Awaiting The Green Revolution…
At a recent address to the NYU Money Marketeers, a New York-based association of financial market participants, Kenneth Volpert, head of the Fixed Income Group at Vanguard, reviewed just how far and how fast the credit markets had improved since late 2008. At the start of this year, municipal, corporate and high yield spreads had spiked to near all time record wides with liquidity sketchy at best. Six months in, while credit markets will still far from ‘business as usual’, they had markedly improved. One of the more influential bond fund managers in the industry, Volpert was generally optimistic about a continued recovery in the markets, but still expressed some caution – a definite sentiment of “let’s wait and see before we all plunge back into the pool”.
In light of this improving financial climate, attention is slowly turning back from stabilization to identifying the next economic opportunity, and few are seeing as much attention as one of President Obama’s most ambitious (and popular) economic agendas: the promotion of Alternative Energy. Indeed, as we write in a recent article on the subject in the financial publication Global Trade Review:
Green energy had been a buzz phrase throughout the final weeks of the US presidential campaign. Both Senator Obama and his Republican rival Senator McCain eagerly promoted their determination to lead the US economy towards energy independence. This was largely due to a massive government campaign of tax incentives and government investment to fund development of alternative energy generation.
Six months into the new administration, though, project finance desks and commercial bankers across Wall Street are not exactly throwing suitcases of money at Alternative Energy deals (and certainly lack the enthusiasm shown for the highly leveraged multi-billion dollar takeover deals of the past). Indeed, with the traditionally slow summer season upon us, the jury is still out as to when and how quickly enthusiasm for financing big ticket alternative energy deals will return. Certainly, while the new presidential administration is speeding full steam ahead to kick start most any aspect of the economy (including incentivizing investment into alternative energy):
…Public funding alone will not change the basic economics of energy production and the tight credit environment. The central questions facing renewables are: how long will credit be tight and how low will oil and natural gas prices fall?
The key question, therefore, remains: will the Green Revolution prove to simply slogan or substance? The GTR article concludes:
For many skeptics, alternative energy, even under a green-friendly White House, recalls the dot com internet and telecom hysteria that bankrupted less than a decade ago when then vice-president, Al Gore, called for a national campaign to develop the “information superhighway”. Nonetheless, there is nothing like massive government intervention to get investors to stand up, take notice and act – particularly in the area of tax credits and the creation of tax equity, which has been a key driver to financing a bulk of the existing US alternative energy infrastructure already in place.
If the free market gets a little helping hand (or even a giant push) from Uncle Sam, perhaps the Green Revolution can take off for Wall Street bankers.
Stay tuned…
The (Ir)rationality of Markets
The Financial Times recently reported on a recent survey by the British Chartered Financial Analyst Institute of its members, which found that an increasing proportion believed that markets did not behave rationally:
The British CFA recently asked members for the first time whether they trusted in “market efficiency” – and discovered more than two-thirds of respondents no longer believed market prices reflect all available information. More startling, 77 per cent of the group “strongly” or “very strongly” disagreed that investors behaved “rationally” – in apparent defiance of the “wisdom of crowds” idea that has driven investment theory.
The shift is significant as the assumption of efficient markets is a cornerstone of calculating the value of everything from stocks to pension fund liabilities to executive compensation.
It’s an interesting result, especially given the fact that CFAs are schooled in the tenets of rational and efficient markets from the outset.
It’s also, in my opinion, in line with the reality of the markets. The evidence has been there for all to see in recent years (and, in truth, much before that as well) – markets have quite frequently behaved irrationally and, many would argue, are not behaving entirely rationally at the moment. Some even go further, such as Jeremy Grantham, the famed market strategist with GMO, who wrote in a recent quarterly letter to his clients (see a recent NYT article):
“The market is full of major league inefficiencies…There are incredible aberrations…The U.S. housing market in 2007. Japan in the 1980s. Nasdaq. In 2000, growth stocks were three times their fair value. We were quoted in The Economist in 2000 saying that the Nasdaq would drop by 75 percent. In an efficient world, you wouldn’t have that in a lifetime…if professional investors had been willing to acknowledge these aberrations — and trade on the fact that the market was out of whack — they should have been able to beat the market. But thanks to the efficient market hypothesis, no one was willing to call a bubble a bubble — because, after all, stock prices were rational.”
Wow.
While it might be a bit of a stretch to blame our entire economic crisis on a specific theory, it is interesting that we are now seeing an implicit rethink of the concept of rational markets. As the FT article also points out, there is renewed interest in the field of behavioral finance, which suggests that markets can be moved by ‘irrational’ considerations such as human emotion (fear, for example). Indeed, as we collectively take our tentative (and circuitous) steps towards recovery, it’s hard to argue with that.
Rethinking the Corporate Ladder
Periods of economic upheaval tend to see organizations rethinking their relationship with their employees. Some of this is driven by the employer (see the ‘rightsizing’ that has taken place over the last year), but others are driven by the changing demands (and expectations) of the employee. A clear example of the latter is the steady but growing rejection of the traditional ‘corporate ladder’ – where an individual works along a defined path for a defined period of time to achieve defined promotion rungs. Stay on that path and everything’s fine. Deviate here or there, and all bets are off.
Given the death of the “Company Man” and the general acceptance that the employee can have diverse needs, organizations have begun to rethink their definition of ‘career path’. In fact, according to an article in Ignites.com (Corporate Ladder Gets Makeover Amid Downturn), organizations could actually be facing a unique opportunity to rethink the traditional corporate ladder:
…the up-or-out ladder model is no longer a tidy fit in corporate America, as the workforce has evolved from a male-dominated cadre to a more diverse group. With that comes a mix of lifestyles and demands, as employees struggle to strike a balance between work and life.
This is especially true in the professional services world.
Are We Not Taking Enough Risk…?
…At least when it comes to Innovation and the Venture Capital community?
In times of trouble, organizations tend to do two things – 1) Conserve cash and 2) Focus on what you know. This makes perfect sense for most corporates but when it applies to a community that is considered by many as being the lifeblood of innovation, perhaps we need to rethink our rules?
Recent commentary has suggested that the VC Outlook in the near to medium term is weak and that the appetite for risk in the industry as a whole is declining. Much of this is understandable given the proliferation of venture firms and funds of funds, the (temporary) death of the IPO and multi-industry wide slowdowns. Simply put, there is just too much money chasing too few investments with not enough light at the end of the payback tunnel.
Or is that really the case? Another school of thought is that while the economic issues are very real and we will likely see a number of VCs disappear in the next 18 to 20 months, the reality is that many firms are essentially becoming risk averse (most notably argued by Timothy Draper at the International Business Forum venture capital conference last week). Many VCs are chasing after the same ideas or are becoming very provincial from a geographic investment perspective (too US-centric).
The implication is that the next boom will not be centered in Silicon Valley but elsewhere across the globe, where innovation is being pushed harder and faster.
From the perspective of our global village, this is quite the cause for optimism, and national sentiments aside (though I’m not entirely convinced that the US won’t drive a lot of the innovation again), suggests a couple of key takeaways, as summed up excellently by The Stimulist: The time for innovation is indeed now – when times seem darkest.
From a pure wealth creation perspective, this is the time to plant the seeds of success, when the ‘arbitrage’ opportunity is at its highest. In addition, we are seeing something of a political, social and economic alignment, especially when it comes to anything ‘green’, ‘cleantech’, etc., suggesting that the avenues to massive prosperity (material and otherwise) lies in a path that will ultimately better both us as individuals and business people, and the planet.
Plenty of cause for optimism…perhaps we need to rethink our perspective on (and appetite for) risk?
Making Sense of Supply Chain Risk
The last 12 months has undoubtedly been one of the most turbulent periods in economic history, with industries (and their constituent companies) across the globe experiencing levels of uncertainty that were unfathomable a mere 24 months earlier. In many respects, the most critical skill of management in recent times has not been the ability to deliver superior performance, but rather the ability to ensure predictable performance. This has been especially relevant in not only public enterprises (where predictability of earnings is paramount) but in private organizations as well, where cash flow considerations have taken precedence over many other priorities.
While predictable performance is influenced by a multitude of factors, one of the most critical and visible over the last year has been the area of Supply Chain Risk. Our global, interdependent economic environment – with its complex web of relationships and dispersed value chains – has made this a critical challenge over the last decade. The recent economic turbulence has simply raised the stakes.
It’s no surprise, then, that as ‘hot topics’ go, Supply Chain Risk is one of the hottest in management today. A key reason for this is that this type of risk is not simply a problem for the supply chain or procurement executive – it is an issue for senior management as a whole.
Rethinking China Outsourcing?
It’s amazing what a few short years will do to a country’s rock star status.
Not so long ago, China was the outsourcing destination du jour with companies scrambling for the first available business class seat to establish their Asian manufacturing beachhead or build on their existing investments and relationships. In our perpetual quest for maximum productivity for minimal investment, it seemed that we had at last found the holy grail.
Not so fast, argues a recent Business Week article.
Surviving the Storm: Value Creation in the US Auto Parts Sector
In a period of unparalleled economic turbulence, perhaps no industry has been more severely impacted than the US Auto Parts industry. The sector, in tandem with the Big 3 Automakers, has been facing severe financial distress over the last year with much of the sector struggling to avoid liquidation following the bankruptcies of Chrysler and GM.
To get a closer look at this industry, we recently completed an exhaustive review of the US Auto Parts sector, analyzing the 98 publicly listed companies within the sector that collectively generated aggregate revenues in excess of $139 billion last year. The report provides a ‘state of the nation’ review of the industry – exploring what brought it to its current position and the issues it faces today. While the sector is undoubtedly facing the most significant challenges in its history, there are also a number of reasons for optimism and, as with all distressed sectors, enormous potential for long term value creation.
A summary of the key findings include:
The Credit Crunch and Outsourcing
The recent tumult in the markets – and its reverberations from Wall Street to Main Street – have made the business news channels compulsive viewing for executives across the globe. One group of professionals that have been keeping a close eye on the day-to-day movements of the markets has been the Business Process Outsourcing (BPO) sector, especially in India. These BPO firms – and their progeny, the Knowledge Process Outsourcing (KPO) firm – have seen tremendous growth in recent years as Wall Street embraced their blend of high talent and low cost to outsource everything from software design and application development to equity research and financial modeling. The value delivered by this sector is undoubted but given the tectonic shifts occurring on wall street, it is inevitable that there would be some sort of impact on this growth story.
Indeed, a recent BusinessWeek article talked at length about the impact that the changing financial sector will have on info-tech spending and outsourcing in general – with some estimates suggesting a 15%-20% revenue impact by next year. While one can argue about the precise magnitude of the impact, there is no doubt that many firms (outsourcing or not) will feel the pinch given the unprecedented changes we have seen over the past few weeks.At the same time, it is important to not get carried away by the paranoia that has engulfed many of those around us. Experienced market watchers will point to one truism that has stood the test of time, and that is that everything goes in cycles. In this instance, we have just gone through a massive up cycle and the current economic climate will see, not so much a down cycle but perhaps a reversion to a more moderate growth trend for the medium term. (Long term, the potential is still huge.)
The Smart Cube Financial Services Survey : Implications of The Credit Crunch
Listen or read any news site or publication over the last several months and talk of the economy is never far behind. Recession or no recession, individuals and corporations alike are clearly acting as if we are in one. Housing figures are flat to declining; oil is at an all time high; food prices are going through the roof; and the financial markets are reflecting this turmoil and volatility.
So what does all of this mean for the job market – and, in particular, the financial services job market?
At The Smart Cube, we’ve just put the wraps on a survey that assessed the financial services employment market – interestingly, from the perspective of the financial services (FS) recruiter. Why the FS recruiter? Because our intent was to check the pulse of the market – and who better to speak with than the very individuals whose daily bread, if you will, is dependent on this important market.
The findings of our study were very interesting:
Offshoring – Taking its place within the Management Toolkit
One of the most intriguing findings from our recent Financial Services survey related to the impact of offshoring (and outsourcing*) on the financial job market – both in recent years as well as today. All in all, 70% of recruiters surveyed felt that offshoring has, indeed, impacted the job market in recent years and this was very consistent across both the US and the UK. However, these recruiters also indicated that the offshoring that has happened has been independent of the current financial crisis. 40% of all recruiters (and 60% of those in the US) felt that it would have no effect on the current market. (Only a small proportion – 11% – felt that off-shoring would contribute to future job cuts in the current crisis.)
While it is true that the current market situation is the result of a different set of problems, one would normally expect cautious employer markets (which is what we have today) to quickly adopt as many cost reduction tools as possible. And offshoring has been one of the more pronounced cost reduction tools available in recent years. However, this is not the case, according to the recruiters we interviewed, and is borne out by further discussions with our financial services clients. The underlying commentary has been that off-shoring has now ‘graduated’ to become “a strategic option available to businesses…independent of the current financial crisis.”
In other words, offshoring has taken its place within the strategy toolkit – from management fad to management fact. There are three key reasons why this has happened.