🌎 Chileans take to streets again | US PE investments down | the UK points fingers at Russia
Updated: Aug 12
July 17th, 2020
Has working from home become a bore? Only so much banana bread you can eat? Netflix has been completed? Not to worry, The Caribbean island nation or Barbados is on a hunt for remote workers, offering yearly visas to foreign workers in an attempt to boost its economy. Who wouldn’t rather take their lunch breaks on the beach with a piña colada?
Did You Know...
Barbados is currently the 174th most populated country in the world with 287,000 people.
Can you name the 3 countries with the smallest population?
Yes 007 all of them...
From finding the COVID-19 vaccine formula to interfering in British democracy, Russian cyber hackers seem to have no limits according to the UK. ¨Footprints¨ of Russian spies were detected in 19 vaccine researches, which are being developed by UK, US and Canadian organizations.
The Russian hacking group called APT29 - or as they are known in some softer circles "Cozy Bear" - not only limits its activity in stealing healthcare intellectual property, but also makes efforts to target government diplomatic, think tank and energy companies. Sounds like they are getting a little too cozy to us.
However, Russia has denied responsibility, obviously. According to a spokesman for President Putin, the Russian government does not have information about who may have hacked into pharmaceutical companies and research centres in the UK, nor in other countries.
To complete the accusations package, the UK foreign secretary has said Russian actors “sought to interfere” in the 2019 UK general election as sensitive government documents relating to the UK-US free trade agreement were illicitly acquired prior to the election and disseminated online via the social media platforms.
Although ministers said that in no way could the disinformation of Russia affect the last election, in 2016 the same British ministers made strong allegations of a certain Russian influence in the referendum that year.
Apparently cyber-attacks will not stop there, it is better for the UK government and companies to update their “antivirus” software more frequently.
Russia and Opec may slowly lift oil production bans as recovery takes shape. OPEC basket is back above 43 per barrel, any currency gains have been nullified by the negative press Russia has been facing. GBP has slowly been gaining ground against the USD. Buoyed by optimism around a 30bn+ stimulus package targeted at the aiding British restaurants and staving off unemployment.
GBPUSD fairly volatile pair at nearly 9%/annum. Fortunately, hedging costs are negligible, < .25% favoring selling GBP.
USDRUB is very volatile, nearly 14%/annum. Hedging costs are still, about 4%, favoring selling USD.
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Riots in Chile hitting stocks
Earlier this week, thousands of Chileans went back to the streets in Santiago to protest against the Government, nothing new there right. However, the protest soon turned to riots amid increasing unrest surrounding President Piñera’s attempt to lower house members and senators from the parties of the ruling coalition to vote against the bill that allows Chileans to withdraw the 10% of their savings that remain controlled by the repudiated Pension Fund Insurers (AFP).
As you can imagine the markets didn’t act too kindly to this news with the country's main stock index falling by more than 3%.
A bit of background - The current pension system started operating on 1 May 1981 amid the Augusto Pinochet dictatorship, since then, are private companies that control pensions in this country. Once this model has already been cited as an example to be implemented in all neighboring countries, in 2016 nationwide protests demanded a major reform to the privatized pension system.
Late last year, Chile watched the most violent riot since the country's return to democracy in 1990, where the pension system was at the centre of mass protests.
Since then, over the last two years, Chilean protests have taken place for different reasons, such as Santiago Metro's subway fare, the increased cost of living, privatisation and inequality.
Although the repeated protests scratch political stability and give strength to social movements, the country's currency remains the strongest among its peers, such as Brazil, Mexico and Colombia.
Thus it is worth noting that the Chilean peso has been supported in recent years largely by the copper international price, which has exhibited a high correlation with the mineral. Copper takes the position of the largest exported material out of Chile. Thus, any variation in copper demand or supply directly affects the value of the Chilean peso against the US dollar.
Copper price vs. Chilean Peso
The Chilean peso is quite volatile, 13.4%/annum. Fortunately, Hedging costs are essentially zero (fwd points for one year = 3!)
The US is no longer the center of the PE universe
Hear ye, hear ye… the US is no longer the only place for investors. Showing an interesting shift in investor activity, firms outside the US announced $143B in deals, on track for the highest full-year proportion in 20 years. But what does that really mean...
The value of all US M&A fell 50% in H1 from a year ago; while Europe saw an increase from 68 in H1 2019 vs 80 in H1 2020.
The proportion of investments outside the US was 60% in H1 2020, with the majority in the EU, followed by APAC.
The long-term trend is for larger deals outside the US, says Scott Moeller, M&A Research at the University of London.
According to Preqin, private equity firms started 2020 with the highest level of cash on hand; dry powder was nearly $1.5Trillion at the end of June.
To understand why the private equity opportunity in Europe has grown substantially and has become a significant source of finance we need to step back and look at the first building block, which is the single currency.
The euro created a more competitive environment, which also helped to foster cross-border transitions. After that, the abundant and cheap capital available in the market has allowed institutional investors to leverage their positions and seek more attractive investments above-market average returns.
A single currency and access to cheap capital have been strong enough to catalyze substantial new investments in private equity, even with such a low sentiment towards the general economic situation (Covid-19 pandemic, Brexit, geopolitical uncertainty between the US and China, Turkish economic crisis and so on).
According to a recent study from CaixaBank and IESE Business Business School, both Spanish organizations, 3 out 5 start-ups located in the Iberian Peninsula, have grown 196% between 2018-2019. Much of this figure is the result of the greater participation of private equity and venture capital funds in both countries, where such firms are fundraising from investors in Asia-Pacific and North America.
Emerging markets have managed to join the party as well, as private equity firms are largely putting risk back on the table, taking advantage of low priced assets and strong legal regulatory frameworks.
Although many countries such as Brazil and Mexico are somewhat lost in controlling the coronavirus expansion, as well as in political governance. Nevertheless, some long-term institutional investors are sticking with emerging markets, and even committing more capital meaning emerging markets remain very attractive.
One point to keep in mind is that Trump recently pushed through legislation to speed up the process for more US infrastructure projects by weakening the 50-year-old National Environmental Policy Act reducing the “mountains and mountains of red tape”.
EURUSD reached a one year high recently, perhaps reflecting its effective control of COVID and resulting in minimal lasting effects on its economy. EUR is not terribly volatile, only 7%/annum. Hedging costs are relatively high at about 1%/yr.
In Other News
Currency Heat Map
This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.
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Quiz of the week
Pitcairn Islands (UK): 50
Cocos Keeling Islands (Australia): 555
Vatican City: 825