Investor opportunities: Spain and China

The 686th Lord Mayor & Women in the City

If I were a man, I would spend my money on women and wine and wandering.

I am, however, most definitely a woman and one who had occasion to feel immensely proud of her sex last Saturday, as fifty City women marched in the Lord Mayor’s annual parade, amid the driving rain and horse poo left by a mounted regiment. (The attached photo has little to do with reality). Perhaps the circumstances were a metaphor for what it takes to succeed in the City as a woman. But that was all forgotten as we waved at the half a million people lining the route and then passed by the Mansion House to salute Fiona Woolf, the second woman in 800 years to be elected Lord Mayor of the City of London.

The historic role for Lord Mayor number 686 involves being the Ambassador for the City (in fact, the whole of the UK’s financial services sector), giving more than 100 speeches and travelling nearly 100 days to promote the City in over 25 countries in the year in office. For the current Lord Mayor, a partner at Cameron McKenna, this may well represent a diminution of her usual travel schedule, given that she is the head of the law firm’s global energy practice and a renowned expert on privatisation and the environment.

Unlike some other women at the top, she is willing to stand tall (literally, at 5 feet and 12 inches) and be counted on to push for more women to join the City and make it to board level. “The City’s diversity and openness is one of the keys to long-term success so it is vital we work hard to move to a new normal by freeing up the talent pipeline. Businesses need to capture the innovation and ideas that difference within the talent pool generate,” she says.

The Lord Mayor speaking next to Prime Minister David Cameron at the Lord Mayor’s Banquet

Our group was as diverse as could be in the Lord Mayor’s Show that Saturday, with women who were born in India, Sri Lanka, Rumania, the US, China and Latin America. No better proof exists of the global nature of the City. As we ate our sodden sandwiches during the lunch break, we inspected some of the 130 vehicles in the parade, including 20 carriages, a tank and 50 horses, while beaming with pride at being involved in a ceremony that dates back to 1215.

Only 6% of managing directors in the City are women, when at university graduate level the division can be almost equal between men and women. Conscious bias has become less of a problem; unconscious bias more of one, which is why the Lord Mayor’s Diversity Advisory Panel, to which I belong, has a 12-month programme (www.fionawoolf.com) to bolster the position of women in the City.

It was not just our faces and languages that evidenced the City’s global medley. So did the handbags we wore as we marched, courtesy of a Chinese retailer. In 1996 entrepreneur Shunyuan Guo bought Powerland an Italian brand, and took it to China. There are now more than 200 stores on the mainland, plus 2 in Hong Kong. The luxury handbags are designed by a former Chief Designer from Gucci. 

Chairman and Ceo Guo listed the shares in Frankfurt a few years ago, raising €95m to finance the continued expansion of the retail network. He is now exploring locations for a shop in London and Paris, albeit he is adamant that “the price and opportunity has to be right.”

Powerland AG may be a good investment. So is Spain. A few weeks ago Bill Gates took a punt by buying a 6% stake in construction company FCC, making him the second largest shareholder. He is not alone in seeing value in Spain and its battered sectors like banking and construction. The IBEX 35 main stock market index is up 25% in the year to date. The country came out of recession officially in the third quarter with a return to growth, albeit a measly 0.1% increase.

On a visit to Madrid last week you could smell the first whiff of optimism. You could also smell the rubbish strewn on the streets due to a rubbish collector strike. Private companies were planning to lay off up to 20% of all sweepers. After 12 days a compromise was agreed whereby there would be no redundancies, but workers agreed to take 6 weeks of unpaid leave every year through 2017.

This is indicative of the drop in internal wages that is making the country competitive again. It has recovered 65% of the competitiveness lost during the credit bubble, while its strength in world class infrastructure and a large and skilled labour force make it the 35th most competitive economy in the world, according to the World Economic Forum. Spain is held back mainly by the bureaucracy and corruption of its unimpressive governing class.

Additionally, the government has been ineffectual, if not inept, in marketing to investors its new fund of funds, FOND-ICO. Launched in March with €1.2bn, the state’s anchor investor will invest in foreign and national private funds over a four year period to help with the non-bank financing of existing and new SMEs.

Ramon Betolaza, a London-based financier who returned to Spain this year, is raising a €500m fund via Black Toro Capital and Trea Capital to leverage FOND-ICO funds and invest in medium sized companies alongside existing management. He notes that although some companies are facing strategic challenges, others are solely suffering from cash flow problems on the back of a country-wide liquidity squeeze.

If FOND-ICO doesn’t tempt you to Spain, gentle reader, then what might do so are revelations this week that sofrito, a special tomato sauce used as a base in Mediterranean cooking, is the secret to longevity and a healthy heart. The women and the wine aren’t bad either. Nor are the boys and the bullfights.

The CEO’s case for rocketing equity markets

Middle East and Korean peace in the offing

A year after writing about the unsustainability of the French economy, I found myself this August once again amidst the glory-on-earth that is inland Provence. The economy is in worse shape, even more of the profit-making elite have left the country and President Francois Hollande is beyond a blancmange.

Demand for places in the South Kensington Lycée is such that a new one is being built near Wembley football stadium. London’s gain is France’s loss.

And yet I join a select group of forecasters who have to date been proved wrong. We continue to hammer away at our theme of the bankruptcy of the French state while enjoying the delights of long lunches with saucissons de sanglier, the local rosé and the dream of owning our own estate. The head and the heart do not always move in sync. Why France will fall next.

The time to invest in equities is now. Ignore the pundits who declare them overpriced. Dismiss the majority view which emphasises these five certainties: anaemic world growth is set to persist for the foreseeable future; China is set to become a superpower; the North-South Korea stand-off is unlikely to change anytime soon; US supremacy is at an end; the Israel-Arab conflict will endure.

Instead, read the fascinatingly contrarian world vision that a well-known, cerebral CEO recently shared with me.

“China will struggle more than many investors expect, particularly in the context of what could be the Asian strategic surprise of the next few years: Japan. Chinese growth well under double digits at 7-8% will not be enough to sustain the socio-political compact which has kept it as a unitary state with a quiescent population. The subversive power of the internet, growing income inequality devoid of the hope that a rising tide will lift all boats, local corruption, Muslim extremism in some provinces and regional separatism, will lead to domestic problems which the Communist Party will not be able to contain. It could lose power while the country messily breaks up into smaller areas of influence, although it is worth keeping in mind that “smaller” in Chinese terms is still large by any other.

The Koreas will unify as the Chinese reconsider the cost of supporting the existing North Korean regime. South Korea will pay for re-unification, just like the West Germans paid for the East. After a decade or two of domestic integration focus, Korea will be born as an even more powerful economic entity, playing a much larger role on the world stage.

The US looks set to continue as a superpower. With the Republican Party in a mess, Hilary Rodham Clinton could be elected on a landslide at the next election, bringing the House along with her. The US will continue its upward trajectory, based on cheap shale gas and its flexible, innovative economy, with no one country able to challenge it.

Peace is due to break out in the Middle East within the next 3-5 years as the Shia axis surely will be broken when Bashar is ousted. He may not be out of power yet, but the prospects of continued Alawite domination of Syria (12% of the population) grow dimmer by the day as Sunni support for the rebels continues to grow. Syria’s fall would effectively defang Hezbollah and creates much improved prospects for peace with Israel. The new military government in Egypt may transition into a civilian government over time, but likely will continue to curtail arms trafficking across their border into Gaza, further weakening Hezbollah. Shia Iran, the main backer of Hezbollah, would end up being further isolated and surrounded by Sunni powers.

The Arab Spring has brought to the surface the main threat to existing regimes in the Arab world: a lack of growth and diversification with its consequent unemployment, especially youth unemployment – under 25’s being the largest (and growing) segment of the population in the Arab world. The monarchies and dictatorships have used the conflict with Israel as an excuse for their lack of progress, but this is no longer enough.

Peace with Israel will allow the focus to shift to growth. Informal approaches to Israel from the Saudis have already been made. For Israel, which does not have the military capacity to fully disable Iran’s nuclear capabilities, a comprehensive peace settlement may have allure. Not least because Arab Israelis are set to be a majority of the population within a decade.

The confluence of these unexpected factors, including the enhanced power of the US and the shock of a Middle East and Korean settlement, means equity markets will take off on the back of the boost to world growth.”

Hopefully, this radical vision will more likely happen than this Column’s dire French predictions.