At first look, the agreement signed by the BRICS to establish a new development bank (NDB) appears to be the strongest challenge yet to the global settlement that grew out of Bretton-Woods.
Analysis of data from Oxford Economics shows that emerging economies now contribute 36% of global GDP, rising to 46% in next 10 years, yet control only 11% of the voting power at the IMF. This has long been a point of contention, with agreements reached in 2010 to rectify this currently stalled in the US Congress, further highlighting the disparity in power under the current system.
At first, the NDB will start off with US$50b in initial capital, with equal financing from each member.
An emergency reserve fund, which was announced as a Contingency Reserve Arrangement (CRA), will also have US$100b, and will help developing nations avoid “short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements”.
China will contribute US$41b to the CRA, compared with US$18b each from Brazil, India and Russia, and US$5b from South Africa.
The bank will have its headquarters in Shanghai and will accord China with the largest voting right at 39.5%, compared with 18.1% each for Brazil, Russia and India, and 5.75% for South Africa, the Chinese central bank said.
However, as with the IMF, it will be how the NDB actually operates that will be more telling of the reality of the bank. The IMF developed its current policies and ways of operating only after the US began to exert its overwhelming voting power and we will have to wait and see if the same happens at the NDB.
The IMF was sanguine about the news. “The IMF has a very strong relationship with all the BRICS nations, which are key members of this institution. We look forward to further strengthening our collaboration,” Managing Director Christine Lagarde said in a statement.
The recently announced merger and asset sale in the tobacco industry highlights a growing trend amongst participants in big-ticket M&A to pre-empt concerns from regulatory reviews, especially competition and anti-trust bodies. Imperial Tobacco acquired several leading brands, and the coveted Blu e-cigarette brand, to alleviate concerns in the US raised by Reynolds American Inc’s US$27b purchase of Lorillard Inc.
We saw similar plans for disposing assets when Lafarge and Holcim announced their combination earlier this year and Comcast was quick to announce the sale of large swathes of the Time Warner Cable business to Charter Communications in order to deflect negative comments about industry concentration.
While the post-merger sale of assets driven by competition concerns is not a new development, the pre-empting at deal announcement is and will become a permanent consideration for those contemplating such deals.
One positive spin-off of this behaviour is that it stimulates M&A at lower value ranges than the multi-billion and that is a good thing.
Not yet timing the market
With the Dow Jones industrial Average breaking records for the 15th time this year many equity commentators are beginning to speculate on how long this bull market can last. But there is nothing that investors can really hang their hat on.
Fed Chair Janet Yellen, In her semi-annual appearance before the Senate Banking Committee, said that valuations across equity markets remain generally in line with long-term averages, but the Fed’s report said the forward price-to-earnings multiples for smaller companies and those in the biotechnology and social media sectors appear “high relative to historical norms.”
What is driving the market at the moment is abnormally low volatility, with the VIX averaging 11.6 since the start of June against 14.2 for the first 5 months of 2014, coupled with reassuring economic news and corporate earnings releases.
At the same time we are seeing the impact of a continuing confidence that the M&A uptick will continue through 2014 and investors are anticipating the sectors and stocks that may be next in line for an approach.
Finally, there is nowhere else for fund managers to place their holdings and generate the returns they are judged on. A recent poll found that a net 21% of fund managers view stocks as at their most expensive since May 2000 and yet a net 61% are overweight in that asset class.
Until there is either a shock that knocks investor confidence or more robust news on the timing of potential rate rises it is hard to see and sustained rebalancing of holdings taking place.
More than geopolitical
We often talk about geopolitical events and concerns and the impact these have on the market, benchmarks or investor confidence. The tragic events in the Ukraine remind us that these geopolitical events have a very human cost. Our thoughts and prayers are with the families and friends of the passengers and crew of Malaysian Airlines flight MH17.