Quantitative Tightening and Capital Flows to Emerging Markets

In its May 15th meeting, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve (Fed) lifted its benchmark policy rate by 0.75% to 1.50%–1.75%, the most significant increase since 1994. The central bank also signaled an additional increase of 0.75% ahead. FOMC members also raised the median projection for the Fed funds rate to a range between 3.25% and 3.50% next year.

In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed vigorously in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening" (QT).

How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets (EM)?

From QE to QT

QE corresponds to large-scale asset purchases by central banks, typically of long-term government debt but also private assets, such as corporate debt or asset-backed securities. QE has  primarily happened in unconventional circumstances, when short-term nominal interest rates are  meager, zero, or even negative. It has been implemented during periods of crisis to provide liquidity and maintain a smooth market functioning.

The Bank of Japan began a QE in 2001. Then, during and after the 2008 global financial crisis, QE became much more widespread, with central banks in the U.S., the U.K., the euro area, Switzerland, and Sweden joining the band. QE aligns with forward guidance and negative nominal interest rates as an unconventional monetary policy action. .

Conventional monetary policy corresponds to establishing the target for the short-term nominal interest rate, with that interest rate target depending on observations regarding aggregate economic performance. Typically, the central bank’s nominal interest rate target is expected to go up if inflation exceeds the central bank’s inflation target and to be lowered if aggregate output - for instance, real gross domestic product (GDP) – comes down below what is deemed to be the economy’s potential.

However, limits to how low the short-term nominal interest rate can go may appear on the way. Central banks in the euro area, Sweden, Denmark, and Switzerland have gone down to negative short-term interest rates. In the U.S., this lower bound has been taken as zero, as was the case in the U.S. at the end of 2008, during the financial crisis, when the Fed resorted to unconventional monetary policy, including a series of QE programs  afterward.

Figure 1 shows the evolution of total assets held by the Fed since then. The magnitude of QE programs can be gauged by noticing that the total Fed assets increased from 6.0% of U.S. GDP in the fourth quarter of 2007 to 23.5% of GDP in the first quarter of 2017. It reached around US$ 4.5 trillion at the end of the Q3 in October 2014, after which the level was maintained as the Fed reinvested (or rolled over) bonds as they matured.

Then, in September 2017, the Fed announced an upcoming shift to QT, when it would reduce its balance sheet not by selling bonds but by slowing the reinvestment of maturing bonds. After slightly shrinking its balance sheet, QE returned in September 2019 as a reaction to the liquidity crisis happening in the markets of overnight repurchase agreements (or "repos"). These are short-term loans between financial institutions. They experienced a sudden and unexpected spike in interest rates, and the Fed moved in to avoid contamination of the rest of the financial system.

The pandemic financial shock led to a robust response by the Fed. Between March 2020 and March 2022, the Fed bought monthly US$80 billion of Treasury bonds and US$40 billion of mortgage-backed securities. Asset holdings in the Fed's portfolio more than doubled in this period, from US$3.9 trillion at the beginning of the period to US$8.5 trillion in May of this year, corresponding to 18% and 35% of GDP.

[caption id="attachment_22285" align="aligncenter" width="800"] Figure 1: Assets Held by the Federal Reserve (US$ trillions). Source: Smith and Duguid (2022).[/caption]

Meanwhile, the average maturity of the assets in the Fed’s portfolio became much higher than before the global financial crisis, with an increased share of long-maturity Treasury securities and mortgage-backed securities. In all these QE programs implemented  worldwide during and after the global financial crisis, central banks seemed primarily focused on how the type and quantity of asset purchases would affect financial market conditions and, ultimately, inflation and aggregate economic activity—but doing it as a direct intervention on longer-term assets. During the pandemic crisis, some EM implemented some QE (Canuto, 2020 a).

As shown in Figure 2, U.S. QE programs started at moments when U.S. 10-year government bond yields descended drastically. By buying medium- and long-term assets, the Fed aimed to raise their prices and yields. The counterpart of QE acquisitions is larger net reserves in the private sector.

[caption id="attachment_22286" align="aligncenter" width="800"] Figure 2: U.S. 10-Year Government Bond Yield and QE. Source: Loane (2022).  [/caption]

Now, given the current overheated labor market conditions and inflation well above the target, the reduction in the Fed's balance sheet will correspond to a gradual reversal of that counterpart in liquidity as a reinforcement of interest rate hikes.

Figure 3 provides a glimpse of where the several QE programs implemented by major developed economies have led their central banks’ balance sheets. Central bank balance sheets of emerging economies also went up  due to drying out domestic liquidity impacts of their accumulation of foreign-exchange reserves (Canuto and Cavallari, 2017).

[caption id="attachment_22287" align="aligncenter" width="800"] Figure 3: Central Bank Balance Sheets of Advanced Economies. Source: Loane (2022).  [/caption]

For the U.S. Fed QT, it will suffice that those funds from maturing securities are not reinvested. The Fed set a monthly cap of US$60 billion of Treasury bonds and US$35 billion of mortgage bonds for balance sheet shrinkage starting in September of this year, starting this month until August with half those amounts.

Under that plan, the Fed's balance sheet is expected to shrink by around $520 billion this year. It will still enter 2023 well above the 20% of nominal GDP where it was before the pandemic. But the rate of decrease of US$ 1.1 trillion a year starting in September will have a corresponding decline in the liquidity – bank reserves and deposits – available in the economy.

How complementary – or substitute – can interest rate and central bank balance sheet policies be?

How complementary will base rate increases and QT be  concerning longer interest rates that affect decisions underlying aggregate demand (private sector investment and consumption) and thus inflationary stabilization? QE and QT are seen to tend to have a direct impact on longer interest rates. In principle, they converge with policy rate decisions on short-term interest rates to manage aggregate demand, even  though different channels.

After all, the policy rate and balance sheet tools influence the economy primarily through their effects on the medium- and longer-term interest rates that drive economic activity. Policy rate actions and communications  affect the cost of short-term borrowing and expectations about the path of short-term interest rates. Balance sheet policies primarily influence the term premiums embedded in medium- to longer-term yields by changing the supply—current and expected—of longer-term securities held by the public.

As they are complementary, the two tools might also be taken as substitutes in terms of their ability to affect medium- and longer-term interest rates, employment, and inflation when lower bounds on policy rates are not binding. Put it another way: could a central bank economize on interest rate hikes (decreases) by using QT (QE)?

Crawley et al (2022), from the Federal Reserve, have recently provided an exercise of translating balance sheet reductions in terms of equivalent increases in the path of the federal funds rate that would lead to similar macroeconomic outcomes:

“(…) a one-time permanent reduction in the Federal Reserve's holdings of 10-year equivalent Treasury securities equal to 1 percent of nominal GDP raises the term premium on a 10-year Treasury security by about 10 basis points, all else equal. In the model, this amount of policy tightening can also be achieved by raising the average expected path of the federal funds rate over the coming decade by about 10 basis points. Together, these relationships provide a simple rule of thumb for the substitutability between balance sheet reductions and policy rate hikes in the model when the economy is away from the ELB [Effective Lower Bound]. However (…) the translation of dollar amounts of balance sheet reductions into equivalent policy rate hikes depends on the evolution of the size and maturity composition of the balance sheet. (…) there is significant uncertainty regarding the transmission of balance sheet and policy rate actions to medium- to longer-term interest rates, as well as the transmission of the resulting yield curve movements to the broader economy (…) Furthermore, there is some evidence that increases in longer-term interest rates may have smaller effects on macroeconomic outcomes when they originate from increased term premiums than when they originate from increased expectations of the policy rate.”

By their simulations, shrinking the size of the Fed balance sheet by approximately US$ 2.5 trillion over the next few years is equivalent to lifting the federal funds rate by just over half a percentage point.

QE (QT) are expected to impact the yield curve flatter (steeper) as the central bank purchases (sells, or not buy) long-term assets. Ultimately, it all depends on how private agents use signals to project future central bank decisions on interest rates. In 2013, all it took was a reference by then-president Ben Bernanke that a reduction in the pace of QE underway was being considered, for a taper tantrum to occur, with markets anticipating a sharp rise in basic interest rates, with immediate effects on asset prices. In turn, between the beginning and the end of the first QT – light and brief – in 2017, the premiums on 10-year Treasury bonds fell.

This time, however, it is possible to assume that the Fed wants the instruments working in earnest in the same direction of containing demand. Doubts concern the pace and extent of the tightening, both about base rates and the size of the Fed's balance sheet at the end of QT. After all, everything will depend on how employment and inflation behave along the way, considering the inevitable lag between monetary policy decisions and their effects on the economy. However, as Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, has recently said, central banks have moved “from whatever it takes to whatever it breaks”.

There is another component in the evolution of liquidity that maintains a relative autonomy –and potential rebellion– about what monetary authorities formulate, even if conditioned by them: bank credit. In addition to the liquidity created/destroyed by the Central Bank, commercial banks also create money via the bank multiplier, depending on how idle or not they decide to leave their reserves. Banks create money when they lend or acquire an asset. Central banks act on reserves, but what is made of them depends on the banks' decisions on how much use them.

Banks in the United States have created a lot of money in the recent past. Since the beginning of the pandemic, bank credit grew by US$ 1.5 trillion in 2021 and; since it has been expanding at a pace not seen before the global financial crisis in 2008. One may expect them not to mitigate the impact of QT, but rather to enhance it. But how much they will do is an open variable.

Another variable in the equation is the values of financial assets. Market-valuation of assets in bank portfolios makes those asset prices transmittable to bank credit via capital restrictions and other decision rules regarding the volume of their operations.

Tighter liquidity conditions and expected interest rate hikes have underlain the fall in equity markets this year, particularly in the case of (technology-related) long-duration assets that have received high-prices relative to current earnings because of extraordinary earnings expected in the future. Higher expected interest rates in the United States have increased discounts on such future earnings.

Share values have melted (Figure 4, left side), whereas riskier bonds have faced stiffer risk premiums (Figure 4, right side). The selloff in US bond and stock markets in recent months has led to a substantial write down in balance sheet values: close to US$ 16 trillion, 60% of 2019 GDP. The recent deterioration of conditions in the real estate market, where a substantial part of the credit goes, tends to reinforce a cooling of bank credit as potential reinforcement of QT.

[caption id="attachment_22288" align="aligncenter" width="800"] Figure 4: Prices-to-Earnings and Bond Yields[/caption]

Financial asset values also affect the target of monetary policy through their so-called "wealth effect" on aggregate demand. In fact, it can even be said that in recent decades the economic cycle in the United States and other advanced economies has been strongly conditioned by what happens in their financial sphere (Canuto, 2021).

Rising interest rates, QT and falling stocks are consistently pointing in the direction of economic slowdown and, tentatively, declining inflation. Until then, the global high inflation shock has led to a global interest rate shock (Canuto, 2022a). Even with different magnitudes of effects, QT adds itself to policy rate increases to tighten financial conditions, change risk evaluations, and impact capital flows to emerging markets.

Capital flows to emerging markets

How have tightening global financial conditions affected capital flows to emerging market economies? How likely is a repeat of the 2013 taper tantrum or the May storm of 2018? How about the dollar appreciation, which is reckoned as painful for emerging markets with significant shares of US-dollar-denominated liabilities (Canuto, 2020b).

The situation tends to be challenging for emerging markets when, like now, the tightening of global financial conditions is driven by concerns about inflation or changes in risk sentiment.  When interest rates in advanced economies go up because of excessive economic growth, the trade channel of transmission may compensate the financial one, which is not the case now. The nature of tightening will make a difference – whether it is orderly or accompanied by market turbulence, including episodic tantrums in US dollar funding markets.

And the global interest rate shock has been accompanied by capital outflows from emerging markets (Figure 5). While long-term government bond yields rose across advanced economies (left side) because of tightening financial conditions and reflecting augmented risk aversion, outflows from emerging markets took place – as captured by the Institute of International Finance (IIF)’s high-frequency flow tracking across the world’s most significant EM (right side). According to Brooks et al. (2022), U.S. 10-year real Treasury yields moved from -1.1% at the end of last year to currently positive 0.7%, a higher jump than during the 2013 “taper tantrum” (Figure 5, left side).

[caption id="attachment_22289" align="aligncenter" width="800"] Figure 5: Global Interest Rates and Emerging Market Capital Outflows. Source: Brooks et al. (2022).[/caption]

By the end-May, close to US$ 36bn had flowed out of emerging market mutual and exchange-traded bond funds since the start of the year. Equity market flows have also gone into reverse since the beginning of May. The picture on flows to local-currency bonds has been diverse and uneven.

In the case of China, Covid and geopolitics – after the Russian invasion of Ukraine - seem to have triggered a sharp sell-off of stocks earlier this year, after rising sharply in 2020-21. But investors have started to return gradually in the end of May.

It should be noted, however, that non-portfolio flows (foreign direct investment and loans) have exhibited a higher resilience (Figure 6). Furthermore, more broadly, as remarked in a recent report by JPMorgan economists (Aziz et al, 2022), looking only at net capital flows may lead to a wrong underestimation of capital inflows relative to pre-global financial crisis, as resident outflows have risen since 2013 in search of risk diversification. Portfolio flows to EM have shrunk, as well as bank and corporate external loans, while foreign direct investments remained strong.

[caption id="attachment_22290" align="aligncenter" width="918"] Figure 6: EMX Monthly Net Capital Flows[/caption]

Looking at those flows from the standpoint of the emerging markets’ vulnerabilities, the picture looks less gloomy than in previous situations of outflows. Projected current account deficits in the 12 months ahead are certainly small by historical standards. Furthermore, fiscal deficits have not fully normalized yet, but many countries have announced large cuts soon.

Many emerging markets responded to local impacts of the global inflation shock before advanced economies and current interest rate differentials tend to mitigate the effects of interest rate increases in the latter. There are though emerging markets where interest rates remain exceptionally low – including negative real levels in some cases.

Here diversity comes to the fore, and one needs to go on a case-by-case basis. On one extreme, we have frontier market economies that are overly indebted and importers of food and energy (Lanaual al.l, 2022). Sri Lanka may have just been a canary in the coal mine, signaling a wave of incoming debt defaults and restructuring, as the IMF and the World Bank have warned about. Over 20% of emerging market bond issuers have debt trading in the distressed territory.

On the other extreme, more favorable, several emerging markets have boosted reserves stocks there and strengthened current account positions relative to the past. At the end of last year, 58 percent of EM were estimated to have international reserves exceeding 100% of the IMF’s adequacy metric. Commodity exporters have slightly improved their trade balances, GDPs, and public revenues with the commodity price shock (Canuto, 2022b).

The “original sin” of currency mismatch in the case of public debt is not as a deep sin as in the past, despite the outflows from EM local currency debt last year. Increased private savings during the pandemic have even facilitated a substitution of foreign creditors by domestic investors in  acquiring domestic public debt.

Private non-financial debt in foreign currency relative to the size of the economy varies considerably across countries, and some have significant exposures, particularly on the corporate side. Turkey remains like in its “fragile 5” times and Argentina has been out since its default. But they are not representative.

Overall, the point is that one must rely on a country-by-country basis– looking at their global trade and financial linkages - when analyzing risks/returns in emerging markets along with the  ongoing perfect storm (Canuto, 2022a). However, overall, the global environment – including QT and interest rate hikes in advanced economies, accompanied by global economic deceleration – is bringing headwinds to capital flows and economic growth in emerging markets.

References

Aziz, J.; Marney, K.; and Jain, T. (2022). “EM capital flows: whatever gets you thru the night”, in JPMorgan, Global Data Watch, June 17.

Brooks, R.; Fortun, J.; and Pingle, J. (2022). Global Macro Views – The Global Interest Rate Shock and EM Outflows, Institute of International Finance (IIF), June 16.

Canuto, O. (2020a). Quantitative Easing in Emerging Market Economies, Policy Center for the New South, November.

Canuto, O. (2020b). Why a Weaker Dollar Might Be Good for Emerging Markets? Policy Center for the New South, December.

Canuto, O. (2021). U.S. Bubble-Led Macroeconomics, PB-21/29, August.

Canuto, O. (2022a). Emerging Economies, Global Inflation, and Growth Deceleration, Policy Center for the New South, PB-30/22, April.

Canuto, O. (2022b). Biggest Commodity Price Shock in Fifty Years, Policy Center for the New South, May 6.

Canuto, O.; and Cavallari, M. (2017). The Mist of Central Bank Balance Sheets, Policy Center for the New South, PB-17/07, February.

Crawley, E.; Gagnon, E.; Hebden, J.; and Trevino, J. (2022). Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion, FEDS Notes. Washington: Board of Governors of the Federal Reserve System, June 03.

Lanau, S.; Figueroa, M.P.; Fortun, J.; and Hilgenstock, B. (2022). Economic Views – External Risk in Frontier Markets, Institute of International Finance (IIF), June 7.

Loane, K. (2022). QE: Not Cause, But Symptom, Fathom, June 17.

Smith and Duguid (2022). Can the Fed shrink its $9tn balance sheet without causing market mayhem? Financial Times, April 7.

Original Post

Abstract

In its May 15th meeting, the Federal Open Market Committee of the U.S. Federal Reserve (Fed) lifted its benchmark policy rate by 0.75% to 1.50%–1.75%, the biggest increase since 1994. The central bank also signaled an additional increase of 0.75% ahead. FOMC members also raised the median projection for the Fed funds rate to a range between 3.25% and 3.50% next year.

In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening".

How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?

About the Author

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a professorial lecturer of international affairs at the Elliott School of International Affairs - George Washington University, a nonresident senior fellow at Brookings Institution, a professor affiliate at UM6P, and principal at Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.


Modern Modem Mobsters are Costing the World a Fortune

The internet has come a long way since the good old days of dial-up. It was slow but relatively safe. What started as the shared domain of government agencies and universities has morphed into an all-encompassing phenomenon — and a virtual playground for cybercriminals.

Even in the least developed countries, 27 percent of the population has some access to the internet; in developed countries access is almost universal, and 90 percent of people are active internet users.

A growing data trove to plunder

Data continues to compound, necessitating new metrics: terabytes, petabytes, exabytes, zettabytes and yottabytes. The global web of connectivity touches on every aspect of modern life — and generates 2.5 quintillion bytes of data each day. (To put that in perspective, there are eight bits, the lowest unit of memory storage, in a byte. Most people measure their consumption in gigabytes: 1,000 megabytes or a billion bytes. A quintillion equals a million trillions.)

Information is power, and so much data is a potential trove to be plundered by anyone with a little tech savvy. Moral considerations don’t come into it.

Cybercrime history

The first computer “worm”, created by Bob Thomas in 1971, was pretty benign. It bounced between computers, infecting screens with the playful message: “I’m the creeper: catch me if you can.” The first Denial-of-Service (DoS) attack was launched by Robert Morris a decade later. To raise awareness of cybersecurity risks, he created a worm that slowed down the internet — with expensive results; estimates of the damage caused rise to $10m.

The earliest recorded ransomware attack happened soon after. Joseph Popp created malware (malicious software) known as the AIDS Trojan. He mailed out more than 20,000 floppy disks claiming to contain information on AIDS research. But when researchers inserted the disks, the malware locked their files and demanded a $189 ransom be sent to a Panama PO Box. The attack was poorly designed and relatively easily reversed, but nonetheless, years of research was lost.

Ransomware and pay-outs skyrocketing

Over the years, attacks have gone from a trickle to a flood. Hackers have upped the ante. Paid ransoms quadrupled from 2019 to 2020, reaching a record $350m. Some believe that figure falls shy of the mark. Most organisations prefer not to publicise attacks for fear of negative press or lawsuits.

The World Economic Forum (WEF) warns that growing digital dependency has intensified cyberthreats — more so since the start of the pandemic. It reports a surge in malware and ransomware attacks, up 358 and 435 percent, respectively.

The WEF Global Risks Report 2022 explains how dependency on digital systems has altered society: “Over the last 18 months, industries have undergone rapid digitalisation, workers have shifted to remote working where possible, and platforms and devices facilitating this change have proliferated.

“At the same time, cybersecurity threats are outpacing societies’ ability to effectively prevent or respond to them. Lower barriers to entry for cyberthreat actors, more aggressive attack methods, a dearth of cybersecurity professionals and patchwork governance mechanisms are all aggravating the risk.”

Colonial Pipeline vs DarkSide Hackers

Colonial Pipeline, which supplies nearly half of consumer and airline fuel for the east coast of the US, suffered one of 2021’s biggest ransomware attacks. A hacker group known as DarkSide Hackers exploited an exposed employee password for a VPN (virtual private network) account. Colonial shut down the pipeline to prevent the infection from spreading, notified the appropriate government agencies, and brought in a specialist to investigate. The hackers got away with a $5m crypto payment before providing Colonial with the decryption key.

The FBI encourages organisations not to pay to avoid copycat attacks, and prevent the ransom being used for illicit activities. There’s no guarantee that the hackers will deliver on their promise, either. Of the 5,600 mid-sized organisations surveyed by cybersecurity specialist Sophos, 66 percent were hit by ransomware in the last year. Nearly half paid the ransom — but only four percent got everything back.

Ransomware-as-a-Service

Echoing the software-as-a-service (SaaS) model popularised by Adobe and Microsoft, hackers have begun to offer ransomware-as-a-service (RaaS). In 2020, two-thirds of ransomware attacks analysed by cybersecurity firm Group-IB used a RaaS model.

Cybersecurity consultant Jake Williams says that the rise in attacks comes with an increase in focus. Hackers develop ransomware programmes and set up online shops with customer service for the cybercriminals and their victims. It’s a smooth user experience, with plug-and-play RaaS options available in a one-click purchase and a help desk walking victims through the steps to convert money into cryptocurrency. Williams quipped: “I wish my internet service provider had customer service like these guys do.”

Crypto, Cybersecurity and Cybercrime

The Ransomware Task Force (RTF), powered by the Institute for Security and Technology, links the rise of cryptocurrencies with the explosion of ransomware. Crypto is the hackers’ preferred payment. Because of lax legislation, crypto markets have developed with little regard for due diligence or KYC (know-your-customer) standards. Practices like “chain-hopping” and “mixing services” help criminals obfuscate funds despite the safeguards of the blockchain. The RTF advocates for greater transparency, collaboration and regulatory consistency in crypto.

SMEs pay high costs as a prime cybercrime target

An IBM study has found that SMEs are the target of 62 percent of all cyberattacks, around 4,000 each day. The cost of a data breach hit a record high in 2021, with surveyed companies spending an average of $4.24m per incident. That’s a hefty expense for any big business, and for smaller players it can be the kiss of death. A study by the National Cyber Security Alliance found that 60 percent of SMEs go out of business within six months of a data breach. Despite those alarming figures, many SMEs have patchy — or even non-existent — IT protection plans.

“Higher data-breach costs are yet another added expense for businesses in the wake of rapid technology shifts during the pandemic,” said Chris McCurdy, the vice-president and general manager of IBM Security. “While (those costs) reached a record high over the past year, the report also showed positive signs about the impact of modern security tactics, such as AI, automation and the adoption of a zero-trust approach — which may pay-off in reducing the cost of these incidents further down the line.”

Cybercrime threatens national security and public health

According to the RTF, ransomware poses significate risks to national security. It threatens critical infrastructure and endangers public health. It can take cities by siege, shutting down municipal services and diverting vital public resources. The City of Atlanta paid a $50,000 Bitcoin ransom in 2018 — but estimated the total cost to exceed $2.6m. The City of Baltimore refused to pay the ransom in a 2019 attack, but it took weeks — and more than $18m — to restore the systems.

The healthcare industry has been under increasing threat from cybercriminals, second only to the SMEs. Hackers exploited vulnerabilities in the pandemic, hitting 560 hospitals, medical centres and healthcare facilities in the US in 2020. The University of Vermont Medical Centre (UVM) was forced to furlough employees and delay medical treatments in October 2020. The UVM president projected the cost of a full system recovery at $64m.

Cybersecurity preparation, practice and response

Jamil Farshchi, the chief information security officer of Equifax, stresses the importance of preparedness: “If organisations go through the steps and they practise with their board and executives, then when bad things happen … you’re able to lean in and solve them in a very rapid fashion.”

There are some basic protocols for all companies. All systems should be backed up at regular intervals on a virtual (cloud) and/or physical (USB drive) database. Software and hardware should be checked for updates; patches are released as new vulnerabilities are uncovered. Passwords should be unique to each user and site, not recycled across multiple pages and providers. Multifactor authentication and antivirus filters help to protect networks from external threats.

Comprehensive cybersecurity guidance could help employees to close any chinks in the company armour and present a unified, high-alert front. Companies could offer training to staff members with the interest and aptitude to level-up skills. This would allow companies to build a cybersecurity team from the ground up, with internal promotion programmes to develop skilled tech workers — currently in short supply.

The RTF laid out a framework to deter ransomware attacks and disrupt their “business models” to cut their profit margins — which are at 98 percent, according to some estimates. The RTF aims to help organisations prepare for, and respond to, ransomware attacks.

“There are only two types of companies,” according to Robert Mueller, the former director of the FBI and special counsel on Russian interference in the US election process. “Those that have been hacked and those that will be hacked.”

According to a 2022 report by Grand View Research, global cybersecurity services will be worth $192.7bn by 2028 — and $500.7bn by 2030. It’s time to find a competent partner to help implement, practise, and maintain a good defence strategy.


Generali´s Josef Beneš Takes Decisions with Care Based on a Century of Experience

[caption id="attachment_23201" align="alignright" width="300"] CEO: Josef Beneš[/caption]

The chief executive of Generali Investments CEE, Josef Beneš, has held positions in the World Bank and London’s Standard Bank, and has investment experience in the Czech Republic, the US, China and the UK.

“We are the region’s leaders in the value of assets under management,” he says. “We currently have assets of over €16bn in the Czech Republic, and similar amounts in other countries. We consider our company the central and Eastern Europe trendsetter — and we constantly provide our clients with new opportunities.”

As well as his leadership role at Generali Investments, Beneš acts as chief investments officer for Generali CEE Holding, overseeing the group’s investments in 12 countries. He has held his chief executive’s position since 2014, and prior to his time at Generali he headed two other major Czech investment companies.

"We consider our company the central and Eastern Europe trendsetter — and we constantly provide our clients with new opportunities."

- CEO Josef Beneš

He studied at the Prague University of Economics and Business and the Columbia University of New York.

Beneš has represented the Czech Republic in beach volleyball and is the vice-chair of the Czech volleyball federation. He is also the vice-president of The Committee of Good Will — Olga Havel Foundation.

Fund Portfolio Management

Five portfolio managers, with 105 years of collective experience, oversee the funds of Generali Investments CEE.

Patrik Hudec has over 18 years of expertise in investments. At Generali Investments CEE, it is him who is responsible for the whole portfolio management department of investment funds. He also manages several funds - the Generali Gold Fund and the Generali Emerging Europe Fund among others.

Martin Pecka has worked in investments for 30 years and specialises in pharmacy and biotechnology. He manages 13 funds, including the Generali Fund of Oil and Energetics and the Generali Fund of Pharmacy and Biotechnology.
Daniel Kukačka has been with Generali Investments for 20 years and in the sector for more than 25. He is an expert on bonds and investments in global companies. He is responsible for the management of the Generali Fund of Global Brands and the Generali Corporate Bonds Fund.

“After all these years, I consider some of the funds I manage, especially the Generali Corporate Bonds Fund, as my children,” he says. “I try to make them the best they can be and hope that they will benefit the most people possible.”

Marco Marinucci focuses on sustainability and the ESG aspects of investments. He manages several funds, including the Generali Fund of the Living Planet and the Generali Fund of Sustainable Growth.

Toghrul Mammadov reinforced the team of portfolio managers in 2021 with specialisation in corporate shares.

“Apart from the flagship funds, Generali Investments CEE also offers thematic and sector funds that respond to current developments in society and the financial markets,” says Beneš.

“The development of modern technologies, economic and demographic developments, globalisation and the shift towards sustainability represent driving forces with considerable impact on the global economy.

“We create specific funds narrowly focused on such areas to complement standard dynamic investments portfolios.”

[caption id="attachment_23200" align="aligncenter" width="882"] Fund Portfolio Managers: Patrik Hudec, Martin Pecka, Daniel Kukačka, Marco Marinucci, Toghrul Mammadov[/caption]


Generali Investments CEE: Leading by Example, with Proximity to Clients and a Firm Sustainability Focus

Generali Investments CEE, the leading investment company in Central and Eastern Europe, draws on its experience to provide funds which are a perfect fit the region.

The company stays on top of latest trends but keeps its focus and emphasis on sustainability and the ability to respond to any situation.

With its expert team and proximity to customers and clients, Generali has maintained its status as the biggest CEE investments company despite the challenges of the pandemic and Russia’s invasion of Ukraine.

Since 1991, Generali Investments has been shaping the culture of the European investments as one of the founders of the Czech capital market association. With headquarters in Prague, the company is as close as possible to the financial markets of Central and Eastern Europe.
“We understand their local diversity and preferences,” says chief portfolio manager Michal Toufar, “but also their complexities and shortcomings. We believe that this knowledge is key to successful asset management.”

The growth of Generali Investments’ AUM has also been aided by the company’s partnership with Moneta Money Bank. The co-operation began in 2016 and rapidly grew with AUM currently amounting to almost €404 million; Generali Investments’s total AUM is impressive €16bn. The company also benefits from the support of the internal distribution network of Generali Česká pojišťovna, which regularly registers a particular interest in tranche products.

[caption id="attachment_23204" align="aligncenter" width="900"] Generali Investments CEE: Fund AUM (mil. EUR). Source: Generali Investments CEE[/caption]

Stability and Innovation

While the investments sector has been shaken by the pandemic and Russia’s invasion of Ukraine, Generali has continued to grow. It has always reacted promptly and aptly to the state of financial markets, broadening its portfolio with new tailor-made funds.

“This year, we have established a new secured fund in response to current conditions,” says Toufar. “The Generali Hedged Equity Income Fund offers the opportunity to invest in stable European companies with high dividend yields — while simultaneously providing a 100 percent hedge of the invested amount, as well as currency hedging.

“The fund met with enormous interest from our clients — during the two-month accumulation period, they invested more than €44.5m, making it one of the most successful tranches ever.”

Emphasis on Sustainability

Generali Investments CEE promotes climate action and sustainable investing. All the company’s flagship funds squarely support ESG principles. They comply with Article 8 of regulation on the sustainability-related disclosure for the financial services sector (SFDR) of the European Parliament and the European Council.

Generali Investments also offer specialised ESG-orientated funds, the Generali Sustainable Growth Fund and Generali Fund of the Living Planet. They focus on companies combining financial growth with social and environmental responsibility and good governance.

The Living Planet fund invests in companies in the fields of alternative energy sources, waste recycling, organic farming and water treatment. These sectors are all necessary to mitigate the climate change, and present exciting investment opportunities.

The basis for the successes Generali Investments lies in its analytics team: seven financial experts with more than a century of collective expertise. Their areas of specialisation include macro-economics, credit assessment, and stocks. The team covers all financial events of the CEE region. And as a part of the Generali Group, it can befit from the analytical findings of other members of the Generali analytical network — the work of 40 experts.

The Prague analytical team has been recognised for its prowess in predicting inflation and the GDP of the Czech Republic, and for the most precise prediction of exchange rates of central European currencies (Consensus Economics Forecast Accuracy Award, Thomson Reuters Analyst Awards).

Social Responsibility

Generali Investments CEE is active in charity and CSR. It has provided financial assistance to elderly citizens during the Covid-19 pandemic. “In addition to supporting organisations helping disadvantaged groups of fellow citizens, we are also involved in the global activities of the Generali Group, which connect non-profit organisations with the private sector through the Human Safety Net movement,” says Generali Investments chief executive Josef Beneš.

In harmony with this focus on sustainability, Generali Investments gives priority to projects focused on the environment. For several years, it has been a partner to the series of amateur Run Forests race events, at which the company promotes the benefits of recycling.

“Both social and environmental sustainability are of the utmost importance in all our activities,” concludes Beneš. “That’s why we offer not only the possibility of sustainable investments, but contribute in this way ourselves.

“As the region’s leader in investments, we hope that others will follow our example.”


Kathrein Privatbank: Investing Today in the Trends of Tomorrow — with Panache

For Kathrein Privatbank, 2021 was all about innovation. In addition to adopting a new brand identity, it worked intensively on expanding its product range.

[caption id="attachment_23118" align="aligncenter" width="900"] From left: Wilhelm Celeda Chairman of the Board Harald P Holzer Member of the Board Stefan Neubauer Member of the Board[/caption]

In troubled times such as these — overshadowed by war in Ukraine, supply chain problems, and inflation concerns — the bank’s individual asset management promises customised investment solutions. Professional risk management is paired with sustainable returns.

With the new Kathrein Private Markets Platform, clients receive digital access to private equity funds of renowned global providers — even in small volumes. The selection and compilation of funds is based on a strict selection process by the Kathrein Private Equity team.

Another innovation is the Kathrein Sustainable Global Megatrends equity fund. Based on sustainability criteria, investments are made in selected megatrends such as digitalisation, health, and urbanisation. The fund focuses on pioneers of the respective industries: investing today in the trends of tomorrow.

At Kathrein, the commitment to sustainability is intensive. The careful selection of securities is carried out in co-operation with partner ISS ESG. Not only are investments sustainable, but out of conviction, Kathrein “lives” ESG in-house.

The project of a company forest in Togo underlines this commitment. Almost 4,000 trees have been planted as a contribution to climate protection and job-creation in the region.

In turbulent times, actively managed funds pay off. This is the advantage provided by the portfolio management team, which boasts decades of experience: guaranteeing customised investments on behalf of clients.

Comparisons with the benchmark show the worth of this strategy. The Kathrein Global Enterprise equity fund, which focuses on defensive stocks, has performed strongly over the past 18 months. Its Mandatum 25, 50, 70 mixed funds were each in the top quartile in their peer group.

In times like these, a gold account also makes sense. The Kathrein gold account is managed like a securities account, where physical gold is stored. The advantage is that customers can pick it up at any time. Kathrein Privatbank also offers a wide range of certificates from worldwide recognised issuers. These are diverse, and offer income opportunities in any market situation.

Kathrein clients benefit from innovation, the highest investment quality, and professional risk management — in even the most challenging of environments.

For further information and risk warnings on the investment funds mentioned, please visit kathrein.at and click on "investment solutions".


Octa Investama Berjangka: The Remarkable Rise and Rise of an Innovative Indonesian Broker

Octa Investama Berjangka notes three main factors that have contributed to its success.

In the past decade, the burgeoning Indonesian economy has sparked interest among investors.

Octa Investama Berjangka’s founders were quick to spot the trend — and act on it. The broker, established in April 2020, swiftly raised a 500,000-strong trading community. As of May 2022, it is ranked the third Indonesian Forex broker by trading volume, according to ICDX.

Octa Investama Berjangka offers a range of trading instruments, including all major currency pairs, precious metals, and indices reflecting the state of economic affairs in significant world regions. Traders can analyse the market using fundamental or technical analysis tools and make financial decisions in the comprehensive MetaTrader 4 trading platform. Clients enjoy some of the lowest spreads in the market, and exclusive promotions including rebates and fixed-rate deposits.

In just two years of operation, Octa Investama Berjangka has seen a 265-fold increase in the volume of trades. The Jakarta-based company attributes its success to three main factors: security, transparency, and education.

Security

When it comes to investing, security is paramount. In Indonesia, the chief regulatory body that inspects brokerage companies and issues licences is BAPPEBTI (Commodities and Futures Trading Regulatory Agency). Octa Investama possesses a licence from the agency, as well as an Indonesia Clearing House certificate, ICDX certificate, and OTC broker certificate.

This certification demonstrates to Indonesian investors that the broker works only with accredited liquidity providers, guarantees the security of clients’ funds, and regularly undergoes thorough audits by BAPPEBTI.

According to regulatory requirements, Octa Investama Berjangka must keep the bulk of clients’ funds in segregated accounts with the Indonesia Clearing House. This guarantees the safety of the funds throughout each client’s trading experience.

Octa Investama Berjangka Transparency

This is a key feature of trusted financial companies. Octa Investama Berjangka clients can trace their accounts and transactions via the Clearing House. That ensures the highest level of transparency when it comes to personal funds.

Another reflection of this transparency is the presence of a physical office in Jakarta. The broker’s director, Rizky Arizona, elaborated: “For more than two years, Octa Investama Berjangka has been providing its clients with secure and uniquely transparent investment services.

“Any client can come to a real office, talk to the people in charge, and get information and advice. For us, maintaining a physical office is an opportunity to be closer to our clients — and serve their financial goals in a personal way.”

Education

Octa Investama Berjangka provides investment education and improves the financial literacy of the local community. One of the highlights of 2021 was an in-depth interview with its brand ambassador, financial expert Ryan Filbert. Gita Wirjawan, Indonesia’s former Minister of Trade —now active as an entrepreneur, investment banker, and philanthropist — personally conducted the interview.

Filbert organised a special project with Kompas.com, targeting the issue of financial literacy in 10 educational articles. In 2022, the broker launched a regular webinar series with in-depth takes on financial topics from industry experts.

As part of a separate educational initiative, Octa Investama and Filbert released a series of radio talk shows via the Smart FM network. The expert discussed ways in which investors could overcome challenges in financial markets.

To give something back to the community in which it works, Octa Investama Berjangka engages in charitable projects to advance education in Indonesia. In 2020, it financed and supervised the construction of a road near Bogor to connect students with their campus. In 2021, it funded the construction of a school library in the province of East Nusa Tenggara, in co-operation with the Happy Hearts Foundation. In 2022, it supported a school renovation project in Depok City, West Java province.

Perspective

Despite the challenges of the pandemic — during which Octa Investama Berjangka was established — the broker has had a remarkable growth rate, rising from the 50th-placed Forex broker in Indonesia to third in just two years.

The broker ascribes its success to the above factors, as well as to investors’ growing interest in the country. Octa Investama Berjangka's plans to expand its services to meet demand and satisfy these sentiments.


Massimo Falcioni: Reinforcing UAE’s Economic Diversification Away from Oil Trade in a Co-operative Way

CFI.co speaks with Massimo Falcioni, Chief Executive Officer of UAE Federal export credit company Etihad Credit Insurance.

[caption id="attachment_22295" align="aligncenter" width="900"] Massimo Falcioni[/caption]

Massimo Falcioni has led Etihad Credit Insurance (ECI), the UAE Federal export credit company, since its launch in 2018 with the mandate to reinforce the country’s economic diversification programmes and support its export and international trade and investment activities.

ECI has protected cash flows and eased SME access to trade finance, accelerating economic recovery during the post-pandemic era. Support for local business has enabled growth in non-oil trade for exports and re-exports, and the company boasts world-class industrial development.

ECI was founded to insure those UAE-based companies not associated with oil export and re-export against non-payment. The company protects investments outside the UAE against political risks, and supports corporate bidding for international tenders. It also plays a major role in the UAE’s strategic sector development, such as Industry Revolution 5.0, energy transition, and advanced technology.

“My leadership inspiration comes from the vision of His Highness Sheikh Mohammed bin Zayed Al Nahyan, president of the UAE,” CEO Massimo Falcioni told us.

“Brothers and sisters, said Sheikh Mohammed, “further diversifying our economy is a key strategic focus of our plans. It is, therefore, necessary to accelerate economic development efforts to continue building a leading global economy, to enhance our competitiveness, and to achieve the highest global rankings.”

The close association between export credit agencies (ECAs) has become crucial in the current economic cycle. Co-operation is key to navigating unprecedented challenges to global trade.

“I see a future of exponential growth for ECI business and organisation,” says Falcioni, “led by a more and more central role for government ECAs to fill the gaps of the private sector in trade credit insurance and the commercial banks’ trade finance accessibility and appetite.”

ECI has embraced, adopted and executed the UAE government’s legislation for economic reforms. The laws include some 40 amendments and put in place proactive frameworks to drive economic expansion.

These are also expected to attract more foreign direct investment and support the growth of SMEs to further diversify the economy.

During the pandemic, ECI helped a UAE manufacturer recover payments from a leading US firm that had filed for bankruptcy and restructuring. The business transactions were insured by Etihad Credit Insurance, ensuring a positive outcome.

“Our contribution to the growth of the energy and sustainability sector comes in line with the country’s Energy Strategy 2050,” notes Falcioni. The strategy aims to reduce the carbon footprint of power generation by 70 percent.

The firm has partnered with private and public entities such as Abu Dhabi Future Energy Company (Masdar) to establish political and commercial risk insurance solutions to improve bankability and attract cheaper capital to renewable energy projects.

The UAE also strives to enhance applications of nuclear technology beyond power generation, such as hydrogen as a clean fuel of the future for industry and transport. ECI has signed an agreement with Korea Trade Insurance Corporation (Ksure), the official export credit agency of South Korea, to boost investments in sustainable green energy.

“We no longer invest in coal or oil to help us reach carbon neutrality,” says the CEO. “However, we will continue to invest in gas as a transitional fuel.”

Falcioni believes in adapting to an evolving business environment. “The competence to overcome hurdles with experience and a futuristic vision is essential in being a global business,” he says.

There are many lessons he has learned from more than 35 years of experience. They include the importance of teamwork, ensuring stakeholder commitment, and communicating the company ambitions and strategy to the board of directors, management and employees. Others are:

Align teams across the organisation of ECI’s customer-based culture

Provide interactive and engaging education and learning interventions to help teams gain alignment and traction

Perform ongoing coaching to enhance individual and team competencies.


New York, New York Still has the ‘Welcome’ Mat Out, but it Helps if you’re Wealthy…

“If you can make it there, you’ll make it anywhere…” — but just what does it take to make it in the Big Apple? CFI.co trips through the realities of living in New York City with facts, figures — and a suggested city-centric playlist to keep you in the mood…

You'll need a job if you're planning to live in New York. Some of the world’s biggest corporations are here, along with some legendary institutions, such as the New York Stock Exchange.

Listen while you read with all the featured songs on our Spotify "Living in New York" playlist.

Track One: Welcome to New York — Taylor Swift

Keep those stars in your eyes for a while; reality can come a little later. Because yes, New York City is… wow. Just wow.

“Cosmopolitan” doesn’t even begin to cut it; this crucible of cultures and nationalities — 800 languages are spoken here — means the world is practically yours. Keep your options open, because the temptations are many — and getting side-tracked really is part of the fun.

But let’s not lose the thread; if you’re considering living in New York, you’ll be aware of its charms. Let’s look at what it’s like to move to, and live in, America’s most populous — and most densely populated — city.

Track Two: New York State of Mind — Billy Joel

To be blunt, living in New York is expensive. Or perhaps rich; it depends which way you look at it. There is certainly wealth here; the city squeezes a similar GDP to Russia out of an area 500 times smaller.

If (perhaps ill-advisedly) you’re heading to the Big Apple without a job, you’ll be heartened to hear that the employment market is generally vibrant for tech, finance, insurance, healthcare, real estate, fashion, journalism, mass media, and publishing. But despite its status as an international hub, the city has been relatively slow to bounce back from the pandemic.

While nationally, 90 percent of jobs have been regained, it’s more like 60 percent in New York. The local unemployment rate currently sits around nine percent (it’s less than four percent nationally). Along with all the investment in tech, the city has come to rely on three main sectors: tourism, hospitality, and retail. All were hard hit by Covid-19.

But don’t lose hope just yet, jobseekers; some of the world’s biggest corporations are here — HBO, American Express, Tiffany’s — along with 50 or so Fortune 500 companies, including JPMorgan Chase, McGraw Hill and Estée Lauder. Also present, of course, are some legendary institutions, such as the New York Stock Exchange, Nasdaq and the UN headquarters. The US might not have as much history as Europe, but it's creating its own as fast as it can.

New York is frequently divided into specialist boroughs; north-eastern Manhattan — aka Silicon Alley — is globally famous attracting tech and media start-ups. You might recognise some of the names: Google, Facebook (or is it Meta, now?), Apple, Robinhood, IBM... The city's also known as the world’s media capital, hosting CNN, NBC, The New York Times, Fox, Reuters, and Warner Bros. Hearst also has a presence in the city. The Wall Street Journal has its head office here, as does (perhaps obviously) The New York Times.

Bright lights, big city…

Track Three: New York I Love You but You’re Bringing me Down — LCD Soundsystem

You’ll want to find work, or get your start-up started-up, fast — because the cost of living in New York is 129 percent above the national average. And — it gets worse — that puts it in seventh spot in global terms. The other six cities must be eye-wateringly expensive, because the charms of New York City don’t come cheap. The crust you hope to earn may have many hungry hands reaching for it — so how much do you need to earn to avoid lying awake worrying about funds in the city that never sleeps?

Wise travel bloggers calculate these things for us online; one site advises that you’ll need more than $2,500 per month, or $35-$40,000 per year after taxes, just to get by. Another, less optimistic, New Yorker reckons you’ll need to make more than $11,000 a month, or $135,000 annually. The average income in New York City is about $63,998; the minimum wage is $15 an hour (but let’s hope that burger-flipping isn’t your game plan).

Track Four: Talkin’ New York — Bob Dylan

In a compact metro area shared by almost 19 million people, that icon of the American Dream, the motor car, doesn’t enjoy its usual status in NYC.

Residents are canny about local transport tips and tricks, and keen to share their knowledge, so buying, renting, or owning a car doesn’t need to be part of a migrant’s to-do list. The city subway is the largest rapid transit system in the world, with 472 stops that would take a full day to navigate. At less than $3 per ride (monthly tickets are cheaper still) taking the subway is a no-brainer. Everyone else in New York will be doing the same thing, mind, so prepare for a bit of a crush in rush hour.

[caption id="attachment_22320" align="aligncenter" width="1000"] While living in New York, you’ll want to see the sights, right? The Statue of Liberty and many others cost little or nothing.[/caption]

If you step away from the glitz and budget carefully, you can get away with modest cash reserves until you hit the big time. And it can be fun: enjoying genuine Cantonese or Italian (or Mexican or Malaysian or Nepali, for that matter) from small diners and restaurants tucked into alleys and side-streets is a true blessing of living in New York City.

You’ll want to see the sights, right? The Statue of Liberty, Carnegie Hall, the Brooklyn Academy of Music, art galleries (there are more than 500), theatres (on- and off-Broadway), museums — some of those things cost little or nothing.

Broadway excepted, of course…

Track Five: Fairytale of New York — Kirsty MacColl

There’s no getting away from the fact that New York rents are expensive. Half the average monthly salary ($5,500 after tax) is likely to go straight to the landlord. A one-bedroom apartment in the city centre will set you back more than $3,000 a month; living a little further out could bring that down to $2,000.

If you plan to live in New York and keep housing costs below $1,000 per month — something most New Yorkers will tell you is nigh-on impossible — it can be done. But you’ll be sharing your living space; consult Craigslist for roommates, and look for flats in cheaper areas such as Chinatown or Brooklyn.

Thinking of buying? Very brave; we wish you luck. Housing costs here are 369 percent above the national average, and that’s without factoring-in down payments, taxes, insurance and closing costs. Not surprising, then, that only around 30 percent of NYC residents own their homes.

Track Six: New York, New York — Frank Sinatra

We had to get Ol’ Blue Eyes in the playlist, singing the praises of the city during more innocent times. With spiralling gun crime and routine muggings, the US has developed a bit of a bad rap for safety in recent years.

Luckily, that reputation is ill-deserved in New York (statistically speaking, anyway). The streets — even for people walking alone — are considered safe in daylight hours, and only marginally worse after dark.

[caption id="attachment_22319" align="aligncenter" width="1000"] You'll be wanting some fresh air if you live in New York — Central Park isn’t even the biggest park in the city, it’s only fifth on the list[/caption]

So, you’ll be wanting some fresh air, too — and thanks to its green lung of Central Park, and other open spaces, that’s entirely possible. Central Park — sandwiched between the Upper East and Upper West Sides of Manhattan — isn’t the biggest in the city; it’s only fifth on the list.

Washington Square Park, in lower Manhattan, is a cool meeting spot with plenty of buskers and street music. Theodore Roosevelt Park, adjacent to the Museum of Natural History, and Manhattan’s Inwood Hill Park are great dog-walking spots. Pumphouse Park, in Brookfield Place, offers neat gardens and a great view of the Hudson River.

In summer, you’ll be sweltering; in winter, you’ll freeze. But year-round, the Big Apple has what it takes to blow your mind — and, if you’re not careful, your budget — on a daily basis.

New York, New York: it’s my kind of town. With some effort and tenacity, you can make it yours, too.


UNCDF: Growth Capital Plan to Assist the World’s Least-Developed Nations

The International Municipal Investment Fund and allied initiatives will support entities with the potential to make a real difference in frontier markets.

[caption id="attachment_22340" align="aligncenter" width="680"] UNCDF Executive Secretary Preeti Sinha and UN-Habitat Executive Director Maimuhan Mohd Sharif[/caption]

 The International Municipal Investment Fund (IMIF)

UNCDF and Meridiam signed an agreement to collaborate on the International Municipal Investment Fund (IMIF). The investment vehicle — the non-OECD sleeve of The Urban Resilience Fund — has a focus on developing countries, and was launched by Meridiam and the Rockefeller Foundation. It will help to develop, finance, build and operate sustainable and economically sound infrastructure projects that have a critical role to play in adapting and mitigating urban climate change.

The IMIF leverages concessional and commercial capital to increase the financing capacity available for urban infrastructure. It provides cities with support for the development and delivery of urban resilience infrastructure.

“This agreement is a further step towards our global ambition to meet the critical need for urban infrastructure that is sustainable, affordable and prepared for long term climate change while contributing to the resilience of cities,” said Meridiam founder and CEO Thierry Deau.

Preeti Sinha, Executive Secretary of UNCDF, said the IMIF would provide access to impact capital for cities and local governments “at scale for the frontier markets of today and the growth markets of tomorrow”.

As an independent Benefit Corporation under French law, Meridiam will act as investment manager for the fund. It has the objective of identifying, developing, and investing in resilient and sustainable infrastructure projects by investing in equity and quasi-equity securities.

UNCDF — the UN’s flagship catalytic finance entity for the world’s 46 least developed countries — will provide projects with early-stage pipeline development. With its coalition partner, United Cities and Local Governments (UCLG) — a global network of some 1,000 cities in 140 countries — UNCDF will provide access to a network of local experts working with municipalities.

The fund will be leveraged as a tool of the Malaga Coalition, which was launched in 2019 by UNCDF, UCLG and its technical partner, the global Fund for Cities Development (FMDV). The coalition’s goal is to lead in the advocacy, creation, and support of a global financial ecosystem for cities and local governments. The fund hopes to accelerate Agenda 2030 by increasing investment in SDG-orientated projects at the local level.

Accompanying the IMIF is an “Expression of Interest” for The International Municipal Investment Fund, Technical Assistance Facility (IMIF TAF), which is managed by UNCDF.

The IMIF Technical Assistance Facility will provide support to assist with cities and local government projects. Furthermore, IMIF TAF will support policy and regulatory reform. IMIF TAF focuses largely on providing direct support to municipalities in developing countries.

After completing the Technical Assistance phase, projects that the IMIF TAF will support may be eligible for acceptance by IMIF for investment.

[caption id="attachment_22341" align="aligncenter" width="1000"] Reps of UNCDF and Meridiam, including Preeti Sinha and to her right, Thierry Deau, Meridiam Chairman and CEO.[/caption]

The Cities Investment Facility

The UN’s Human Settlements Programme (UN-Habitat) and the UNCDF have announced the launch of the Cities Investment Facility (CIF) as part of the partnership.

The CIF is designed to support investment in small and intermediary cities, and develop and deploy innovative financial models. It will play a crucial role in advancing sustainable finance at the local/subnational level, where most sustainable development services are delivered.

UNCDF and UN-Habitat aim to raise $40m over the next four years to support the required programming, operations, and technical support. The goal is to assist 250 cities with sustainable finance support by 2025.

“The partnership between UN-Habitat and UNCDF will look to leverage each organisation’s distinct strengths to support sustainable finance at the local level,” said Sinha.

UN-Habitat executive director Maimunah Mohd Sharif added: “Through this offering, cities in emerging and developing economies will be supported to build effective, own-source revenues and public financial management systems to prepare high-impact projects that can be financed, and reach local and international investors to deliver the SDGs’ impact.”

The partnership between UN-Habitat and UNCDF will look to leverage each organization’s distinct strengths in order to support sustainable finance at the local level. UN-Habitat’s experience of promoting and consolidating collaboration with local governments to implement the Sustainable Development Goals (SDGs) will be coupled with UNCDF’s expertise in local transformative finance as the UN hub for subnational finance.

Call to Action

There is a frequent call for the private sector to become an active and robust agent for sustainable development. The question is perhaps not why we should do this, but how can we do it. What financing models can catalyse private capital towards SDG-positive projects with commercial potential?

These two funds are intended to address that question.

If the private sector is continually asked to increase its appetite for promising projects in often overlooked or riskier markets, then the actors outside of the private sector need to increase its appetite for risk and innovation. Even without the agility of the private sector, the openness to new instruments, new capabilities, and a greater willingness to play a role as a de-risking partner for the private sector, make it possible.

The IMIF and the Cities Investment Facility embrace the risk and innovation needed to unlock private finance to ensure that capital serves humanity — and not the other way around.


Tightening Financial Conditions Bring Impacts to Asset Values

In the first half of this year, US stock markets suffered a fall not seen in more than 50 years.

The S&P 500 index on Thursday June 30 was more than 20 percent down compared to January, a drop not experienced since 1970. The S&P 1500 Index, built by Bloomberg and incorporating companies of various sizes, has seen more than $9 trillion in stock value disappear since January. All sectors except energy stocks have suffered value reductions. On Wednesday June 29, Citi announced that it expected the S&P 500 to fall by another 11 percent by the end of the year.

Stock market declines have also occurred in Europe and Asia. The European Stoxx 600 index is down about 17 percent since January, while the MSCI index for Asia-Pacific markets is down 18 percent in value in US dollar terms. The FTSE All World index, which brings together stocks from advanced and emerging economies, has shrunk by just over 20% so far this year. Figure 1 shows how generally bad the global asset class performance has been in the first half of the year.

The perception of recession risks in the US and Europe has been a major factor in this flight of investors from stock markets. Although the numbers in the US labour market in May showed a high degree of heating, household consumption spending decreased in the month, on top of the numbers in the previous months that have been revised downwards. Consumer confidence indices have plummeted.

[caption id="attachment_22348" align="aligncenter" width="873"] Figure 1: Global Asset Class Performance - A Painful 1H22. Source: Calamos Investment Team Outlooks, July 2022.[/caption]

In housing, the unprecedented rise in mortgage interest rates since 2010 has reinforced this. An Institute of Supply Management (ISM) report, released on July 1, showed signs of a sharp drop in the pace of manufacturing activity in June.

There was a deterioration in indicators of manufacturing activity and consumer confidence in the German economy. The European economy was expecting the impact of the supply and price shocks resulting from the war in Ukraine. In Asia, the impacts of China's zero-Covid policy led to a downward revision in growth forecasts. The real change corresponds to earlier signs that the growth slowdown in the US economy has joined that of other advanced economies.

A major factor in the withdrawal of equity investors has been the perception that signs of a slowdown will not reverse the trajectory of rising interest rates on either side of the Atlantic — previewed for later this year in the Euro area — and tightening of financial conditions. At the annual conference of European central bankers in Portugal on June 30, US Federal Reserve governor Jerome Powell spoke of “some pain” as necessary to return inflation to closer to the target average of two percent.

As Figure 2 shows, financial conditions have tightened as government bond yields have risen globally, including in most emerging-market economies except China. Such tightened conditions are expected to worsen as central banks keep moving along that path.

In this context, the stock devaluation fits in with other items of US monetary policy in the pursuit of lower inflation rates. In addition to the quantitative tightening — the gradual reduction of the Fed’s balance sheet, without a replenishment of the assets in the portfolio — the negative wealth effect of the fall in share values will help to contain aggregate demand, which corresponds to the Fed's policy objective.

This is a significant difference from other moments in the recent history of the relationship between Fed policies and asset markets. In 1987, after an almost 30 percent drop in US stock prices, then-Fed president Alan Greenspan cut interest rates in what became known as a “Greenspan put”, a kind of insurance against losses similar to a put option purchased as protection against sudden losses in value. In this case, it was provided by the Fed, free-of-charge to asset holders.

In the years that followed, the expectation of bailouts via Fed monetary policies as a reaction to asset devaluations ended up being incorporated as a premium in asset values.

That was the case in 2018 — but not this time. The commitment to reduce inflation by containing aggregate demand seems the priority.

[caption id="attachment_22349" align="aligncenter" width="936"] Figure 2: Financial Conditions Have Tightened as Government Bond Yields Have Risen. Source: BIS Annual Economic Report, June 2022.[/caption]

The Fed can ignore falling stocks while keeping an eye on credit markets, because there is a direct relationship between credit and bank money creation, and therefore implications for aggregate demand and inflation. But the Fed cannot ignore risks that financial intermediaries will go insolvent.

And how are prices in the credit markets behaving? Risk spreads have widened both for high-risk bonds — rated CCC — and investment grade cases. Attention has now turned to the risks to credit and liquidity.

Judging by reports from credit-rating agencies, US non-financial corporations have taken advantage of the facility opened by the Fed in March in the wake of the pandemic to lengthen debt maturities on favourable terms. The apparent scope for rate hikes, with little concern for their impact on corporate equity structures, allows the Fed to continue raising rates. Rates are still low in real terms when discounted by anticipated inflation rates this year and next.

How far the Fed will go is an open question. It will depend on the signs of inflation as interest rates move up. A bad sign was the fact that the index that serves as the official reference — the Personal Consumption Expenditures (PCE) Price Index — rose in May and reached a level 6.3 percent higher than a year ago. In the euro area, inflation in June hit a record 8.6 percent.

Long-term inflation expectations expressed in 10-year inflation-protected US Treasury bonds are around 2.36 percent per annum, remaining in the range between 1.5 percent and 2.5 percent that has been a trademark for the past 20 years. If inflation shows clear signs of slowing in the months ahead, the Fed may not reach the 3.5 to 3.75 percent range currently expected for the middle of next year.

The problem is that — even knowing that there is a time lag between interest rate decisions and their effects — the Fed will not be able to ignore what happens to monthly inflation rates, even if that hampers a soft landing for the economy.

Significant negative surprises on the corporate finance side could also lead to some sort of “Powell put”. What seems more likely is a global economic slowdown and continued tightening of financial conditions. Equity markets in advanced economies will continue to exhibit downward slides until the monetary-financial grip eases.

First appeared at Policy Center for the New South

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a professorial lecturer of international affairs at the Elliott School of International Affairs - George Washington University, a nonresident senior fellow at Brookings Institution, a professor affiliate at UM6P, and principal at Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.


BlueRock's Ronny Pifko: A Solid Strategy Built on Strong Foundations

CFI.co's Jason Agnew finds out from BlueRock Group's Managing Partner, Ronny Pifko, how they've kept constructive during testing times.

When Ronny Pifko co-founded BlueRock in Zurich back in 2010, the focus was entirely on Swiss commercial real estate. The company grew rapidly and within three years was investing in the German office sector. The strategy was conservative, and Pifko and his team took full advantage of the relatively risk-free core and core-plus segments to build up a large and diversified portfolio.

[caption id="attachment_22352" align="aligncenter" width="900"] BlueRock Group's Managing Partner Ronny Pifko[/caption]

In 2017 a reduction in yields in these segments led BlueRock to switch to riskier value-add opportunities, and the team’s deep knowledge of the German market enabled them to make the transition so effectively that by 2021 the company's total portfolio size had increased to €1.5 billion.

Catching up with Ronny Pifko post-pandemic, I asked him if the team had maintained the same balance as before or if they had adopted a slightly riskier approach. He told me:

“As an investment boutique with a wide range of investor vehicles, we have always and will always offer various options of investment products in terms of diversified risks and asset classes. In this way, every risk appetite can be met according to each individual investors’ appetite.

Increasing residential investments in central Berlin does not pose an investment risk in our opinion, as it is a very solid and risk averse investment.”

Ronny Pifko explained that Germany has become by far BlueRock's biggest market because it boasts a strong economy and is very open to international investors. That openness meant that the company was able to develop its expertise in the local real estate market, creating a strong know-how of that market plus building an extensive network of partners in various complementary fields. He emphasised that, “This has become our home market and will keep us there for many years to come.”

Being an investment boutique undoubtedly offers the team, currently 15 strong in the various locations and growing, a certain amount of flexibility that large, more rigid set-ups don´t enjoy. I wondered whether office and residential would continue to be the main focus of the firm and he confirmed that indeed it would as it is “our field of expertise.”

In response to my question about the effect of Covid-19 on the value of office space, with many people continuing to work from home, he expressed the view that the office will always be an integral part of the working environment but that companies will have to adjust and adapt for the times in order to attract employees into the office.

“Tenant and employee satisfaction are something that has become integral in acquiring and renting office space so companies will require modern space and need to be creative to refurbish and provide modern workspace.”

Continuing on the theme of the pandemic's effects on the real estate market, with prices soaring in certain locations, I asked his opinion on the possibility of another bubble. He replied that they have been expecting a correction for some time and this has made them more cautious; they have only bought one off-market office property in the last two years, and they obtained that at a special discount.

“Inflation, interest rates and the banks' reluctance to lend has brought the office market to a standstill but we don't expect a bubble, rather a healthy correction. Being that our portfolio has steadily increased in value this doesn’t pose any problem to our investors.”

He firmly believes that BlueRock will keep focusing on perfecting its asset management and, by preserving asset values through technical improvements and ESG measures, will be able to, as a landlord, “pull through the upcoming price correction.”

Communication and transparency are both important and BlueRock provides all its investors with a detailed asset management report every quarter. This includes an update on the current Net Asset Value of their investment, the current property valuation, the upcoming distribution and a full property management report which includes all details on the P&L of the property and its development.

The company's offer is restricted to direct placement deals and has singular structures for each product ensuring the investor has a clear choice of which product to invest in: “Thus the investor is aware of the stringent asset selection and can simply decide if they want to participate in the venture.”

Ronny Pifko, despite BlueRock having achieved an ROI of 16 percent a year, has his feet on the ground and, when I ask him if he expects to reach that in 2022, he is philosophical:

“At the moment we are happy to stay in the black during these turbulent times.”

This winning combination of ambition, know-how and realism has ensured that BlueRock has delivered high returns right from the start and its ability to innovate while offering its investors clear solutions, free from any liquidity constraints, should guarantee sustainable success built on ever solid foundations.


Federal Realty Investment Trust: ESG Pays Dividends at Leading Real Estate Investment Trust

‘It not only helps us be a better business — it is our business,’ says Federal Realty Investment Trust CEO Don Wood.

[caption id="attachment_22420" align="aligncenter" width="900"] Don Wood, CEO of Federal Realty Investment Trust[/caption]

For more than six decades, US-based Federal Realty Investment Trust has been forging an enviable reputation for the ownership, operation, and redevelopment of retail properties in coastal markets.

The firm prides itself in delivering long-term, sustainable growth through investment in communities where retail demand exceeds supply. This overriding focus has enabled Federal to endure some tough economic cycles. Its commitment has been rewarded with 54 consecutive years of dividend increases — the longest annual dividend growth recorded among American REITs.

Federal credits its growth and resilience to financial discipline and a longstanding dedication to ESG principles which set the foundation for how, and why, it invests. Its portfolio features more than 100 top-notch properties, spread across 25 million square feet of real estate. Locations range from small local shopping centres to urban, mixed-use neighbourhoods. Environmental and social considerations have been front and centre for the firm since the 1990s.

[caption id="attachment_22421" align="aligncenter" width="1000"] North Bethesda, Maryland, USA: LEED-certified Neighbourhood, Pike & Rose.[/caption]

Federal Realty Investment Trust initially focused on redeveloping its properties to include outdoor areas. Those spaces quickly became gathering places for local communities. In 2008, the company established a GreenBox standard for building out tenant spaces to minimise environmental impact. Two years later, it became one of the real estate pioneers to develop on-site renewable energy through rooftop solar arrays. In 2012, and the company earned its first LEED certification for its commitment to environmentally friendly design and construction.

Today, Federal boasts the highest solar-generation capacity of any publicly traded shopping centre REIT — and has invested almost $2.3bn in LEED-certified buildings.

“ESG has been a part of our business well before the term was widely recognised,” said Federal CEO Don Wood. “We know that good financial investments can also serve a greater societal good — and keeping that in mind is a critical part of positioning our company for future success.”

Federal Realty Investment Trust continues to demonstrate this positive mantra with investment and operational strategies focused on preserving and improving the long-term value and resilience of assets. Sustainability measures are put in place well in advance of the first blueprint for new construction and redevelopment. They are specifically identified for every investment of more than $1m.

[caption id="attachment_22422" align="aligncenter" width="1000"] Somerville, Massachusetts, USA: Assembly Row Site in 2005[/caption]

Federal Realty Investment Trust’s acquisition of new operating assets requires climate-related risks and opportunities, as well as resource conservation measures, be factored into capital plans.

The firm champions sustainable design and development by prioritising energy and water efficiency, reuse of materials, waste mitigation. It protects natural habitats by building only on sites which had been previously developed. Project-wide LED lighting, white and green roofing, on-site renewable energy, electric vehicle-charging stations and stormwater management are staples in its development and redevelopment activities — and its day-to-day operations.

“We understand that the decisions we make now have impacts for years to come,” said Wood. “Our team continually looks for innovative ways to safeguard our assets, minimise our environmental footprint, and support the transition to a low-carbon economy —while delivering increasing value for our shareholders and other constituencies.”

Federal’s conscientious strategies don’t stop there. Sustainable investment requires investment in people, and forging deep community connections. This means creating places that meet the needs of the surrounding neighbourhoods, and reinvesting in them as needs evolve. This means incorporating art into experiences and events that celebrate culture and diversity. It also means corporate and local philanthropic donations to spur economic growth and transform spaces and communities.

[caption id="attachment_22423" align="aligncenter" width="1000"] Somerville, Massachusetts, USA: Assembly Row Today[/caption]

Positive transformation is evident across Federal’s portfolio, but nowhere more so than in Assembly Row in Somerville, Massachusetts. What was once an unproductive, contaminated industrial site has been turned into a vibrant, mixed-use property that serves as an economic engine and community anchor for the city.

“Assembly Row encompasses all our objectives for sustainable investment,” says Wood. “With significant local collaboration, we have built a place that serves the local community, supports local residents, and creates lasting value for all stakeholders.”

Federal’s investments have served to advance social equity in real estate. Over the past five years, it has worked with Primestor Development, a full-service real estate company focused on economic development in under-served neighbourhoods. Some $425m has been invested across nine properties, including the Freedom Plaza shopping centre in Watts, Los Angeles.

[caption id="attachment_22424" align="aligncenter" width="1000"] Somerville, Massachusetts, USA: Assembly Row Riverfest[/caption]

Freedom Plaza, lined with murals created by local artists, serves as a retail hub for community engagement, economic prosperity, and the ongoing redevelopment of the Watts neighbourhood. The centre has closed the “grocery gap” for residents by providing convenient access to fresh foods. The centre supports the people of Watts by requiring commercial tenants to hire locally; it also provides scholarship programmes for local youth.

Federal Realty Investment Trust has committed an additional $2m to Primestor’s Urban Vision Fund dedicated to projects in low- and moderate-income markets.

Behind all Federal’s actions, and progress, is a team of 300 talented employees that exemplify the company’s ESG commitments. They are empowered by regular opportunities for professional development — and by their positive responses to challenges. Successes are recognised and celebrated; diversity, equity and inclusion are respected. Through good corporate governance, the company drives positive change and performance.

[caption id="attachment_22425" align="aligncenter" width="1000"] Six-story-high LED art installation, "The Conversation"[/caption]

“We create exceptional places because we have an exceptional culture driven by exceptional people,” says Wood. “I firmly believe that our success is a testament to the inherent sustainability and resilience of our company.

“We remain focused on a growth strategy that is built on a strong ESG foundation. ESG not only helps us be a better business — it is our business.”


AAY Investments Group: Panama-based Company Earns a Happy Niche in the VC World

Panama-based Venture Capital Funding firm AAY Investments Group started life in 1986 — and has been able to adapt to the buffeting of changing times and challenging economic trends.

The group is made up of Templeton Equity, Swiss Credit & Guaranty, Swiss Credit Underwriters, Swiss Credit Equities and six AAY-affiliated partner companies.

The group’s success stems from the long-term relationships it has always established with clients. The 45-person AAY staff play a vital role in this, of course. Managers assess how actions throughout the decision-making process affect client and employees. This conscientiousness has resulted in low staff turnover — and high employee and customer retention.

AAY has developed business relationships with national and international brokers, attorneys, banks, financial institutions, insurance companies, and project owners throughout the world.
The venture capital funding it has provided has given life to projects that create wealth for owners — and provide secure jobs for international employees.

"AAY Investments Group now has an insurance team of individuals who are highly skilled in risk management."

AAY’s senior management team has almost a century of combined professional experience in commercial project finance and venture capital funding. The company recently added an insurance team, focusing on risk-management, and it continues to grow thanks to its reputation, and a belief that confidentiality and non-disclosure are essential for business.

No Substitute for Experience — and it Helps that the AAY Team Members have a Range of Skills

This firm has had venture capital in focus since the mid-80s, and shows a flair for seizing opportunity — and avoiding risk.

AAY Investments Group has been in the international project-funding business since 1986.

Over that time, its adaptability and ability to evolve has brought continued success. It has thrived while many financial institutions have failed, and it has an enviable track record.

The company provides venture capital around the world, in various currencies. It has given life to projects that have gone on to create wealth for their owners and secure jobs for workers in many countries.

AAY Investments Group has worked with national and international brokers, attorneys, banks, financial institutions, and insurance companies.

[caption id="attachment_22429" align="aligncenter" width="900"] AAY Investments Group: Headquarters[/caption]

The Team

Sam Davis, senior project director, BA in International Business Finance, 15 years in financial and banking services.

Mark Manson, senior managing partner, MBA, 25 years managing fund capital and investment strategies.

Simon Greene, head of legal, LLM, with 18 years’ international experience in corporate governance and legal and regulatory matters.

The senior management team has some 95 years of combined professional experience in commercial project finance and venture capital funding.

The dynamic members have backgrounds in invaluable fields such as law and investment banking, and all have deep knowledge of the workings of financial institutions.

AAY Investments Group now has an insurance team of individuals who are highly skilled in risk management. This allows the group to provide commercial insurance products through reinsurance and guarantees. It can also accept business from the wholesale insurance broker community.

AAY’s reputation has never been stronger. It has established long-term partnerships, and provides underwriting for commercial funding and related reinsurance projects to non-affiliated financial and insurance entities.

Funding Capacity

As a global project investment group with a private fund and its own private investor capital, AAY has the resources it needs to be a world player. The minimum lending requirement is $5m, with the capability to fund upwards of $50m by using syndicated partners.

AAY Investments Group is able to offer low interest rates — and, if necessary, a grace period for repayment until a project has adequate cash flow. This has been achieved via a 100 percent project funding programme: 60 percent private lending, 40 percent private equity.

Broker Participation

AAY is seeking professional contacts around the world to place client business. Brokers, consultant or other entities working in commercial finance and/or insurance are urged to get in touch.