BusinessDay 31 Oct 2017

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Tuesday 31 Octoer 2017 FT FINANCIAL TIMES C002D5556 BUSINESS DAY A3 IMF warns volatility products loom as next big market shock World Business Newspaper Eurozone economic confidence surges to highest level since 2001 Germany leads the way as bloc enjoys robust recovery in industry, retail and construction MEHREEN KHAN Economic confidence in the eurozone has surged to its highest level since the early years of monetary union, as the bloc enjoys a surprisingly robust recovery in a year that has seen major European elections. Germany led the European Commission’s official monthly measure which surveys confidence in sectors across the EU’s 28 member states, turning in the best performance in the eurozone. A month after Angela Merkel’s Christian Democrats emerged from elections as the biggest party in parliament, the country’s economic confidence rose 2.1 points to reach a six-year high in October. Confidence across the eurozone as a whole rose 0.9 points to 114.2 — its highest level since January 2001 and the 14th consecutive monthly rise. October’s uptick was driven by strength across the bloc’s major economic sectors, including industry, retail and construction. The figures suggest the bloc’s recovery has further to run this year with growth already accelerating at its best annual rate since the eurozone sovereign debt crisis and unemployment at its lowest in nine years. In a sign of Spain’s businesses resilience, the Catalonia crisis did not dent the country’s economic confidence measure which rose 0.3 points to a near two-year high. Official figures show Spain’s economy was broadly unaffected in the run-up to the Catalan referendum on October 1. The country’s quarterly GDP growth slipped to 0.8 per cent from 0.9 per cent in the three months to September. Special counsel Robert Mueller has charged three individuals involved in Donald Trump’s 2016 presidential campaign as part of his criminal probe into Russia’s role in the 2016 election. Paul Manafort, Donald Trump’s campaign manager during part of the 2016 US presidential election, and Richard Gates, another former campaign official, have been indicted by a federal grand jury on 12 counts. “Political tensions continue to have little effect on economic sentiment this year,” said Bert Colijn, senior eurozone economist at ING. “The surprisingly healthy economy trumps political risks in terms of sentiment for the moment.” Outside the eurozone, the UK registered a healthy 1.5 point jump in its measure of economic confidence, while France was the only blot among the major economies, slipping 1.6 points in October to a three-month low. Official GDP numbers for the eurozone’s third quarter will be released on Tuesday and are expected to show a slight slowdown in quarterly growth from a pace of 0.6 per cent to 0.5 per cent in the three months to September. But economists said the October sentiment figures would help the economy pick up momentum towards the end of the year. “While we expect tomorrow’s GDP data to reveal that quarterly growth slowed in Q3, we suspect that growth will rebound to about 0.6 per cent in the fourth quarter,” said Stephen Brown at Capital Economics. “That would result in annual GDP growth of 2.2 per cent in 2017,” he added. The eurozone’s industrial sector, which accounts for a quarter of the bloc’s GDP, is now in its rudest health since 2000, according to the European Commission, while the construction sector has bounced back from its precrisis levels. The brightening outlook is likely to reinforce calls for the European Central Bank to ease up further on its stimulus measures after it announced a cutback in the pace of its asset purchases last week. Three former Trump aides charged in Russia probe Campaign chief Manafort and official indicted as another policy adviser pleads guilty to lying about Moscow links COURTNEY WEAVER AND JOHN MURRAY BROWN Page A5 Separately, George Papadopoulos, a former policy adviser for the Trump campaign, has pleaded guilty to charges that he lied to the FBI about his contacts with Russian nationals during the 2016 race, in a separate indictment charge from Mr Mueller. In a 31-page indictment filed on Friday but unsealed on Monday, Mr Mueller charged Mr Manafort and Mr Gates, a former business partner of the ex-campaign chief, with money laundering, tax evasion and making false statements — accusa- Continues on page A4 Hail the large activist investor Norway’s sovereign wealth fund shows potential power to influence company decisions MARTIN SANDBU The FT carries a story on Monday about the Norwegian sovereign wealth fund’s approach to activist investment. (Not “active investment” as opposed to “passive” in the sense of formulaically following a market index, but “activist” in the sense of making demands of company managers.) The fund’s move two years ago to start pre-announcing its voting intentions at shareholder meetings has been so successful that it has done this much less frequently than it expected: only three times this year. Apparently the implicit threat of a public showdown is enough to make management more solicitous of this mega-investor’s preferences. That clearly proves the fund’s power, but it may also suggest it is not putting that power to the best use — for itself, investors generally, and society at large. The best way of thinking about investors’ role in corporate governance for the common good is to acknowledge that investors as a class also suffer when the companies they own act in anti-social ways. This is because the “negative externalities” that occur when a company pushes the costs of its behaviour on to others affect other companies as well. Managers who act in what they perceive as the company’s interest may thus act against the interest of shareholders as a class: corporate negative externalities harm investors. This is compounded when managers also have a shorter-term horizon than investors, even aside from externalities. That is why sovereign wealth funds, pension funds and other large investors are particularly Big Tech and Amazon: Too powerful to break up? Page A6 Norway’s sovereign wealth fund has been publicly disclosing how it would vote ahead of companies’ annual shareholder meetings © Dreamstime well-placed to remedy this problem through activism. First, they tend to be “universal investors” with stakes in a broad range of companies — so the externalities are directly “internalised” in their overall investment portfolios. Despoliation of common natural resources or unwillingness to invest in real productive capital by one company may be opportunistically sensible and even profit-maximising yet still reduce such universal investors’ return by imposing costs or reduce demand for other companies in the portfolio. Second, large investors have the clout to influence company management, both directly and as standard-bearers around which other, smaller investors can rally. The question is whether they decide to use that clout. As my colleague Rana Foroohar points out in her latest column, many investors tend to outsource their voting decision in shareholder meetings to “proxy advisers”. That is better than ignoring one’s voting power altogether. (I disagree, however, that it is “understandable that large asset managers like BlackRock or Fidelity and myriad smaller institutions would want to offload this task”. Smaller institutions, yes, but large asset managers have the wherewithal to make their own decisions, as well as an interest in wanting to for the reasons outlined above.) But it is far from good enough if the proxy advisers themselves do not take externalities and long-term effects of company decisions into account. Foroohar suggests that this is the case, and that proxy advisers focus too much on short-term shareholder return. If she is right, that means they simply replicate the myopia and unenlightened selfishness of the conventional governance practice of treating management with benign neglect. That only increases the responsibility of large investors to show better stewardship for the private business economy in which they hold such big stakes. One can see the political reasons for a sovereign wealth fund such as Norway’s to be discreet. But the argument for taking into account the external and long-term effects of management decisions is also an argument for doing so publicly: giving smaller investors leadership leverages the self-interest of the larger ones. But when that self-interest is of the enlightened kind, this is also a public good. And at a time when private sector leaders themselves say the promise of capitalism has been broken, it even counts as a public duty. Other readables • Last week we urged the European Central Bank to follow the Bank of Japan’s lead in targeting long-term interest rates directly. Daniel Moss explains just how important this has been for Japan: even if BoJ governor Haruhiko Kuroda is not reappointed for another term, his adoption of this tool has put the central bank in a position to continue stimulating the economy long after his departure. • Germany’s policy of encouraging employers to reduce hours worked rather than firing workers in the last recession kept unemployment low but came at a cost in productivity growth, by slowing down the movement of workers from lower- to higher-productivity jobs. Numbers news Business and consumer confidence in the eurozone is at a 17- year high.
Tuesday 31 Octoer 2017 A4 BUSINESS DAY C002D5556 FT Three former Trump aides... NATIONAL NEWS Higher bonus costs take shine off HSBC’s rise in revenues MARTIN ARNOLD AND HUDSON LOCKETT • Outgoing chief Stuart Gulliver says ‘pivot to Asia’ strategy is paying off A sharp increase in costs to cover higher bonus payouts and extra investment in retail banking took the shine off HSBC’s third consecutive quarter of higher revenues stemming from loan growth in Asia Continued from page A3 tions mostly tied to Mr Manafort’s work in Ukrainian politics before the US presidential campaign. Overall, the two men are accused of funnelling $75m through unreported offshore accounts. Mr Manafort turned himself in to the FBI’s Washington field office early on Monday morning. Mr Trump quickly seized on the fact the charges focus on Mr Manafort’s work for then-Ukrainian president Viktor Yanukovich and his pro-Russia Party of Regions government, rather than any conduct during the 2016 race. “Sorry, but this is years ago, before Paul Manafort was part of the Trump campaign,” Mr Trump wrote on Twitter. “But why aren’t Crooked Hillary & the Dems the focus????? . . . Also, there is NO COL- LUSION!” However, the charges against the third Trump campaign official, Mr Papadopoulos, relate directly to his time on the campaign. According to the charging document against Mr Papadopoulos, he lied to FBI agents during a meeting in January, alleging that he had interacted with an unnamed London professor whom Mr Papadopoulos believed to be close to the Russian government. Mr Papadopoulos told FBI agents that the individual had told him that Russian officials had “dirt” on Hillary Clinton only before he took on his foreign policy adviser role in the campaign. However, according to the charging document, Mr Papadopoulos “repeatedly sought to use the professor’s Russian connections in an effort to arrange a meeting between [Trump’s campaign] and Russian government officials”. Mr Papadopoulos has pleaded guilty to willingly making false statements to the FBI, a charge that carries a maximum prison sentence of five years and a maximum fine of $250,000. In the separate indictment against Mr Manafort, the former campaign chair is accused of using “his hidden overseas wealth to enjoy a lavish lifestyle in the US”, which included buying multiple multimillion-dollar properties and obtaining loans using the properties as collateral. Mr Manafort, 68, is accused of laundering $18m, while Mr Gates is accused of transferring $3m from offshore accounts from 2006 to 2015, a period in which the two men served as “unregistered agents” for Mr Yanukovich and his political party. Mr Yanukovich was ousted in a pro-western revolution in 2014. According to Mr Mueller’s indictment, Mr Manafort paid hundreds of thousands of dollars through offshore accounts to pay for high-end goods and services without paying tax on the income used to make these purchases. and the UK. Stuart Gulliver, who is due to step down as chief executive in February having run the bank for seven years, dismissed this as a one-off and said the bank’s revenues would still grow faster than its costs over the full year. He added that his planned successor, John Flint, who currently runs HSBC’s retail banking and wealth management division, would stick to the bank’s “mantra” that its revenue growth has to exceed any increase in costs. Mr Gulliver, who will hand over to Mr Flint after presenting annual results next year, said the “pivot to Asia” strategy he launched two years ago to shift hundreds of billions of dollars from underperforming assets to more profitable areas was paying off, “driving higher returns and lending growth, particularly in Hong Kong”. Mr Flint is an HSBC lifer with almost three decades at the bank and is viewed by analysts as a safe pair of hands. He is expected to exert a moderating influence on new chairman Mark Tucker, formerly the chief executive of Asia-focused insurer AIA, who became the first outsider to chair HSBC since the bank was founded 152 years ago. His leadership at AIA spurred a 50 per cent jump in revenues and profits. HSBC has struggled to generate A police officer carries away a schoolgirl caught up in running battles between police and protesters in Nairobi on Monday © EPA Would you donate your data for the collective good? A nation’s ability to exploit information in smart, creative ways will help determine its economic success JOHN THORNHILL There is a saying that scientists would rather share their toothbrushes than their data. But we will all have to imagine more open and hygienic forms of data sharing if we are to make the most of this revolution. Data are emerging among the most important assets of the 21st century economy. Vast quantities of human- and machine-generated data, combined with ever more powerful computers and clever algorithms, are providing the feedstock for artificial intelligence systems and promising striking improvements in productivity. A country’s ability to exploit data in safe and creative ways will increasingly determine its success. It is high time for institutional innovation to encourage the process. For now, Pacific Rim companies, from the west coast of the US and the east coast of China, outstrip the rest of the tech industry. The likes of Google, Amazon, Alibaba, and Tencent are vacuuming up data and using them in inventive ways — to the delight of most consumers and the concern of some citizens worried about the concentration of corporate power and the erosion of privacy. Earlier this month, the UK government published an independent report by Professor Dame Wendy Hall and Jérôme Pesenti about how Britain could boost its own AI industry. Britain boasts an illustrious history in computing but risks becoming sub-scale in this emerging economy. The report made good suggestions for improving technical education, preserving the free movement of talented experts (a particular challenge after Brexit), and making government data readable by machines. But the report’s most striking recommendation was to pioneer the creation of data trusts, a framework of agreements between government and industry to stimulate the secure and mutually beneficial exchange of data. It is a neat an idea in theory but it will be hard to implement in practice. Even Professor Hall admits: “There is a will to do it but not yet a way.” The central idea would be for the government to work with independent institutions, such as the Royal Society and the Open Data Institute, to encourage the creation of robust arms-length mechanisms to share public and private sector data. That would help reassure data donors that their information was being used for the collective good rather than for private profit or government surveillance. But it would also give researchers and entrepreneurs access to exciting fresh seams of data. The report’s authors argue the public sector could benefit enormously in realms such as energy, healthcare, transport, and cyber security. Other experts suggest that regulators could incentivise companies, like Uber, to share anonymised data, helping urban planners, for example. Charitable research institutions, such as the Wellcome Trust, could encourage pharmaceutical companies to contribute “exhaust” data from failed clinical trials that could provide invaluable insights. Sir Nigel Shadbolt, AI professor and co-founder of the ODI, says the aim should be to create “interested, disinterested institutions” to supervise such communal data assets. He cites the historic example of the Lloyd’s Register of Shipping, a charitable organisation dating back to the 1760s, set up to accredit and classify merchant ships for the benefit of all trading companies and insurers. Copyright libraries in the UK and Ireland have also been granted the right to obtain all published books for free to spread knowledge. “We have been here before and have quite successfully established regimes where information has been made available for the common good in perpetuity,” he says. “The idea of creating data trusts is well worth pursuing.” Privacy and security are the most obvious obstacles. Anonymising data is more difficult than it sounds, particularly for health information. The EU’s sweeping General Data Protection Regulation, which comes into force in May and will be adopted by Britain, also imposes strict restrictions on data use. “GDPR is fantastically protective of people but potentially restrictive for research,” says Professor Hall. That may well put Europe at a further competitive disadvantage in the short term given looser accountability elsewhere. Companies in China, in particular, face few constraints on data use, either from government regulation or public concern. But Jürgen Schmidhuber, professor of artificial intelligence at the University of Lugano, argues that safeguarding data rights may make good business sense over the longer term if it results in a more trusted infrastructure for data sharing. “Respect for privacy will be profitable one day,” he says. top line growth since Mr Gulliver took charge in 2011, in which time the bank’s annual revenues have fallen by about a third, hit by disposals, restructuring and low interest rates. In the three months to September, HSBC’s revenues rose 3 per cent year on year. Its provisions for bad debts shrank more than a fifth, but operating costs increased 7 per cent, which led to a slight fall in adjusted pre-tax profits to $5.4bn. Uhuru Kenyatta wins rerun Kenyan election after opposition boycott Voting prevented in 25 constituencies because of protests by supporters of Raila Odinga JOHN AGLIONBY Uhuru Kenyatta has won a second term as Kenya’s president after being declared the winner of a rerun presidential election that was boycotted by his main opponent. Mr Kenyatta secured more than 98 per cent of the vote in Thursday’s poll, Kenya’s electoral commission said on Monday, although turnout was low and there was no voting in two dozen constituencies because of protests by supporters of opposition leader Raila Odinga. The non-voting in 25 of the country’s 290 constituencies is likely to further colour the credibility of a process that has also been marred by divisions within the electoral commission, confusion over turnout, intimidation of supreme court judges and Mr Odinga’s boycott. The rerun was required after the supreme court nullified the result of August’s election in which Mr Kenyatta was declared the winner despite Mr Odinga’s claim of widespread fraud. The supreme court judges cited “irregularities” and “illegalities” in the tallying of votes for their decision. In Monday’s acceptance speech Mr Kenyatta thanked supporters for “validating my victory” in August and called for peace. He criticised Mr Odinga for appealing against the original vote and for not participating in Thursday’s poll. “You cannot choose the opportunity to exercise a right and thereafter abscond from the consequences of that choice,” Mr Kenyatta said. Mr Odinga’s spokesperson said the opposition leader would make a statement on Tuesday. Mr Odinga still came second in the poll, with 0.96 per cent of the vote, despite urging supporters to boycott the election. There were five other candidates. Turnout was 38.8 per cent compared with 79.5 per cent in August, according to the Independent Electoral and Boundaries Commission. Wafula Chebukati, chairman of the commission, said: “I’m satisfied that we were able to . . . deliver what to us and all Kenyans and observers was a free, fair and credible election.” This was a marked change from Mr Chebukati’s view a week before the rerun vote when he said that political meddling in the commission was so great that he could not ensure the process would be sufficiently credible. The election commission also on Monday said voting would not happen in the areas where it was abandoned on Thursday, saying conditions “were not conducive” to holding elections in those 25 counties. Officials said it would make no difference to the result, and the risk of violence, particularly towards IEBC staff, was too great.
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BusinessDay 31 Oct 2017

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