Transfin.

Widening Leveraged Loan Market – History Rhyming?

Colin Lloyd

Credit

For those of you who have not read Michael Lewis’s, The Big Short, the great financial crisis of 2008/2009 was caused by too much debt. The sector which precipitated the great unravelling was the US mortgage market and the particular instrument of mass destruction was the collateralised debt obligation, a security that turned out to be far from secure. Today, more than a decade on from the crisis, interest rates are close to historic lows throughout much of the developed world. The problem of too much debt has been solved with even more debt. The nature of the debt has changed, so too has the make-up of debtors and creditors, but the very low level of interest rates, when compared to 2008, means that small changes in interest rates have a greater impact the price of credit.  Here is a hypothetical example, to explain the changed relationship between interest rates and credit. Back in 2008 a corporate borrower might have raised capital by issuing debt paying 6%, today the same institution can borrow at 3%. This means they can double the amount of capital raised by debt financing without any change in their annual interest bill. Put another way, apart from the repayment of the principal, which can usually be rolled over, the cost of debt financing has halved over the course of the decade. Firms can raise capital by issuing equity or debt, but, as interest rates decline, debt has become cheaper than equity finance. In the example above, however, assuming the corporation chooses to double its borrowings, it becomes twice as sensitive to changes in interest rates. A rise from 3% to 4% increases its interest payments by one third, whereas, previously, a rise from 6% to 7% amounted to an increase of just one sixth. So much for the borrower, but what about the lender? Bonds and other interest bearing securities are generally purchased by investors who need to secure a stable, long-term, stream of fixed income. As interest rates fall they are faced with a dilemma, either accept a lower return or embrace greater risk of default to achieve the same income. At the heart of the financial crisis was the illusion of the free lunch. By securitising a diversified portfolio of high-risk debt, the individual default risk was supposed to be ameliorated. The supposition was that non-correlated investments would remain non-correlated. There is a saying in financial markets, ‘during a crisis, correlations all rise to one.’ In other words, diversification seldom works when you really need it because during a crisis every investor wants the same thing, namely liquidity. Even if the default risk remains unchanged, the market liquidity risk contrives to wipe the investor out. An alternative to a fixed-income security, which may be especially attractive in a rising interest rate environment (remember the Fed was tightening for a while prior to 2019), is a floating-rate investment. In theory, as short-term interest rates rise the investor can reinvest at more attractive rates. If the yield curve is essentially flat, floating rate investments will produce similar income streams to longer maturity investments, but they will be less sensitive to systemic market risk because they have shorter duration. In theory, credit risk should be easier to manage. What’s New?More than ten years into the recovery, we are witnessing one of the longest equity bull-markets in history, but it has been driven almost entirely by falling interest rates. The bond market has also been in a bull-trend, one which commenced in the early 1980’s. For investors, who cannot stomach the uncertainty of the equity market, the fixed income market is a viable alternative, however, as government bond yields have collapsed, income-yielding investments have been increasingly hard to find. With fixed income losing its lustre, credit products have sought to fill the void. Floating-rate leveraged loans, often repackaged as a collateralised loan obligation (CLO), are proving a popular alternative source of income. The typical CLO is a floating-rate tradable security backed by a pool of, usually, first-lien loans. Often these are the debt of corporations with poor credit ratings, such as the finance used by private equity firms to facilitate leveraged buyouts. On their own, many of these loans rank on the margins of investment grade but, by bundling them together with better rated paper, CLO managers transform base metal into gold. The CLO manager does not stop there, going on to dole out tranches, with different credit risks, to investors with differing risk appetites. There are two general types of tranche; debt tranches, which pay interest and carry a credit rating from an independent agency, and equity tranches, which give the purchaser ownership in the event of the sale of the underlying loans. CLOs are hard to value, they are actively managed meaning their risk profile is in a constant state of flux. CLOs are not new instruments and studies have shown that they are subject to lower defaults than corporate bonds. This is unsurprising since the portfolios are diversified across many businesses, whilst corporate bonds are the debt of a single issuer. CLO issuers argue that corporations are audited unlike the liar loans of the sub-prime mortgage debacle and that banks have passed ‘first loss’ risk on to third parties. I am not convinced this will save them from a general collapse in confidence. Auditors can be deceived and the owners of the ‘first loss’ exposure will need to hedge. CLOs may be diversified across multiple industry sectors but the market price of the underlying loans will remain highly dependent on that most transitory of factors, liquidity. Where Are We Now?Enough of the theory, in practice many CLOs are turning toxic. According to an October article in the American Banker –  A $40 billion pile of leveraged loans is battered by big losses – the loans of more than 50 companies have seen their prices decline by more than 10%. The slowing economy appears to be the culprit, credit rating agencies are, as always, reactive rather than proactive, so the risk that many CLOs may soon cease to be investment grade is prompting further selling, despite the absence of actual credit downgrades. The table below shows magnitude of the problem as at the beginning of last month:  It is generally agreed that the notional outstanding issuance of US$ leveraged loans is around $1.2trln, of which some $660bln (55%) are held in CLOs, however, a recent estimate from the Bank of England – How large is the leveraged loan market? suggests that the figure is closer to $1.8trln. The authors go on to state: We estimate that there is more than US$2.2 trillion in leveraged loans outstanding worldwide. This is larger than the most commonly cited estimate and comparable to US subprime before the crisis. As global interest rates have declined the leveraged loan market has more than doubled in size since its post crisis low of $497bln in 2010. Being mostly floating-rate structures, enthusiasm for US$ loans accelerated further in the wake of Federal Reserve (Fed) tightening of short-term rates. This excess demand has undermined quality, it is estimated that around 80% of US$ and 90% of Euro issues are covenant-lite – in other words they have little detailed financial information, often relying on the EBITDA adjustments calculated by the executives of the corporations issuing the loans. Those loans  not held by CLOs sit on the balance sheet of banks, insurance companies and pension funds together with mutual funds and ETFs. Several more recent issues, failing to find a home, sit on the balance sheets of the underwriting banks. Here is a chart showing the evolution of the leveraged loan market over the last decade:  Whilst the troubled loans in the first table above amount to less than 4% of the total outstanding issuance, there appears to be a sea-change in sentiment as rating agencies begin to downgrade some issues to CCC – a notch below investment grade. This grade deflation is important because most CLO’s are not permitted to hold more than 7.5% of CCC rated loans in their portfolios. Some estimates suggest that 29% of leveraged loans are rated just one notch above CCC. Moody’s officially admits that 40% of junk-debt issuers rate B3 and lower. S&P announced that the number of issuers rated B- or lower, referred to as ‘weakest links’, rose from 243 in August to 263 in September, the highest figure recorded since 2009 when they peaked at 300. S&P go on to note that in the largest industry sector, consumer products, downgrades continue to outpace upgrades. As the right-hand of the two charts above reveals, the debt multiple to earnings of corporate loans is at an all-time high. Not only has the number of issuer downgrades risen but the number of issuers has also increased dramatically. At the end of 2010 there were 658 corporate issuers, by October 2019 the number of issuers had swelled 56% to 1025. The credit spread between BB and the Leveraged Loan Index has been widening throughout the year despite three rate reductions from the Fed:  Q4 2018 saw a sharp decline in prices as the effect of previous Fed tightening finally took its toll. Then the Fed changed tack, higher grade credit recovered but the Leveraged Loan Index never followed suit. Despite a small inflow into leveraged loan ETFs in September, the natural buyers of sub-investment grade paper have been unnaturally absent of late. Leveraged loan mutual funds have seen steady investment outflows for almost a year. The inexperience of the new issuers is matched by the inexperience of the investor base. According to data from Prequin, between 2013 and 2017 a total of 322 funds made direct lending investments of which 71 had never entered the market before, during the previous five year only 85 funds had made investments of which just 19 were novices. Inexperienced investors often move as one and this is evident in the recent absence of liquidity. The lack of willing buyers also highlights another weakness of the leveraged loan market, a lack of transparency. Many of the loans are issued by private companies, information about their financial health is therefore only available to existing holders of their equity or debt. Few existing holders are inclined to add to their exposure in the current environment. New purchasers are proving reticence to fly blind, as a result liquidity is evaporating further just at the moment it is most needed. If the credit ratings of leveraged loans deteriorate further, contagion may spill over into the high-yield bond market. Whilst the outstanding issuance of high-yield bonds has been relatively stable, the ownership, traditionally insurers and pension funds, has been swelled by mutual fund investors and holders of ETFs. These latter investors prize liquidity more highly than longer-term institutions: the overall high-yield investor base has become less stable. Inevitably, commentators are beginning to draw parallels with mortgage and CDO crisis. The table below, from the Bank of England report, compares leveraged loans today with sub-prime mortgages in 2006:  The comparisons are disquieting, the issuers and underlying assets of the leveraged loan market may be more diversified than the mortgages of 2006, but, with interest rates substantially lower today, the sensitivity of the entire market, to a widening of credit spreads, is considerably greater. The systemic risks posed by a meltdown in the CLO market is not lost on the BIS, page 11 of the latest BIS Quarterly Review – Structured finance then and now: a comparison of CDOs and CLOs observes: …the deteriorating credit quality of CLOs’ underlying assets; the opacity of indirect exposures; the high concentration of banks’ direct holdings; and the uncertain resilience of senior tranches, which depend crucially on the correlation of losses among underlying loans. These are all factors to watch closely. The authors’ remain sanguine, however, pointing out that CLOs are generally less complex than CDOs, containing little credit default swap or resecuritisation exposure. They also note that CLOs are less frequently used as collateral in repurchase agreements rendering them less likely to be funded by short-term capital. This last aspect is a double-edge sword, if a security has a liquid repo market it can easily be borrowed and lent. A liquid repo market allows additional leverage but it also permits short-sellers to provide essential liquidity during a buyers strike, in the absence of short-sellers there may be no one to provide liquidity at all. In terms of counterparties, the table below shows which institutions have the largest exposure to leveraged loans:  Bank exposure is preeminent but the flow from CLOs will strain bank balance sheets, especially given the lack of repo market liquidity. Conclusions and Investment OpportunitiesThe CLO and leveraged loan market has the capacity to destabilise the broader financial markets. Rate cuts from the Fed have been insufficient to support prices and economic headwinds look set to test the underlying businesses in the next couple of years. A further slashing of rates and balance sheet expansion by the Fed may be sufficient to stave off a 2008 redux but the warning signs are flashing amber. Total financial market leverage is well below the levels that preceded the financial crisis of 2008, but as Mark Twain is purported to have said, ‘History doesn’t repeat but it rhymes.’ Until the US election in November 2020 is past, equity markets should remain supported. Government bond yields are unlikely to rise and, should signs of economic weakness materialise, may plumb new lows. Credit spread widening, however, even as government bond yields decline, is a pattern which will become more prevalent as the cash-flow implications of floating-rate borrowing instil some much needed sobriety into the market for leveraged loans. With interest rates close to historic lows credit markets are, once again, the weakest link. Originally Published in In the Long Run. FIN.(We are now on your favourite messaging app – WhatsApp. We strongly recommend you Subscribe Now to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Social Media & Stock Trading: How Your Tweets & Facebook Posts Influence Stock Prices

Netaji Subhas University of Technology

Tech

Technology is the ultimate disruptor: it has changed everything about everything. And the world of stocks has by no means escaped the tech onslaught. Social media is impacting stock trading in a big way and how we approach this disruption and harness the power of social networking is up to us, writes Ishita Rana. Being a diehard fan of the movie The Wolf of Wall Street, I have always imagined the stock exchange as a large floor with huge monitor screens surrounded by chaotic ringing of phones with hundreds of traders shouting their orders. However, since the Digital Revolution, technology has replaced men and there has been a shift to automatic trading with minimum human intervention using advanced computer programs and mathematical formulae. This is known as Algorithmic Trading or Algo-trading. Algo-trading is a system of trading where complicated trading strategies are constructed into algorithms that use this information to inform users of any profit-making opportunity arising in the market and transact within a fraction of a second. Just like it was said in The Wolf of Wall Street, the stock market is highly unpredictable: “Nobody knows if a stock is gonna go up, down, sideways or in f**king circles.” Algo-traders try to bridge this uncertainty by feeding historical data and stats into their machine learning algorithms. When combined with live data from the internet, the algorithm studies patterns and takes trading decisions at lightning speed. Today, algo-trading constitutes nearly 70% of trading activity in developed markets and developing markets like India are swiftly catching up. Social Media - The Puppet-Master of the Stock Market? Social media is a big source of data that is mined by these algorithms. And due to its mass appeal and instant updates of real-time events, Twitter in particular is a significant player in this game. In the past, its 140 characters have been monumental in causing havoc in the world’s biggest stock market. In 2013, the official Twitter account of Associated Press news agency was hacked and a false tweet was sent out claiming explosions at the White House injuring President Barack Obama. Within a few minutes , the Dow dropped by 1%, oil prices dropped, the price of gold rose and the market was in a state of utter chaos! All this couldn’t possibly be the result of a few traders on their phones. It was a response of several high speed computers which were programmed to detect keywords such as “White House”, “explosion” and “Obama” that triggered this frenzied selling of stocks and caused instability in the market. Dip in the stock market index after the tweet by Associated Press. In yet another case, on May 2016 there was a gruesome train accident in Maryland and the public incessantly tweeted about it. Within a span of just 90 minutes, the stocks of the transportation company guilty in the case, CSX Corporation, fell by $500 million! In recent times, many companies have taken to Twitter, Facebook and other social media sites to release important announcements and financial data. Algo-traders are consistently refining their algorithms by incorporating phrases related to business acquisitions and mergers, market releases and other related terminology that might affect stock prices. However, like human beings, these machines are also vulnerable to fake news and rumours that can cause losses to the tune of millions of dollars. New features are being tested to scrutinise the data and verify the credibility of the source. Sentiment analysis is another aspect where social media acts as a game changer for Algo-traders. The algorithm gauges public sentiment and opinion about a company or stock based on its mentions in posts, news articles and the number of upvotes and retweets associated with it. In simple words, if the algorithm interprets positive sentiment surrounding a particular company, it will draw traders to purchase the stock and in return increase the stock price. On the other hand, negative public sentiment instils fear in traders and compels them to sell their stocks. There is no doubt about the vast power of social media in the world of finance. While it has sparked some major market fluctuations in the past, it has also significantly helped traders to earn millions by the second. In an era where change is inevitable, it is up to us to shape the way social media influences the future of trading. If we play our cards right to harness the immense potential of social media correctly, the possibilities are endless. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Why is Nirmala Sitharaman’s Budget 2019 “Reasonable”?

Nikhil Arora

Budget

The big question looming ahead of Finance Minister (FM) Nirmala Sitharaman’s debut Budget represented a quandary. How to take India to a $5tr GDP future in the backdrop of a slowing economic present? Most commentators perhaps assumed the FM would announce a roadmap to set India on an annual growth rate of 8%-10% for the next half decade or so! It was an unfair question to start with. However, considering the target was set and announced by the government itself following its massive electoral return, one really cannot blame the expectants!? Let us keep the broader vision aside for a moment…the fact of the matter is that India’s supply side has been sluggish for the past 12-18 months, as demonstrated by all major indicators be it Gross Fixed Capital Formation (GFCF), private investment at-large, manufacturing/services sector indices, or credit. And in recent months the demand side i.e. consumption seems to have caught the trend, intermittently slowing but now structurally coming to a halt. In shadows are an NBFC-led liquidity crunch, the need to create more jobs, and a burgeoning agrarian distress which shows no sign of dissipating. And let’s not forget an ever-shrinking fiscal headroom. Any FM, notwithstanding her or his superior judgement would be lacking if they fail to address these matters on priority, before even reflecting upon a broader vision. The criticality of their prompt resolution cannot really be overstated. On that mark the FM’s speech on July the fifth was an exercise in reason. Having an almost workman-like quality from the start it focused on targeting acute areas of the “institutional” kind. Softer credit and operational greasing of MSMEs, real measures to deepen corporate bond markets, enhancing market liquidity in general, easing FDI/FPI norms, another bank recapitalisation, government support for NBFCs, corporate tax breaks, disinvestments, nation-wide water works, electricity, gas, and connectivity commitments – all aiming to revive both liquidity and job creation in parallel. This institutional emphasis was even more pronounced when one could see most interventions in Direct Taxes were centered around corporates rather than individuals. While tangible incentives were presented for companies e.g. advanced tech players, startups, property developers, electric vehicle manufacturers; emphasis was shifted towards plain operational optimizations for individuals. Case-in-point being the Aadhaar-PAN linkage and the pre-filling of IT returns. The FM has volumes and scale in mind, rather than specific mass-market constituencies like the middle class or rural. How else would you explain new surcharge only for the wealthy but status quo for the rest? However, in its efforts to effuse pragmatism the Budget did miss a crucial ingredient – inspiration. When would we re-align ourselves away from tax revenues? When would we dabble with innovative models to enhance government coffers, be it Sovereign Wealth Funds, at scale public real estate unlock or monetization of PSU assets? Why considering global and even Rest of Asia’s personal income tax, indirect and corporate tax rates are on a structurally downward trajectory, we take baby-steps towards reductions without yet giving up easy pickings like spiking duties on petrol, diesel, gold, or even books? Why do we keep tethering agrarian distress on the backburner, preferring to rehash older schemes, talk of passive concepts like “zero budget farming”, but rather not make significant commitments towards industrializing Indian agriculture? Because July the fifth may have addressed the issues most pressing, but it is still a case of band-aid fixes abound. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Gold – Is it All that Glisters?

Colin Lloyd

Macro

Uncertainty about US trade policy has truncated the rally in stock Gold remains supported by central bank buying and fears of a US Dollar collapseGold miners look best placed to reap the benefits regardless of directionA collapse in the Dollar is needed for gold to rally substantially In Q4 2018, as stocks declined, gold rallied 8.1% and gold mining stocks 13.7%. It was a prescient reminder of the value of gold as a portfolio diversifier. There have, however, been some other developments both for gold and gold mining stocks which are worthy of closer investigation. Central Banks Central bank net purchases of gold reached 651.5 tons in 2018, up 74% from 2017, when 375 tons were bought. The Russian central bank, perhaps fearing US sanctions, sold almost all of its US Treasury bonds to buy 274.3 tons of gold last year. For probably similar reasons, the Turkish central bank bought 51.5 tons, down from the 88 tons purchased the previous year. Other big central bank buyers included Kazakhstan, India, Iraq, Poland and Hungary. In the first quarter of 2019 central banks purchased a further 145.5 tons, up 68% on Q1 2018. The trend is not new, central bank purchases have been rising since 2009:  Source: BIS, IMF, GEMS, Reuters Putting global reserve holdings in perspective, here is the central bank world ranking as at March 2019:  Source: IMF, Statistica Despite the substantial buying from central banks the price of gold has been broadly range bound for the past five years. Source: Trading Economics The absence of a sustained rally suggests that many investors have forsaken the barbarous relic, however, concern that the gold price will collapse have to be tempered by the cost of mining an ounce of gold. Mining costs have increased substantially since the early 2000’s due to increasingly expensive exploration costs and a general decline in ore quality. In the chart below Money Metals Exchange shows Barrick (GOLD) and Newmont (NEM) average cost of production since 2000:  Source: SRSrocco Report, Kitco In a July 2018 post for Seeking Alpha – Money Metals Exchange –  Never Before Seen Charts: Gold Mining Industry’s Costs Are Higher Than Market Realizes show that the amount of ore needed to produce an ounce of gold at Barrick’s (GOLD) Nevada Goldstrike and Cortez Mines has increased four-fold since 1998:  Source: SRSrocco Report, Barrick The market capitalisation of the sector has halved since 2012, leading to understandable consolidation and deleveraging. Gold, however, is an unusual commodity in that its stock is far larger than its annual production. About 3000 tons of gold is mined annually, this is dwarfed by the 190,000 tons that have been mined throughout history according to World Gold Council estimates. Since it has little industrial use, almost all the gold ever mined remains in existence: central bank reserves are a key determinant of its price. Interesting research on the subject of what drives gold prices can be found in this article from the London Bullion Market Association – Do Extraction Costs Drive Gold Prices? They conclude that, due to the large stock relative to production, the price of gold is the principal influence on the mining industry. The US Dollar and Inflation Expectations The rally in the gold price in 2011-2012 was linked to the Eurozone crisis, the moderation since then has coincided with a recovery in the US Dollar Index. Other factors which traditionally drive gold higher include inflation expectations, these fears have continually failed to materialise whilst the inexorable increase in debt has led some to speculate about a debt deflation spiral; an environment in which gold would not be expected to excel:  Source: Trading Economics A different approach to gold valuation is the ratio of the gold price to the total-return index for ten-year US government bonds. This ratio has been moving steadily higher, suggesting a shift to an era of structural inflation, according to Gavekal Research. Other evidence of inflation remains muted, however. Is Gold Perfectly Priced or Do the Central Banks Know Something We Do Not? A look back at the decade after the end of gold reserve standard is a good starting point. The Bretton Woods agreement collapsed in 1971. In the years that followed currency fluctuations were substantial and the US Dollar lurched steadily lower:  Source: Trading Economics The US Dollar was so little revered that in 1978 the US Treasury had to issue foreign currency denominated Carter Bonds in Swiss Francs and German Marks, such was the level of distrust in the mighty greenback. Confidence was finally restored when Paul Volker took the helm of the Federal Reserve. Volker did what his predecessor but three, William McChesney Martin, had only talked about – taking away the punch bowl just as the party got started – he hiked interest rates and managed to subdue inflation: the fiat US Dollar was back in favour. Today the US Dollar is undoubtedly the first reserve currency. In the era of digital money and crypto currencies the barbarous relic has stiff competition. Added to which it is traditionally an unexpected inflation hedge and traditionally affords scant protection in a deflationary environment. Given the global overhang of the US Dollar denominated debt, many believe this is the next challenge to the international order. Considering the conflagration of factors alluded to above, I believe gold is destined to remain a much watched side-line. Gold mining stocks may fare better, as S&P Global Market Intelligence – Outlook 2019: $3.9bn Increase In Earnings For Majors – explains:  …rising production in 2019, higher metals prices and lower costs could increase free cash flow by $1.3 billion, or 19%, year over year. Companies will use this increased cash flow to lower net debt, which is expected to fall 19% year over year in 2019, placing the majors at their lowest level of leverage in five years. The majors have been focusing on returns to shareholders. Higher earnings have led to dividend payouts increasing 103% to $2.0 billion in 2017 from $1.0 billion in 2016 and remaining at about $2.0 billion in 2018. As for price of gold itself? The attractive fundamentals underpinning mining stocks is likely to cap the upside, whilst continued central bank buying will insure the downside is muzzled too. When I have little fundamental conviction I am inclined to follow the trend. A break to the upside maybe closer, but the long period of price consolidation favours a break to the downside in the event of a global crisis. Originally Published in In the Long Run (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Indian Economy and The Dance of the Bond Yield Curve

Ankit Gupta

Macro

Off late, there has been a whole lot of discussion around the Yield Curve, especially with the recent inversion of the US Treasury Yield Curve - a phenomena commonly deemed to be a “Recession Predictor” of sorts. It is rather fascinating to analyse how a small change in the Yield Curve is representative of the upcoming possibilities in a country’s economy. The article attempts to analyse the Indian Bond Yield Curve, since 1998, highlighting its key aspects and how the Indian economy has reacted to any change in the curve and vice-versa.  First things first. How to interpret the chart. We have the weekly Bond yields of available India Government Bond maturities since Jan 1998 till 17th March 2019.Instances where the yield points are not connected in the chart suggest the unavailability of a yield point of an intermediate maturity. Over time, the Indian government issued bonds of varying maturities, and hence one can see the curve dancing to its full potential in the later years.  Pretty neat, isn’t it! The gif illustrates how India's Yield Curve has changed over the course of time, but what does it really represent? Before we get into that, here is a recap of some of the common traits of a Bond Yield Curve. a. Normal Yield Curveb. Inverted Yield Curvec. Flattened Yield Curved. Steep Yield Curve. We shall now move on to examine how the Yield Curve has changed over the course of time. 1998 - 2002 Due to the lack of enough data points, it is rather difficult to interpret anything substantial during this phase. Noteworthy however, is the fact that both the short term and long interest rates were above 10% during this period.  2002 - 2004 There is an overall downward shift in both the short term and long term bond yields throughout this period. What caused the downward shift and what does it imply? The short term rates fell from 6% to 5% - quite a significant drop. A Central Bank usually announces a rate cut to boost the economy, and/or to avoid recession. As borrowing money becomes cheaper, consumer spending tends to go up, thus further increasing the money circulation in the economy.  In recent times, we have seen countries such as Japan/EU set the interest rates below 0% - a rather severe measure, nonetheless helps revive the economy. A similar effect was felt in the Indian economy as well. India GDP growth rate shot from 3.8% to a staggering 8%.  2005 - Until Mid 2008  One wonders...if low interest rates are good for the economy, shouldn’t they be just kept low? Not really. When rates are low, borrowing becomes cheap, which means debt market shoots up, increasing the overall debt in the economy. This is what happened until 2004. 2005 onwards, until the dawn of the financial crisis, rates kept increasing, indicative of a highly distressed economy. During this period, short term rates shot up more than the long term rates indicating efforts by Central Banks to prevent inflation, which of course, was the Financial Crisis of 2008. Long term rates are not driven by the Central Bank policies. They provide an overall view of the economy on a longer term horizon. During these times, the spending decreases, and savings increase, implying trouble in the short term.  So, now we know that something bad with economy is about to happen. Too late now, though! Financial Crisis and Recovery (2008 - 2011) This chart is quite interesting. I have split it in 3 sections, all of which are equally important. It highlights the period leading to the crisis, the actions/measures taken during crisis, and the slow recovery thereon. The period until August 2008...Well, by now, the crisis had almost hit the United States, and it had its repercussions felt globally. Short term rates (6months/1 year), all shot up vis-a-vis the long term rates. A classic case of Yield Curve flattening. There is a recession in sighting! Then it struck! A sharp decline in the Bond yields. Money became cheap again - a drastic measure taken by Central Banks across to handle the crisis. A good measure indeed! Short term rates fell from as high as 9% to just below 5% within a couple of months. That is extreme! Short term rates kept falling, highlighting the Steepening of the Yield Curve. This was done to encourage consumers to borrow more and kick start the economy. Across the globe, Central Banks took significant measures to inject more money into the economy - US reduced interest rates, EU initiated the Quantitative Easing program et al.  Over the course of the next 3 years, the Indian economy tried to recover. Slowly and gradually, rates increased indicating an overall revival. Yield Curve returned to its normal shape, not flat, not steep and definitely not inverted! Curios Case of Inversion This Time (2012 - 2014)  The recovery happened, or so it seemed. After returning to its normal shape, India Bond Yield Curve went on to become flatter. Short term rates again shot up to coincide with long term rates.  From the Financial crisis, it became quite evident that a crisis is not just limited to the economy in which it is started. This time around, with rising commodity prices, and looming Euro debt crisis, the RBI had to increase short term interest rates over and over again, hence leading to the Flattening of the curve again. The Curve remained similar until mid 2013, when suddenly an inversion happened - 6 months bond yield shot up to 11%, while the 10 year Bond yielded only 9%. An extremely rare scenario! It was a desperate and deliberate attempt by the RBI to defend the weak Indian Rupee, thereby making it hard for speculators to sell currency. As Reuters summarised, The RBI’s strategy of using short-term money markets to defend the rupee seemed ideal. By anchoring long-term yields, the Central Bank could ensure that its policies to defend the currency were contained at the short end of the Yield Curve and so did not affect other borrowers and investors in the economy. Indeed, a very drastic measure taken by the RBI. Returning Back to Normalcy (2014 - 2016)  It took some time for the Yield Curve to change its course. It remained inverted until 2015, but there was a gradual decline in the interest rates across maturities. Across the globe, emerging markets economies continued to struggle. With rise in commodity prices, and oil reaching new highs, emerging market economies tumbled up until 2015. Emerging market currencies weakened against the USD. Yield Curves remained flat or inverted (in India’s case).  But beginning 2016, the Indian economy began to recover its lost sheen. Both long term and short term yields fell, with short term falling more than the long term. The Yield Curve had started to return to its normal phase, some of which could be attributed to oil prices, as it took a significant hit in the global markets. Highly depended on oil and a major importer, the Indian economy fluctuated with the rise and fall of oil prices. Now a Days! (2017 - Now) So, what’s happening these days? What can we read from the current Yield Curve? From 2017 until mid 2018, rates were increasing constantly - a sign of rising debts, heavy corporate books, banking books. As we now know of the Black Friday and the Flash Crash of September, it became evident that there was a bubble in the Indian economy, waiting to burst. In September 2018, a financial crisis in Indian Housing Sector emerged, and it extended itself to other parts of economy as well. With much at stake, and the 2019 General elections in the offing, the Central bank had to constantly lower rates to make room for cheaper borrowings. Short term rates have gone down significantly compared to long term rates, highlighting the Steepness in the Yield Curve again. This allows for cheap short term financing, further raking up the overall debt in the economy. What Next?   With the upcoming General Elections, it is highly unlikely that the interest rates will change much. As highlighted above, long term yields are generally an indicator of the economy in the longer run. In this regard, the Yield Curve is likely to become Normal again with long term rates falling faster than short term rates on back of a slowing GDP growth. Originally Published here. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Understanding Debt: Difference between 'Good' and 'Bad' Debt

Nikhil Arora

Credit

Today let's talk about one of finance's most feared and mis-understood concepts. Debt. Debt forms the back-bone of any economy. It is inescapable. No matter how rich you are or become, in some or other strand of your mortal existence, you would be compelled to deal with it. Either when you use a credit card, go abroad for higher studies, buy a house, or decide to scale up your company. Debt is modern society’s engine of growth. Let back-track for a moment. How does Debt work? What does it look like? Why does it transpire in the first place? If unchecked, how can it go so wrong? The concept is straightforward. Say you want to buy a car selling at Rs 10L. But you don’t wish to pay the entire amount in lumpsum. After all, Rs 10L is a sizeable amount. When you mention your concern to the car salesman, he promptly gives you an alternate. Instead of asking for Rs 10L upfront, he says why don’t you just pay Rs 1L (i.e. only 10% of the car’s selling price) and agree for a payment plan amounting to Rs 18,000 per month…and the car is all yours! Not bad huh?! Think about what just happened. For Rs 1L only, and a small monthly pay-out, your favourite Rs 10L car is yours to take home! Let us assume you agree to this option. Well, congratulations! For two things: Firstly: For your new vehicle. And Second: You just took some Debt (here known as a “car loan”). What! Yes. The alternate presented by the car salesman included a mysterious third party i.e. a bank or a financing company, which in effect paid a major share of the lumpsum amount (i.e. Rs 9L) to the car showroom on your behalf. With the remainder Rs 1L coming from you (remember?), the car showroom makes its money on day one, as it would have liked. The Rs 18,000 per month that you would now shell out, say for the next seven years, would go to the same third party (from whom you effectively “borrowed”) to repay the Rs 9L plus...surprise - surprise...Interest! The car showroom makes its money upfront. The third party makes its money over next seven years by charging Interest. You get to buy your car, right now. So, remember, when you “borrow” money…you take Debt. Why is Debt so Attractive? Well for starters, it allows you to spend more than your present capability. It allows you to invest and grow. It allows you to consume more. It lets you take home a car by only paying a small part of its total value upfront. Why is it so Risky? The fact that you have borrowed money, implies that you need to pay it back. And in most cases, you need to pay back with Interest. And if you don’t pay your dues, you’ll be in trouble. What Kind of Trouble? Let us get back to our car example. It has now been almost five months since you bought the car. You’ve made five payments of Rs 18,000 each, all on time. But in the sixth month…say your company starts downsizing…and unfortunately you end up losing your job. You don’t have an income and now the Rs 18,000 per month hurts. A month passes by…you are unable to find a new job…and end up missing a due payment. Someone from the bank calls and gives you a stern warning. You’re hopeful that you’ll get back on your feet soon, so end up dishing another Rs 18,000 from your savings, but the bank levies a small penalty this time for the delayed payment. Another month passes by…you still don’t have a job…and you start panicking. You call the bank and tell them you’re unable to pay them anymore. Your bank account is almost empty. You don’t have any savings. The bank sends a guy who takes away (or “reposes”) your beloved car. Another month passes by, and amidst all these distractions, you somehow manage to snag a new job. The pay cheques are back, and you are once again at ease. You thank your Stars…thinking the worst is over! But is it? You now wish to apply for a credit card. The credit card company rejects you. Your health insurance policy is up for renewal, and your premium spikes up. You try to take another car loan, and the Interest on the monthly payment this time is much higher than Rs 18,000 like last time! What Happened? Simple. For the banking system – you are now deemed as a risky borrower. Your erstwhile “default” on the car loan turned your good debt into bad. Anytime you need to borrow in the future, the system would remind you of your risky behaviour, either through rejection, or through a higher Interest rate. This distinction between good debt and bad debt is important. Good debt can easily turn into bad without proper planning or due to unforeseen circumstances. Debt can do wonders and grant you 'leverage' but chasing too much leverage comes with its own set of risks, costs of which can be far-reaching and far too real. Debt is a tool that works best when used carefully. Scratch that, Debt is a tool that ONLY works when used carefully.  (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

What are Robo Advisors and How Do They Help in Financial Planning?

Sudhanva Shetty

Picks

Editor's Note: This is Part One of a two-part series on robo advisors in India. This article explains the basics about robo advisors - What are robo advisors? What are they used for? How do they help in financial planning and support investing decisions on mutual funds, equity or commodity assets? What are their pros and cons? For an in-depth review of the most popular robo advisors in India, head to Part Two of the series by clicking here. In the age of the internet, the world lives online. And if the business of movies, television, commerce, and education can be conducted without human contact in a frictionless and customisable manner, why not financial planning services and investment advice?  What is a Robo Advisor? A robo advisor is a digital platform that provides financial planning advice or investment management services online with moderate to minimal human intervention. A robo advisor can be a software or application that collects certain data points from a consumer and, based on the data inputted and using pre-defined algorithms, provides suggestions or advice on various investment-related queries. There is minimal human involvement in the robo advisory process. The bulk of the human element is in the algorithm – which was written and is routinely updated by humans. Besides this, everything else is automated.  Some Data Points: Globally, according to Statista, the robo advisory market – comprising companies like Betterment, Ellevest, Vanguard, SoFi Invest, Schwab and Wealthfront – has over $980,000m of assets under management (AUM). In the US alone, AUM for this sector amounts to $749,703m. Robo advisors in India include names like Upwardly, 5Paisa, Goalwise, Groww and Sqrrl. AUM currently within this segment in the country stands at $42m, reflecting how this industry is still in nascency. Expected to grow at a compound annual growth rate (CAGR) of 36.2%, AUM is forecasted increase to $145m by 2023. Pros and Cons of Robo AdvisorsWhat WorksPros of Using A Robo Advisor: There are many merits to using robo advisors. For one, they are easily accessible and widely available. All you need is a smartphone/laptop and an internet connection, and you’re all set. Plus, it is much easier to compare and select services on an App Store going through reviews by other users than zeroing in on a human wealth manager, where the onus of searching and assessing quality is on the user. This feature comes with an added benefit – consulting a website or an App at your leisure and convenience saves you time as compared to tracking human advisors, setting up meetings, and matching (or trying to!) schedules. Second, robo advisors are relatively affordable. They reduce the cost of investing. An internet connection plus a small subscription fee to use the App (unless its free) is invariably less expensive than hiring a human advisor. Bonus Tip: Financial advisors, in general, operate differently but they broadly follow one of two business models – they are either paid a commission by the product manufacturers they recommend (i.e. banks, AMCs etc.) or they charge you an advisory fee for their services. The advisory fee model is rarer to find, albeit much preferred due to no conflict of interest. Hence it is recommended you check in which category your robo advisor or human advisor sits.   Robo advisors are automated and internet-based, requiring little to no minimums, and have low overheads. Depending on the service you choose, your annual fees could be anywhere between 0%-0.5% of your portfolio assets. For human financial advisors, an unofficial industry benchmark is about 1%-2% of invested assets. Caveat: These figures are based on American benchmarks hence may not be applicable to the Indian context. Moreover, a robo advisor eliminates human errors and, when compared with conventional advisory, it is less likely to be biased in favour of some products or companies (as per research by the Wharton School and the University of Pennsylvania Law School).  What Doesn'tCons of Using A Robo Advisor: There are demerits, too. One drawback is the lack of “bespoke” services . No matter how ingeniously crafted a robo advisor application’s algorithms may be, it can’t recreate the proverbial “human touch”. To understand this, think of a human advisor as a personal tailor. He makes suits and dresses specifically for you, keeping your dimensions and needs in mind. This is “bespoke” service. A robo advisor, on the other hand, is like a made-to-measure shop, which has standardised patterns for different body structures and tweaks the clothing to suit you – but the design isn’t made specifically for you. This is personalised and customisable – but only to an extent. And because algorithms can vary between different robo advisory firms, if you’re using more than one such service, you could get different results for the same data points. This could create needless confusion and doubt. (But a point to note: robo advisors’ algorithms are divergent because their human programmers are divergent. The obvious sequitur from this is that human wealth advisors will be as divergent in their opinions, if not more.) Who Uses Robo Advisors? By now, it should be clear that two aspects that define a robo advisor (besides the “robo” aspect of it) are accessibility and affordability. Robo advisors are relatively cheaper and, thanks to the internet, easily available.  This means the typical crowd lining up for robo advice mainly comprises Millennials. This is obvious because this generation is famously tech-savvy and fintech and Millennialism go hand-in-hand. No wonder they are two times more likely to enlist the help of a robo advisor than older generations. But robo advisory is not limited by age or demography. Any kind of investor can avail their benefits as and when it suits them. Top 5 Robo Advisors in India Given the number of options in the rapidly growing robo advisory market and the importance of choosing the right option that works for you, foraying into this sector might seem intimidating. To ease you in and let you know who the major players are and what factors you might want to keep in mind while selecting a robo advisor for financial planning advice, here’s a list of five of the top robo advisory services in India:5Paisa.comET MoneyFundsIndiaORO WealthScripbox For a deep-dive into the services these platforms offer, the rates they charge, the reviews they received, their pros, their cons, and the proverbial “X Factor” they possess, you can read the next article in this series here.FIN.Hand-curated Business News from Top Publishers & Platforms, Richly Crafted to Fit into One Wholesome Email. 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How to Choose a Stock Broker? How Can Discount Brokers Help in Investing?

Simi Sebastian

Picks

Does your New Year's resolution include saving more or investing? Read on to find out how a stock broker, particularly a discount broker can come in handy while conducting stock market trading, or for executing investing decisions in mutual funds, equity, or commodity assets.  Editor's Note: This is Part One of a two-part series on discount brokers in India. It tries to shed some light on who discount brokers are, how they are different from a traditional full-service broker and what you need to know when choosing between a discount brokerage and full-service brokerage in India. A whole new decade is upon us. With most New Year resolutions including some element of saving more, investing or managing one’s finances better, lot many of us are actively raiding the internet for the best investing options out there. The search includes not just what to invest in, but also how to. Enter…stock brokers. Investing in mutual funds, equity or commodities? Any transaction in a stock market, buy or sell, would require a stock broker – an agent between the market and the participants/investors.   Stock broker business can broadly be classified into two categories: Full-Service Brokers and Discount Brokers.   Who Are Full-Service Brokers?These are stock brokers who provide a full-service offering (i.e. Advice, research etc.) in addition to “executing” trades on your behalf in stocks, commodities, other asset classes. These full-service brokers usually work out of offices and charge commission in percentage terms (the “brokerage”) on total amount of trade executed for the client. Some popular full-service brokers in India include ICICI Direct, HDFC Securities, Sharekhan, Axis Direct and Kotak Securities.    Who Are Discount Brokers?With the onslaught of internet, came the era of discount brokers, synonymous with online brokerages. These discount brokers carry out trades at reduced brokerage. However, unlike full-service brokers, discount brokers only focus on trade “execution”, and not lay a lot of emphasis on advice, and research offerings, and hence the lower brokerage. Most of these discount brokers operate through online platforms, and usually have little or no physical interaction with the clients. Popular discount brokers include names like Zerodha, Upstox, Wisdom Capital, SAMCO and 5Paisa.com. Now that we have gone through the basics of what a full-service broker and a discount broker do, here’s a closer look at some advantages and shortcomings of using full-service brokers: Pros and Cons of Using Full-Service BrokersWhat WorksFull-service brokers offer customized support and interaction in facilitating trade, managing portfolios, financial planning, and wealth management services to clients. They have robust research departments with analysts that provide proprietary detailed reports and recommendations. They often have their own in-house line of products like mutual funds, portfolio management, insurance, loan services, and exchange-traded funds (ETFs). Some also have investment banking divisions that may provide certain accredited investor clients access to special financial products such as initial public offerings (IPOs), senior notes, preferred stock, debt instruments, limited partnerships and various exotic and alternative investment opportunities.  What Doesn't Customised support and interaction often comes with a high price tag – including a combination of commissions and fees. Considering the high costs and perks involved, a good full-service broker may be reluctant to work with investors with a small fund pool, screening them out by requiring higher minimum investments. One should also be beware of the possibility of conflicts of interest. A broker may be prompted to push for products that are more profitable to him/her than for the client. Brokers have also been known to engage in churning, wherein they encourage clients to buy and sell more often than necessary so that the brokerage can earn a commission with each transaction. Next, we shall probe into the benefits and detriments of using discount brokerages. Pros and Cons of Using Discount BrokersWhat Works Lower cost is the primary benefit of using discount brokers. Because they don’t offer any advice, and make money simply by buying and selling stocks, discount brokers have no vested interest in persuading a customer to buy or sell a particular stock.  Moreover, discount brokers charge the same from all investors – big or small. For instance, if you buy 1 lot or 100 lots of NIFTY, Zerodha charges you flat ₹20 whereas full service broker charges you as per % of volume you trade in. What Doesn'tOn the flip side, it would mean that the client will have no access to expert guidance or routine portfolio analysis. Discount brokers are therefore, more suited for those who are comfortable doing their own research or have adequate financial acquaintance.  Key TakeawaysNot sure whom to pick? If one has the requisite knowledge, time and research acumen while treading the stock market, perhaps discount brokers would be a more efficient way to go. On the contrary, someone who is new to the market, and one who does not mind paying extra commission should opt for a full-service broker. ConclusionThe emergence of discount online brokers coupled with the shutting down of traditional brokerages has turned the industry into a business of high volumes and wafer-thin margins, prompting several large publicly traded broking firms to expand into lending, wealth management and even insurance. Needless to say, players like Zerodha are dominating the broking landscape, with more than 1.5 million clients and accounting for about 10% of the nation’s stock trades in the year ended March. It is against this rising prominence of discount brokers that we shall, in the next article, be looking at some top players in India.FIN.Hand-curated Business News from Top Publishers & Platforms, Richly Crafted to Fit into One Wholesome Email. 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Want a Better Work-life Balance? Get Your Mood Right First

Dr Foo Maw Der

Culture

Much has been said about how technology and flexi-work arrangements can help to improve work-life balance. But what if your mood — and that of your spouse — can also have an impact on that balance? While official statistics show that the number of working hours in Singapore has been on a steady decline in recent years, work-life balance remains elusive for many employees as they still spend more time at work than their counterparts in many countries. In 2017, Singaporeans worked an average of 45.1 hours a week, according to the Ministry of Manpower. The figure was higher than in countries noted for their infamous overwork culture, such as Japan and South Korea. Most discourse on work-life harmony often focuses on technology and flexible work arrangements as among the solutions, and rightly so. But the conversation tends to ignore a more intangible but no less important aspect: The moods of a working couple. For such a couple, their respective positive or negative moods can spill over from the workplace to the family setting and vice-versa — which, in turn, will have an impact on work and family outcomes. This issue of “mood spillover” and “mood crossover” among working or dual-earner couples was examined in a 2008 study involving 50 couples, who used their mobile phones to provide reports of their momentary moods over eight consecutive days. A spillover occurs when a spouse’s bad or good mood spills over from work to family, or from family to work. Thus, a husband’s anxiety about some unfinished project in the office may make him a less than agreeable companion during a family weekend at Sentosa, while a mother’s exasperation with a rebellious teen may affect her concentration at the morning office meeting. A crossover happens when a spouse “catches” the positive or negative mood of the better-half, and usually takes place within the family setting. A woman may end up inspired after listening to her husband’s enthusiastic recollection of events at work. During the study, the couples were asked to carry their mobile phones at all times and to complete a two-minute phone survey several times daily for eight consecutive days. The couples were separately asked to rate their current positive or negative moods — such as enthusiastic, inspired, or jittery, ashamed — on a scale of 1 (not at all) to 5 (extremely). Since phones were used, the responses were time-stamped, which offered real-time monitoring. To determine their orientation towards work and family, the  couples were also asked to rate several statements — such as whether the major satisfactions in their life come from their job or family— on a scale of 1 (strongly disagree) to 5 (strongly agree). The dual-career couples, who were all around 37 years old, and on average had been married for nearly 11 years and had 1.4 children. They comprised full-time employees who held various occupations, such as managers, engineers, educators, and systems analysts. Based on the mood responses given by each spouse at different times of the day — and comparing them with the responses given by the corresponding husband/wife — the study found that spouses with a stronger work orientation were more likely to exhibit mood spillover by bringing home their negative moods — such as being upset or irritable — related to events at the workplace. Individuals with a stronger work orientation tend to deeply value their time at work and take the greatest satisfaction in a job well done. For such driven individuals to achieve greater work-life harmony, the study suggested, they will have to make a conscious effort in drawing a clearer line between work and family experiences, so that work moods do not necessarily affect their interactions with family members at home. Taking a short time to clear one’s mind before leaving the office, or doing some physical exercises before heading home are among the ways to pre-empt a mood spillover into the family domain. Employers can also do their part by putting in place family-friendly policies, such as generous parental leave or flexi-time.  The study also found that mood crossovers — which usually occurred when the spouses were physically together — tended to have a relatively short lifespan. Thus, the one with the bad mood might want to set some time alone to decompress, even if briefly, to avoid spreading the negative vibes to the spouse. While often momentary, the importance of mood crossover should not be discounted — since the accumulation of “small incidences”, such as daily mood crossover, may influence “bigger issues” such as marriage quality, the study cautioned. Other studies have shown that those with a poor marital relationship exhibit more negative feelings and moods than those with a better relationship. The study also found that the presence of children could actually have a calming effect — by reducing the likelihood of one parent infecting the other with his/her negative moods. One possible reason could be that the parents diverted some of their attention towards their children and were thus less likely to be influenced by their spouses’ bad moods. Parents may also be conscious of the need to avoid displaying negative moods in front of their children since these could be interpreted as signs of conflict and distress in the family. Exploring less well-known concepts, such as mood spillover and crossover, may help us further in our search for the holy grail of work-life harmony.  About the Author The writer is an associate professor at Nanyang Business School, Nanyang Technological University Singapore. The research mentioned in this article is co-authored with his colleague Marilyn A. Uy, and Zhaoli Song from the National University of Singapore. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Mental Health Benefits of Self-Employment

INSEAD Knowledge

Welfare

UK data find the mental well-being of Uber and Deliveroo drivers to be surprisingly good. Around the world, Uber drivers encounter wage and security worries, Deliveroo workers have too much competition, Airbnb owners face problems in Paris and other cities. But rather than a dark cloud over the heads of those self and/or temporarily employed in the gig economy, recent data unexpectedly show that they are about 33% more likely to self-report positive traits in terms of mental health. Given the many stories we have read, it seems like a counterintuitive result. But, in a working paper with Bénédicte Apouey (Paris School of Economics-CNRS), we found that the self-employed gig workers in the United Kingdom score higher across a range of psychological well-being measures than workers in the mainstream economy. Meanwhile, gig work in the UK is surging in an environment with low unemployment (under 4% in 2019) and demand is rocketing for sharing-economy services. Deliveroo, for example, was named the UK’s fastest growing tech firm for 2018 by Deloitte. Uber, although facing regulatory issues in the UK, still posted a huge increase in profit last year. Airbnb’s market in London has increased by four times since 2015. Self-Employment and Self-Worth The combination of the rise of the gig economy and the changing nature of work with more precarious jobs drove us to consider the question: What is the impact of the gig economy on its workers? We matched data from the Understanding Society: the UK Household Longitudinal Study and Google Trends. Understanding Society has individual-level information about health and demographics. It also tracks self-employment/employment and temporary/permanent employment. The Google search terms we used were primarily words associated with gig economy work in a given area. This served as a predictor for gig employment at Uber, Deliveroo and Airbnb. Matching the data based on location, we found that self-employed workers indicated  an improved ability to concentrate and higher self-confidence, which are both important to mental health. Gig workers also reported a boost to self-worth and happiness. Our results seem unlikely, given the stories we have read, yet when we consider how the sharing economy can benefit certain workers, the boost in self-confidence and concentration fits with not needing to adhere to certain restrictions found in traditional employment, like working schedules set by a boss or having long commutes. Other research indicates that Uber drivers in London, although they make less than most Londoners, have greater life satisfaction. For employees in the mainstream economy, heavy job requirements plus low autonomy equals a scenario with high occupational stress. Employees with ‘zero-hours’ contracts – workers whose hours fluctuate from week to week and who have no control over their schedules – may be under even more stress than those with regular jobs. In contrast, gig workers decide when to work and make their own decisions about customers, leading to a greater sense of control. Our health and well-being measures are from the General Health Questionnaire (GHQ-12), which evaluates a respondent’s current state and asks if it is different from their usual state. Some of the questions relate to concentration, loss of sleep due to worry, the feeling that the person plays a useful role or can face up to problems. Other questions ask if the subject is unhappy or depressed or is lacking confidence. The scores for our measures run from 0 (lowest mental health) to 36 (highest mental health). The mean is around 24. Self-employment increases a subject’s score by 8 points, around one-third higher. One very large change in the factors we examined was drink expenditure. For gig workers, it dropped by a breath-taking 200%. This isn’t necessarily a reduction in consumption of alcohol, but in spending. Uber drivers and Deliveroo cyclists/scooter drivers are often at work during mealtimes or when people are down at the pub, i.e. when money is often spent on alcohol. These are peak hours for gig workers, who of course need to be sober on the job. It is nonetheless a remarkable difference for mental health, especially in the UK where alcohol misuse is the biggest risk factor for death and ill-health amongst those aged 15-49.  Increased Results for Certain Groups Our results show that women, those without a university degree and older workers, groups which are often overlooked in the regular economy, fare particularly well in terms of mental health. Self-employed women gig workers had a 9.6-point increase in the GHQ score vs. 5 points for men. The sharing economy offers not only flexibility but a direct connection that allows these workers to feel that they are making a real and immediate contribution. For women especially, self-employment gives a level of flexibility to part-time work that isn’t possible in the mainstream workforce. As they are often responsible for taking care of children and elderly relatives, this autonomy is vital to their mental health. Yet only 14% of Uber drivers were women in 2015, according to their own statistics. Transferring the Gig Experience to the Office Our preliminary conclusions point to the importance of autonomy in the workplace. The gig economy offers workers the opportunity for more control in their jobs, which may lead to more self-worth, more confidence and less strain. It’s clear that workers who benefit from flexibility, have more confidence and feel that they're in control and making a difference are more mentally healthy. Managers can weave flexibility into office life, empowering and engaging workers to be responsible for and confident in their decision-making abilities. Teleworking is often cited as a method of giving a level of autonomy to workers. The results are not certain to be as dramatic as for gig workers; nonetheless, when managers give more autonomy to their team, it may improve employees’ mental health. The Perfect Lab Our data and results are from the UK at a very particular moment – one of very low national unemployment, access to a different labour experience and with huge demand for “sharing” services. In France, for example, there is a much higher rate of unemployment, but it is possible that other marginal groups are positively affected by the gig economy. Poor mental health is expensive for employers. In fact, a UK government study from 2015 cites mental health issues as the reason for 17.6m lost days at work. The cost of poor mental health is, of course, not limited to the UK. In the US, it’s estimated that $193bn is lost in earnings each year due to serious mental illness. Past the dramatic articles about the perils of the gig economy, the changing nature of work needs more attention. Employment surveys are starting to catch up with this new way of working and we hope to see more research in the near future. Self-employment has a positive impact on mental health, even with some insecurity, that zero-hours contracts almost certainly lack. The precariousness of zero hours contracts – where workers who learn their schedule just a few days in advance – should not be associated with the gains in well-being found amongst gig workers. Mark Stabile is an INSEAD Professor of Economics, the Stone Chaired Professor in Wealth Inequality and the Academic Director of the James M. and Cathleen D. Stone Centre for the Study of Wealth Inequality. Follow INSEAD Knowledge on Twitter and Facebook. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How Blockchain Can Assist With Plastic Waste Management

INSEAD Knowledge

Environment

By Michael Peshkam, INSEAD Executive in Residence, and David Dubois, INSEAD Associate Professor of Marketing Start-ups are making incremental use of blockchain to reduce plastic waste, but the technology’s power to drive real change is yet to be realised. It is always difficult for business executives to grasp when a new technology is ripe for use, and blockchain is no exception. This is ironic given blockchain is often presented as the “technology of trust”. Blockchains can be thought of as networks of virtual ledgers able to securely store and distribute data without a controlling intermediary. Unlike most digital technologies used to facilitate connectivity and duplicate processes, blockchain can tokenise, securely distribute and transfer anything of value to individuals on the network (such as a person’s vote or their financial assets). The ability to assign and transfer unique value to specific assets has proven particularly useful for helping new markets to emerge (e.g. Bitcoin and Ether) and is now being used to solve some of the most pressing global challenges. Plastic Packaging: Turning Waste into an Asset One crucial area in which blockchain may be pivotal in creating change is the growing plastic waste crisis. In 2019, economists estimated the level of plastic waste to be around 6.3bn metric tonnes (mt) with a value of $7.2tr. Around 90.5% of plastic ever made has never been recycled. At this rate, by 2050 we will have amassed roughly 12bn mt of plastic waste, enough to outweigh all the fish in the ocean, with an economic loss of more than $14tr. Digital technologies – from social media to apps promoting recycling behaviours and nudging change – have significantly raised public awareness of the challenge. Litterati, for example, has created an app to share geolocalised pictures of waste tagged by brand and item type. The app has had many successes including public institutions reportedly switching from plastic to paper packaging after students documented an overload of plastic packaging in their school’s vicinity. Beyond public awareness, a solution to the plastic waste challenge will require both a massive public behavioural shift to stop packaging leaking into the environment, and an increase of resources to change and accelerate the process of innovation. Currently, most plastic waste innovation initiatives undertaken by producers, retailers, research institutions, NGOs and waste management are siloed, which limits their impact. They are entrenched in traditional frames of thinking rather than seeking a systemic shift. Such a shift will require a change to the actual and perceived value of plastic packaging so it is seen as an asset rather than junk. Economic, societal and ecological ideals will need to be married and market mechanisms created to assign, transfer and exchange this value. This could take the form of crypto-credits or blockchain tokens. To be truly effective, these credits need to encompass all the ideals mentioned above – like carbon rewards.  Technological Advances in Plastic Waste Management Technology advances already exist to assist with each step of the plastic waste management process – from asset creation and valuation to transfer and exchange. For instance, to optimise collection and recycling (and reduce poverty around the world), Canadian company Plastic Bank has created collection centres in Haiti, the Philippines and Indonesia (additional centres are soon to open in Egypt and Columbia), which buy waste by type and weight. Participants take their plastic packaging waste to one of Plastic Bank’s collection centres and receive credits on their blockchain-based app, using smart contracts accessed from their mobile device. Another initiative that focuses on transparency in asset valuation and transfer is Circularise, a Dutch start-up founded in 2016. Circularise created a blockchain solution that provides an accurate pricing system for any recycled material and can indicate the number of times the product has gone through the recycling process. For example, in textiles and plastics, it transmits info on recycled contents to the brand owners (e.g. Calvin Klein) by leveraging both the Circularise system and a tracer made by a third party. Many other solutions are likely to emerge to accelerate and promote plastic packaging recycling practices at the company level. One example is Empower, a Norwegian start-up that uses blockchain tokens to foster donation-based recycling. For every euro donated by an organisation, Empower commits to clean up the same amount of plastic waste by weight. So, if Nestlé donates €1,000, Empower will collect 1,000 kg (€1/kg) of any Nestlé plastic packaging waste. But the opportunities that blockchain offers extend even further. The technology’s role as an enabler to create and transfer assets means it can connect each item of plastic packaging with the consumer so that it can be treated like an asset with clear monetary, social and ecological value. This could be achieved by adopting technologies such as digital watermarks, RFID, NTFS or IoT, which are currently being used to trace products through the supply chain. Another option could be a QR code printed on the packaging. A simple scan of the code could automatically link information to an app and generate a crypto-credit. Blockchain also provides the means to create for each item a “material passport” containing valuable information about the packaging features, including the material composition, the proportion of raw vs. recycled plastics, the origins of the material or even the number of times it has been recycled. The Key Lies in Adding Value to the Waste At present the near-zero value of plastic packaging after use makes any new business model almost impossible. This needs to be urgently revisited. One potential solution could be to borrow from the United Kingdom’s deposit-return scheme model. This adds a small surcharge to the total price of each product, redeemable when the empty container is returned to the store. In the case of plastic packaging, the consumer would receive a crypto-credit and become accountable for disposing of the packaging in the appropriate container. Just as microcredits have transformed global development, the simple act of assigning value to packaging and connecting it to consumers through blockchain has the potential to profoundly transform consumer behaviour and entrepreneurial projects in the coming decades. Keeping in mind the pioneers of technologies, from social media (Facebook) to e-commerce (Amazon) and e-marketplaces (Airbnb), it is clear that there are tremendous opportunities and first-mover advantages to be had by leveraging blockchain in emerging digital markets where asset valuation is under-formalised. Addressing the issue of plastic packaging pollution is no exception. What is needed is a change champion, someone from inside or outside the field who understands the opportunities blockchain presents and has the foresight and resources to use it to bring about sustainable, large-scale change. Follow INSEAD Knowledge on Twitter and Facebook This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2019. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.) 

What is the Normal Serum Cholesterol Level: Do You Really Need to Know Your Number?

Dr Arun K Chopra

Ship Shape

One has often come across WhatsApp forwards claiming that cholesterol is no longer a matter of concern, implying no requirement for restraint in their consumption. This article is an attempt to set the record straight. Lifestyle diseases are a pandemic today. Obesity, hypertension (high blood pressure), diabetes and heart disease have become shockingly common, pushing for a new awareness of these conditions globally. And this has prompted people to search for answers: What drives these conditions and How to overcome them? A common strategy promoted by the medical fraternity is creating awareness through some important parameters. Over time, people have started tracking them on a periodic basis via frequent medical check ups. These parameters primarily include blood sugar, serum cholesterol, haemoglobin, serum TSH (thyroid hormone) levels, blood pressure and body weight. One of the most common investigations is the serum cholesterol or lipid profile (a set of lipoprotein levels that include HDL cholesterol, LDL cholesterol, triglycerides and a few others in addition to serum cholesterol levels). That begs some questions: Does cholesterol in diet (i.e. dietary cholesterol) correlate with serum cholesterol levels?Is dietary cholesterol associated with increased risk of heart attacks?Does serum cholesterol predict the risk of heart disease?Does it predict survival? (This week we dwell upon the first two questions. The other two would be discussed next week.) Does Cholesterol in the Diet Correlate with Serum Cholesterol Levels? The average consumption of cholesterol in the diet is estimated at 200-350 mg/dl in the Western world, largely due to restrictions against cholestrol recommended by several medical associations like the AHA, American Heart Association until recently. For several decades, eggs were discouraged due to their cholesterol content (about 188mg in a single large egg yolk). However, large well-controlled studies have found no or weak associations between egg consumption and CVD (cardiovascular diseases - most common being heart attacks and strokes) risk.  The balance of data reveals that about 2/3rd of normal individuals have minimal responses to dietary cholesterol, while the remaining have a more significant increase in serum cholesterol, and also HDL and LDL cholesterol. It is estimated that the typical rise in serum cholesterol with the consumption of 1 egg per day is about 2-3%, i.e., 2.2-2.5 mg/dl per 100 g cholesterol consumed. Most human cells manufacture cholesterol regularly on their own, (about 850 mg per day for a 70 kg adult), while the body has a total cholesterol requirement of about 1000-1300 mg of cholesterol daily. The majority (called Compensators or Hypo-responders) compensate for an excess consumption by reducing the amount of cholesterol synthesised and/or reabsorbed from the gut. Those who can’t do this (called Non-compensators or Hyper-responders) develop greater increase in serum cholesterol levels, along with rises in HDL and LDL cholesterol, leading to a small increase in the LDL/HDL cholesterol ratio by approximately 0.17, and the serum cholesterol/HDL cholesterol ratio being relatively unaffected. Is Dietary Cholesterol Associated with Increased Risk of Heart Attacks? Coming to the more important question: Does an increase in dietary cholesterol, as in consuming eggs regularly, lead to an increased risk of CVD? Apparently, despite being feared as a cause for heart disease for decades, it does not. This could be due to several reasons: There is a very minor change in serum levels in most individuals, as discussed above.The protective HDL cholesterol rises in parallel with total cholesterol levels.The potentially harmful LDL cholesterol does rise but is associated with an increase in LDL particle size, making it a relatively benign increase.Finally, it depends on what food is being replaced. Whereas eggs might be less healthy than fresh fruits and vegetables, they are decidedly healthier than sugar-sweetened beverages and refined or processed carbohydrate containing foods like most breakfast cereals and sweetened juices. Also, increasing egg consumption while restricting processed foods often results in weight loss, leading to a further diminution of any possible harms associated with eggs. The exception to this is seen in diabetic individuals. They seem to have a more consistent association with CVD, especially when consumed at >7 eggs/week in American, but not in European and Asian studies. While American studies generally show associations between dietary cholesterol and CVD, the same is not borne out in a large study from China this year. In summary, large controlled studies show that dietary cholesterol does not increase serum cholesterol significantly in most individuals; even in those who do get a marked rise, there is a parallel rise in protective fractions of cholesterol. The result is that there is no significant rise in CVD risk with rise in dietary cholesterol, which is why the AHA removed dietary cholesterol from the list of nutrients of concern in 2015. This doesn’t mean that one starts hogging on fried foods and snacks; it only means that eating a whole egg or two a day (one egg for diabetics) is within the ambit of a healthy diet, especially when they replace unhealthy processed foods. This is a recurring column published every Sunday. Click here to view my other articles on health, nutrition and exercise.  (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How Customers Can Be Used As Micro-Influencers to Effectively Boost Sales

ESCP Europe

Consumer Behaviour

By Florian Dost; Ulrike Phieler; Michael Haenlein; and Barak Libai  KEY TAKEAWAYSWHAT? Brands are investing in seeded marketing campaigns (SMCs), using customers to help sell products. Customers receive products or samples and create buzz about the goods and engaging with their peers.SO WHAT? Brand managers know that SMCs are an important tool, but can't measure how effective they are or how they interact with other marketing tools.NOW WHAT? SMCs do increase sales by 3% to 18% during campaigns. However, they interact negatively with advertising and positively with promotional activities. Celebrities have shilled products for years, accepting millions of dollars to represent brands in big-bang advertising programs. Think of George Clooney with Nescafe, Charlize Theron with Dior, and the Kardashians with almost everything. Internet celebrities have followed suit, leveraging large online audiences to win big marketing deals. Ordinary citizens also have a chance to be influencers by helping companies market and sell goods. While marketing research has amply studied social sharing, face-to-face word-of-mouth (WOM) marketing is less understood. A new study in the Journal of Marketing explores the effectiveness of WOM with seeded marketing campaigns (SMC) in which companies hire customers to spread the word about everyday products, such as coffee, chocolate, and toothpaste. Customer advocates, or “seed agents,” can be particularly effective selling “mundane” products (categorized here as fast-moving consumer goods (FMCG)). In an analysis of brands in Europe, more than 80% of all commissioned SMCs are for FMCG brands.  FMCG brand managers work in a trillion-dollar industry characterized by relentless competition, constant innovation, changing customer tastes, and price sensitivity. In addition, they must target digitally savvy customers who are no longer easily reachable via TV and newspaper advertising. To respond to these challenges, companies have started to experiment with SMCs. With the help of specialized agencies, they employ thousands of seed agents, who receive brand information and products or samples, to “buzz” about the products with their peers. These campaigns are often created after the brand’s marketing plan has been developed and with left-over budget because they are cheaper to run than traditional advertising programs. However, how to manage SMCs is a source of confusion. One brand manager we interviewed ran three different SMCs of similar design, size, and cost for the same brand, but saw estimated sales effects that differed by more than 150%. She could not explain any apparent differences in those SMCs or the amplified WOM generated that could have explained those significant variations. Another manager suspected that as her marketing plan became more complex, advertising increasingly cannibalized firm-created WOM effects. Yet she didn’t have sufficient insights on the potential interactions between SMCs and traditional marketing communications to explicitly consider these effects in her decision making. Our study presents the first empirical evidence on the effectiveness of FMCG seeding programs and how they interact with traditional marketing tools. Our team studied four brands from various European FMCG markets, combining advertising and sales promotion data with market research data and word-of-mouth variables from SMC agencies. Our data set comprises different market situations to represent the wide variety of both FMCG products and SMCs. Key findings include: Firm-created WOM from SMCs incrementally increases sales in all cases. SMCs can increase total sales by approximately 3% to 18% over the course of campaigns.In the brands we studied, companies estimated that 90% of WOM took place offline and was universally positive. More than 90% of incidents were positive and only 3% were negative.Sales elasticities are comparable to or stronger than those previously represented for tools such as social sharing.Firm-created WOM consistently interacts negatively with all tested forms of advertising. The sales effects decrease by -0.6% to -2.2% for every 1% increase in concurrent advertising activities.In contrast, firm-created WOM consistently interacts positively with promotional activities that convince buyers to take advantage of price deals. SMC sales effects increase by +0.3% to 1.1% for every 1% increase in promotional activities. For managers, our findings provide insight into what to expect when introducing SMCs into this environment. Our findings support the importance of SMCs to FMCG marketers and also provide guidance on how to conduct a rigorous analysis, including simulating specific marketing plan conditions. On a theoretical level, we provide evidence of how new tools such as SMCs integrate with more established tools of the marketing mix, which can help shed light on the dynamics of interactions and indicate of how SMCs contribute. Specifically, while advertising ignites WOM for many industries, for supermarket sales it may be markedly different. From: “Seeding as Part of the Marketing Mix: Word-of-Mouth Program Interactions for Fast-Moving Consumer Goods,” Journal of Marketing, 83 (March). Originally published on American Marketing Association. More information about ESCP Europe here.FIN.(We are now on your favourite messaging app – WhatsApp. We strongly recommend you Subscribe Now to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How TikTok Took Over Social Media Using Artificial Intelligence

INSEAD Knowledge

Digital

By Jason Davis, INSEAD Associate Professor of Entrepreneurship and Family Enterprise A curious combination of prediction technology and human censors enables ByteDance to create a dynamic global video ecosystem. While the BAT – Baidu, Alibaba and Tencent – dominate internet browsing, e-commerce, messaging and gaming in China, one kind of success has eluded them so far. Despite their might, they have yet to gain much ground beyond China, with the possible exception of Alibaba in Southeast Asia. Recently, though, a newer Chinese big tech firm, ByteDance, has managed to secure vast consumer markets on a global scale with its video platform TikTok. Hugely popular with teenagers and millennials, TikTok – known as DouYin in China – is a social media application used for creating and sharing short videos. Lasting 15 seconds or less, the typical clip features fun music, a skit, lip-sync, dance or light-hearted humour. Users often participate in “challenges” or create “duets”, i.e. videos with split screens built on existing content. The app has been downloaded more than one billion times so far, with a global footprint including India, the United States, Japan, South Korea, European nations, Brazil, and much of Southeast Asia. In the first quarter of 2019, it was the third most downloaded app in the world after WhatsApp and Messenger.  TikTok is a consumer AI success story, as I explain in my upcoming case study, “ByteDance Beyond China: Leveraging Consumer Artificial Intelligence (AI) from Toutiao to Musical.ly and TikTok”, co-written by Minh H. Vo, INSEAD PhD candidate, and Anne Yang, INSEAD Research Associate. TikTok relies on AI technology in two ways. First, on the consumer side, its algorithms quickly learn individual preferences, as they capture not only the users’ “likes” and comments, but how long they actually watch each video. As the clips are very short, TikTok’s algorithms quickly build sizeable datasets. Secondly, on the producer side, AI also helps content creators craft viral videos. It simplifies video editing and suggests music, hashtags, filters and other enhancements that are trending or have been proven popular based on the category. This AI recipe is so effective that experts have cautioned against TikTok addiction. Similar to Facebook and Instagram users, the average TikTok user spends 52 minutes per day on the app. In that timeframe, they may watch more than 200 videos, including carefully targeted ads or offers. In short, ByteDance combines prediction-based AI and network effects on its vibrant multi-sided platform. More and more users join for a highly personalised stream of content they find addictive, and ever more producers join the ecosystem to create these quickly trending videos. Advertisers and vendors follow with well-targeted ads and offers. AI tightens the connections between players so that each can find a valuable niche in a thriving community. It is perhaps no wonder that the company became, in November 2018, the world’s most valuable start-up, estimated at US$75 billion, one year after TikTok’s international launch. Growing Pains: AI-Based Platforms Can be Victims of Their Own Success However, growing at breakneck speed isn’t without difficulties. AI-enabled content consumption and production generate their own problems as inappropriate content is sometimes created and delivered to users. In China, Bytedance has paid fines for pornographic content and fraudulent ads. In the US, the company paid a record fine of US$5.7 million in February this year to settle a charge that it had failed to seek parental consent before collecting personal data from users under the age of 13. According to a statement by the Federal Trade Commission, the company willingly chose to “pursue growth even at the expense of endangering children”. Out of similar concerns, India banned TikTok from its app stores in early April this year after one of its high tribunals deemed the app encouraged pornography and other illicit content. The court also warned that the app could expose children to sexual predators. The ban was reversed within the month but led TikTok to pull 6 million videos from its platform and quickly introduce content moderation features for the Indian market. Likewise, in Indonesia, the government blocked access to the app in early July 2018, claiming that it featured pornographic and blasphemous content. ByteDance crafted an interesting solution to these problems. Of course, it applies AI-based filtering of inappropriate content. But even a 99 percent effective solution allows thousands of inappropriate videos to seep through. Its solution, therefore, is a unique hybrid of AI and human censorship, in which thousands of employees monitor videos with AI-based tools. This curious solution has gone global, as the firm has established local content monitoring units in other countries, including Indonesia where a staff of 20 now filters videos based on local regulations and cultural values. The Emerging TikTok Strategy: Leveraging AI for Global Platform Dominance ByteDance seems to have found a winning format. Its platform calls for very short videos, letting more users easily create content. It leverages AI not only for the production of videos, but for their delivery as well. Users do not even need to specify their preferences when they join the platform. AI algorithms immediately get to work analysing their behaviour and delivering content, as opposed to simply making recommendations. In very little time, they learn enough to make stunningly accurate predictions about which videos will catch a user’s interest. In a way, TikTok soon knows users better than they know themselves as behavioural preferences may differ from stated desires. This drives user engagement – exactly the kind of audience advertisers and vendors are after. However, inappropriate content is rife on media platforms. When an ecosystem of user-generated content takes off, monitoring problems scale with it. This is even more true when an app is, in fact, designed to quickly surface the most popular content. Of course, AI can be used to filter most inappropriate content, but technology will never be perfect. Even if a tiny percentage of questionable content percolates through, it can still mean thousands of videos. The TikTok solution combines AI and human censorship in a way that is specific to each nation's culture. While ByteDance is still learning along the way, it has made astounding progress since it launched TikTok for an international audience in September 2017. Until now, the BAT trio were so dominant that no one expected a tech start-up to rival their success. ByteDance has defied conventional wisdom with its clever AI-based video-sharing platform. Who knows what new applications it may find in the future for its AI capabilities? Follow INSEAD Knowledge on Twitter and Facebook This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.) 

How Airlines Manage Conflicts Between Profits and Safety

INSEAD Knowledge

Aviation

By Henrich Greve, INSEAD Professor of Entrepreneurship, and Vibha Gaba, INSEAD Associate Professor of Entrepreneurship Warning: Don’t Read this Just Before Your Next Flight. Commercial air travel is an industry in which relatively small mistakes can result in disproportionately dire consequences. While it is best not to think about this when on the tarmac, it is comforting to know that safety, for airlines, is a major priority. Even so, there are limits to how much an airline can spend, and firms must balance the demands of safety and profitability to avoid running financially aground. In other words, when it comes to safety, it is not so much a matter of “how safe can we be?” as “how safe can we afford to be?” The question of safety vs. profitability is an example of the conflicting operational objectives firms face on a regular basis and the focus of our recent research, “Safe or Profitable? The Pursuit of Conflicting Goals” (forthcoming in Organization Science). The study examined how airlines balance the dual focus of safety and profits, and the influence these factors have on the costly decision of whether to change the configuration of their fleet of aircraft after an accident. Updating fleets, replacing older aircraft or those perceived to be less safe, with newer, more reliable models, is an important way that airlines ensure the safety of their operation. However, fleet replacement can be a costly transaction involving selling at a discount and buying at a premium, and decisions are not made without close scrutiny of an airline’s balance sheet. It may seem intuitive that more profitable airlines are in a better position, and therefore more likely, to replace aircraft perceived as less safe. We found that this was not the case. In fact, while more profitable airlines are generally ahead on the safety front, when it comes to making changes to their fleet after an accident, it was the less profitable carriers that were more likely to sell off aircraft and replace them with models considered more reliable. Less Profitable Firms are More Reactive To track aircraft sales and purchases, we used fleet composition data from the website www.airfleets.net, which includes full data on passenger aircraft across the industry, as well as accident records of all global airlines. We then narrowed these accident statistics down to those accidents in which an aircraft was deemed permanently unfit to fly (referred to as “hull loss accidents”). An analysis of these statistics showed that following a hull loss accident, among the group of airlines that boast above-average safety records, low-profit carriers increased aircraft sales by 55% while high-profit airlines increased aircraft sales by 29%. Profitability played an even more decisive role among airlines with relatively high accident rates. When we assessed airlines with a similar below-average safety record, firms with low profitability were 50% more likely to sell aircraft than those with higher profitability. We also examined the tenor of media coverage for each aircraft model following an accident and found that public relations, while not as influential as accident rates, were a consideration for decision makers. Less profitable airlines were more inclined to sell when the media tenor regarding their fleet was least favourable. In short, while underperforming airlines were more likely to replace aircraft in a bid to improve safety, prosperous firms were not so reactive, being less at risk and more able to survive a scandal.  Should Boeing be Concerned? These findings are particularly interesting when looking at the industry today, as airlines consider their response to the recent air tragedies involving the Boeing 737 Max. After two fatal crashes and the worldwide grounding of the model, air carriers are faced with the costly decision of what to do next. The Boeing 737 Max is a relatively new model but one that has been widely accepted by airlines, particularly low-cost carriers. As of February 2019, 376 aircraft have been delivered and another 4,636 are on order. Already, Garuda Indonesia, Lion Air and a number of other carriers are reportedly dropping or reviewing their orders with Boeing. However, given our findings and the fact that budget airlines, which make up the bulk of Boeing 737 Max’s top customers, are generally more profitable than full-service carriers, it is unlikely that too many airlines will cancel their orders. Southwest Airlines, the number one customer of the Boeing 737 Max, recently completed its 46th straight year of profitability. Ryanair, another top customer, posted a 2018 net profit of €1.45 billion, a 10 percent increase on the previous financial year. That flydubai, the Boeing 737 Max’s second biggest customer, has posted full-year profits since 2012 and came out earlier this month with assurances the aircraft remained integral to its future, further supports our findings. The Ultimate Objective is the Firm’s Survival While the results of our study may fly in the face of general expectations, they actually confirm the premise that when companies perform below aspirations (i.e. less profitably), managers become more risk averse and take actions aimed at improving their firm’s survival. This is not to suggest that nervous travellers should bypass the more profitable, industry-leading carriers in favour of their less successful competitors. There is already good evidence that an airline’s safety record will decline when its margins or profitability are low. However, aircraft sales and buys are made at the top level of an organisation, by individuals who are well aware of the safety consequences of their actions and of the consequences that any accident will have on the firm. Senior managers may even suspect that cost-cutting occurring in other areas of the firm’s operations has the potential to endanger safety, and therefore attempt to compensate for that possibility when deciding what to do about aircraft replacement. Ultimately, what our study found was that both safety and financial objectives are taken into consideration when airlines decide whether to replace aircraft models after an accident. The goal that triggers the stronger reaction is the one perceived as being more important for the firm’s survival. Henrich R. Greve is a Professor of Entrepreneurship at INSEAD and the Rudolf and Valeria Maag Chaired Professor in Entrepreneurship. He is also the Editor of Administrative Science Quarterly and a co-author of Network Advantage: How to Unlock Value from Your Alliances and Partnerships. You can read his blog here. Vibha Gaba is an Associate Professor of Entrepreneurship at INSEAD. She is also the Programme Director of Leading Successful Change and Learning to Lead, INSEAD Executive Education programmes. Follow INSEAD Knowledge on Twitter and Facebook. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

D-Mart: Something Left on the Table or All Soaked In?

Nikhil Arora

Equities

Indian equities are a diverse bunch. On one hand you have a Jet Airways or NDTV…sexy as brands but fabulously pointless as investments (thanks to their decade-long range bound share price charts), every once-in-a-while you can find a stock which investors love from day one. A company whose solid fundamentals, an almost workman-like quality, focus on efficiency, complemented by a sober and austere management adding to its aura. D-Mart, a supermarket chain listed (as Avenue Supermarkets Limited) in March 2017 fits that bill. Promoted by veteran Mumbai investor Radhakishan Damani, who directly and indirectly holds more than 80% of the company, the stock has quadrupled since issuance and remains a market favourite. Currently trading at c. INR1,300, almost 70x its 1y forward earnings, DMart’s growing retail base (from 131 stores in 2017 to 176 in 2019, major footprint in Maharashtra & Gujarat but gradually spreading all across), rising ‘per store’ earnings (from INR7.5cr EBITDA per store in 2017 to INR9.3cr per store in 2019), low leverage and ROEs regularly touching high teens is perhaps why investors love it. No doubt it is a robust business! Its “Everyday low cost – Everyday low price” philosophy i.e. to become the lowest priced retailer in the region they operate in, finds phenomenal resonance in the rapidly transforming Indian retail landscape. But Is It Trading At A “Fair” Price? Assessing fundamental value can be a lot of fun. Even more so if done quick-and-dirty and without any skin in the game. You know…spending one Sunday afternoon to put the company’s basic numbers in a spread sheet and get a feel of things. D-Mart currently trades at INR1,292 per share translating into market capitalisation of INR80,991cr, surely places it at the higher end of the retail spectrum. But it does post higher ROEs, while demonstrating discipline with leverage, so why not!? The Future Discounted Cash Flow (DCF) valuation basics: project the free cash flows (FCF) of the company and discount it by a suitable (tricky point, always) weighted discounted rate (or WACC) to get the present enterprise value (EV). Deduct the company’s net debt from EV to calculate its equity value. Let us look at its actuals then to project future FCF. Revenues: D-Mart’s revenues grew by 38.6% in 2017, 26.4% in 2018, and 33.1% in 2019. Slowing, but come on! Newstores take time to gestate. Will simply assume a 1% drop in growth every year for the next 10 years (as the base becomes bigger, growth will slow down), but still a healthy 23% expected growth in 2029 – not bad. EBITDA: EBITDA margin have been roughly between 8-9%. Taking a word from the CEO’s book of 8-8.5% margin as comfortable, let us assume a conservative and stable 8% (considering there has been some margin pressure lately). FCF: Will simply project working capital as proportion of revenues and assume the capex as 1% of revenues (again very conservative). Deducting change in working capital and capex from EBITDA and you have the FCF. Discount Rate: Don’t really have a strong view on suitable discount rates within the Indian retail space…but here are a few references...D-Mart’s cost of debt is around 9%. Considering D-Mart’s ROE is 18%, one can guess its cost of equity would be somewhere in between. As per Prof Damodaran (if you don’t know him and you’ve managed to read so far, it is your loss alone! Now go and cry in shame.), Indian equities currently hold a risk premium of 8.6%. Hence even with a beta of 1.0 for D-Mart, we’re looking at an expected cost of equity of 16%. Considering its low leverage, we can assume D-Mart’s WACC to be circling around 14%, though considering beta in real terms would be more than 1.0, we can lock in around 15%-16%. But wait, let’s plug in our numbers and goal-seek to see how investors view D-Mart’s WACC coming to its current value of INR80,991cr. The answer...drumroll...12.6%! Now that’s optimistic. Too many bubbles? In my view, yes! Think about it. We’ve assumed practically zero margin expansion, gradual growth slowdown, conservative capital spend, a status quoist approach towards working capital, and still need to apply a relatively aggressive 12%-13% discount rate (vs. 15%-16% IMHO or not less than 14% at least) to square with present market value. Don’t think much is left on the table. Nevertheless, enclosing some valuation sensitivities for you to ponder over. Also click here to view the full spread sheet.     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

First Among Equals: Differential Voting Rights in India

Kushan Chakraborty

Legal

India has for long held the common perception of one-share one-vote, which assumes that all shares represent an equal percentage of a corporation and that all shareholders have equal rights and obligations. This common perception is likely to witness some churn in the times to come. Capital markets regulator, Securities and Exchange Board of India (“SEBI”) has issued a consultation paper on issuance of shares with differential voting rights (“DVRs”) and invited public comment on it till April 20, 2019. Let’s try and unbox the concept of DVRs.  DVRs or dual-class shares (“DCS”) is a system in which a single company may issue different classes of shares with distinct voting rights and dividend payments. Typically, the shares issued to general public are distinct from the shares issued to the founder(s)-promoter(s) and investor(s) in that the latter class may have higher voting power or more control over the company. Jurisdictions like the United States have had DCS structures for a few decades now, while others like Singapore and Hong Kong have recently jumped on that bus. Still others like the United Kingdom and Australia are more circumspect about the disparity the DCS structure creates between shareholders' economic and voting rights, and have thus far, not permitted it. The American affinity to the DCS structure is, among other reasons, why certain companies like Manchester United (UK) and Alibaba (China) chose to list their IPOs on the New York Stock Exchange even though football and Alibaba aren’t as popular in the US. Others like Facebook and Google, which had huge listings in the US deployed versions of the DCS structure to great effect. On the other hand, SNAP Inc., the holding company of the massively popular social media app Snapchat by offering shares with no voting rights in its IPO, raised more than a few eyebrows. Voting is important as it provides the shareholders control over the company’s affairs. Under the Companies Act, 2013, shareholders have the right to vote in matters relating to the company’s merger, appointment of director, amendments to the constitutional documents of the company, etc. In a single-class structure of shares, A with 10 votes will exercise the same degree of control over the company as B, with 10 votes. In a DCS structure, if A holds 10 shares with higher voting power, she will exercise a higher degree of control over the company than B, who may hold 10 ordinary shares.     Interestingly, SEBI had prohibited companies from issuing shares with “superior” rights with regard to voting and dividends in 2009. This had acted as a barrier to Indian companies issuing shares with DVRs, prompting several companies to list outside India in order to incorporate a DCS structure in relation to their shares. This new step by SEBI is seen by some as an attempt to make India a more friendly jurisdiction for Indian as well as foreign companies to incorporate and list. SEBI's consultation paper proposes two routes for issuing DVRs: For companies that are unlisted but propose to list on the stock exchange with DVR structures (primary listings); andFor companies that are already listed that propose to list DVRs (secondary listings) Further, it discusses the concepts of “superior” and “inferior” rights as to shares, i.e. when shareholders receive voting rights in excess of one vote per share, there would be share with superior voting rights (SR share) and conversely, with inferior or fractional voting rights (FR share).  SR shares may only be issued by unlisted companies and that too only to promoters. The idea is to ensure that promoters maintain more control via their voting rights in addition to their economic rights before the company opts to list its shares. Once the company is listed, it can no longer issue SR shares. There are a few other conditions related to SR shares: Since they can only be issued to promoters, there can be no encumbrance over them. This means that promoters will not be permitted to pledge these SR shares for any debt funding. They are restricted to a perpetual lock-in after the company’s IPO. They can constitute a maximum ratio of 10:1, i.e. they cannot exceed 10 votes per share. They will not carry superior voting rights on every matter. On certain matters, all shareholders (including those holding SR shares) must be subject to the default rule of one vote per share. These are crucial matters that are fundamental to the existence and business of the company. In this regard, SEBI has proposed some "coat tail" provisions, under which SR shares will be treated at par with ordinary shares and FR shares on matters such as appointment and removal of independent director or auditor, change of control, entering into a contract with a person holding SR shares, alteration of the constitution of the company, voluntary winding up of the company, etc. SR shares will be subject to a sunset clause, under which they would automatically convert into ordinary shares at the end of 5 years from the date of listing, at which point their voting rights will become at par with ordinary voting rights. However, the life of SR shares may be extended for a further period of 5 years if the same is approved by a special resolution by all shareholders on a one-share one-vote Promoters, of course, have the discretion to accelerate the conversion of SR shares to ordinary shares. The addition of the sunset clause highlights that DVRs are mostly required at the initial stages of a company’s lifecycle. During and immediately post incorporation, DVRs play an important role in enabling the promoters to assume business risks without ceding control. Subsequently, once the business is more established, shares with DVRs lose their purpose and are converted into regular shares. The sunset clause also has a corporate governance play, effectively preventing promoters from exercising control over a company by holding on to a small number of shares for a large period of time. On the other hand, the paper proposes that FR shares may only be issued by companies whose shares have been listed on the stock exchange for at least a year. FR shares are usually issued to outsiders and investors who want control in the company. Voting rights on FR shares cannot exceed a ratio of 1:10, i.e. one vote for every 10 shares. Companies may pay a higher dividend on FR shares as an incentive for investors to opt for them, in lieu of lower control rights.   The paper also recommends amendments to the Companies Act, 2013 and various other SEBI Regulations such as those relating to capital issuances, continuous listing requirements, buyback and takeovers, which reflect the impact of DVRs on these legislative and regulatory provisions. (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Fending Off Disruption: Incumbent Strategies for Digital Transformation

Prof Sia Siew Kien

Digital

With all the hype about technological disruption, companies are scrambling to jump onto the digital transformation bandwagon. An international Ernst & Young survey, conducted on over 900 companies in 2017, shows that 90% of these companies are elevating digital priorities in their strategic planning over the next two years. But more digital initiatives do not mean stronger transformation strategy. You need to understand the tech disruption scenario in your specific context when you formulate an effective and targeted transformation strategy.  Clarify your Specific Tech Disruption Scenario  According to Professor Ron Adner (Tuck School of Business at Dartmouth College) and Rahul Kapoor (The Wharton School at the University of Pennsylvania), a specific disruption scenario is the unfolding of competitive forces between the new and the old technology ecosystems. The greater the challenges (e.g., industry resistance, regulatory constraints) confronting the new technology ecosystem, the slower the disruption. The more positive the improvement prospects of old technology ecosystem, the more incumbents will remain relevant and competitive. The different competitive dynamics would yield four disruption scenarios - creative destruction, illusion of resilience, robust coexistence, and robust resilience.   Creative destruction will take place very rapidly, where the new tech ecosystem is emerging fast, and the old tech ecosystem is no longer relevant. Illusion of resilience is a period of inactivity followed by rapid disruption, where the old tech ecosystem is no longer relevant but the speed of new tech ecosystem emerging is slow such that incumbents will continue its dominance until new entrants resolve emergence challenges. Robust coexistence occurs when incumbents and new entrants each have their respective advantages because the new tech ecosystem is emerging fast and the old tech ecosystem is still relevant. Robust resilience is the best scenario for incumbents, where the old tech ecosystem continues to be relevant and the speed of new tech ecosystem emerging is slow. Align Your Digital Transformation Strategy In the Creative Destruction scenario, passive participation is most sensible as it is too late for incumbents to develop new capabilities and old tech ecosystem is no longer relevant. Refusal to acknowledge the reality can be costly. For example, to counter the rapid rise of mobile payment in China (e.g., AliPay and WeChat Pay), ICBC, China’s largest bank, invested aggressively in its own payment app and e-commerce site, but still failed to challenge the dominance of these disruptors. Instead, incumbents should focus on their niches to do what they do best, and ensure that they are readily connectable to these platforms to participate in the growth of the disruptors.  In the Illusion of Resilience scenario, incumbents should focus on preemptive reinvention. This is what DBS Bank has done. To preempt disruption of its core retail banking business, it embarked on a radical tech transformation to ramp up its digital capabilities to be like a tech giant. It invested heavily on its people to be a 22,000 person startup. It also disintermediated itself to “make banking invisible” by embedding itself in the lives of its customers. However, preemptive reinvention is still a defensive strategy. DBS is only getting itself on par with the tech disruptors in terms of new capabilities. With the disruptors’ entrance into Singapore (e.g., Ant Financial and Grad Pay), the competitive battle is still out there to be fought. But DBS would be so much more ready to compete with these disruptors now. Under the Robust Coexistence scenario, incumbents still have some relevant old capabilities but have no time to develop new capabilities. On the other hand, disruptors have new capabilities, but they need access to some old resources. Since they each have a piece of the puzzle, incumbents should seek to develop a win-win strategic collaboration with the disruptors. Citibank, for example, has accumulated deep global treasury management expertise in enterprise banking, but it lacks new digital capabilities. Its strategy was to actively seek partners with complementary capabilities. KJ Han, Chief Executive of Citibank Singapore, coined the term “fintegration” and noted that banks will need to become extraordinarily adept at integrating the best fintech innovations into their operations.                                                              Finally, in Robust Resilience, incumbents have the opportunity to entrench their competitive position through platform transformation, given their advantageous positions. For example, Ping An, China’s second largest insurance provider, went beyond reimbursement for social health insurance to build a digital ecosystem that integrated relevant healthcare services around its customers. Ping An Health Cloud facilitated sharing of patients’ electronic medical records across stakeholders (i.e., patients, clinics, insurance providers, government). Ping An Good Doctor enabled online medical consultation and Ping An Wanjia offered offline healthcare services linking to thousands of clinics. The transformation leveraged its strong incumbent advantages - high quality medical data, extensive hospital network, and massive user base. Measure Your Digital Transformation Efforts There is no one-size-fits-all digital transformation strategy. Ask these two questions: Which tech disruption scenario are you encountering?  What should be the focus of your digital transformation strategy? Such clarity should help you establish appropriate measures to track the progress of your transformation efforts (e.g., KPIs for “platform transformation” versus “preemptive reinvention”). The truth is that your digital transformation efforts will be scrutinized! Unlike venture funding for startup disruptors, investments for incumbents’ digital transformation must come from its traditional businesses. You need to continuously justify the resource bridging from the old to the new. Having little to show after pouring in huge sum of money is the surest way to kill such transformations. You need to demonstrate real business value as you progress along. Co-written with Mou Xu About the authors Sia Siew Kien is associate professor of Information Technology and Operations Management at Nanyang Business School at NTU Singapore while Mou Xu is research associate at the business school’s Asian Business Case Centre. (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Transfin. Adda

The New Age of News and Podcasts to Beat the Blues

A Billion Security Cameras and Why Gemology is in Vogue

Sudhanva Shetty

Adda

Growing Old Before Becoming Rich and Everyday Rental Fashion

Sudhanva Shetty

Adda

Aramco's Titanic IPO and Why All Maps Are Wrong

Simi Sebastian

Adda

Are We Winning The War Against AIDS?

Sudhanva Shetty

LongShorts

For over four decades HIV/AIDS has spread fear and grief throughout the world. The lethal virus has claimed over 35 million innocent lives, resulted in endless trauma and discrimination, and ignited a massive public scare unlike any other disease. But today, what was once a death sentence has in fact become treatable. The virus still strikes, spreads and kills, but its body count has greatly plummetted. Today, thanks to research and scientific advances, there is reason to hope that humanity is on the verge of winning the war against AIDS - and soon. The Berlin Patient: In 1995, Timothy Ray Brown was diagnosed with HIV while studying in Berlin. What followed was a long decade of antiretroviral treatment (ART) to suppress the virus. Then, in 2006, in an unrelated development, Brown developed blood cancer. To treat this life-threatening disease a blood-stem-cell transplant would be conducted. That’s the usual procedure followed. But here’s what changed everything – the tissue-matched donor who was selected had inherited from both his parents a rare mutation (the CCR5 or CD195 cell surface receptor, if we’re being technical). This mutation helps build immunity in healthy people against HIV infections. The result? History. Three years later, though ART had been discontinued, doctors could no longer detect HIV in Brown’s blood. The London Patient: In March this year, a second person was declared “cured”. The procedure undertaken (in a London hospital) was similar to Brown’s, and the virus was not observed again in the patient though he was taken off treatment for 18 months. Doctors warn against using the word “cure” for these cases. A cure would be a final, definitive fix to kill the virus in an infected person’s body for good. In the above two cases, the virus’s reproductive chain was broken but it might resume replicating in the bloodstream in the future. That’s why doctors prefer to say the person is “in remission”. A final, definitive cure for AIDS, meanwhile, is still out of reach. But it is within our grasp  How to Tame A Pandemic: HIV/AIDS was first observed in 1959 but became an international scare only in the 1980s. The pandemic peaked in the mid-2000s, when the mortality was almost two million people each year. Meanwhile, ART was priced at over $10,000/patient/year. Fast-forward to today, about 15 years later, and you’ll find the amount of ground covered by science and humanity to be astounding. The mortality rate has halved, as has the number of new infections (two-thirds of them in sub-Saharan Africa). Access to treatment has never been more easily available. And antiretroviral therapy? In 2016, it stood at $75/patient/year for first-line treatment. Meanwhile, the efficacy of treatment has progressed significantly. The first treatments emerged in 1987; in 1996, ART revolutionised HIV care. Over time, the focus of scientists shifted from containing the progression of the disease to reversing it. And treatments have simplified too – from dozens of medications on a daily basis to single-tablet regimens. This shows the progress that’s been made and gives us reason to be optimistic for even more simple procedures in the future. Case in point: during his treatment, the Berlin patient had to be put in a medically induced coma and had nearly died. The London patient, on the other hand, was put through a milder, more tolerable experience to be “cured”, even though the procedure was a similar one. How is India Coping With AIDS?: About 2.3 million Indians live with HIV. Since 2010, annual new infections have fallen by 27% (considerably better than the global average of 16%) while AIDS-related deaths have plummeted by 57% (the global average is 33%). While our progress in the last ten years is admirable, these numbers could – and should – be much, much better. And the movement against AIDS might be losing momentum – in 2017, the number of new infections actually rose, something that’s often blamed on waning interest in the anti-HIV programme and unpredictable funding. Domestic funding of the anti-AIDS programme has skyrocketed in India since 2012, but government budgetary allocations have fluctuated. For example, in 2015-16 the budgetary allocation to the National AIDS Control Organisation (NACO) was slashed by 22% and a year later it was increased by 17% (in the recent budget, the allocation was boosted by 30%). These fluctuations have hurt the functioning of prevention programmes and laid off many health workers. The big obstacle India faces in eradicating AIDS is the “epidemic of non-communication”. The government’s test and treat policy provides free and guaranteed ART to patients, but only 56% of those afflicted are on this treatment. Though over 70% of the population is aware of this disease, many are unaware of its links to unsafe sex and drug use, or its treatments. This is especially critical in rural areas, where 40% of youth don’t have knowledge about AIDS. A lot of this might have to do with the societal taboos around sex and sex education prevalent in our society. New HIV infections and AIDS-related deaths in India. How Close is India to Eliminating AIDS?: Well, the UN’s goal is to end the AIDS epidemic globally by 2030. To achieve this goal, they have a sub-target called “90-90-90”, to be reached by 2020. 90-90-90 stands for ensuring that 90% of those infected know their HIV status, 90% of those diagnosed will receive sustained treatment, and 90% of those treated will have viral suppression. Against this target, India’s numbers as of  2017 stand at 79-56-X (X because data for the same is unavailable). Look How Far We’ve Come: The Berlin and London patients were milestones in the race to the Holy Grail – a definitive cure for AIDS – and experimental science around this topic has grown even more sophisticated since then. Today, DNA editing, gene knockouts and even laser technology are being used to combat HIV or research treatments. Awareness about the causes and treatments of AIDS has spread like wildfire, aided both by governments and NGOs. And even as efforts to find a cure are tantalisingly close, vaccines are also being developed and tested to prevent AIDS in the first place. Black & White: CRISPR is a field of particular interest to researchers. Its technology uses a protein called Cas9 to add or remove targeted portions of the human genome. Scientists opine that as the tech develops it could be used to target the virus in an infected person’s chromosomes. It has already been used in mice and monkeys with relative success. But with great power comes great controversy. Last year, a Chinese scientist used CRISPR to meddle with CCR5 in human embryos to create the world’s first genetically edited babies (two twin girls, and possible more children). The scientist argued that he was enabling HIV-resistant human beings, but his “project” was met with near-unanimous international backlash. It was panned as “human experimentation” and sparked a major debate on bioethics and genetic engineering.    Still Not at the Mountaintop: Since the beginning of the AIDS epidemic, 35 million people across the world have lost their lives to this dreadful disease. Today, 36.9 million people still live with HIV. In a matter of four decades, humanity has come a long way – from struggling to deal with a global pandemic to coming close to a cure. But while it can be said that we are winning the war against AIDS, we must keep in mind that the end is still some distance away. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Business Quiz: Who is the New RBI Deputy Governor, Which SoftBank Companies Laid Off Workers, and More

Sudhanva Shetty

TheWeekThatWas

It's been an eventful week in the world of Business and Finance - as usual! From SoftBank-backed companies like OYO announcing lay-offs, Byju's rising in the list of the country's largest unicorns to the RBI getting a new Deputy Governor, a lot has happened. Think you've followed the news ardently enough or want to test your Quiz acumen? Take this week's Quiz Knock to find out! Here's what you can expect:1)    Ola, Swiggy, OYO, Paytm and Byju's are India's five biggest unicorns. How can you arrange them as per decreasing valuation of the company?2)    2019 was the worst year on record for auto sales, industry body SIAM said in a recent report. What does SIAM stand for?3)    Who was recently appointed Deputy Governor of the RBI?4)    Which Chinese company is reportedly in talks with Vodafone Idea and Airtel to jointly develop a cloud network in India?(Hint: This company is the largest mobile telecommunications corporation in the world by market capitalisation and also the world's largest mobile network operator by total number of subscribers.)5)    The company represented by red has seen its market cap increase by five times over the past few years. Meanwhile, its competitors' market caps have fluctuated only slightly. Which is the company in red? (Hint: Think electric.)6)    Which fintech startup did Visa recently purchase for $5.3bn (roughly twice its private valuation)?7)    The world's most precious metal has seen its value surge 222% in only one year. It costs $7,925 per ounce and most of it is mined in South Africa. Which is the world's most precious metal?8)    2019 was a big year for music streaming companies in the US. It was the first year that music streams crossed ____ in number.9)    OYO, Rappi, Getaround and Zume - these are startups that laid off hundreds of their employees in recent days. What connects these four companies?10)    Tsai Ing-wen recently won another term as President of which country after elections were held last week?FIN.How well do you know the top news of the last week? Have a go at our TheWeekThatWas Quiz and test your wits.

Transfin. Podcast E36: Brand Power, Clean Slate, Human Element

Professor S

LongShorts

  Our podcast with Arjun Guleria (of Beam & Words, a Delhi-based brand communications & brand strategy firm) started with a conversation on Brands, but gradually changed course to reflect on his personal journey as an entrepreneur, the human element which is key for creative solutions, and the blessing that is his accountant! P.S. He also humoured our usual digressions towards AI/ML, the myriad evolutions of consumer tech, for better, and for worse! When Arjun started with his co-Partners, Beam & Words wanted to look at "Communications as a Whole", avoid siloes, and not become a hostage of platforms. 7 years later, seems not much has changed.  The TOC: Why Brands First, Platforms Later? We start by talking about brands and communication, the two main areas of focus of Beam & Words. Arjun tells us in detail about his “brands first, platforms later” ideology, through which the company places emphasis on identifying the story of a brand and not on the platform of promotion, which are often only momentary. Starting Business with a Clean Slate We move on to talk about Arjun’s relatable phase of imposter syndrome and feeling like the odd-one-out in the beginning, given the PR and advertising background of his co-founders, and his own in finance. It seems to have worked out to their advantage though, allowing them to start their business with a clean slate, bringing together different ideas and perspectives. This proved to be so important in the ever-evolving world of business and communication, that the company has now taken to hiring people from a variety of backgrounds! Can AI get Creative? Touching upon a topic from our previous podcast, in our last section we talk about offline versus online marketing, and similar to our previous guest, Arjun also talks about the benefits and the emotive aspect of the offline. This discussion organically leads us to the topic of Artificial Intelligence (AI) and Virtual or Augmented Reality and their role in the marketing industry. We question whether the ever-more lifelike bots could ever replace humans when it comes to data interpretation and communication with clients, with Arjun arguing that despite being advantageous as efficiency tools, there’s still a long way to go before they can begin to offer creative advice. (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Manufacturing Batteries for Electric Vehicles in India: A Case for Make in India

Simi Sebastian

LongShorts

The Government of India (GoI) kicked off its Electric Vehicle (EV) drive over two years back with much zeal and vigor. However over time on back of ambiguous policy-making, industry pushback and a palpable slowdown in the auto sector at-large, the momentum for ubiquitous “mass market” adoption has somewhat mellowed. This shouldn’t come as a surprise since such expectations would naturally come across as elusive unless a concrete policy framework, significant tech value-addition from manufacturers backed by robust and reliable infrastructure emerges. LOSING STEAM Now while much has been said on a lack of charging station penetration and EVs total cost of ownership (TCO, that is, the cost of owning the vehicle plus cost of maintenance and charging) acting as a deterrent (the latter being true at least in the passenger segment if not in the commercial space which to be fair also depends heavily on government subsidies and financial engineering for their unit economics to work), an aspect that is often overlooked is the batteries themselves. Batteries are of singular significance within the EV value chain...For instance a lithium-ion battery (LIB) on average accounts for almost 40% of the EV’s manufacturing cost base. DIGGING DEEPER Here’s a quick look at the typical value chain for battery manufacturing:  In the first step, a myriad of raw and processed materials, including cobalt, natural graphite, silicon metal and lithium are used to produce various cell components - anode, cathode, binder, electrolyte and separator. These components are then assembled into individual “cells”. Subsequently, individual cells are configured into larger modules. These modules are next installed with systems that manage power, charging and temperature. Following this, the battery pack is integrated into the vehicle structure along with the battery-car interface (connectors, plugs, mounts). India at present, primarily figures in the pack assembly onwards value chain. The country is mostly dependent on Chinese imports for manufactured cell components & modules. In fact, according to an analysis by BloombergNEF, in early 2019 there were 316 gigawatt-hours (GWh) of global lithium cell manufacturing capacity. China is home to 73% of this capacity, followed by the US, far behind in second place with 12% of global capacity. Considering raw materials alone comprise almost 60% of the finished battery pack, a lack of indigenization there obviously implies margin dilution for OEMs and exposure to out-of-control geopolitical forces, like what the country faces in case of crude oil imports.    WHEREIN LIES THE PROBLEM? WHY CAN'T WE MAKE IN INDIA? A battery used in a typical EV consists of hundreds of large lithium-ion cells that use metals like lithium, cobalt, nickel and manganese. The problem however, is that there are only limited reserves of lithium and cobalt. 65% of lithium reserves are in Bolivia and Chile, while 60% of cobalt reserves are in Congo. A skewed supply demand ratio ensures that costs remain high. Interestingly, Chinese state-owned firms have been securing lithium mine concessions in countries such as Bolivia, Argentina and Chile for years now. Their formative control on the global supply chain is clear, considering they are responsible for 63% of lithium’s global demand. Now that we have established the importance of manufacturing LIB indigenously, let us have a look at some of the key strategic challenges at play. ROADBLOCKS To begin with, the occurrences of Li ores (lepidolite, pegmatite, spodumene and hiddenite) in India is low and concentrated in a few locations such as the Bihar mica belt, areas of south Chhattisgarh and Karnataka. To this effect, the government can begin with scanning for these resources within the country, while incentivizing strategic investments in international mines for these materials. Additionally, over time, India would also need to secure other materials used in LIB including cobalt, nickel, manganese, and graphite. Yet another vital task would be setting up of a robust LIB recycling industry. Furthermore, the government could also allow import of used Lithium-ion batteries for recycling as suggested by this NITI Aayog report. India lacks high quality R&D infrastructure to identify emerging, high performance LIB variants. A robust R&D support can bring down the battery cost, enhance capacity as well as prolong its life cycle. However, one must not discredit the fact that building battery manufacturing units is no mean task. It involves numerous financial, logistical and technological challenges. To put things into perspective, the Tesla Gigafactory at Sparks Nevada, which has an annual capacity for 35 gigawatt-hours (GWh) — one GWh being the equivalent of generating (or consuming) 1 billion watts for one hour - nearly as much as the entire world’s current battery production combined, occupies nearly 4.9 million square feet across several floors and costed over $5bn.  To address this, early plants can be set-up either by international manufacturers or as joint ventures between Indian companies and international manufacturers. These measures, when coupled with better optimisation of manufacturing plants and implementation of government subsidies and tax incentives can significantly reduce the cost of LIB in the future. LESSONS FROM OVERSEAS The strategic importance of battery technology to EV is increasingly being recognised and countries across the globe have adopted policy measures to further battery manufacturing. For instance, in China, policy support aims to kindle innovation and induce consolidation among battery manufacturers, giving preference to those that offer batteries with the best performance. The European Union in 2018 adopted the Strategic Action Plan for Batteries in Europe to build a robust battery value chain, including extraction of raw materials, sourcing, processing, battery systems, reusing and recycling. Needless to say, India could benefit much from taking a leaf out of these instances.  RECENT DEVELOPMENTS The government earlier this year launched the National Mission on Transformative Mobility and Battery Storage to formulate and launch a Phased Manufacturing Program (PMP) to localize production across the entire EV value chain. It also recently approved a subsidy plan of INR700cr to subsidise manufacturing of batteries for electric vehicles and mobile phones, which shall now be sent to the cabinet for its approval. As per this NITI Aayog report, in addition to the currently available Lithium-ion chemistries, future developments in battery chemistry may yield a new generation of batteries which will include ‘solid state’ batteries that promise a storage capacity of about 1000 Wh/kg and 80% charge in about 10 minutes. As indigenous manufacturing gathers paces, it is likely to bring down the cost of batteries to $76, or about Rs 5,450, per kilowatt hour (kWh) from $276, or about Rs 19,800, per kWh – thereby bringing down the cost of EVs at par with combustion engine vehicles in the next 3-4 years.FIN.(We are now on your favourite messaging app – WhatsApp. We strongly recommend you Subscribe Now to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Only Thing Indians are Talking About

Sharath Toopran

LongShorts

 This episode is very different from our usual routine. We will not talk about Business or Finance. Because let's face it...nobody's talking about it right now! Even with the United States conducting air strikes against Iran, no one in India seems to notice.  What is being noticed is the ongoing sense of disillusionment, rage, and confusion that has gripped many Indian cities and academic campuses thanks to Article370-Ayodhya-CAA-NRC-Jamia-JNU in the age of WhatsApp and Twitter.  It is the Elephant in the room.  So we thought, let's dig in. Nevertheless, this is a one-off break from our weekly ritual. We shall continue to fanatically (wrong choice of word maybe!) ignore political content...until the next elephant shows up. Enjoy the show!FIN.For similar banter on all things Finance, subscribe to "Transfin. Podcasts" on your favourite Podcast App.

Draft National E-Commerce Policy: Treading the Thin Line Between Regulation and Restriction

Professor S

LongShorts

Backdrop: The government recently released a draft e-commerce policy for stakeholder comments, barely two months post rollout of its new FDI policy which shook the nascent industry, especially major players. The Draft deliberates upon a comprehensive framework aiming to preserve consumer interest by creation of suitable regulatory mechanisms. However, like most policy actions, it walks on a fine line of managing citizen interest at the expense of creating a less-than-conducive regulatory environment for the industry at-large - one that may not allow the country to reap the maximum benefit from the rapid digitalization of the domestic, as well as the global economy. Let’s Start from the Start: India’s burgeoning e-commerce market was valued at $38.5bn in 2017 and is estimated to rise to $200bn in 2026. Electronic commerce and data are emerging as key enablers and critical determinants of India’s growth and economic development, facilitated by cheap smartphones and even cheaper data. Here’s a rundown of the key points: On Point?: Six broad issues have been touched, including i) data, ii) infrastructure development, iii) e-commerce marketplaces, iv) regulatory issues, v) promotion of domestic digital economy and vi) export. Data is the New Oil: There’s an overwhelming push for a robust administrative, regulatory and legal mechanism to control data flows. The word “data” itself has been quoted more than 200 times within the 42 page document. The principal case has been that an individual consumer/user who generates data retains ownership rights over it. Viewed in conjunction to the Personal Data Protection Bill submitted to the government (for consideration by the Justice BN Srikrishna Committee on 27th July 2018), the policy at the least envisages to regulate cross-border data flow while enabling sharing of community data (data collected by IoT devices installed in public spaces like traffic signals or automated entry gates).  Breaking it Down: No data collected or processed in India shall be made available to a third party or to other business entities outside India, for any purpose, even with the consent of the customer. Neither can it be made available to a foreign government, without the prior permission of Indian authorities. The document, however, is light on details around potential implementation mechanisms.Push for a three-year data localization requirement  Backbone: Development of data-storage facilities/infrastructure is another vital part of the value chain recognized. Data centres, server farms, towers and tower stations, equipment, optical wires, signal transceivers, antennae etc. will be accorded ‘infrastructure status’ – facilitating access to longer maturity loans, easier lending terms, and even cheaper foreign currency funding through the external commercial borrowing route. An ‘infrastructure status’ also seeks to streamline the regulation of the sector.Budgetary support to be provided for the exploration of domestic alternatives to foreign-based clouds and email facilities Supply Chain Transparency:  To streamline functioning of the e-Commerce sector under the FDI Policy, e- commerce websites/applications are required to ensure that all product shipments from other countries to India must be channelized through the Customs route.The Policy provides for integrating Customs, RBI and India Post systems to improve tracking of imports through e-Commerce.All ecommerce sites/apps operating in India must have a registered business entity in India as the importer on record or as the entity through which all sales in India are transacted.All parcels under the ‘gifting’ route to be banned, with the exception of life-saving drugs. This move comes in light of companies exploiting India’s “gifting” rule whrein personal gifts priced below INR5,000 are exempt from duties. Several red flags have been raised in the recent times over numerous “gift” deliveries being made to the same address and heavy 15 kilogram parcels being brought in with a declared value of just INR3,000.  Watchdog: Given the inter-disciplinary nature of the sector, a Standing Group of Secretaries on e-Commerce (SGoS) would be appointed to regulate the issues effectively. No standalone regulator proposed, so far. Bonus: The Policy also proposes regulation of advertising charges in e-commerce (including social media platforms), to create a “level-playing field” for small businesses, who otherwise have to allocate an excessively high proportion of their budget and working capital to advertising to find their potential customers. In our view such a stance borders on regulatory overreach and we’d be very wary of its detailed wording, whenever it comes out. In Conclusion While the draft ecommerce policy means well for MSMEs and startups who seek to break through the competitive space, it is also likely to increases their compliance costs having to restructure means of how they store and share data. Giants such as Amazon and Flipkart will likewise be hit in a significant manner, forced to make huge changes to comply with the proposed rules, even as they have often been known to find legal or other ways to circumvent potential downsides. The enhanced cost of compliance may also have an adverse bearing on the rate of investment in Indian e-commerce, specifically on FDI inflows. As for the consumers, the policy seeks to offer some respite with strong anti-counterfeiting and anti-piracy measures, pushing e-tailers to publicly share all relevant details of the sellers listed on their portals and ensuring speedy redressal of consumer grievances. While the draft at multiple instances reiterates the need for the creation of a facilitative regulatory environment for growth of e-commerce sector, it falls short of providing specific details on implementations or addressing any operational nuances.   Moreover, the manner in which the policy addresses the question of ownership of personal data has been termed as “unusually parochial”, often directly at odds with the recommendations of the Justice Srikrishna Committee and the decision of the Supreme Court in its right to privacy judgement. With the Department for Promotion of Industry and Internal Trade having kicked-off a round of stakeholder consultations on the draft policy, one can only hope that the future iterations don’t propose ham-fisted solutions to problems, rather push for a more definite and implementable framework. (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)