BusinessDay 31 Oct 2017

Tuesday 31 Octoer 2017
COMPANIES & MARKETS
@ FINANCIAL TIMES LIMITED 2015
Barclays Africa and Standard
Bank end contracts with
Management consultant loses two big bank clients amid South Africa scandal
MADISON MARRIAGE
Two of the largest banks in
South Africa have terminated
their contracts with
McKinsey just two weeks
after the consultancy apologised
for making “errors of judgment”
in working alongside a company
linked to the politically contentious
Gupta family.
Standard Bank and Barclays Africa
are the first large companies to publicly
confirm they have cut ties with
the management consultancy since
it in July became entangled in South
Africa’s biggest political scandal since
the apartheid era.
The banks, which are also reviewing
their relationship with KPMG
— the accounting firm that audited
businesses run by the Guptas for 15
years — declined to comment on why
they had ended their contracts with
McKinsey.
Barclays Africa, which used McKinsey
for strategy and consulting
advice, said: “Barclays Africa Group
has taken a decision to not contract
any new work with McKinsey and is
going through a process of winding
down existing work.
“We continue to review our relationship
with KPMG and will take
a decision once that review is complete.”
Standard Bank said it had “elected
to terminate McKinsey and Company’s
services and has notified it
accordingly”.
The world’s best-known consultancy
was first drawn into controversy
surrounding the Guptas when its
work with Trillian Capital Partners,
which was until recently owned by
an associate of the billionaire family,
came under public scrutiny in July.
Trillian has been accused by civil
•ICBC is trading above book value
in Hong Kong for the first time in
two years
As part of China’s anti-corruption
drive, the free liquor
and even bottled water disappeared
from the hotels housing
guests for the 19th Party Congress,
which concluded last week. But
despite the austere note on which
the core leadership insisted, there
was a congratulatory air about the
proceedings.
The reflationary trade may be
moribund in the US, but across the
Pacific it is alive and well. Consider
one small indication noted by Chris
Wood, strategist at CLSA: ICBC, the
largest bank in China and in the
world, is trading above book value
in relatively cynical Hong Kong for
the first time in more than two years.
“The improvement in Chinese banks’
reported asset quality can be seen in
the continuing rally in Chinese bank
stocks, where a re-rating is now taking
place,” he notes.
Banks are generally a proxy for
wider economic trends. In this case,
the recovery of the share prices of
ICBC and its peers reflects two benign
developments.
For one thing, the rate of growth
society groups of siphoning hundreds
of millions of rand from Eskom, a
state-owned power utility, and of
acting as gatekeeper for international
companies to access state groups. It
has denied the claims.
The Gupta family has been accused
of using ties to Jacob Zuma,
South Africa’s president, to influence
state contracts and appointments
to favour its business interests. The
Guptas and Mr Zuma deny the claims.
McKinsey said earlier this month
that an internal investigation of its
work in the country had found no
evidence of corruption or bribery, but
that it should not have worked with
Trillian until its due diligence process
was complete.
Dominic Barton, McKinsey’s global
managing partner, said at the time:
“We are sorry for the distress this matter
has caused the people of South
Africa. We are taking a hard look at all
of our practices in the country.”
A spokesperson for McKinsey said
of the banks’ decision to drop the
consultancy: “It is our longstanding
policy not to comment on individual
companies or discuss our clients.”
Last month KPMG announced the
departure of eight senior executives
and appointed a new leadership team
in South Africa in an attempt to draw
a line under the scandal.
However, several large South African
companies have already decided
to stop working with KPMG, including
South Africa-listed asset manager
Sygnia Asset Management, Hulisani,
an energy investment company, and
Sasfin, a financial services company.
Many other companies, including
Standard Bank, are waiting for the local
accounting regulator to conclude an
investigation of KPMG’s work in the
country before deciding what action to
take with the accounting firm.
Banks benefit from China’s
economic rebalancing
HENNY SENDER
of debt — widely seen by bearish
hedge fund managers as one day triggering
a systemic financial crisis —
has slowed. Indeed, the second quarter
was the first since 2011 in which
debt actually declined, according to
Haibin Zhu, chief China economist
at JPMorgan in Hong Kong.
Although the drop in total debt
(including the shadow banks) was
“marginal”, as Mr Zhu notes, the
composition of that debt has also
shifted. The share of corporate lending
in the total is down, while that
of households is increasing. That,
in turn, means the long-promised
rebalancing of the economy from
investment to consumption is gaining
momentum.
The banks are double beneficiaries
of this because loans to households,
especially for mortgages, are
less likely to become problem assets.
Moreover, banks can also charge
more to consumers, thereby improving
their margins.
Financial stocks make up nearly
24 per cent of the MSCI China index,
which has been a star performer
year to date. Given that these positive
trends in the quality of banks’
balance sheets are still in their early
days, not only are the banks far less
likely to bring down the system, they
may even be as highly regarded by investors
as they are by the leadership.
FINANCIAL TIMES
IMF warns volatility products loom as next big market shock
Assets invested in such strategies estimated to have risen to about $500bn
MILES JOHNSON
The International Monetary
Fund has warned that the increasing
use of exotic financial
products tied to equity volatility by
investors such as pension funds is
creating unknown risks that could
result in a severe shock to financial
markets.
In an interview with the Financial
Times Tobias Adrian, director of
the Monetary and Capital Markets
Department of the IMF, said an
increasing appetite for yield was
driving investors to look for ways
to boost income through complex
instruments.
“The combination of low yields
and low volatility facilitates the use
of leverage by investors to increase
returns, and we have seen rapid
growth in some types of products
that do this,” he said
Equity market volatility has
plumbed to its lowest level in a
decade, with the Chicago Board Options
Exchange’s implied volatility
index, also known as the Vix, sitting
at a level close to 10 compared with
Oil and metals trading gives Glencore further boost
DAVID SHEPPARD AND NEIL HUME
A
good year for oil and metals
trading has led Glencore to
upgrade its full-year guidance
for the division for the third time
since January, even as production
volumes at its mining operations fell.
In an update on Monday, Glencore
said its trading business was now
expected to earn between $2.6bn and
$2.8bn, following a strong performance
in the three months to September.
The previous full-year guidance
was $2.4-$2.7bn in August, and
$2.1-$2.4bn at the start of the year.
While the company did not explain
the exact cause of the improvement,
a number of factors have
moved in its favour.
Chief executive Ivan Glasenberg
said in August that higher prices
were good for its metals trading operations
as they increased arbitrage
opportunities.
Prices of both copper and zinc,
where Glencore is a major miner
and trader, have rallied significantly
in 2017. Copper is up almost 25 per
C002D5556
an historical average of about 20.
The IMF believes that sustained
low volatility increases incentives for
investors to take on higher levels of
leverage while causing risk models
that use volatility as an important
input to understate real levels of risk
participants may be taking on.
“A sustained increase in volatility
could then trigger a sell-off in the
assets underlying these products,
amplifying the shock to markets,”
Mr Adrian said.
Mr Adrian’s warning comes amid
increasing evidence that pension
funds and insurance companies
are venturing into riskier types of
investments to gain income. Some
are also effectively writing insurance
contracts against a market crash to
pocket premiums.
Last year the $14bn Hawaii Employees
Retirement System said it
was writing put options to boost
its income, while other US pension
schemes such as the South Carolina
Retirement System Investment
Commission and Illinois State Universities
Retirement System have
also hired outside managers to use
cent since January and traded above
$7,000 a tonne earlier this month for
the first time in three years.
Zinc, where Glencore is the largest
trader, has risen by a similar
amount and hit a 10-year high above
$3,300 a tonne at the beginning of
October.
However, Glencore has also cut
its guidance on production of both
metals, citing short-term factors including
power problems, industrial
action and bad weather.
Analysts at RBC Capital Markets
said that while production volumes
had disappointed, earnings per share
were likely to have risen because of
higher commodity prices:
“As we mark actual third quarter
commodity prices in our model, the
production misses were completely
offset and actually cause a slight uplift
in EPS (earnings per share). The
lower production, especially in coal
and zinc, likely helped to support
prices, and in turn has offset their
impact,” said RBC.
Volumes at Glencore’s oil trading
business have risen to more than 6m
BUSINESS DAY
A chart of the Vix index since 1990 shows that volatility is at its lowest for more than two decades © FT montage; Bloomberg
Sharp rally in copper and zinc prices leads to upgraded guidance for division
A5
option writing strategies.
The IMF estimates that assets
invested in volatility targeting strategies
have risen to about $500bn, with
this amount increasing by more than
half over the past three years.
Marko Kolanovic, head of macro,
derivative and quantitative Strategies
at JPMorgan, last month warned
of “strategies that sell on ‘autopilot’”,
and how risk management models
that use volatility could be luring
investors into taking on too much
risk. “Very expensive assets often
have very low volatility, and despite
downside risk are deemed perfectly
safe by these models,” he wrote in a
note to clients.
With equity implied volatility
continuing to drop over the course of
this year investors who have bet that
markets will remain tranquil have
been rewarded. Yet the true quantity
of complex products being sold that
are linked to volatility of various assets
is hard to ascertain due to such
deals mostly being done in private.
Regulators therefore find it difficult
to map out the risks in the event of
an unexpected market shock.
barrels a day, after deals with Russia’s
state-backed oil company Rosneft
and Iraqi Kurdistan.
There has also been a general
recovery in commodity markets in
the past two years — a slump in 2015
raised concerns about Glencore’s
debt load, forcing it to deleverage
and raise cash.
On Monday, its shares were trading
flat at 367p, up more than 50 per
cent in the past year and more than
four times higher than at their nadir
in September 2015, although they
remain below the 530p issue price
six years ago.
The company, which has its
primary listing in London, is now
preparing to delist in Hong Kong,
according to people familiar with
the company. Only 0.3 per cent of its
shares are registered there.
When Glencore launched its
$60bn IPO in 2011, Mr Glasenberg
said a secondary listing in Hong Kong
would help the company to build its
profile in the region, where most of its
biggest customers are based, and to
attract cornerstone investors.