in Thousands)

    % Change (2010-25)

    Dar es Salaam




























    Addis Ababa








    Côte d'Ivoire




























    As per IMF estimates, Africa is expected to witness steady GDP growth in coming years.

    Increasing urbanization, improving demographics, and rising disposable income are sure to be a shot in the arm for the brewery industry.

    Several global beer brands are hard at work trying to tap a budding beer market that’s been dominated by local (sometimes shady) home-brews until recently, and international brands have steadily won over African consumers that were otherwise content with backyard brews.

    South Africa was the thirstiest African market in 2014, guzzling over 30.9m hectoliters (hl), followed by Nigeria at 15.2 hl, and Angola at 12.8 hl.

    While expense is a big factor in markets where frosty foreign brews are an expensive indulgence for the average customer, rising income levels and easy availability of foreign brands are fueling the industry’s growth right now, with more of Africa’s middle-class consumers taking to premium beers as a status symbol.

    International Players Opt for Localization to Lure Customers

    Alcoholic beverages in Africa have always been an artisanal pursuit, brewed in the backyards of countless rural households using cassava, sorghum, and other native ingredients.

    While “home brew” alcoholic beverages are still popular among the majority of Africa’s rural and semi-urban tipplers, a growing awareness of the health risks associated with an unregulated industry — coupled with the easy availability of cheaper branded alternatives — is shifting consumer preferences toward commercially brewed beer.

    In an effort to gain a greater share of a market dominated by home-brewed beverages, international players are also innovating to stay ahead.

    Plenty of foreign brands have launched cheaper products that are prepared using locally sourced raw materials, and some African governments even give tax holidays to breweries that source locally.

    One of the African beer market’s dominant players, SABMiller has tailored its products to local tastes, launching products like Eagle lager in Ghana, Hero in Nigeria, and Balimi in Tanzania, a strategy that’s won the company 20% more of the region’s organized beer market.

    Investments on the Up-swing in African Breweries

    With established markets relatively stagnant worldwide, international beer brands think Africa is their best bet for the near future.

    Industry giants are investing heavily to gain more than just a local foothold, and consolidation as well as the involvement of international shareholders (and their interests) is good news indeed for local assets. Favorable policies and promising returns have encouraged several international (and local) beer brands to up their ante in the African market:

    • Heineken bought two state-owned breweries in Ethiopia (Bedele and Harar) for $163 million in 2011.
    • Diageo bought state-owned brewery Meta Abo brewery in Ethiopia for $225 million in 2012.
    • SABMiller announced completion of a $100.0 million expansion plan at its Ghana brewery in February 2015, doubling its capacity in the region. It’s also investing heavily to increase capacity in markets such as Nigeria and Zambia, among others.
    • Kenya-based Keroche Breweries started a new facility in March 2015, a $60 million investment that boosted their production capacity tenfold.

    It’s a win-win for local governments as well, who aren’t shying away from foreign investment.

    While the market for home-brew alcoholic beverages is huge, its unregulated nature always meant negligible tax revenues, if any. Local governments have a lot to gain from taxes they’ll collect in a more organized market environment.

    A budding breweries industry could also boost employment (and investment opportunities) across the region, with related businesses such as packaging, logistics/distribution networks, and the hospitality industry creating jobs for Africa’s growing working-age population.

    International players such as Heineken, SABMiller, Castle Group, and Diaego already hold a sizable (almost 90%) stake of the overall organized African beer market.

    What they’ve accomplished however, is just the tip of the iceberg in what’s likely to be the world’s next big beer market.

  24. Oil Prices May Rise if the OPEC Algiers Accord Holds

    Crude prices jump over 6% as OPEC reaches consensus on production cuts; builds hope that oil prices will rise.

      to read | words

    Crude prices jump over 6% as OPEC reaches consensus on production cuts; builds hope that oil prices will rise.

    Brent Crude prices are on a roller coaster, dropping from a peak $115p/bbl in June 2014 to under $28p/bbl at the end of January 2016.  It’s making global markets queasy, with macroeconomic development across the world’s biggest economies bearing the brunt over the past 20 months.

    The sharp fall is similar to what happened in 1985-1986, and then again in 2008-2009.

    While the 1985-86 price drops were supply-driven — OPEC members reversed earlier production cuts —the drop in 2008-2009 was due to a collapse in demand due to the global financial crisis.

    The latest slump however, is an odd mix of both.

    Crude Prices Fell Due to a Demand That Never Rose

    When things started turning around after the last slump in 2008-2009, Brent Crude prices recovered, growing steadily till they hit $115p/bbl in Q2 2014.

    Demand exceeded supply, and was expected to climb further with time.

    Then there was shale.

    The US increased shale gas production from 1Q 2014 to meet its growing energy needs, and capacity climbed over 1mbpd. With US domestic oil production nearly doubling over the past several years as well, America began to reduce her oil imports.

    When the largest oil importer in the world dials down orders, markets react.

    Brent Crude slid from $115p/bbl in Q2 2014 to just $57.3p/bbl by Q4 2014, a drop of more than 50%.

    As demand from the US dipped, other markets couldn’t soak up the excess crude.

    Suppliers who counted on the US for demand (such as Saudi Arabia, Algeria, and Nigeria) collectively turned to Asian markets, where prices took further hits to gain competitive advantage.

    Demand from Europe and other developing countries remained weak as well, with growing environmental concerns as well as a gradual shift to renewables and electric vehicles hitting it further.

    Although China and India have been shoring up their oil reserves in earnest, it’s done little to alleviate the glut caused by a supply that was groomed and geared for far greater demand.

    Production Capacities Meant to Cope With Growing Demand Ended Up Flooding the Market

    According to the International Energy Agency (IEA), the average global oil supply was 95.9mbpd in the second quarter of 2016, up from an average 93.8mbpd in 2014.   There’s been a continuous rise in production since 2014, with average output surging by 4Q 2015, hitting record levels like 97.3mbpd, when demand was just about 95.5mbpd.

    While the IEA reduced their estimates for demand due to the financial instability and economic concerns surrounding China — the second largest economy in the world — OPEC along with other producers were optimistic about growth and continued to build surplus.

    Oil production in Canada and Iraq rose year on year, Iran restarted production with a gusto after its nuclear deal with US, and Russia was pumping oil at record levels.

    The demand and supply gap was at its peak — 3mbpd — by the second half of 2015.

    Major oil producing nations maintained output unabated at 30mbpd between 2014-2016, compounding the oversupply issue simply because they didn’t want to lose market share.

    It was this series of unfortunate events that inspired the OPEC meeting in Algiers. The Executive Director of the IEA Fatih Birol believes that the oil market cannot rebalance without major intervention.

    Previous OPEC Meetings — At a Glance


    166th Meeting — November, 2014
    • The OPEC decided to maintain its collective production level at 30mbpd for the next 6 months.
    • Majority of OPEC countries expected a production cut to help boost prices; however individual members were afraid to cut production as it could hamper their market share and oil related income.
    • OPEC was worried that a sharp cut in oil production would further incentivize production of US shale oil; thereby reducing its current market share.
    • This resulted in fall of the oil price, the global Brent Crude contract for January fell 6.7% to $72.58 a barrel on the ICE Futures Europe exchange.

    167th Meeting — June, 2015
    • After the previous meeting held in November 2014, Brent Crude oil prices fell to around $63p/bbl ahead of the meeting held in June.
    • The OPEC believed its market share would increase if it kept oil production at a high level of 30mbpd to squeeze rival high-cost producers.
    • OPEC members hoped that oil demand would continue to improve and absorb the supply if Iran finalizes a nuclear deal in the near future. The OPEC secretary said that it expects the price to remain at below $100p/bbl on account of the ongoing developments.
    • There was no major change in oil prices after the meeting in June as the price of Brent Crude oil was around $60p/bbl.


    168th Meeting — December, 2015
    • Ahead of the meeting to be held in December 2015, the Brent Crude oil price fell to around $43p/bbl from the previous price $60p/bbl after the previous meeting.
    • There were hopes that an output cut would be announced in the meeting as supply reached peak levels after Iran started pumping oil again, while Libya, Nigeria, Saudi Arabia and Russia increasing their production levels.
    • In the meeting, OPEC did not make any policy change to constrain output, it also did not arrive at a conclusion of the production ceiling; this put a risk of a further drop in oil prices.
    • OPEC has had maintained its increase in output since Nov 2014, wherein Saudi Arabia resisted cutting its output as the other suppliers such as Iran and other non-OPEC producers declined to co-operate. As a result there was a fall of over 5% in the Brent Crude oil price post the meeting.

    169th Meeting — June, 2016
    • The Brent Crude price fell below $28p/bbl in January — its lowest level since 2003 — over concerns that Iran could produce 500,000 barrels per day in excess of existing capacity.
    • The OPEC again failed to agree upon a consensus regarding its oil-output strategy.
    • Iran insisted on raising its own production capacity further.
    • Saudi Arabia promised to lower its production during the meet.
    • The OPEC emphasized a need for coordination between member countries as well as with non-OPEC producers.
    • OPEC recommended the Secretariat to continue monitoring the developments in the near future.
    • It also proposed that a meeting be held again in the near future, should the need arise, in order to suggest further measures that account for prevailing market conditions.
    • The Brent Crude oil price slumped by 1% after the meeting.

    September 2016, Algiers

    In tune with market expectations as well as speculations, a positive decision regarding the output cut has been made.

    The OPEC has decided to set output levels between 32.5 to 33mbpd from its current levels of 33.25mbpd; a cut of around 700,000bpd.

    The decision — a first in eight years —came as welcome relief to the market, with Brent Crude jumping around 6.5% to $48.96p/bbl, and Exxon Mobil (the world’s largest publicly listed oil company) witnessed its stock price jump over 4%.

    The deal is yet to be formalized, with details still being etched out.

    The next meeting that’s scheduled in November will decide production targets for member countries.

    The deal will also exempt some from production cuts.

    Iran will get some respite on account of its preexisting sanctions, while Libya and Nigeria will get similar exemptions to recuperate losses after recent terrorist attacks impacted their oil facilities. This is a major concession by Saudi Arabia, a dominant oil producer that’s in turn expected to reduce its output by 350,000bpd.

    While member nations may be in accord, the OPEC could still run into some hurdles reining in Russia’s record-breaking output.

    Formal Output Levels Will be Decided in November

    Opinion is divided.

    The IEA expects a weak petroleum market over 2017, while some expect oil prices to grow and stabilize by the end of 2017.

    Russia — the world’s second largest oil producer — still remains a wildcard.

    Its co-operation is essential if demand has any chance to catch up with supply, which the IEA expects will increase steadily over 2017 by over 1mbpd.

    China could be another deciding factor to account for.

    Although China has been importing oil on a large scale over the past two years as part of its government-controlled Strategic Petroleum Reserve (SPR), current economic conditions and financial instability is making market players wary of another drop in demand.

    While oil-producing nations may have finally agreed to work together to protect their own interests, they’re yet to establish a formal agreement and terms.

    Despite the current spike in oil prices, the real impact of this agreement will surface after the next meeting in November, when we’ll have a better idea of the quotas assigned to individual member countries.  

    An amicable agreement and execution is perhaps all that remains between a steady rise and a steep fall.

  25. Is the ECB Fuelling an Asset Bubble in the European Corporate Debt Market?

    ECB maintains status quo; continues to blow a growing asset bubble. In its latest policy review, the European

      to read | words

    ECB maintains status quo; continues to blow a growing asset bubble.

    In its latest policy review, the European Central Bank (ECB) announced it’ll maintain interest rates at -0.4 per cent and monthly asset purchases at EUR 80 billion till March 2017.

    This current policy may also persist well beyond March 2017, if necessary, until the ECB is satisfied that Eurozone inflation hovers around its target of 2 per cent.

    While the ECB has ensured policy continuity, markets expecting an expansion in the quantitative easing program (or QE3) were disappointed.

    By continuing the program however, the ECB has virtually assured that the rally in Europe’s fixed income market — as reflected in falling borrowing costs or continuously falling yields — will continue in the foreseeable future.

    Fallout of ECB Bond Purchases — Yields Keep Falling, Hitting New Lows

    Bond yields have already dropped below zero for major sovereign debt like 10-year German bonds.

    Corporate debt is now nearing negative yields as well, even for junk rated bonds.

    A new issuance at negative yield for a private sector financial institution took place in January 2016, an erstwhile unthinkable event.

    The first such issuance for non-financial corporate debt has also happened.

    Considering the ECB’s commitment to its bond purchases and monetary infusion, we may even see a junk bond issuance at negative yields sooner rather than later. The ECB, knowingly or inadvertently, seems to be fuelling an asset bubble in the European corporate debt market.

    In the World of Asset Purchases, Nothing is Off-limits for the ECB

    The ECB has pumped in EUR 1.23 trillion of liquidity into the markets since October 2014, when it started the bond purchase program in a small way.

    While investors and analysts slammed the ECB at the time, criticizing their efforts to support the economy as too little too late, the subsequent pace of monetary action picked up, and the size of asset purchases increased multi-fold.

    ECB Asset Purchase Program

    The ECB announced a bold step to reduce its main rate below zero, and then doubled down by dropping it lower to -0.4 per cent. In parallel, the size of bond purchases was set at a high limit of EUR 60 billion per month, and subsequently expanded to an even higher limit of EUR 80 billion per month.

    The basket of instruments qualified for purchase was also expanded to include corporate bonds.

    The ECB has stopped short of purchasing equity (unlike the Japanese and Swiss regulators) but the press conference held after its latest policy review indicated nothing is off-limits for the ECB in pursuit of its 2 per cent inflation target.

    ECB Feels its Goals are Within Reach — The Data Says Otherwise

    The ECB expects a 0.4 per cent cumulative impact on inflation over 2016-18 to justify its asset purchases. 

    The last announced inflation (euro area annual HICP inflation in August 2016) was 0.2 per cent, far below the ECB’s target of 2 per cent.

    Eurozone Inflation

    The ECB expects annual HICP inflation in 2016 to be 0.2 per cent, climbing to 1.2 per cent in 2017 and subsequently 1.8 per cent in 2018.

    The ECB also expects a 0.6 per cent jump as a result of its ongoing policies for GDP growth.

    The last announced Q2 2016 GDP growth (QoQ) for the Eurozone was 0.3 per cent however, lower than the 0.5 per cent growth it saw in Q1. The ECB itself lowered its GDP growth estimate to 1.7 per cent for 2016, pegging 2017 and 2018 at 1.6 per cent each.

    Eurozone GDP Quarterly Growth

    Two years and EUR 1.23 trillion down, they’ve got little to show for it.   

    While the ECB’s monetary stimulus hasn’t really made a difference, it argues that inflation would have been far lower if not for their present policy.

    If the ECB’s latest policy review and subsequent press conference are anything to go by, all indicators point to a continuation —perhaps even an increase — of asset purchases.  

    The ECB is Inflating Europe’s Fixed Income Market Bubble  

    While markets were initially disappointed that an expansion of the stimulus program was not announced, the disappointment may be short-lived.

    Asset purchases so far have not only driven down yields for sovereign debt (which forms the bulk of ECB purchases) but also lowered yields for corporate bonds across credit ratings.

    From ‘A+’ rated Siemens to junk-rated Peugeot, corporate bond yields have generally rallied without respite.

    Such significant improvements in yield have not accompanied corresponding improvements in operating performance or any notable reduction in operating risks however. Instead, the increased liquidity (in the form of asset purchases) has translated to greater demand for such bonds, leading to falling yields.

    According to Bank of America Merrill Lynch, the average euro-denominated corporate bond yield had reached a record 0.61 per cent low by the end of August this year.

    European Corporate Bond Yields

    Primary Issuances Also Being Done at Negative Yields

    In March 2016, German bank Berlin Hyp issued EUR 500 million of covered bonds at -0.162 per cent yield — the first non-government entity in history to issue bonds at negative yield.

    Barely three months later, German railway operator Deutsche Bahn issued debt at -0.006 per cent yield.

    In September, Henkel became the first private non-financial and non-government backed company to issue debt at negative yield, when it sold EUR 500 million of two-year debt at -0.05 per cent.

    At this rate, it’s only a matter of time before a junk rated company issues debt at negative yield.


    The ECB Can See the Bubble — They Just Can’t Do Anything About It

    The ECB probably didn’t expect its asset purchase program to lead to negative yields for corporate fixed income instruments, either in primary or secondary markets.

    By its own admission, the asset purchase program is an extraordinary monetary policy measure.

    Considering European governments’ unwillingness to implement fiscal measures (such as spending on infrastructure) however, the ECB is Europe’s first —perhaps last — line of defense against economic decline and deflation.

    It’ll be hard to mitigate the momentum of the ECB’s expansionary monetary policies, condemning Europe’s fixed income market to an unwieldy bubble.

  26. How Risk Return Relative Value Approach Helps Create Higher Alpha for Global Credit Portfolios

    Security selection for a Fixed Income Investment portfolio is a critical task in the entire portfolio management process.

      to read | words

    Security selection for a Fixed Income Investment portfolio is a critical task in the entire portfolio management process.

    In contrast to the conventional top-down approach, the Risk Return Relative Value approach offers an alternate investment screening mechanism that helps generate higher returns for investors.

    With global markets increasingly integrating and central banks’ role in managing monetary cycles changing, the Bond Investing dynamics have been transforming over a few years. The traditional dependence of bond yields on interest rates and macro-economic factors have now advanced meaningfully to include credit specific risks, demand supply dynamics, corporate cycles and default probabilities.

    Security selection for a Fixed Income Investment portfolio is a critical task in the entire portfolio management process. Global asset managers employ various approaches to facilitate this. In fact, a most of the firms follow a top down approach to identify the economies and sectors they are overweight on, and then select appropriate credits from the universe.

    However, we are now witnessing contrasting approaches to the Bond Investing styles.

    Conventionally, a Fixed Income Portfolio Manager invests a portion of funds to fixed income instruments by selecting a bond issue or choosing a fixed income fund within the sectors and asset classes screened using top down approach. Such investments aren’t timed to generate incremental returns, and the Manager remains contented with the YTM offered by the investments during the time of investment.

    In contrast, a Global Portfolio Manager initiates a relative value screening of the global bond universe, even before over-weighing the sectors and asset classes. The idea is to generate global credit opportunities, which offers the most compelling investment proposition – similar or higher returns at lower risk. The Portfolio Manager subsequently chooses which issues to invest in—by carefully considering the macro cycle and monetary policies. It is in this stage of the screening process that the Portfolio Manager decides on specific sectors to invest, duration of the investment, and the appropriate exit strategies.

    While both the approaches consider relative value analysis at some stage of the investment screening process, the latter reflects an aggressive and active approach to screen attractive investment opportunities amidst currently volatile markets. We know this approach as Risk Return Relative Value approach.

    While there are pros and cons of both the approaches, we believe the Risk Return Relative Value approach enables a detailed screening of the global credit universe, thereby offering attractive spread pick up opportunities to Global Fixed Income Portfolio Managers. Given the lower or negative yields in majority of developed markets, we believe this approach can assist Global Portfolio managers to effectively screen relevant investment opportunities in EM debt space.

    Let’s try to explore in detail this second approach to draw an analogy, and figure how the better set of investment screening processes help generate higher alpha in global credit portfolios.

    How Does the New Approach Work Better?

    The Risk Return Relative Value approach seeks to find attractive opportunities in the global markets through drawing a meaningful comparison between risk and return profile of the bond universe. For example, a Portfolio Manager starts by screening BB+ to BB- rated corporate credits and plots a scatter chart by comparing modified duration to YTM of the investments to invest in high yield corporate debt. He selects the securities based on the risk reward dynamics. Given the large number of entries that he will generate, he filters the list down by eliminating sectors he does not want to invest in, or regions he thinks are too risky for the value proposition.

    From the shortlisted securities, the Portfolio Manager takes valuation calls on the securities, duly supported by a Fixed Income Research team. He is interested in the spreads of the bonds versus the duration and risk ratings. The Research team helps draw specific conclusions on the fair value of spread vs. the risk and business cycle, and therefore draws an initial conclusion on the mispricing of securities.

    This approach screens through the asset classes and securities with a global market view, and thus eliminates the chances of missing out on attractive mispricing opportunities in the global credit markets. The Research team thoroughly researches on the credits that look undervalued or overvalued upfront, and then shares relevant insights with the investment committee. The specific investments and entry and exit strategies are decided based on the Investment Policy Statement and the Portfolio mandate.

    We believe the Risk Return Relative Value approach works well for global portfolio managers in conditions where the investment opportunities are skewed toward certain markets. For instance, a Portfolio Manager who does not want to invest in Russian markets due to sovereign specific risks might ignore the entire Russian credit universe in the traditional selection process. However, in the Risk Return Relative Value approach, he might select specific Russian credits, which are least likely to be prone to sovereign specific risks, and offer attractive spreads picked up over similarly rated developed market credits.

    As a result, the Global Fixed Income portfolio becomes more dynamic and works with relatively more deep dived approach to security selection in Fixed Income Portfolio management process.

    Ironically, the Relative Value approach hasn’t yet pervasively replaced the traditional approach. Top down approach still holds a place across the desks of many portfolio managers.

    However, given the risk reward spectrum and market dynamics, several Portfolio Managers have started adopting the innovative approach to security selection in credit portfolios to generate higher returns for investors.

    In our view, the Risk Return Relative Value approach not only enables the experts to screen relevant investment ideas globally, but also assists in devising an appropriate exit strategy based on the risk reward matrix results. This, evidently, results in a high market focused and dynamic credit portfolio management.


    Would you like to know more about our Fixed Income and Credit Research offerings?

  27. India’s Newest FMCG Upstart is Making Rivals Sweat

    India’s newest FMCG upstart is unsettling her markets. A home-grown brand that touts itself as holistically ayurvedic, P

      to read | words

    India’s newest FMCG upstart is unsettling her markets.

    A home-grown brand that touts itself as holistically ayurvedic, Patanjali Ayurveda Limited is growing aggressively enough to displace other veteran and more well-established brands in the Indian market.

    Patanjali Ayurveda Limited is fast emerging as a serious threat to other big Indian FMCG players thanks to a combination of aggressive marketing and value proposition. Renowned Yoga guru and brand ambassador Baba Ramdev has set Patanjali on a steep growth trajectory, and his fellowship has helped transform the brand from a cottage industry to a major player in India’s FMCG space.

    Indian consumers seem to have a renewed interest in all things herbal, with many turning to the country’s ancient art of healing and prolonging life — Ayurveda — for natural cures and supplements. This is giving nightmares to well-established FMCG market players like HUL, P&G, Emami, Nestle and Dabur, among others, who seem to be losing their FMCG market shares in India. 

    Based on the available figures, Patanjali has raked in revenue of INR 2,006crore (USD 328 million), with a net profit of INR 317 crore (USD 52 million) in 2015.

    Patanjali Has Witnessed More Than Just Healthy Growth in Revenue and Net Profit

    Having already surpassed Jyothy Labs’ net revenue —a competitor with a three decade head start — in under a decade, Patanjali has also closed the gap with its next biggest competitor, Emami Limited, over FY15.

    Patanjali is More Than Just a Blip on India’s FMCG Radar

    Patanjali is undoubtedly growing faster than any of its peers, consistently besting most of them in both revenue and profit over the past five years.

    For the year ended March 2016, Patanjali’s revenues more than doubled, with y-o-y growth surging by almost 81% as reported for the same period in the previous year.

    India's Biggest FMCG Players — Revenue (INR crores)
    Patanjali 453.0 849.0 1,191.0 2,006.0 5,000.0
    663.0 1,018.7 1,260.2 1,437.8 1,575.4
    Emami 1,389.8 1,627.1 1,705.1 2,030.6 2391.5
    Marico 2,965.4 3,407.1 3,682.5 4,681.2 4974.4
    Dabur 3,757.5 4,349.4 4,870.1 5,431.3 5,750.0
    Palmolive (India)
    2,693.2 3,163.8 3,578.8 3,981.9 4162.3
    Unilever 22,116.4 25,810.2 28,019.1 30,805.6 31,987.2
    P&G Hygiene
    and Health Care
    1,297.4 1,686.8 2,050.9 2,333.8 NA

    Source:, Release by Registrar of Companies, Media Reports
    Note:  (1) Revenues represents total operating revenues including excise/service tax/other levies and other operating revenues
             (2)Data for P&G Hygiene and Health Care is for the year ended June

    India's Biggest FMCG Players — Revenue Growth (%)
    Patanjali NA 87.4% 40.3% 68.4% 149.3%
    9.3% 53.7% 23.7% 14.1% 9.6%
    Emami 15.6% 17.1% 4.8% 19.1% 17.8%
    Marico 26.2% 14.9% 8.1% 27.1% 5.7%
    Dabur 14.5% 15.8% 12.0% 11.5% 5.9%
    Palmolive (India)
    17.8% 17.5% 13.1% 11.3% 4.5%
    Unilever 12.1% 16.7% 8.6% 9.9% 3.8%
    P&G Hygiene
    and Health Care
    29.4% 30.0% 21.6% 13.8% NA

    Source:, Release by Registrar of Companies, Media Reports
    Note:  (1) Revenues represents total operating revenues including excise/service tax/other levies and other operating revenues
             (2)Data for P&G Hygiene and Health Care is for the year ended June

    The company has not yet disclosed its profits for FY16. 

    If historic performance is anything to go by however, growth will be as strong as it has over the past few years.

    India's Biggest FMCG Players — Net Profit Growth (INR crores)
    Patanjali 56.0 91.0 186.0 317.0 NA
    83.5 44.0 106.1 142.8 162.4
    Emami 154.7 221.7 398.2 471.6 327.7
    Marico 336.6 429.1 577.2 545.2 701.9
    Dabur 463.2 591.0 672.1 762.6 939.5
    Palmolive (India)
    446.5 496.8 539.9 559.0 576.5
    Unilever 2,691.4 3,796.7 3,867.5 4,315.3 4,082.4
    P&G Hygiene
    and Health Care
    181.3 203.2 302.0 346.1 NA

    Source:, Release by Registrar of Companies, Media Reports
    Note:  (1) Revenues represents total operating revenues including excise/service tax/other levies and other operating revenues
             (2)Data for P&G Hygiene and Health Care is for the year ended June

    India's Biggest FMCG Players — Net Profit Growth (%)
    Patanjali NA 62.5% 104.4% 70.4% NA
    4.0% -47.3% 140.9% 34.6% 13.7%
    Emami 23.4% 43.3% 79.6% 18.4% -30.5%
    Marico 6.7% 27.5% 34.5% -5.6% 28.7%
    Dabur -1.7% 27.6% 13.7% 13.5% 23.2%
    Palmolive (India)
    10.9% 11.3% 8.7% 3.5% 3.1%
    Unilever 16.7% 41.1% 1.9% 11.6% -5.4%
    P&G Hygiene
    and Health Care*
    20.2% 12.1% 48.6% 14.6% NA

    Source:, Release by Registrar of Companies, Media Reports
    Note:  (1) Revenues represents total operating revenues including excise/service tax/other levies and other operating revenues
             (2)Data for P&G Hygiene and Health Care is for the year ended June

    Patanjali met its 2016 revenue target of INR 5,000 crore (USD 764 million), surpassing some of its biggest competitors such as Jyothy Laboratories, Emami, Marico, and Colgate Palmolive (India) in terms of revenues.

    Patanjali Plans Ahead to Maintain Growth Momentum

    With swift growth in revenue and net profit over the last few years, Patanjali expects to further double its sales this year, from INR 5,000 crore in FY16 (USD 764 million) to INR 10,000 crore (USD 1,497 million) in FY17.

    In 2015, Patanjali took advantage of a ban imposed on "Maggi" (a popular Indian brand of instant noodles) and launched their own whole-wheat "Atta Noodles" to fill the market void. During FY17, Patanjali plans to invest over INR 1,000 crore (USD 150 million) in five to six new processing units, and has set aside another INR 150 crore (USD 23 million) for an R&D center.

    The company also has plans afoot to improve its online presence, with focus on e-Tailing and better inventory management. Having established itself in northern India, Patanjali now plans to tap markets down south, beginning with a new distribution hub to cater to the growing demand for its products. Patanjali also plans to enter new segments such as animal feed, dairy, and khadi garments, besides bolstering its already popular lineup of products.

    Popular Patanjali Products

    Ready-To-Eat Food

    Cookies, Biscuits, Candies, Ketchup, Pickles, Murabba, Honey, Papad, Snacks, Namkeen, Sweets (Soan Papdi), Cornflakes, Aata Maggi.

    Grocery And Staples

    Ghee, Mustard Oil, Dals, Pulses, Atta, Besan, Salt, Spices, Rice, Fruit jam, Herbal Tea, among others.

    Personal Care

    Toothbrush, Toothpaste, Dant Manjan, Kajal, Shaving Cream & Gel, Handwash, Soaps, Face cream, Lip Care, Face Wash, Body Lotions, Foot Care Cream, Body Wash, Hair Oil, Body Ubtan.


    Juices & Fruit Drinks, Sharbat, Squash.


    Health Drinks, Chyawanprash, Nutrition & Supplements, Digestives.

    Home Care

    Cleaning & Washing (detergents & soaps) , Herbal Gulal.


    Books and Media, Medicines

    Source: Company Website

    Patanjali Garners Greater Market Share Through Attractive Product Pricing

    As with all things organic, herbal products used to cost considerably more than the usual fare.

    Patanjali changed that for good.

    Emphasizing the benefits of natural products and capitalizing on nationalist pride by branding their products as Swadeshi (made in India), Patanjali has quickly captured a sizable market share and a dedicated following. While prevailing market players charged a premium for herbal and ayurvedic products, Patanjali served customers a similar fare at lower prices. The company also enjoyed several tax and duty exemptions from the government, as their products were peddled under the umbrella of several charitable trusts. These exemptions allowed the company to pass on savings to consumers.

    India's Biggest FMCG Categories and Competitors

    Even if competing brands engage in price wars to sway their market shares, it’s unlikely to dent Patanjani’s now well-rooted brand loyalty. A brand loyalty whose growth was, for the most part, organic in its own right.

    It’s worth noting that Patanjali has proliferated mostly by word of mouth.

    Patanjali has become one of the fastest growing FMCG companies in India with minimal marketing spends. They’re now investing more in conventional marketing and advertising, airing regular commercials across major Indian channels. The company has also tied up with the retail arms of Reliance (Reliance Fresh) and Future Group (Food Bazaar, Big Bazaar and FBB) to drastically increase the reach and availability of Patanjali products across major outlets in various cities across India.

    Competitors are Adopting Strategies to Contend With Patanjali

    Patanjali’s competitors have responded for the most part by reviving existing products, improving focus on advertising, and utilizing cash reserves to fund acquisitions.  

    Hindustan Unilever Ltd. (HUL) re-positioned itself this year by renewing its brand Lever Ayush in the ayurvedic and herbal products segment. Last year, ITC acquired the personal care brands Savlon and Shower to Shower, while Emami acquired Australia-based personal care company Fravin, as well as a foray into the hair-care segment through its acquisition of Kesh King

    Most Indian FMCG firms — flush with cash reserves and unencumbered by debt — are desperate to defend their market shares, fervently looking for M&A opportunities both domestically and internationally. They’re likely to spend heavily in the near future, with many shoring up their advertising spend as well as plans to launch new brands.

    India’s FMCG Market Growth to Stay Steady

    According to data released by Statista, India’s FMCG market has grown from USD 11.6 billion in 2003 to an estimated USD 33.4 billion in 2015.

    Based on the category-wise penetration by players in India’s FMCG space, there exist opportunities for growth in several categories with low penetration levels.

    India's FMCG is Poised for Growth

    India’s expecting a healthy monsoon in 2016, and that’s always a stimulus for her economy.

    A good monsoon usually heralds growth in India's consumer spending as well as demand in rural markets, important factors that are expected to boost growth in India’s FMCG sector.

    Patanjali’s Here for the Long Run

    Through competitive pricing, value proposition, and a focus on ayurvedic products, Patanjali has established a firm foothold for itself in India’s FMCG space.

    Plenty of existing customers have turned brand loyalists and evangelists.

    New customers are flocking to the brand not only for its low prices, but also for the holistic benefits they offer.

    Built on the backs of such satisfied customers, the Patanjali brand’s plan to expand is likely to see stellar success. Within just five years of its first forays into India’s FMCG space, a hitherto unknown brand is now a label to reckon with, going head-to-head with some of the market’s most established players. As one of its fastest growing FMCG companies right now, Patanjali’ success definitely marks a new chapter in the Indian FMCG space.

  28. Will Credit Growth Revive the Saudi Banking Sector?

    As Saudi Arabia begins diversifying its economy in earnest, the banking sector is looking forward to some favorable

      to read | words

    As Saudi Arabia begins diversifying its economy in earnest, the banking sector is looking forward to some favorable tailwinds amid government reforms and favorable demographics.

    Saudi Arabia’s banking sector saw credit growth peak at 36.2% in 2005 on the backs of high oil prices and a thriving economy.

    2009 was another story however. Credit growth hit an all-time low of 5.2%, dragged down by major defaults by two giant Saudi groups (the Saad and Al Gosaibi) as well as the 2008 financial crisis.

    Banking remained resilient though, owing to minimal international exposure, stringent banking regulations and strong capital buffers. A spur from the Arab Spring alongside growth in the private sector proved to be ample stimulus for the sluggish sector, with a double-digit rebound of 17.6% in 2012.

    Saudi Arabia’s banking sector looked like it was just about shaking off the effects of 2008.

    Then 2013 happened. 

    Banking Sector Credit Trends

    The oil sector took some serious hits in 2013 due to volatile oil prices and a drop in oil production. As a result, Saudi Arabia’s real GDP growth declined, dropping from 5.8% to 3.8%. This not only dented credit growth, but also led to cautious lending practices by banks in the kingdom. The slowdown as well as a decline in deposits affected the banking sector’s credit growth noticeably, with the sector clocking just 9.2% YoY growth in 2015, its lowest level since the financial crisis of 2008.

    Retail Credit Will Grow Bigger Than Corporate Credit

    Though commercial banking’s loan portfolio is dominated by the corporate segment right now, consumer lending — having grown remarkably in the recent past — will likely overtake it.

    Corporate Lending vs. Consumer Lending

    The retail segment made up 32% of all loans and advances in 2015, up from 25% in 2010. This strong growth has been driven by favorable demographics, increased consumption, improved lifestyles, and government initiatives such as Saudization.

    Among commercial banks, the top three banks catering to the corporate segment are National Commercial Bank (NCB), Banque Saudi Fransi, and the SAMBA Financial Group.  The consumer segment on the other hand, is completely dominated by AlRajhi Bank.

    Bustling Private Sector is Supporting Credit Growth

    Despite a decline in the oil sector, the non-oil sector has seen consistent growth, driven mainly by the Saudi government’s fortitude.

    In their 2015 budget, the government maintained expansionary spending and announced its highest ever budgeted spending of SR860bn (USD229bn; 0.6% YoY) for 2016. Key areas of investments included education, healthcare, transport, and water utilities.

    Mining and quarrying as well as the building and construction sectors have seen the highest demand for loans and advances.

    Commercial Bank Credit Growth — Sector-wise Breakdown

    *Data as of 1Q16

    Loans & Advances Fluctuate With Oil Revenue & Real GDP Growth

    Lending growth in the kingdom’s banking sector moves almost in line with its oil revenues and GDP growth.

    A decline in oil prices significantly affects corporate profitability as well as government revenues. This in turn the banks liquidity, spurring cautious lending practices by banks.

    Bank Credit Growth vs. KSA Oil Revenue Growth

    Loans and Advances Growth vs. KSA Oil Revenue Growth

    Credit Where Credit’s Due — KSA’s Banking Sector Will Stay Strong

    Despite an overall decline in the Kingdom’s deposits, bank credit is likely to grow moderately in the near to medium term. Credit growth is likely to surge, bolstered by the following factors:

    • Non-oil Sectors are Engines for Growth
      Saudi Arabia’s non-oil private sector will continue to stimulate growth in the economy, backed by high government spending, corporate lending, and solid domestic consumption. Construction and utilities are likely to be the fastest growing areas in the private sector, and they’re certain to drive and maintain loan growth in the long run.
    • Loan to Deposit Ratio Eased to 90% from 85%
      In light of declining deposits and a growing appetite for credit in the Kingdom, the Saudi Arabian Monetary Agency (SAMA) eased the banking sector’s Asset to Deposit Ratio (ADR) threshold to 90%, up 5% in February 2016. This will go a long way toward boosting liquidity and stimulating credit in the market.
    • National Transformation Program 2020
      To achieve the government’s Saudi Vision 2030, the national transformation program 2020 has helmed the long-term prospective growth in the KSA banking sector. Primarily meant to transform and diversify the oil-reliant economy, the kingdom has undertaken numerous initiatives that could boost the region’s non-oil revenue. This will likely accelerate demand for credit, spurring asset growth and profitability in the sector.  Large banks like AlRajhi, NCB, and SAMBA could largely benefit due to high exposure in consumer and commercial lending.
    • Favorable Demographics
      With almost 70% of the population between 25 to 35 years, the government’s emphasis to improve employment levels for Saudis in the private sector could accelerate the overall loan growth in the long run.

    While these factors will make banking credit profitable over the near to medium term, a prolonged economic slowdown amid other weakening financial conditions may be a serious impediment to banking liquidity. A positive outlook and serious reforms by the Saudi government to reform its economy should offset any detriments however, affording the banking sector ample liquidity, and profitability.

    Saudi Arabia is well on its way to a diversified economy, and likely, won’t break the bank.

  29. Saudi Arabia’s "Vision 2030" to Transform its Economy

    he oil-dependent Kingdom of Saudi Arabia (KSA) has a long-term blueprint to transform itself into a more diversified

      to read | words

    he oil-dependent Kingdom of Saudi Arabia (KSA) has a long-term blueprint to transform itself into a more diversified economy, with non-oil government revenues projected to increase six-fold to SAR1tn by 2030.
    It’s an ambitious dream to transform an economy that relies on crude oil exports for more than 70% of government revenues.

    Deputy Crown Prince Mohammed bin Salman’s 15-year economic plan is the boldest attempt yet in the Kingdom’s history to spur additional revenue streams amid a steep fall in commodity prices.

    Saudi Vision 2030 is built around three key themes – a vibrant society, a thriving economy and an ambitious nation (proxy for an efficient government).

    The roadmap outlines numerous commitments under each theme with tangible goals to be achieved in the next 5–15 years. The planned economic diversification emphasizes on the increased participation of the private sector, with its share of total GDP projected to rise to 65% by 2030 from less than 40% at present. The reforms would focus on key non-oil sectors including manufacturing, mining, tourism, healthcare, education and retail. In addition, the diversification is intended at creation of job opportunities for the Kingdom’s growing workforce (approximately 50% of population is below 25 years of age).

    KSA aims to leverage its investment capabilities to become a global investment powerhouse.

    A vital part of the plan encompasses the restructuring of its Public Investment Fund (PIF), which is touted to become the world’s largest sovereign wealth fund post the transfer of funds from the stake sale in Arabian American Oil Company (Aramco). KSA intends to sell less than 5% stake in Aramco, the value of which is pegged around USD2–2.5tn. In addition to contributing to the PIF stake sale in Aramco and its subsequent IPO (expected to be the world’s biggest IPO), the initiative would provide much needed depth and breadth to the Saudi stock exchange (Tadawul). Most importantly, the PIF would provide necessary capital for the development of strategic sectors and establishing national corporations.

    The plan also outlines more radical changes such as the women empowerment program to alter the Kingdom’s ultra-conservative image. KSA is determined to increase the participation of women in its workforce to 30% by 2030. At present, women make up only 22% of the workforce.

    The government has already begun working towards achieving its Vision 2030 with numerous transformational programs underway. Moreover, an economic council headed by the Deputy Crown Prince Mohammed bin Salman would be responsible for the implementation of the plan.

    KSA is expected to release further details including economic details of the vision, a package of state budget reforms, regulatory changes and policy initiatives for the next five years known as the "National Transformation Plan", by May or early June this year.

    Saudi Vision 2030 has garnered strong local support and is backed by the one of the most powerful men in the Kingdom Prince Mohammed bin Salman. Despite having the ability and resources, the execution of the plan would be a formidable challenge for Saudi Arabia.

    Vision 2030: Key Themes

    Broadly, the key themes envisaged under Vision 2030 aim at a diversified economy, more open and connected society, and a smaller, but more efficient government. Each theme contains specific goals and objectives to be achieved by 2020 and 2030, with certain objectives extending and overlapping within themes.

    A Vibrant Society

    As written in the document: “This first theme is vital to achieving the vision and a strong foundation for economic prosperity…Our nation is the core of the Arab and Islamic worlds and represents the heart of Islam. We are confident that, God willing, we will build a brighter future, one based on the bedrock of Islamic principles. We will continue to excel in performing our duties towards pilgrims to the fullest and promote our deep-rooted national identity”.

    The plan outlines following goals and commitments to attain a vibrant society:

    • To rank among the top 15 economies in the world from its current position as the 19th largest economy.
    • To rank among the top 10 countries on the Global Competitiveness Index from the current 25th position.
    • To increase household spending on cultural and entertainment activities inside the Kingdom to 6% from the current level of 2.9%.
    • To rank 25th on the Logistics Performance Index from 49th position and ensure the Kingdom is a regional leader.
    • To rank 10th on the Social Capital Index from 26th position.
    • To increase capacity to welcome Umrah visitors to 30mn every year from 8mn.
    • To have three Saudi cities recognized among the top 100 cities in the world.

    • To increase household savings as a proportion of total household income to 10% from 6%.
    • To increase the ratio of people exercising at least once a week to 40% of population from 13%.
    • To more than double the number of Saudi heritage sites registered with UNESCO.
    • To increase the average life expectancy to 80 years from 74 years.
    • To increase women’s participation in the workforce to 30% from 22%.
    • To lower the rate of unemployment to 7% from 11.6%.

    A Thriving Economy

    As written in the document: “A thriving economy provides opportunities for all by building an education system aligned with market needs and creating economic opportunities for entrepreneurs, small enterprises, and large corporations.”

    The plan outlines following goals and commitments to attain a thriving economy:

    • To increase the private sector’s contribution to 65% of GDP from 40%.
    • To raise the share of non-oil exports in non-oil GDP to 50% from 16%.
    • To increase non-oil government revenue to SAR1tn from SAR163bn.
    • To increase PIF’s assets to over SAR7tn from SAR600bn.
    • To increase the localization of the oil and gas sector to 75% from 40%.
    • To increase the contribution of SMEs to the GDP to 35% from 20%.
    • To increase foreign direct investment to the global level of 5.7% of GDP from 3.8%.
    • To raise the non-profit sector’s contribution to the GDP to 5% from less than 1%.
    • To rally 1mn volunteers per year as compared with the present 11,000.

    An Ambitious Nation

    As written in the document: “We will apply efficiency and responsibility at all levels. Our third theme is built on an effective, transparent, accountable, enabling and high-performing government.”

    The plan outlines the following goals and commitments to attain an ambitious nation:

    • To rank 20th on the Government Effectiveness Index from 80th position.
    • To rank among the top five nations on the E-Government Survey Index from 36th currently.
    • To improve the efficiency of various government departments and establish committees to review them.
    • To reduce bureaucracy and improve transparency in government programs.

    The government has set optimistic goals, but is yet to announce a detailed plan to achieve these goals. However, the government has marked certain milestones that it hopes to achieve by 2020.

    Vision 2030 Goals: Key Sectors and Themes

    1 — Privatization / Divestment

    • The Kingdom plans to value state oil company Saudi Aramco at more than USD2tn ahead of the sale of less than 5% of the company through an IPO.
    • The government will further develop the sophistication of investment vehicles, particularly after transferring the ownership of Aramco to the Public Investment Fund, which will become the largest sovereign wealth fund in the world. It will increase the efficiency of the fund's management and improve its return on investment, with the aim of diversifying government resources and the economy.
    • Emphasis would be placed on facilitating the process of listing private Saudi companies and state-owned enterprises, including Aramco. This will require deepening liquidity in capital markets, fortifying the role of the debt market, and paving the way for the derivatives market.
    • The Prince plans to transform Aramco from an oil producing company into a global industrial conglomerate.

    2 — Public Investment Fund (PIF)

    • At the centre of the plan is the restructuring of the Public Investment Fund (PIF), which Prince Mohammed said would become a hub for the country's overseas investments, partly by raising money through the sale of shares in Aramco
    • The kingdom would raise the fund's capital to SAR7tn (USD2tn) from SAR600bn (USD160bn)

    3 — Tourism

    • By improving the quality of the services offered to Umrah visitors by 2020, the plan aims to enable over 15mn Muslims per year to perform Umrah. Separately, the former member of the National Haj and Umrah Committee of the Makkah Chamber of Commerce and Industry estimated revenues generated by the Umrah season to increase to SAR200bn by the year 2020.
    • The government has commenced the third phase of expansion of the Holy Mosques. It is also modernizing airports and increasing their capacity. It has launched the Makkah Metro project to complement railroad and train projects. The metro service would cater to visitors to the Holy Mosques and other holy sites. Furthermore, it has strengthened the transport network to help pilgrims complete their visit with greater ease and convenience. The plan also proposes to establish more museums, tourist and historical sites, and cultural venues, and improve pilgrims' experience.
    • The plan proposes to build an Islamic museum in accordance with global standards. The museum will boast of the latest methods of collection, preservation, presentation, and documentation. It will also serve as an international hub for erudition, and include a world-class library and research centre.
    • By 2030, the government plans to more than double the number of Saudi heritage sites registered with UNESCO.

    4 — Education

    • By 2030, the government plans to have at least five Saudi universities among the top 200 universities globally.
    • By 2020, the government aims to ensure that 80% of parents engage in their children's school and learning activities. The government will launch the "Irtiqaa" program, which will measure how effectively schools are engaging parents in their children's education. It will establish parent-led boards in schools to open discussion forums and further engage with parents.
    • The plan emphasizes on building an education system aligned with market needs, and creating economic opportunities for entrepreneurs, small enterprises, and large corporations.

    5 — Small and Medium Enterprises (SMEs)

    • Saudi Arabia’s SMEs are minor contributors to the GDP, especially when compared with advanced economies. Therefore, the Kingdom will strive to create suitable job opportunities for citizens by supporting SME entrepreneurship, privatization, and investment in new industries.
    • The government aims to create suitable job opportunities for citizens by supporting SME entrepreneurship, privatization, and investment in new industries. To help achieve this goal, it has established the SME Authority and will continue to encourage young entrepreneurs through business-friendly regulations, easy access to funding, international partnerships, and a greater share in national procurement and government bids.
    • The government will strive to facilitate enhanced access to funding and encourage financial institutions to allocate up to 20% of their overall funding to SMEs by 2030.

    6 — Expatriates

    • The government plans to improve living and working conditions for non-Saudis by extending their ability to own real estate in certain areas, improving the quality of life, permitting the establishment of more private schools, and adopting an effective and simple system for issuing visas and residence permits.
    • In a televised interview, the Deputy Crown Prince informed of plans to introduce a "green card" system within five years to allow resident expatriates in the Kingdom to have more rights, thereby improving its investment climate.

    7 — Social

    The government aims to achieve the following goals by 2030:

    • To lower the rate of unemployment from 11.6% to 7% and increase women's participation in the workforce from 22% to 30%.
    • To have three Saudi cities among the top 100 cities in the world.
    • To increase household spending on cultural and entertainment activities inside the Kingdom from the current level of 2.9% to 6%.
    • To increase the ratio of individuals exercising at least once a week from 13% of the population to 40%.
    • To increase the share of Saudi families that own homes by 5% (from 20% currently) by 2020.
    • To raise the KSA's ranking from 26 to 10 on the Social Capital Index.
    • To increase the average life expectancy from 74 years to 80 years.
    • To launch the National Labour Gateway (TAQAT) and establish sector councils that will determine the skills and knowledge required by each socio-economic sector.
    • To expand vocational training in order to drive economic development.
    • To increase household savings from 6% to 10% of the total household income.
    • To work toward promoting private medical insurance to improve access to medical services and reduce wait times for appointments with specialists and consultants.

    8 — Housing

    • To increase the housing ownership rate by 5% until 2020. The government will introduce laws and regulations, encourage the private sector to build houses, and provide funding, mortgage solutions, and ownership schemes to citizens.
    • To achieve housing coverage of more than 90% in densely populated cities and 66% in other urban zones.

    9 — Subsidies and Taxes

    • Subsidies for fuel, food, water, and electricity will be better utilized by redirecting them to the needy.
    • The criteria for subsidies will be created based on the maturity of all economic sectors, their ability to compete locally and internationally, and their actual need for subsidies, without endangering promising and strategic sectors.
    • There will be no taxes on citizens’ income or wealth, or on basic goods. The government will keep prices stable over the long term and provide Saudi citizens greater economic security.

    10 — Military

    • To cater to half of the country’s military needs locally to create more job opportunities for citizens and retain more resources in the country.
    • To localize over 50% spending on military equipment by 2030.

    11 — Diversification of Economy

    • To privatize state-owned assets, including leading companies, properties, and other assets.
    • To provide better opportunities for partnerships with the private sector through three pillars: the KSA’s position as the heart of the Arab and Islamic worlds, the country’s strategic geographical position, and leading investment capabilities.
    • To localize the renewable energy and industrial equipment sectors, and generate 9.5 gigawatts of renewable energy.
    • To create tourist attractions, improve visa issuance procedures for visitors, and develop historical and heritage sites.
    • To achieve a digital economy and boost the technology sector.
    • The mining sector is expected to reach SAR97bn by 2020. The government will provide incentives to encourage companies to explore and develop the Kingdom’s mineral resources. Furthermore, it aims to create 90,000 jobs in the sector.
    • To localize the oil and gas sector, double gas production, and construct a national gas distribution network.
    • To increase the contribution of modern trade and e-commerce to the retail sector to 80% by 2020 and create jobs in the sector.
    • To partner with the private sector to develop quality telecom and IT infrastructure, especially high-speed broadband.
    • To increase telecom and IT coverage within and around cities.
    • To increase foreign direct investment from 3.8% to the global level of 5.7% of the GDP.
    • To increase the private sector’s GDP contribution from 40% to 65%.
    • To raise the ranking on the Logistics Performance Index from 49 to 25 and ensure that the Kingdom is a regional leader.
    • To boost the share of non-oil exports in non-oil GDP from 16% to 50%.
    • To create special economic zones in King Abdullah Financial District with visa exemptions and direct links to the King Khaled International Airport.

    Other Qualitative Goals

    • To improve the quality of services by privatizing government services, especially in healthcare, improving the business environment, attracting the finest talent and best investments globally, and leveraging the country’s unique strategic location.
    • To create a conducive environment for citizens, the private sector, and the non-profit sector to assume responsibilities, face challenges, and seize opportunities.
    • To encourage citizens to lead a healthy lifestyle and promote physical, psychological, and social well-being.
    • To enhance the role of government funds while attracting local and international investors and create partnerships with international entertainment corporations.
    • To provide land for cultural and entertainment projects and support talented writers, authors, and directors.
    • To encourage participation in sports and athletic and work in partnership with the private sector to establish additional dedicated facilities and programs.
    • To promote safety and security in cities, drive infrastructure development, and provide high-quality services such as water, electricity, public transport, and roads.
    • To ensure waste management, establish comprehensive recycling projects, reduce pollution, and tackle desertification.
    • To promote optimal use of water resources by reducing consumption and utilizing treated and renewable water.
    • To protect and rehabilitate beaches, natural reserves, and islands, and open them to the general public.
    • To review regulations to simplify the establishment and registration of amateur, social, and cultural clubs.
    • To launch ‘Daem’, a national program to enhance the quality of cultural activities and entertainment.
    • To establish more than 450 registered and professionally organized amateur clubs by 2020 for cultural activities and entertainment events.
    • To move from the current position of 19 to the top 15 economies of the world.
    • To push for a common GCC market; unify customs, economic, and legal policies; and construct shared road and railway networks.
    • To collaborate with consumers, food manufacturers, and distributors to reduce resource wastage.
    • To create effective non-profit organizations and raise the non-profit sector’s contribution to the GDP from less than 1% to 5%.
    • To rally 1mn volunteers per year (compared with 11,000 now).

    Means to Achieve Targets

    The government has not outlined a step-by-step plan to achieve its 2030 goals.

    It has however, announced 13 programs to achieve the targets. Some of the programs are already underway.

    Programs Underway
    Planned Programs
    • The Government Restructuring Program
    • The Strategic Directions Program
    • The Fiscal Balance Program
    • The Project Management Program
    • The Regulations Review Program
    • The Performance Measurement Program
    • The Saudi Aramco Strategic Transformation Program
    • The Public Investment Fund Restructuring Program
    • The Human Capital Program
    • The National Transformation Program
    • The Strategic Partnerships Program
    • The Privatization Program
    • The Program for Strengthening Public Sector Governance

    Programs Underway

    There are seven key initiatives currently underway that will further KSAs efforts toward their 2030 goals.

    The Government Restructuring Program

    The Saudi government has started eliminating supreme councils. Furthermore, it has established the Council of Political and Security Affairs and the Council of Economic and Development Affairs, which have expedited strategy development and decision-making, and resulted in better governance. The government plans to continue with its restructuring policy.

    The Strategic Directions Program

    The government has reviewed the existing roles of various government agencies to align them with the country’s future economic and social needs. This was done on the basis of detailed studies and benchmarks as well as a comprehensive analysis of each agency’s programs, plans, and relevant performance indicators.

    The Fiscal Balance Program

    The government has formed committees and new departments to review relevant regulations and capital expenditure, their approval mechanism, and measureable economic impact. It plans to continue diversifying non-oil revenues in the coming years by introducing new measures.

    The Project Management Program

    In order to coordinate its efforts toward reforms and transformation, the government has adopted an effective approach to project management and established expert Project Management Offices (PMOs) under the Council of Economic and Development Affairs and other government agencies. It has also set up a central delivery unit.

    The Regulations Review Program

    The government reviewed existing laws and enacted new laws in the past year, including company laws, non-governmental organizations’ law, General Authority for Endowments (Awqaf) law, and the law concerning fees on non-used land. It plans to continue this process to ensure that the country’ laws are in line with the Kingdom’s priorities.

    The Performance Measurement Program

    The government has established the Center for Performance Management of Government Agencies to institutionalize the principle of performance measurement for the evaluation of all government agencies, their programs, initiatives, and executives. In addition, it has built performance dashboards to promote accountability and transparency.

    Planned Programs

    There are also seven key initiatives that are planned underway that will further KSAs efforts toward their 2030 goals.

    The Saudi Aramco Strategic Transformation Program

    The government is working on a transformation program, which will position state-run Saudi Aramco as a leader in other sectors besides oil.

    The Public Investment Fund Restructuring Program

    Following the restructuring of the Public Investment Fund, the government is working on refining its investment capabilities and enabling the fund to manage a broader portfolio of current and new assets, in a bid to convert it into the world’s largest sovereign wealth fund.

    The Human Capital Program

    The government plans to launch a program for nurturing human talent. The program will assess the efficiency of civil services and support government agencies with regard to staff, assessments, consultations, and strategic partnerships related to human capital.

    The National Transformation Program

    Under the National Transformation program, government agencies are working on identifying partnership opportunities with the private sector as well as innovative administrative and funding approaches.

    The Strategic Partnerships Program

    The Saudi government is working to build new strategic partnerships with the Kingdom’s economic partners around the world, with the aim of connecting with three continents (Asia, Europe and Africa) and enhancing exports.

    The Privatization Program

    The government is working on determining additional sectors suitable for privatization, with the aim of creating a comprehensive privatization program by employing international best practices and enabling the transfer of knowledge.

    The Program for Strengthening Public Sector Governance

    The government aims to restructure government agencies on a continuous basis to eliminate redundant roles, unify efforts, streamline procedures, and define responsibilities. A strategic management office will be established under the Council of Economic and Development Affairs to facilitate coordination between government programs and ensure their alignment with the national vision. A Decision Support Center will be established at the Royal Court to support decision-making through analytical and evidence-based information and reports.

    Although the KSA Vision 2030 is the most comprehensive program aiming to overhaul the country, it is not the first attempt.
    In the past, smaller incremental changes have already been undertaken on a regular basis, making it a continuum of reforms.

    Huge Step in the Right Direction; Execution Remains Key

    Deputy Crown Prince Mohammed bin Salman foresees the Kingdom to “live without oil by 2020”.

    With the launch of Vision 2030, KSA has taken a significant step in the right direction. Nonetheless, the timing and pace of reforms to achieve the long-term objectives is uncertain. Moreover, the Kingdom has been criticized in the past for slow reforms. We expect the path to be extremely challenging with several roadblocks, especially for the cultural reforms aimed at changing the ultra-conservative social structure; the implementation of these reforms is expected to result in significant backlash from the conservative parts of the Saudi society. However, persistently low oil prices and a rapidly rising population provide a strong impetus to the government to diversify its economy away from crude oil exports.

    Several positive developments have recently been recorded in KSA, including a cabinet reshuffle, wherein princes who held ministerial rank were replaced with civil servants with PhDs and other degrees from Western universities. Moreover, the Deputy Crown Prince demonstrates a strong drive for change, which could help turn Vision 2030 into a reality and enable KSA to make its mark in modern history. Nonetheless, the overall transformation plan would require sustained long-term commitment from the government. The actual transformation of the Kingdom would depend on efficiency, timing, and pace of implementation of the plan.

  30. The 2016 US Presidential Election - Not Your Typical Year

    Any major economic or political event in the US, especially one that is recurring, is bound to be

      to read | words

    Any major economic or political event in the US, especially one that is recurring, is bound to be tested for its impact on the stock market.

    And as far as big events go, there are few as big and closely followed as the US Presidential elections.

    Given the importance of the event, the Internet’s already abuzz with speculation. There has always existed a fairly evident cyclicality between the stock market’s performance in the US and its four-year Presidential term.

    While each presidential cycle would typically have its own set of unique circumstances and economic indications, over the past 116 years (period considered for analysis in this note) the latter part of a presidential term has been favorable for stock prices. We observe that policy decisions necessary for improved economic activity and growth typically occur during the first half of a presidential term.

    While the net impact of these decisions are meant to be positive, they could still imply higher taxes, increased regulation, and tighter controls. As such, they may not bode well for corporate profit expectations.

    As a President approaches the latter part of his term, policies tend to favor the electorate. Harsher measures are unlikely to be put in place. Of course, external global factors would still play a role in determining which way the stock market moves. A case in point is the recent global recession of 2008, where despite being the last year of a US presidency, the Dow Jones lost 34% of its value led by the sub-prime crisis and a near freeze on global financial markets.

    Having stated the average US stock market behaviour driven by the US presidential cycle, we believe the 2016 election year would break away from the trend. While there are a few noteworthy common traits that suggest 2016 shouldn’t stray from the norm, there are some clear emerging trends that, in our view, could defy it.

    The Two Sides of the US Political System

    Before we illustrate our findings, here’s an overview of the US political system with respects to its two oldest parties, i.e. the Democratic Party (est. 1828) and the Republican Party (est. 1854).

    Since the beginning of the 20th century, both parties have shared the presidency almost equally, 15 for the Republicans and 14 for the Democrats.

    Spread Of US Presidential Rule – Democrats and Republicans

    Policy-wise and on key issues, both parties differ markedly.

    While Democrats are more liberal and progressive, the Republicans tow a conservative and traditionalistic line.

    Here is how they compare on some of the most debated issues in the US.

    Comparison on Major Policy Issues

    Both parties have been diametrically opposite on some very contentious issues in recent US political and economic debates however, some of which include calls for tighter gun control after a spate of civilian gun shooting incidents, issues related to immigration especially with the mass exodus of Syrian refugees currently taking place in the Middle East, and government spending on healthcare. Looking at the above comparison, one can understand the strong rhetoric used by the current Republican hopeful Donald Trump with respect to gun control and immigration.

    Some of the more prominent candidates for the nomination of the 2016 US Presidential election include Donald Trump, Ted Cruz, and Marco Rubio from the Republican Party. The Democrats have Bernie Sanders and former First Lady and Secretary of State Hillary Clinton as two of their main candidates.

    Presidential Terms and the US Stock Market’s Cyclicality

    Coming back to the impact of a Presidential term on the stock markets, our empirical analysis backs the view that — historically — the second half of the four year period has been stronger on average.

    Average Annual DJIA Performance

    The Dow Jones Industrial Average has returned, on average, nearly 12% and 7% in Year 3 and Year 4 respectively over the past 29 Presidential terms. The economy has also performed comparatively better on average in that period, which, in our view, reflects the impact of the measures that the governments usually put in place during the first half. It’s also worth noting that, historically, a majority of corporate tax increases have occurred during the first half, while a majority of the corporate tax cuts have occurred during the second half.

    Tax Increases and Tax Cuts

    Another interesting anecdote to note is that the US stock market, in an election year, has gained (on average) its highest when the incumbent President is not running for a re-election. This is the case in 2016, with the current President Barack Obama having already served his second consecutive term at the White House.

    Average DJIA Performance in Election terms

    Here’s Why 2016 Won’t Be a Typical Election Year for the US Markets

    While there are a few historical trends that suggest why 2016 could differ from the usual cycle, there are some new and emerging trends that appear more convincing. But first, let’s see what history has taught us.

    Historically, the US stock market (on average) has under performed by over 900 bps in an election year when a Democrat is in the White House as compared to when a Republican is an incumbent.

    We also note the effect of the January cycle. It has been widely prescribed that the US stock market’s performance in the month of January is a very strong indicator of how the rest of the year pans out. We extrapolate this hypothesis onto election years over the past 116 years and note that out of the last 28 Presidential cycles, there have been 14 instances where the DJIA saw a decline in January of which 65% of the times, the full-year returns were also negative.

    Democrats v/s Republicans Performances

    The year 2016 saw the DJIA fall by over 5% in the month of January. Over the past 115 years, over 60% of the time, January’s performance has been an accurate indicator of how the entire year would settle.

    The World Is a Different Playground Now

    While we’ve noticed a few trends in history that suggest 2016 will defy the norm, the fundamentally different global economic scenario that the current election year is encountering could make a huge difference.

    The biggest game changing factor of all, in our opinion, is China.

    The Asian economy now contributes almost 16% to global GDP and is the second largest in the world. US’ trade deficit with China has increased nearly 5x over the past decade and a half alone. Therefore, China’s rapid economic slowdown is likely to build pressure in 2016.

    US Economy and China Economy

    The current oil price dynamic also has no precedent.

    Oil prices have lost almost 70% of their value since the mid-2014. As much as the tepid global economic growth scenario has a role to play, the ongoing geo-political crisis has exacerbated the fall. Some might argue that $30/barrel is pretty much the floor; volatility on the way up could still keep US markets on the edge in 2016. Only three times in last 116 years has the price of oil dropped as much or more in the year preceding an election year.

    Finally, the US dollar has seen significant gains in the past 12-15 months and could also put some pressure on overall economic growth in the US. A strong American Dollar makes US goods more expensive in foreign markets, leading to a negative impact on the US’ overall trade balance. 2016 could also see a much more definitive move up in the Fed fund rates, putting further pressure on US equities.

    Oil price Movement in Year preceding an Election Year

    We also note that 2015 saw the dollar index increase by almost 10%, among the highest gains any year has seen going into the election year. Our analysis suggests that over the past 50 years, the dollar index and the Dow Jones Industrial Average have an inverse correlation of 48% suggesting that a strengthening dollar, going into 2016, has a good chance of keeping the equity market under check.

    Valuation doesn’t seem to be in favour of the US equity market either.

    The S&P 500, adjusted for inflation and cyclicality, is trading at near all-time high levels, excluding the technology bubble seen at the start of the last decade.

    S&P500 and Dollar Index v/s DJIA

    We, therefore, believe it would be unwise to position one’s portfolio towards US equities purely on the basis of the US market’s cyclicality with Presidential election years. There are clearly more than a few factors that are likely to be headwinds for the market. The ongoing Presidential campaigns and debates too have been rather vague and uninspiring, leading to more scepticism. We believe US’ safe haven tag and lack of alternatives for equity investments elsewhere globally are the two key factors that are likely to extend support to the market.

  31. Is There an E-commerce Bubble in India?

    Do businesses run on profit or unique ideas? The 1600s witnessed a surge in the demand for tulips.

      to read | words

    Do businesses run on profit or unique ideas?

    The 1600s witnessed a surge in the demand for tulips.

    At its peak, a single tulip was worth someone’s entire estate.

    When it bottomed out, you could trade the once-lofty tulip for an onion.

    It’s hard not to draw parallels with the bubble burst of the late 1990s, where investors and venture capitalists threw caution to the wind and poured money into Internet firms in the hope they’d turn profitable someday.

    Nature teaches us that when things grow unbalanced or out of control, something must give in order to restore equilibrium.

    With the proliferation of smartphones, high speed Internet connectivity, and an abundance of e-commerce start-ups plied with excess funding, it begs the question: are we heading toward an e-commerce bubble in India?

    Indian E-commerce Companies — Funding Landscape in 2015

    The year 2015 was an investment bonanza.

    Indian start-ups raised about $18 billion in investments during 2010–15, nearly half of which was in 2015 alone.

    Quarterly Funding for Start-ups in 2015

    Of the $9 billion in funding pumped into Indian start-ups across over 1,005 deals in 2015, e-commerce and m-commerce accounted for the majority of investments made in 2015. Indian “unicorn” companies (start-ups valued over $1 billion) include firms such as Flipkart, Snapdeal, Ola, InMobi, Paytm, and Quikr, which accounted for $3 billion, or 33% of funding in 2015.

    Funds raised by unicorns in 2015

    E-commerce in India — Business Viability

    With a rise in capital and subsequent funding, will e-commerce thrive in India?

    E-commerce in India - Infographics

    About 20% of India’s population had access to the Internet by 2014 — a number slated to grow.

    There’s still significant room for expansion with the emergence of new users from tier 2 and 3 cities. A growing middle-income group will also prove conducive to expansion. This group not only has a large amount of disposable income, but also boasts the willingness to splurge. Technological advancements such as the introduction of high-speed Internet through 3G and 4G services is bound to further the growth of an online consumer base in India as well.

    Running an e-commerce business is pretty cost-effective.

    A majority of a company’s investments are in technology, while capital expenditure is negligible. Such firms’ operating costs primarily comprise of employee and administrative expenses, whereas inventory cost is minimal.

    E-commerce may be a viable option for both businessmen and investors.

    Food-tech and grocery start-ups have recently gained large following among investors. Cash-back schemes on the use of online wallets, attractive discounts when ordering online, free shipping, and a slew of other offers are being leveraged successfully to augment customer retention and growth.

    Key Challenges That E-commerce Faces in India

    While the sector’s still ripe with possibilities, entrepreneurs and investors alike still have quite a few hurdles to contend with.

    Profitability of E-commerce Businesses

    The e-commerce sector’s expanding markets and demand coupled with the easy availability of funding makes it quite attractive to investors. On the flipside however, is good old profitability and returns on investment.

    E-commerce giants such as Flipkart, Amazon, and Snapdeal have bagged investor funding in the billions — but are nowhere close to being profitable.

    These firms are utilizing their funding to cover losses, acquire new customers via discounts, and pump up the products on offer.

    Rakesh Jhunjhunwala in an interview with CNBC-TV18 correctly stated “Where is Flipkart's complete business model? Forget about valuation. I want to know Flipkart’s business model. I want to know how you will be profitable."

    This sentiment was echoed by the MD of Network18 Raghav Bahl, who said, “Ultimately, businesses run on cash flows and profits and not on ideas that can be valued at astronomical figures.”

    Let us analyze the other side of the coin for insights into the profitability of India’s three biggest e-companies: Flipkart, Amazon, and Snapdeal.

    Financial Research of top E commerce companies in India

    Flipkart led net revenue with INR 1,790 million in FY14, while Amazon and Snapdeal generated INR 1,689 million and INR 1,541, respectively.

    Flipkart’s net-loss-to-net-revenue ratio for the period was 2.23, which meant that for every INR 1 earned, Flipkart lost INR 2.33. This was true for Amazon and Snapdeal as well, which lost 1.90 and 1.72, respectively.

    Flipkart’s current Gross Merchandising Value (GMV) is $4 billion. The company raised $2 billion in 2014 and $550 million in 2015 with a valuation of $15–16 billion, but it never booked profits since its inception in 2007.

    Haresh Chawla, Partner at India Value Fund, explained that in order to justify this valuation, Flipkart has to generate $300 million in after-tax profits over the coming years. This figure would increase to $400 million within the next three years, when its valuation would be around $20 billion. Currently, the cumulative sales of Flipkart, Snapdeal, and Amazon amounted to $85 million — and their combined losses about $160 million.

    Intense Competition and Low Customer Retention Rates

    Another aspect to consider is the market share that these companies command.

    E-companies compromise on profit and increasingly offering heavy discounts, cash-back offers, and promotions to attract and retain customers. This strategy has gone from being a competitive tactic to becoming the norm however, which has led to a rise in customers’ buying power, but not in the company’s market share.

    Despite strong efforts to capture and retain its customer base using attractive marketing strategies and discounts, Flipkart was reported to have a mere 5% market share. This highlights the fact that price-sensitive customers are free to move from one provider to another without incurring any switching costs, something that’s made customer retention a significant challenge in e-commerce.

    Lack of Well-thought-out and Detailed Business Plans

    India’s Prime Minister Narendra Modi has supported online start-ups through his campaign ‘Start up India, Stand up India’ to create employment for youngsters in India.

    Recent events however, suggest all is not well in the world of online start-ups.

    TinyOwl, Zomato, and have been in the negative limelight since they sacked around 300, 300, and 600 employees, respectively. Even though these firms’ concepts are novel, they’re still in a learning/nascent stage and will likely falter on their journey toward a viable strategy. This makes layoffs and other cost-cutting measures justifiable, and sometimes inevitable, in order to sustain their business. It’s easy to surmise that successors to these pioneering players would have shorter learning curves and more robust business plans.

    Another challenge e-companies have to consider is their digital identity and brand name.

    With low barriers to entry and intense competition, creating a strong brand name in a truly global marketplace, ensuring customer retention, and ultimately profitability, will pose a serious challenge to competing players.

    Why then, in spite of the numerous challenges plaguing the average e-commerce company, are they valued at exorbitant multiples?

    Are High Valuations Among E-commerce Companies Justified?

    The answer’s in the multiples.

    Any fundraising process depends on what stage in its lifecycle the start-up is at. As businesses grow, returns on investment increase, and these businesses raise money at higher valuations. It is important to note that these funds are deployed to generate returns after a specific period of time, unlike in e-commerce firms, where they cover marketing expenses and overheads that results in higher cash burn rates.

    Unconventional e-companies are mostly valued by an unconventional metric Gross Merchandising Value (GMV) multiple. GMV is a product of the price at which a good is sold to the customer and the number of items.

    For example, if product A is sold to a customer at INR 1,000 and there are 10 items of this product, the GMV is calculated to be INR 10,000.

    The flaw in using the GMV multiples to value a company is that it doesn’t consider the actual sales generated by the e-company with respect to its profit margins. There’s no accountability for profitability in GMV.

    Let us consider the importance of using EV/GMV multiples for two of the big 3’s.

    EV/GMV of Flipkart and Snapdeal

    Companies such as Flipkart and Snapdeal rely on inflated GMVs to boost their valuations.

    Taking into account the EV/GMV multiples, in FY 2011, both Flipkart and Snapdeal had high multiples since their GMV value was less. For instance, Flipkart’s valuation in 2011 was $164 million and GMV was $11 million; thus, its valuation was almost 15 times the GMV.

    Over time, as a company’s GMV increases, its valuation multiple consequently decreases.

    Flipkart’s GMV in May 2015 was $4.5 billion and its valuation was around $15–16 billion, which is around three times the GMV. Similarly, Snapdeal’s valuation multiple declined from 20 times to nearly 2 times its GMV as its GMV increased from $200 million in 2011 to $5 billion in 2015s.

    Flipkart and Snapdeal are hot on the heels of international e-commerce giants such as Alibaba and Amazon, with valuation multiples close to those of their international peers.

    EV/GMV of Amazon and Alibaba

    Another point to consider is Alibaba’s valuation, which is approximately 0.5x. Amazon’s on the other hand is 1x since its EBITDA margins on GMV (2.5%) are higher than that of Alibaba (1.5%). This has led to a higher EV for Amazon.

    The EV/GVM multiples of Flipkart and Snapdeal may not seem attractive when compared to the likes of Amazon and Alibaba. Alibaba and Amazon have reasserted a well-established fact —profitability matters, no matter what business you’re in.

    It’ll be interesting to see how much more capital funding Flipkart and Snapdeal can raise, and when, if ever, they’ll turn profitable.

    Outlook for E-commerce in India

    There is no doubt that the e-commerce sector poised for growth.

    There is an underlying uncertainty regarding actual profitability however.

    According to UBS’s latest report “Is India in an eCommerce bubble?,” the e-tail market is expected to grow 10 times to $50 billion in 2020 from its current size of $5 billion in 2015, led by high Internet penetration, technological advancements, and the prevalence of disposable income in a growing and affluent middle class.

    The UBS report states that e-tail, the fastest growing segment in e-commerce, had an aggressive approach and was compromising on profitability to provide higher discounts and inflate GMV, all aided by capital injections.

    While this clouds objectivity and creates uncertainty in the minds of many who would think e-tail is a bubble waiting to burst, UBS believes e-tail could be a viable business option if the margins obtained from distributors/wholesalers and retailer are able to cover operating costs, such as logistics, adequately.

    Aswath Damodaran, an authority on corporate finance and valuations, believes e-commerce companies to be collectively overvalued; barring a few that may yet be valuable in the long run. Investors would do well to identify such companies if they’re looking to invest.

    Aswath also stated that social media and apps are not businesses by themselves; they need to have a revenue model in order to become a viable business.

    Some key questions that you ought to ask yourself before investing in an upcoming e-commerce firm are:

    • How do start-ups generate profit without users and downloads?
    • How would the company deal with success and failure?
    • How easily replicable is the company’s business model?
    • From a conservative perspective, a wait-and-watch approach would be most advisable.

    If e-commerce businesses, and especially e-tailers, turn profitable by 2020 , any investments you make in these firms are sure to be a safer bet.

  32. COP21 & Its Implications for India

    The Paris summit held in December 2015 marked a ground-breaking global agreement on climate change. The summit was organized

      to read | words

    The Paris summit held in December 2015 marked a ground-breaking global agreement on climate change.

    The summit was organized under the umbrella of the 21st Conference of Parties (COP21), wherein leaders from more than 195 countries joined hands to seal the historic deal. The landmark agreement takes forward the unfinished agenda of the 2009 Copenhagen Summit (COP15) and 2010 Cancun Summit (COP16), wherein the concept of Intended Nationally Determined Contributions (INDCs) was first discussed.

    The Agreement

    The new deal is a result of several scientific studies that suggest we’re on the cusp of a drastic change in the global climate if global temperatures increase beyond 2°C of their pre-industrial levels by the year 2100. However, the Alliance of Small Island States argued that any temperature rise beyond 1.5°C would put existence of the low-lying island nations in danger. Keeping these arguments in mind, the Paris summit reached a consensus to curtail a global rise in temperature to 2°C while trying to achieve a more ambitious target of 1.5°C.

    During 2009’s COP15 held in in Copenhagen, participating countries were asked to submit their emission pledges — known as INDCs — to the United Nations Framework Convention on Climate Change (UNFCCC). The 146 INDCs received from member countries (before October 1, 2015) revealed that if countries continued with their national contributions, global temperature would still rise by 2.7 – 3.0°C by 2100. While that’s a significantly lower figure than the expected rise of 4.5 –6.0°C if they followed their current trajectory of greenhouse gas emissions, it’s still higher than the 2.0°C threshold set by scientists.

    To tackle this issue, the participating nations in the Paris summit agreed to review their commitments every five years beginning 2020. Under the deal, participating countries are encouraged to peak their emissions as soon as possible and to increase their commitments in further rounds of negotiation. The agreement also calls for carbon neutrality after 2050 and reducing the use of fossil fuels in favor of renewables.

    Contentious Issues of the Summit

    The entire argument between developed and developing countries at the Paris summit can be summarized in the following points:

    • Climate finance to be provided by developed countries to their developing counterparts in order to adapt and mitigate the effects of climate change.
    • Distinguish between developed and developing nations by considering a country’s overall emissions.
    • Advanced countries to provide greener technology to poor countries, at a low cost.
    • Compensate vulnerable countries, especially island nations and African countries, for the losses and damage caused by climate change.
    • Develop a transparent mechanism to assess the national contributions submitted by countries to the UNFCCC.

    Climate Finance

    The most contentious issue between developing and developed countries in the Paris summit was climate finance. Developing countries argue that the majority of carbon emissions are due to developed nations; however, the impacts of climate change are equally disastrous for every nation. According to a December 2015 report from Oxfam America, nearly 49% of global carbon emissions are released by the world’s richest 10%, while 50% of the poor countries contribute just about 10% to total emissions.

    % of CO2 Emmision - World

    % of CO2 Emmision - World

    The concept of climate finance emerged in the Copenhagen summit to assuage such differences between developing and developed countries, wherein developed nations — under the leadership of the US — pledged USD100 bn to developing countries by 2020 in order to help them mitigate and adapt to climate change. To fulfill this commitment, developed countries set up the Green Climate Fund (GCF) at the Cancun summit. The GCF boasted just around USD10.2 bn in funds by November 2015 however, with the US’s contribution totaling around USD3 bn.

    Continuing on the same lines, the Paris agreement strongly urges developed nations to provide USD100 bn to developing countries annually by 2020. This is meant to facilitate adaptation and mitigation, with a special focus on adaptation to climate change effects. The Paris deal even encourages developing countries to join climate finance on a voluntary basis. In case of climate finance beyond 2025, it was decided to fix the amount of USD100 bn as the minimum supporting contribution.

    Historical Emission of Countries

    The concept of common but differentiated responsibility of the developed and developing countries arose due to the historical emissions of developed countries.

    As of 2011, cumulative greenhouse gas emission data revealed that America is the top polluter in the world, accounting for 27% of overall emissions, followed by the European Union at around 25%. India, which has witnessed strong growth in the past few decades, is responsible for just about 3% of total historical emissions.

    CO2 Emmision in 2011

    CO2 Emmision in 2011

    Since the commencement of climate negotiations in the 1990s, developed countries have been against any emission control that is legally binding based on the historical emissions of a country.

    For instance, the Kyoto protocol, which had legally binding commitments, was rejected outright by the US. In the Paris agreement however, any connotation to ‘historical emissions’ has been omitted, thus absolving rich nations from their ethical duty to steeply reduce emissions. Currently, member nations are required to submit their INDCs, which are emission pledges submitted by different countries depending on their individual circumstances.

    Easy Transfer of Cleaner Energy

    At the Paris summit, India took the helm in raising the issue of easy transfer of greener technologies at lower costs from developed countries to the developing nations. However, the Paris summit abstained from any clarity on the subject, and the issue was left open for future negotiations.

    Provision for Loss and Damage

    The Paris climate deal contains provisions to compensate vulnerable countries for the occurrence of climate-related disasters using funds sourced from developed countries. The deal mentions no legal mechanism and liabilities however, making the clause related to loss and damage ineffectual.

    Assessment of National Contributions

    In the past, India and China have advocated the use of different monitoring and reporting systems for developing and developed countries, citing a lack of necessary capabilities for stringent reporting among developing countries. However, the current form of the Paris deal calls for a common system of review, thus removing the difference between the developed and developing countries. Additionally, the draft calls for a first review in 2023 and every five years beyond that in order to discuss countries’ progress on their pledges.

    Impact of the Summit on India

    India’s action plan emphasized striking a balance between emissions reduction and sustainable development among developing countries.

    Its viewpoints were in resonance with that of other developing countries. India wanted developed nations to substantially reduce their greenhouse emissions and provide sufficient time to the developing countries to expand their economies using fossil fuels.

    Likewise, India was in favor of climate finance to be provided by the developed nations, free access to green technologies to the poor countries and expected the climate deal to include the idea of historical emissions by the developed nations.

    On the national front, India was under pressure to declare a peak year for emission. It was also concerned about the possibility of stringent sanctions against the use of coal. The joint statement by China and the US in November 2014 declaring that China’s emissions would peak by 2030 exerted pressure on India to disclose its peak emission year. However, as the per capita annual CO2 emission in the US is close to 17 tons — more than 10 times that of India — any announcement of peak emission year by India would have compelled the country into consuming lower levels of energy, thereby restricting the level of development.

    The Paris summit turned out to be a satisfying agreement for India.

    As far as declaring a peak emission year is concerned, the Paris agreement mentions that countries ought to peak their emission as early as possible. It also acknowledges that developing countries may need more time than their developed counterparts to do so.

    Moreover, the deal doesn’t really broach the topic of coal.

    Coal is not only a major source of energy in India (accounting for 75% of India’s energy needs) but also the cheapest of all other energy sources. Furthermore, the availability of abundant coal deposits in India makes it a prime choice for energy generation.

    Although the agreement calls for the adoption of greener technologies, it abstains from stating a complete boycott of fossil fuels. Any restrictions on coal would have implied a lack of funds from international financial institutions for India’s coal-linked projects and a major setback to India’s plans of generating an additional 500,000 megawatts of electricity from 455 of her proposed coal-fired power plants.

    By not resolving issues related to restrictions on coal usage, the climate summit has postponed, if not solved, dilemmas of several countries. Germany for instance, employs nearly 21,000 individuals in coal-based industries. Any outright ban on coal would have left the country with significant unemployment levels to contend with.

    The Paris summit is among the first in a series of important steps toward tackling the immediate and drastic problem of climate change. Although several past climate summits faltered due to non-compromising stand of participants, the actions of all the countries participating in COP21 reflected their strong resolve to find a workable solution. The success of the Paris summit now relies on how countries work together to meet their INDCs, and it’ll also depend on nations resolving (in the future) those issues that weren’t discussed at the summit.

  33. China’s Car Population May Peak With Regulatory Caps

    Auto sales in China slowed considerably over the nine months leading up to September 2015. Sales growth has decelerated,

      to read | words

    Auto sales in China slowed considerably over the nine months leading up to September 2015.

    Sales growth has decelerated, falling from 12.3% in 2013 and 7% in 2014 to around 0.3% in 2015. This decline is primarily ascribed to the country’s economic slowdown, a slump in her stock market, and increasing regulatory changes — to check traffic congestion and air pollution —that curb car ownership in a growing number of cities.

    While growth in the new car market has been decelerating, the used car market has witnessed an upsurge.

    New Car Sales Slow as Used Car Sales Surge

    In H1 2015, growth in China’s used car market (in terms of trading volume and value) rose 15.1% YoY and 8.3% YoY, respectively.

    Car sales in China - Market Research

    Car sales in China - Market Research

    Vehicle Population Projected to Increase as Car Density Remains Below Other Countries

    According to reports from the Ministry of Industry and Information Technology (MIIT), the number of registered vehicles in China surged to 154 million at the end of 2014, up from 93.6 million in 2011.

    The vehicle ownership rate in China is much lower as compared to other countries however, with a car density of 111 vehicles per 1,000 persons as compared to 825 per 1,000 persons in the US. This is highly indicative of the underlying vehicle market’s growth in the country.

    MIIT expects China’s vehicle population to exceed 200 million by the end of 2020.

    Most forecasts anticipate Chinese growth to stagnate at an ownership rate of about 200–300 vehicles per 1,000 persons in 2030, or later - implying a vehicle population of 300 – 400 million.

    Vehicle Population/Density in China

    Vehicle Population/Density in China

    Are Chinese Roadways Prepared to Shoulder a Surge in Traffic?

    China increasingly faces concerns like traffic congestion as her roadways struggle to cope with growing vehicular traffic.

    The length of Chinese roads rose at a CAGR of 3.4% in the eight years through 2013, while the vehicle population surged at a CAGR of 19%.

    Evidently, the rise in vehicle population is exerting unmanageable pressure on Chinese roadways.

    Tier-one cities in China, including Beijing, Shanghai, Guangzhou, and Chongqing, have road networks that measure less than 1 kilometer per 1,000 people, as compared with 5.7 kilometer in London and 4.8 in New York City.

    China’s Car Population May Peak

    China’s Car Population May Peak

    Source: Tom Tom Traffic Index

    Increasing Congestion to Restrict Registration of More Vehicles

    Seven of the world's 25 most congested cities are in China, including Chongqing, Chengdu, and Shijiazhuang.

    Some of these cities have imposed restrictions in terms of vehicle quotas and license plate bans. Other cities are likely to follow suit.

    Vehicle sales in Chengdu and Chongqing increased more than 20% in 2014, outpacing an overall domestic growth rate of 10%.

    China’s Car Population Peak

    China’s Car Population Peak

    Source: Tom Tom Traffic Index

    Chinese cities traffic control

    Chinese cities traffic control

    China’s Automobile Market to Shift from New Car Sales to Used Car Sales

    With an increasing number of cities imposing caps on registrations, growth in new auto sales in China is expected to decelerate. The car market in China is undergoing a major structural change, with sales of new cars dropping in favour of used cars.

    SAIC Motor Corp, the largest automobile manufacturer (by sales) in China, forecasts zero growth in industry sales in 2015. In July, the auto manufacturers’ group slashed its 2015 growth forecast for China’s auto market to 3% from their earlier prediction of 7%. As new car sales growth decelerates, used car sales are expected to surge.

    China’s Automotive Dealers Association (CADA) forecasts the used car sales volume to double to 11 million in 2015.

    According to this forecast, China’s used car sales ratio would double from 0.22x in 2010 to 0.5x in 2015. This is expected to reach 0.75x in 2017 and 1x by 2020, which is still below the 2–3x levels among most developed car markets.

    China new vs old car

    China new vs old car

    Chinese Auto Population to Peak by Middle of Next Decade

    As the country’s car population reaches its peak, new car sales could equal the number of cars taken off the road. In 2015, 5.5 million high-emission passenger vehicles are expected to be scrapped, with an additional 16 million vehicles expected to be scrapped by 2020.

    According to Bloomberg analysis, growth in passenger vehicle sales in China may slow nearly 2% if a tier-two city like Chengdu imposes a cap on new vehicle registrations. As more Chinese cities impose limits on new vehicle registrations amid a slowdown in new car sales, the number of road going vehicles in China is likely to peak by the middle of the next decade.

  34. Will Norway Survive The Global Slump In Oil Prices?

    As lower oil prices plague markets worldwide, the Kingdom of Norway — which generates about a quarter of

      to read | words

    As lower oil prices plague markets worldwide, the Kingdom of Norway — which generates about a quarter of its GDP from the oil and gas sector — has also been affected.

    Latest IMF forecasts peg Norway’s GDP growth at 1.3% in 2016, a slip from the 2.2% recorded in 2014.

    As per Moody’s credit review, the country’s credit outlook remains intact in the near-to-medium term, as it draws on the strength of its strong governance framework, albeit with longer-term concerns.

    Moody’s mid-year report states: “The hydrocarbon sector, which accounts for approximately 20% of national GDP, has been undergoing structural changes, including reduced investment and lower oil prices that are weighing on the Norwegian economy and the government's fiscal position. Although these developments do not have immediate implications for Norway's creditworthiness, the structural shifts in the sector raise some long-term concerns regarding the viability of the reliance on the hydrocarbon sector, and necessitate adjustments in the economy and government budget.”

    Norway's Rising Wealth

    Norway's Rising Wealth

    NOK against USD

    NOK against USD

    Nordic Government Pension Fund Global (GPFG)

    Norway has historically preserved her oil riches through the Government Pension Fund Global (GPFG) — the largest sovereign fund in the word — financed by taxes levied on oil companies. The fund’s size recently surpassed NOK 7 trillion, or more than 200% of the country’s GDP. The government’s fiscal spending is backed by returns generated on the fund, and therefore, remain cushioned from volatility in the oil markets.

    Short-term Remedial Measures

    In the short-term, the country’s strong government policy framework should cushion growth despite the crash in oil prices.

    The business environment for Nordic companies has dampened due to an expected decline in oil investments (estimated to drop by c.9% in 2016 over 2015) and GDP growth. Nonetheless, the Norwegian economy stands to benefit from the ongoing krone depreciation as a means of boosting the performance of non-oil sectors. Historically, Norway’s non-oil sectors have been characterized by stronger currency and higher wage levels. In order to weather the current oil-price storm, the Norwegian government has already cut its benchmark rates twice (with the possibility of another cut soon) and also announced increased spending and tax relaxations in its budget.

    Key Metrics That Are Vulnerable in the Long-term

    However, sustained low oil prices in the long-run would necessitate major adjustments to Norway’s government budgeting protocols.

    As a direct consequence of sustained low oil prices, Norway’s oil investments could be cut substantially, impacting key economic metrics such as wage levels in both oil and non-oil sectors, private consumption, and consequently, the region’s economic growth prospects in general.

    Norway boasts of strong key economic metrics such as a GDP per capita that exceeded the EU-28 average by more than 60% in 2014, budget surplus at more than 7% of GDP since 2005 and government assets net of debt in the form of sovereign fund worth more than NOK 7 trillion. However, the country’s household debt stood at unsustainably high levels (c.220%) of disposable income in 2014 and could become a major challenge in the event of an oil shock.

    Norway's banking system is heavily reliant on market funding as compared to domestic funding sources, funding that could be inaccessible as the oil imbalance grows. A potential failing, to say the least. As per an IMF report (Sep 2015), market funding among Norwegian banks comprised 60% foreign funds and 40% domestic funds.

    Will the Slump Hit Hard?

    It could be challenging for Norway to adapt to a low oil price benchmark in the medium-to-long run, which would entail foregoing growth, enacting major fiscal and government policy changes, as well as regain competitiveness in traditional non-oil sectors.

    As reflected in the words of Oystein Olsen, Governor of Norway’s central bank: “The shift to an oil-driven economy with a high wage capacity has been a comfortable journey. The journey forward, where the oil service industry must downscale and other trade-exposed industries must grow, will be more challenging.”

  35. QFI Trading at TASI: Trends and Analysis

    Saudi Arabia opened its capital markets in June 2015 in a bid to attract foreign investments. The move allows

      to read | words

    Saudi Arabia opened its capital markets in June 2015 in a bid to attract foreign investments. The move allows foreign institutions to directly invest in shares listed on the Saudi stock exchange after obtaining a Qualified Foreign Investor (QFI) status from the Capital Markets Authority (CMA). The registered QFIs started participating in the capital market from June 15, 2015.

    Tepid Start by QFIs with Negligible Contribution in Trading Turnover

    Despite the immense opportunities for the market and investors alike, high expectations from QFIs were misplaced as evident from their tepid initial response. On the first day of trading, only seven Saudi stocks attracted investments from the QFIs. The average traded value in June was just SAR 13.8mn, quite insignificant compared to the exchange average trade of SAR 112.8bn over the same period.

    TASI total traded value

    TASI total traded value

    After the tepid start in June, trading activity ramped up in July and August as the total traded value rose from SAR 27.5mn in June to SAR 92.3mn in August. The upside could be attributed to the resumption of the stock market after the Eid-break, which was preceded by Ramadan, when trading activity is generally subdued.

    QFI total trade

    QFI total trade

    Although QFIs were net buyers (SAR 18.2mn) at the end of June, they turned into net sellers in July (SAR 21.3mn) and August (SAR 3.5mn), respectively. We believe this was primarily on account of Ramadan.

    QFI Turned to Net Sellers

    QFI Turned to Net Sellers

    Main Factors Restraining Investments by QFIs are as follows:

    Limitations of Investment

    Certain restrictions by the CMA limit the QFI’s participation in the market. One of those restrictions states that QFIs can only hold up to 5% individually (and 20% collectively) of the shares of any traded company. Also, in total, foreign investors may hold a maximum of 49% of the shares of any traded company. Furthermore, total investment by QFIs is limited to only 10% of the TASI market cap.

    Oil Played Spoilsport

    The performance of the Saudi exchange has been weak since June 2015 (crashed from 9,700 points in early June to below 7,600 points in August). The downside was a result of the continuous dip in oil prices, with Brent declining over 50% Y-o-Y in August 2015 from more than USD 100/barrel. Despite being a predominantly oil-based economy, historical data suggests low correlation between oil price and TASI. However, the scenario has changed in the recent past and the correlation has peaked (YTD 2015 correlation stands at 0.82), fueled by the dip in oil prices. This has eventually affected TASI’s performance.

    Dropped Oil prices impact TASI

    Dropped Oil prices impact TASI

    Budget Cuts are Evident

    Saudi Arabia’s fiscal breakeven oil price has increased over the years to USD 106/bbl in 2015 from USD 69/bbl in 2010 mainly due to expansionary government spending. Saudi Arabia’s breakeven price is the highest among the Gulf nations. Therefore, oil price shock is likely to trigger cuts in spending and its transmission to other areas of economy which is of immense importance to Saudi Arabia.

    KSA Fiscal Breakdown 2015

    KSA Fiscal Breakdown 2015

    Premium Valuation "Unwarranted"

    The high valuation of the stocks trading in Saudi Arabia’s exchange dissuaded QFIs from participating in trading activities. TASI was the best performer among the Gulf markets until 2Q15. The index traded at a blended forward P/E multiple of 15.5x compared with 11.8x for the key Gulf markets and 12.3x for the MSCI global emerging markets. Given the changing fundamentals of the economic scenario in Saudi Arabia, we believe this does not warrant a premium valuation especially with the sustained weakness in oil price.

    TASI Valuation vs other GCC Exchanges

    TASI Valuation vs other GCC Exchanges


    Despite the restrained start to the foreign investment activity in TASI, the framework set is a big step toward the development of the market. Factors such as the large size of the Saudi market and initiatives by the government to make investment opportunities for QFIs even more attractive could boost participation in the future.

  36. Pharma Deal-Making: In the Pink Of Health

    Deal-making in the global pharmaceuticals sector is booming, with no signs of slowing down. 2015 promises to be a

      to read | words

    Deal-making in the global pharmaceuticals sector is booming, with no signs of slowing down.

    2015 promises to be a prosperous year, with deals likely to be at their highest since 2005 — as evident from Shire's hostile takeover bid for Baxalta. The total size of M&A deals was USD200 bn in 1H15, the highest reported for the first-half period in the last 10 years. Deal values in 2014 and 1H15 have exceeded the average deal value of USD105 bn for the period 2000–13.

    With M&A continuing in the pharmaceuticals sector, we expect the total deal value in 2015 to surpass the USD275 bn mark recorded in 2014, reaching the highest level in the decade.

    Since 2014, M&As worth USD475 bn have been announced. It's likely that this surge is driven by sluggish growth in revenues, lower capital cost due to low interest rates, patent cliffs, high cost of manufacturing new drugs, and tax inversion.

    M&A activity is expected to continue as major pharmaceutical companies focus on aligning product portfolios with their long term growth plan and cutting product lines.

    M&A in Pharmaceutical Sector

    Rise in M&A Activity Primarily Due to Declining Revenue and Lower Capital Cost

    M&A activity in the pharmaceutical sector has been stoked by a decline in revenues and low interest rate environments. Companies have taken advantage of low interest rates by issuing bonds to finance acquisitions.

    Many pharmaceutical companies are grappling with slow revenue growth; they're also likely to face higher competition from generics manufacturers as their patents for blockbuster drugs expire. The emergence of new players is putting pressure on larger generics players to either move up the value chain or expand their revenues inorganically.

    Slow Sales and Earnings Growth

    The global pharmaceutical sector has been coping with slow growth, and companies operating in the sector are looking for new growth avenues amid pricing pressures and higher competition.

    Our study of the top 10 pharmaceutical companies based on sales over 2005–14 indicate that their average revenue and net income growth slowed significantly during the period. It revealed that revenue growth in 2014 was among the lowest during that decade.

    Revenue declined 3.0% yoy on average in 2014 vis-à-vis an average rise of 4.8% over 2005–14. A few companies (Bayer, Johnson & Johnson, Roche, and Sanofi) reported mid to low single-digit growth. In 2014, revenues at Eli Lilly and GlaxoSmithKline (GSK) declined 15.1% yoy and 15.2% yoy, respectively. Likewise, average earnings of these top 10 pharmaceutical companies declined 0.2% in 2014 vis-à-vis the average earnings growth of 10.6% during 2005–14.

    It's notable that the average return on equity (ROE) of these companies declined to 11.6% in 2014 from 12.6% in 2013 and the average return on assets (ROA) decreased to 7.9% in 2014 from 9.1% in 2013.

    Delcine in ROE and ROA

    Reduction in Capital Cost Owing to Low Interest Rates

    Many pharmaceutical companies have raised debt through loans and bond issuances, taking advantage of low interest rates. Major bonds issued to finance acquisitions by pharmaceutical companies totaled about USD51 bn till July 2015.

    In March 2015, Actavis PLC sold bonds totaling USD21 bn to finance its USD70.5 bn acquisition of Allergan Inc., a Botox manufacturer. Amid a low interest environment, investors have shown a strong appetite for corporate bonds that involve greater risks but have higher yields. Among other companies, Merck & Co. raised a USD8 bn jumbo bond for the acquisition of Cubist Pharmaceuticals for USD9.5 bn and Valeant Pharmaceuticals raised USD10.1 bn in debt for the USD14.5 bn acquisition of Salix Pharmaceuticals.

    Bond Issuances in pharmceutical sector

    Patent Cliffs and the High Cost of Innovating New Drugs

    Pharmaceutical companies continue to face patent cliffs, scenarios where exclusive rights to top-selling drugs expire. While some companies are investing in product innovation, others are buying growth off-the-shelf. Many blockbuster drug patents expired over the last few years, with few more expected to expire in the years to come. New drugs are costly to innovate; they require significant investment and are subject to higher regulatory processes. The costs of developing a new drug increased from USD1.1 bn in the late 1990s to USD5bn in 2013.

    Product Launches v/s Patent Expirations

    Some companies have made acquisitions in order to add existing patents to their own portfolios. In May 2015, Teva Pharmaceutical acquired Auspex Pharmaceuticals for USD3.2 bn. Auspex is close to launching a new drug to treat Huntington’s disease. In May 2015, Dublin-based Horizon Pharma acquired US-based Hyperion Therapeutics for USD1.1 bn, adding two orphan drugs used in the treatment of generic disorders.

    Dropped Oil prices impact TASI

    Competition Among Generics Manufacturers Driving Acquisitions

    Fragmented generics markets in Europe and the US are poised for consolidation. The top three players in the US and European markets have a market share of 28% and 19%, respectively. Meanwhile, with the emergence of lower cost rivals such as Sun Pharma and Cipla, generics manufacturers such as Teva, Mylan, and Actavis are under pressure. They are either moving up the value chain or are pitching up for other generics. Actavis has shifted its focus toward higher value branded products through its acquisition of Allergan.

    Market Share of top 3 players

    Companies Realigning Product Portfolio to Meet Cash-Flow Needs

    Companies are divesting their nonstrategic assets, using the proceeds to invest in a pipeline of new medicines that are core to their business.

    In March 2015, GSK and Novartis completed a series of asset swaps totaling over USD20 bn. GSK bought Novartis’ vaccine business in exchange for its cancer drug portfolio, resulting in net proceeds of USD7.8 bn with the former. The deal is likely to fortify Novartis’ substantial presence in oncology and boost its core margins, while GSK plans to distribute the proceeds to its shareholders.

    Among other transactions, AstraZeneca recently divested Capreisa, used to treat of a rare type of cancer, to Sanofi for USD300 mn, after it sold off Entocort (gastrointestinal drug) to Tillotts Pharma for USD 215 mn.

    Tax Inversion Seen as an Added Advantage in Deal-Making

    In 2014, tax inversion emerged as one of the major catalysts that led to a spurt in global M&A activity. US companies carried out M&As primarily focused on availing lower global tax rate benefits.

    One such deal in the pharmaceutical space was Actavis Plc. acquiring Allergan, Inc. for USD70.5 bn in 2014. Mylan’s USD5.3bn deal to acquire Abbott’s generic business is another case in point. However, the imposition of a stringent rule on tax inversion by the U.S. in September 2014 put a brake on such deals.

    Future Outlook

    M&A deals in the global pharmaceutical sector are expected to continue to gain momentum in 2H15. Major companies aim to expand their strategic assets, bouncing back from slow growth rates and divesting nonstrategic assets. Small biotechnology firms with late-stage drug candidates and healthy pipelines are likely to be prime targets for acquisition. We may also see more acquisitions among generics players, as the market still remains largely fragmented.

    Major deals in 2015

    Major deals in 2015

    Acquisitions that took place in 1H15 covered all types of pharmaceutical companies (large, biotech, generics manufacturers companies and over-the-counter [OTC] drug providers). By value, the biggest deal of 2015 so far is the acquisition of Allergan’s generics business by Teva Pharmaceutical for USD40.5 bn. The acquisition was aimed at focusing on growth from premium drugs such as Botox.

    In April 2015, Mylan, a major generics player, made a USD29.0 bn takeover offer for Perrigo, a manufacturer of OTC consumer products, generic topical medicines, and animal health treatment products.

    Among the notable deals in the biotech segment was AbbVie’s acquisition of Pharmacyclics for USD21 bn and Valeant Pharmaceuticals’ purchase of Salix Pharmaceuticals (a gastrointestinal drug manufacturer) for USD14.5 bn. Major biotech companies are targeting medicines developed by nimble biotech firms to help them replenish their product portfolios.

  37. Why Hope Isn’t Lost For the Indian Markets?

    Image source:Wikimedia Commons | Craig Mayhew and Robert Simmon, NASA GSFC India has been well marketed by the

      to read | words

    Image source:Wikimedia Commons | Craig Mayhew and Robert Simmon, NASA GSFC

    India has been well marketed by the Prime Minister Narendra Modi with his “Make in India” campaign as a great investment destination over the past year. The days post the rise to power of a majority government saw euphoria of sorts gripping the Indian market. However, the situation on ground at present is not as cheerful as the bulls would have liked it to be.

    Nevertheless, we argue that all is not lost and if we look beyond the Parliamentary affairs and the reforms hoopla, there are signs of improvement. We highlight that any rise is not linear and short term concerns usually dwarf the big picture, especially the slow changes that often get unnoticed. Let us try to take a stock of the situation and examine the road ahead.

    Equity Markets Overheated?

    Currently, the CNX Nifty is trading at a PE of 21.63 compared to the historical average of around 18-19x. Generally, a PE of 22x and above may signal that the market is overvalued, it was at 28.29 in March, 2000 and 27.62 in January, 2008. Looking at market cap-to-GDP ratio, it stands at around 76 now vs. 146.9 in 2007. The usual caveats like interest rates (high rates scenario witness lower Mcap to GDP), number of listed companies especially after recent IPOs etc. do apply while looking at such ratios.

    In our opinion, the current earnings season has been weak and high valuations may warrant a correction. We believe India is yet to reach the overheated stage as earnings will improve albeit slower than expected. Our belief is backed by the improving inflation, and potential for lower rates and record low commodity prices. Evidently, the Indian market continues to fair better than its EM and Asian peers.

    Monsoon Session Wash-Out

    Everyone observed the Parliament’s monsoon session being washed out. Even, the critical bills such GST and Land Reform couldn’t see the light of the day. However, political pundits have been arguing how the government may call for a special session to pass the GST bill. It’s yet to be seen how it may all unfold.

    The Macro Picture

    CNY devaluation led to a sell-off in the markets as fears of competitive Chinese exports increased. Movements in Yuan do have an impact (see our recent article) on the global markets.

    The PBOC said in a press conference recently that there’s no basis for depreciation to persist and policy makers will step in to control large fluctuations, Bloomberg reported. Moreover, India may not be as vulnerable to FX movements as it was a few quarters ago. The latest RBI data shows that the ratio of hedged positions for Indian corporates has gone up sharply, from 15% of all foreign exchange liabilities a few quarters ago to around 41% in the 1QFY16.

    To add to it, July WPI inflation fell at a faster-than-expected (Reuters poll estimates at -2.8%) annual rate of 4.05%, its ninth straight decline and the lowest in at least a decade. Softening inflation and better hedging may protect to some extent against the impact of a weak Yuan. Soft inflation figures may prompt the RBI to go for a much awaited rate cut sooner than later.

    Make In India - The States Are Taking It Ahead

    Maharashtra recently secured a five year deal worth USD5bn from iPhone maker Foxconn. General Motors also announced its plan to invest USD1bn in India. Chinese phone maker Xiaomi, in partnership with Foxconn, launched a new plant in Andhra Pradesh. Ten states accounting for almost half of India's economy, and most of them led by Mr. Modi’s party, have said they want to enact their own laws to ease land deals that boost infrastructure development, according to Reuters.

    We conclude that current Indian situation appears to some as a disappointment due to the unreal expectations. The point worth noting here is that despite logjam in the parliament, there is considerable investment heading to India.

    We feel that though broad-based reforms are needed to catapult India into higher growth trajectory, the current situation is being perceived to be bad largely due to unrealistic hope that such reforms can happen in a much shorter time frame. In fact, we see the ongoing correction as an entry opportunity for investors. For us, the glass is most definitely half-full!

  38. Payment Banks: A Paradigm Shift in India’s Banking System?

    The Reserve Bank of India (RBI) granted 'in-principle' approval to eleven entities that allows them to set up

      to read | words

    The Reserve Bank of India (RBI) granted 'in-principle' approval to eleven entities that allows them to set up payment banks.

    Those with approval include big players such as Reliance Industries, Tech Mahindra, Vodafone, Airtel, and Aditya Birla Nuvo.

    A Payment Bank operates just as a regular bank would, except for its lending rules. Payment banks can lend only to the government. Leading companies across the country’s different sectors have shown considerable interest in this new banking category, signifying the importance and potential that payment banks could hold.

    This is the first time that the RBI has approved differential licensing with the intent of further financial inclusion. As the Hon’ble Finance Minister announced during his presentation of the Union Budget 2014-2015, "Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force."

    The move is expected to boost the government’s plan of financial inclusion, with these banks acting as a bridge that provides 'last mile banking' services at a low cost. Payments banks can service a significantly wider range of customers, who may be otherwise out of reach.

    Moreover, the proliferation of mobile banking would bolster the development of cash-less banking. Mobile devices could be a preferred medium of payment over time, becoming as prevalent as credit and debit cards. Payment banks could very well use the mobile platform to provide basic services such as payment and subsidy transfers, playing a crucial role in better implementation of the government’s direct benefit transfer scheme.

    The success of these new banks would largely depend on them being profitable, relying on low-cost technology and significant transaction volumes to even the scales. Providing attractive returns in order to lure deposits will also be a significant hurdle to overcome.

    While payment banks would be a boon to banks with limited reach, it may impact some public sector banks’ market share in the long run. Payment banks have been successful in developing countries such as the Philippines and Kenya. In Kenya, almost two out of three adults use Vodafone M-Pesa to store money, transfer funds, or make purchases.

    Although it’s a bit early to bet on business models right now, the RBI’s move may be a game changer for the industry, revolutionizing how retail banking works in India.

  39. Obama's Climate Clean Up!

    The Long & Short Of It The US Environmental Protection Agency’s (EPA)’s Clean Power Plan (CPP), which EPA

      to read | words

    The Long & Short Of It

    The US Environmental Protection Agency’s (EPA)’s Clean Power Plan (CPP), which EPA unveiled in 2014, is expected to be finalized in early August. This plan mandates all states to reduce their carbon dioxide emission from existing power plants. It is the mantelpiece of the Obama administration’s Climate Action Plan, which the President announced in June 2013. This also reinforces the President’s recent pledge to the United Nations that the US will slash its carbon emissions by as much as 28 percent from the 2005 levels by 2025.

    In our view, the CPP may have an adverse impact on the utilities in the short term, which can become favorable in the long term if some of the infrastructure cost can be passed on to the consumers, and the sector begins to benefit from the fuel and grid efficiencies envisaged in the CPP.

    Demand is fairly inelastic to tariffs, which may result in increased tariffs for the consumers. However, the federal and state governments’ strategy to tackle this remains to be seen. Another school of thought believes that consumers will benefit from such a plan. A new study claims that consumers will save on energy bills, but how this would transpire for various stakeholders is not yet clear. This may be the first big step that the US has undertaken toward the global climate action.

    Stakeholders: How Does It Impact Them?

    The EPA’s CPP will affect various stakeholders across the value chain of the power sector in the US. The stakeholders have varying perspectives on this plan. Quite a few stakeholders acknowledge that they may benefit directly or indirectly from this Plan. However, many are apprehensive about its repercussions.

    How are Stakeholders impacted?

    Concerns Of The Naysayers

    There are many concerns regarding the CPP by various stakeholders. While largely debatable, there is definitely an air of disbelief in the stakeholders as to the intentions and actual impact of this plan.

    Federal overreach

    Critics are equating CPP, the first such federal rule to limit carbon emissions from existing power plants, to federal overreach. They are arguing that this federal government initiative is another effort to advance its climate change agenda onto the states without giving due regard to the impact it may have on the general economics and regulatory electricity rates for the consumers. Furthermore, the critics believe that the federal government intends to limit the state’s control over its energy assets by setting state-specific goals and mandating them to achieve such goals.

    Higher electricity prices

    With the utilities having to close down low-cost, coal-fired power plants and incur capital expenditures toward infrastructure development, the electricity tariffs are set to rise in the near term. Regulated utilities are allowed to pass on any regulatory capital expenditure toward infrastructure development and efficiency. Each case is approved by the state’s public utility commission, which allows a gradual rise in electricity rates such that these expenditures can be financed. Many states fear that without a proper mitigation strategy/grants for such expenditure, the utilities would decide how much of these regulatory costs they would bear or pass on to the consumers.

    Too much cost, too little benefit

    In the hearing of the House Science, Space and Technology Committee, held on July 09, 2015, EPA Administrator Gina McCarthy provided a testimony on CPP. The committee grilled EPA Chief on the massive costs associated with the plan compared with the limited returns. Committee Chairman US Rep. Lamar Smith (R-TX) commented “even EPA data shows that this regulation would reduce sea level rise by only 1/100th of an inch. (source)" He went on to claim that the plan was “all pain and no gain”.

    McCarthy countered this argument in a holistic view by claiming that the plan’s value was not in the measurement of decreasing sea or temperature levels, but in demonstrating strong domestic support and spurring global action on climate change, by leading from the front.

    In another development, in the first week of July 2015, the Supreme Court struck down a major EPA mercury rule, MATS, which was forcing hundreds of coal-fired power plants to prematurely retire. However, the plants will shut down as they have already made investments required by the rule. Critics are drawing parallels with this ruling of the Supreme Court, stating that significant costs being the underlying reason for the quashing of MATS, would also result in a similar decision against the CPP.

    The EPA argued that this would have no impact on the CPP and that EPA has long considered cost as the main factor while setting standards under the section 111 of the Clean Air Act.

    Not enough time for implementation

    Coal utilities are urging the White House to push back the EPA’s power plan, claiming that the aggressive deadlines may pose a threat to electric reliability in the states. The EPA claims that utilities have enough time to meet the 2030 deadlines once the state-specific plans are tabled by 2016. The utilities, on the other hand, point to EPA’s interim goals, which need to be achieved during 2020–29, before even meeting the 2030 goals. They claim that majority states (~84%, i.e., 41 of 49 states) have to achieve over 75% of their final goals, starting 2020, as part of their interim goals. This, the critics claim, is not achievable without shutting down existing coal-fired plants even before they have a replacement for it, which is bound to cause power outages and create reliability issues across the states.

    As seen in the graph above, about 47% of the states’ interim goals cover more than 85% of their final goals, which they need to achieve starting 2020. The EPA assured the utilities that it is planning to address these concerns once the plan is finalized. In a recent update as stated in an article in Washington Post, the Obama administration during last week of July 2015 decided to give the states more time to achieve their interim goals and will extend the interim goal deadline to 2022.

    State's Interim Improvement Goals

    Adverse impact on minorities

    Although this is not being raised as a concern by many, but it finds some support in a study conducted by the National Black Chamber of Commerce, a body that represents 2.1 million Afro-American-owned businesses in the US.

    The study conducted to evaluate the impacts of EPA’s CPP on minority groups revealed that there would be a 23% rise in poverty and loss of about 7 million jobs in the afro American community by 2035. The study found evidence that the Hispanic community would also be adversely impacted, with a 26% rise in poverty and a resultant loss of 12 million jobs by 2035.

    Key Elements of CPP

    The EPA’s CPP proposal has two main elements, which encompass the essence of the plan and establishes the actionable plans.

    State-specific emission rate-based CO2 Goals and their Mass Equivalents The emission rate-based CO2 goals are different for each state. These are pollution-to-power ratios that the states are required to meet by the year 2030, after successful implementation of various measures under their respective plans. Many states and utilities have existing plans to curb carbon emissions in the power sector. The EPA utilized this information to formulate practical and affordable state-specific emission rate-based CO2 goals for the states to achieve by 2030, with meaningful progress toward reductions by 2020.

    The basic formula for the state goal rate is:

    Obama’s Climate Clean Up

    The formula applies uniformly to all the states, with each state having a unique set of emission and power sources to plug into various parts of the formulae. This provides an equitable basis for states to work toward their respective goals, which are strategic and achievable in the timeframe set under the CPP.

    The EPA has provided the states with an option to convert this emission rate-based CO2 goal into mass equivalents, which would specify the target metric tons of CO2 emission as their goal. The agency provided states with two approaches to convert the emission rates into their mass equivalents with the basic formula as:

    Obama’s Climate Clean Up

    The state goals are not requirements of any specific fossil fuel-based electric generating units (EGUs). Instead, these are the requirements of the states as a whole and the state can fulfill these goals based on their individual plans. States have various emission rates and hence different emission rate goals. The states with the highest and lowest emission rates are Montana (~2,245 Lbs/MWh) and Idaho (~340 Lbs/MWh), respectively. The goals of such states are set taking into account many factors, such as their position as a net importer/exporter of power, types and composition of generation capacity, and plans underway for improvement of emission rates. More examples of states with high and low emission rates are provided below, along with their targeted goals for 2030.

    Highest Emmision Rates States and their Goals

    Lowest Emmision Rates States and their Goals

    To set these goals, the EPA considered the strategies and initiatives adopted by many states and utilities to curb carbon emissions in the power sector. This analysis culminated in the creation of the Best System of Emission Reduction (BSER).

    In addition to setting the final goals for the states in terms of emission rate-based CO2 goals and their mass equivalents, which they need to achieve before 2030, the EPA has identified certain interim goals in line with each state’s ability to achieve such goals in the short term.

    The ideology underlying such interim goals is that the states can recognize certain emission reductions in the short term, although the full effects of other initiatives, such as the energy efficiency program and renewable energy capacity expansion, may take longer. Considering this, the EPA has set interim goals, which need to be achieved by 2020.

    Guidelines for development, submission, and implementation of state plans

    The EPA has provided the states with their respective goals, which they have to meet by 2030. However, it allows the states to figure out a plan to achieve these goals. Each state has to determine emission performance levels for its affected EGUs that add up to the total emission goal requirements for that state.

    The state has to specify the measures it would be undertaking to achieve such levels and the overall goals. As a part of setting these levels, the state has a choice of following the rate-based emission goals or the mass equivalents of CO2 emissions. These are documented in the State Plan, which needs to be submitted to the EPA as per the set timelines specified earlier. The state has to ensure adherence and implementation of its plans across the EGUs and other stakeholders. The measures to be utilized for achieving these goals can include, but are not limited to, those provided by the EPA in its four building blocks approach.

    Considering the interconnected nature of the power sector, the states have been accorded the flexibility to create multi-state plans with neighboring/partnering sates to achieve their respective goals. As mentioned earlier, the states can choose the measures best suited to meet their goals. The states can:

    • - Utilize their existing plans focused on emission reductions/renewable energy initiatives;
    • - Invest in energy efficiency initiatives;
    • - Upgrade aging infrastructure;
    • - Design plans using innovative, cost-effective strategies; and
    • - Identify best practices in the power sector for emission reduction and implement these across the EGUs in the state.

    All states need to submit their initial or complete plans by June 30, 2016, with an option to extend the submission of a complete plan in one or two years, depending on whether it is a single- or multistate plan, respectively.

    After submission of the complete plan, the EPA would have 12 months to review the plan. In case, a state does not submit a plan by the stipulated date, the EPA would provide the state with a plan to follow. The latter option confers certain authority to the federal authorities to intervene and ensure the implementation of the plan by the EGUs of the state.

    Cost Versus Benefit: Is It Really Worth The Effort?

    The CPP, with its emissions reduction goals, has an environmental agenda. Furthermore, the EPA believes the plan has monetary benefits compared with the costs associated with the achievement of these goals. The states will determine as to how the various emission guidelines are to be met. Thus, the costs and benefits may vary for each state. The EPA has calculated illustrative costs and benefits in two ways: based on individual state plans, and by assuming that the states will choose multi-state plans. These are explained in further detail in the following sections. Note that the figures provided below are illustrative in nature.

    State plans

    • 3. This is calculated using the Integrated Planning Model (IPM) and include end-use energy efficiency and participant costs along with the monitoring, reporting and recordkeeping costs.
    • 4. The reduction in exposure to ambient PM2.5 and ozone through emission reductions of precursor pollutants.

    Win-Win Situation

    The EPA’s CPP has been doing the rounds of various legislative bodies and discussions for a while now, and the discussions and debates about its feasibility, effectiveness, and requirement as an immediate measure will culminate into a legislation being brought in in early August. Stakeholders have different stances on this plan. And, all await it with bated breath.

    For contesting against such a regulation, the states may take legal recourse. However, there are recent examples, such as the state of Oklahoma’s lawsuit against the CPP, which was quashed first by the US Court of Appeals for the DC Circuit in June 2015 and later by the US District court on July 17, 2015. Both cited lack of jurisdiction and its premature nature, as the proposed rule is not yet finalized. As such, the states and utilities are gearing up to meet the goals set in the CPP, and it may be a bit late to roll back these investments after the finalization of the rule.

    From an environmental and social perspective, this initiative by the US federal government and agency is commendable and in the right direction. From an economic standpoint, this initiative is quite bold in terms of the stringent deadlines and infrastructure requirements that it poses for the states and hence the utilities. Conventional utilities and coal-rich states, such as Kentucky, with high carbon dioxide emission rates may feel the heat due to this regulation. However, if steps are undertaken to ensure smooth transition to less or zero emitting sources of energy, it could be a win-win situation for the energy providers as well as consumers.

    The EPA used historic data from 2012 as a basis to draft four building blocks, that together, are the best system to curb carbon emission from fossil fuel-based power plants. Click to know more.

  40. Ramadan - The Impact on Saudi Stock Market

    We observed that the Ramadan has a pronounced impact on the Saudi stock market as measured by its

      to read | words

    We observed that the Ramadan has a pronounced impact on the Saudi stock market as measured by its all-share index TASI, when we analyzed past eight years’ stock market data. The index levels and volumes generally follow a downtrend trend in the run-up to Ramadan as well as in the initial two weeks of the holy month. We believe this is because of two key reasons: 1) retail investors, who participate in the stock market in majority, liquidate holdings to meet additional expenses incurred during the festival, and 2) other investors expect share prices to decline along with depressed volumes and, thus, try to realize gains

    The volume of shares traded begins to decline at least a month prior to Ramadan. During the month, average volumes remain at the lowest annual level or approximately 40% below the annual average. After the third week, volumes begin to turn up gradually. We attribute this to investors looking to build positions in anticipation of a rise in TASI levels along with a general pick-up in trading activity following the long holiday. Interestingly, average volumes rose ~38% in the four weeks following Ramadan compared with the average volume during the month.

    We observe a similar pattern in TASI levels due to the Ramadan effect. On average, the index declines 0.6% between the two weeks prior to Ramadan and the first week of the festival. Thereafter, it generally remains flat in the following two weeks, before picking up an average 2.9% in the fourth week.

    However, the previous three years reported a positive bias where average volumes were flat-to-up during the holy month. In 2012, 2013 and 2014, the Ramadan pattern was distorted due to positive spillover effect of approval of the long-pending mortgage law, overall positive earnings season and announcement of Saudi market opening to QFI, respectively.

    Trading Volume in Ramadan

    TASI in Ramadan

    Sectors positively impacted during Ramadan

    • Food sector: Food and Agriculture sector gains an average 6% during the festival which we believe is led by higher consumption of staples in the run-up to Ramadan as well as during the holy month. Almarai, the heavyweight, is up on average 6% as a significant 33% of its annual earnings come from quarter in which Ramadan falls. Savola, another heavyweight, is also up 10% on average as Ramadan and Hajj generates sizeable sales/earnings for the company.
    • Retail sector: Retail stocks report strong performance during the holy month generally due to higher discretionary spending, with the sector on average gaining 4% during this period. Retail heavyweight Al Hokair is up on average 10% as Ramadan is their main business season and the corresponding quarter generates a significant 40% of the total annual earnings.
    • Hotel & Tourism: Additionally, the Hotel and Tourism sector increases an average 4% during the month of Ramadan, with an increase in domestic demand as well as a higher number of international visitors driving up occupancy in hotels.

    Sectors negatively impacted during Ramadan

    • Banking: The Banking sector generally remains flat due to fewer working hours, a decline in demand for loans as well a lull in the market trading activity.
    • Construction: Construction sectors record a subdued performance during the month of Ramadan as most construction companies generally suspend work due to curtailed working hours as per the labor policy.
    • Cement: The spillover effect of subdued construction activity is felt across the cement sector, where average monthly sales volume dips by 32% during Ramadan i.e. 2.8 mn tons as compared with yearly average of 4.1 mn tons.

    Positive Impact of Ramadan

    Technical View: Suggest a likely bounce back in near-term

    The TASI traded with negative bias to end the day 0.74% lower at 9,275.27. As seen from the daily charts, the index has been retracing the previous uptrend over the past few days. Currently, it is approaching the 50% (9,190) and 61.8% (9,028) retracement levels. Hence, the ongoing correction would halt and market could consolidate near support levels, with likely short-term recovery. Hence, buying could emerge at those levels. Furthermore, RSI is approaching oversold zone, suggesting limited scope for downside. Considering technical studies, we are of opinion that the pullback in next few days cannot be ruled out. The next area of resistance is around 9,550 and 9,770.

    On analyzing the performance of the TASI on an extended time frame, we found it declined in December 2014 and posted a low of 7,225.83. Eventually, the index found support near the 50% retracement level of 4,068 & 11,159.50. Since, then it is trading above the said level. Monthly MACD line is hovering above the zero line suggesting medium-term trend to be positive. In addition, on the weekly charts, we are witnessing that the index is making higher high and higher lows. Hence, the medium-term trend will remain upward unless we get the close below the swing low of 8,700. Considering the extended timeframe, we believe buying could emerge at support levels.

    Technical daily chart in Ramadan

    Technical Weekly chart in Ramadan


    TASI Trend during 2009

    TASI Trend during 2010

    TASI Trend during 2011

    TASI Trend during 2012

    TASI Trend during 2013

    TASI Trend during 2014

    Key historical trends in Ramadan for TASI:

    • Decline over a few days before the start of the month of Ramadan
    • Continued to decline during the initials days of the month of Ramadan: TASI extended losses during the initials days. Sideways trend observed in the middle of the month
    • Buying emerged during the last few days of Ramadan
    • Downtrend reversed during the month of Ramadan and the index traded with positive bias ahead
    • Continued rise was witnessed during the initial days of the of the post Ramadan

    Considering the historical trends, we are of the opinion that the short-term reversal of the current downtrend would take place in the month of Ramadan. The index would trade with positive bias post Ramadan.

    Ramadan trading pattern in 2015 to follow historical trends

    We believe the activity in 2015 witnessed so far in the weeks prior to Ramadan is in-line with the historical pattern observed with volumes as well as the TASI showing a declining trend. Moving ahead, we expect trading pattern to follow normal historical trends seen during Ramadan. As such, we expect trading activity to gain momentum as we enter the third week of Ramadan when we believe TASI will likely report surge in index levels as well as volumes. This trend is further supported by the technical analysis as above, suggesting a near-term rise in TASI levels.