In today's Exponential Investor...- Binance? What do the decision-makers who really matter think about crypto and digital assets?
- OPEC? What is the real reason why the oil price has further to run?
- Private Equity? What are the big themes that have been driving the deal-makers?
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BRIGITTENAU, VIENNA If you fly into Vienna Airport, stop off for a cappuccino or a
Wiener Melange at the excellent café opposite the enormous electronic board that dominates the Arrivals Hall.
At a glance, you will get insights from that board about what is really happening in Central and Eastern Europe.
On Saturday (3 July) it was obvious that there were a lot fewer flights than normal.
Covid-related restrictions mean that travel across Europe is still limited and disrupted.
I could not count a single flight coming in from the UK or Ireland.
It was – as ever - reassuring to see that flights were coming in from places that you'd read about in a panorama of Eastern Europe by
National Geographic were still coming in: such cities included Varna, Tirana, Odessa, Podgorica and many more.
Vienna has long been a regional hub.
There were also a lot of flights coming in from Greek islands and Croatia: the Austrians are in holiday mode.
That fact gives rise to the title of this edition of
Exponential Investor. And behind that title is this question:
who is still in the office, rather than at the beach?Regulators such as the FCA and strategic planners at custodian banks
When I returned from Bulgaria to my desk here in Vienna's Millennium Tower, I could not help but notice a lot of worrying headlines about Binance, one of the world's largest crypto-exchanges.
The Financial Conduct Authority (FCA – the UK's main regulator of financial markets) has barred Binance from undertaking any regulated activity in the country from Friday (i.e. 2 June).
In January, the FCA had said that all crypto-related firms operating in the UK should register with it.
Since then, only six have done so.
Binance withdrew its application to be registered in May.
Another 60 or so firms have also reportedly withdrawn their applications.
Now, the UK is only one of many countries in which investors invest in and/or trade in crypto-currencies.
Moreover, I sensed that the headlines were missing a bigger – and much more positive – theme in the crypto world.
About a month ago,
Global Custodian and US-based banking giant Citi published a report entitled "Is the securities services industry ready for digital assets?".
The survey was based on a survey with responses from over 200 custodian banks, asset managers, insurance companies, broker/dealers and providers of financial markets infrastructure – the "core constituency" of
Global Custodian.
Global Custodian may not be a household name, but it focuses on what really matters for banks and other large financial services companies that do business with other banks: for corporate planners at these organisations, it is an important publication.
The scope of the research included the crypto world:
"In this paper, we take digital assets to mean essentially a basket of different asset classes enabled by a common technology, cryptographically secured on distributed ledger technology(DLT). These assets can include cryptocurrencies, stable coins (cryptocurrencies pegged to fiat money or other assets), central bank digital currencies, security- and asset-backed tokens and NFTs (non-fungible tokens), representing anything from music to art and other collectibles. In addition, other relatively illiquid assets, such as private equity and real estate, have the potential to be digitalised and fractionalised."
A key finding of the research was that 91 percent of respondents expect that digital assets will become mainstream – or dominant – over time.
"Some 63% of survey participants indicated they were in the process of developing a strategy to invest in or support digital assets, while 28% said they already have a clear strategy in this regard."
"Almost 50% of survey respondents expect investor interest in digital assets and related services to grow rapidly."
One obvious conclusion is that, for all the excitement about the crypto world, institutional investors have actually, not had much involvement.
This may well be because the regulated organisations, providers of infrastructure, market makers and custodian banks which support conventional markets have yet to appear in the crypto world.
The
Global Custodian/ Citi report suggests that that could change fairly soon.
When
Global Custodian's constituency does become involved, you can be sure that volumes and liquidity in the crypto world will increase and that volatility may well come down.
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OPEC negotiators and IEA researchers
Last year, the Organisation of Petroleum Exporting Countries (OPEC – a Vienna-based club that includes the governments of some of the world's largest oil and gas producing countries) and some others agreed to cut oil output by 10 million barrels per day.
They did this in response to the weakness in demand for oil resulting from the Covid-19-related slump in the global economy.
On Friday, OPEC and friends agreed to increase production by 2 million barrels per day, in stages, from August to December this year.
However, the United Arab Emirates (UAE) has apparently disagreed with the proposal that a return to the production levels that prevailed prior to last year's cuts be postponed until the end of 2022.
The UAE wants output to return to the pre-cuts level by April next year.
This disagreement has been widely reported as causing oil prices to rise in the very recent past.
The West Texas Intermediate (WTI – the main benchmark oil price for North America) has nearly doubled over the last year.
About a month ago, my colleague Charlie Morris, the editor ofSouthbank Investment Research's
The Fleet Street Letter Monthly Alert, discussed why "reports of the death of oil are grossly exaggerated".
Charlie explained how, in spite of the excitement about the green energy transition, and governments' enthusiasm for energy sources that are not based on hydro-carbons, demand for oil is still growing strongly.
Charlie's briefing came after the publication in April of the Global Energy Review 2021 of the International Energy Agency (IEA).
The IEA's Review noted that:
"World oil markets have rebounded from the massive demand shock triggered by Covid-19 but still face a high degree of uncertainty that is testing the industry as never before. The forecast for global oil demand has shifted lower, and demand could peak earlier than previously thought if a rising focus by governments on clean energy turns into stronger policies, and behavioural changes induced by the pandemic become deeply rooted."
However, the IEA's hard numbers told a different story.
The IEA noted in their 'Oil 2021 Analysis and forecast 2026' that demand for oil is likely to rise beyond 100 million barrels per day in 2023.
Charlie noted that that target could be reached next year, in 2022.
In the meantime, adverse court rulings have made it harder and more expensive for conventional oil companies to increase output.
It is the demand/supply dynamics of the global oil market that are driving prices higher, not the apparent disagreements in OPEC.
Private Equity (PE) dealmakers and Environmental Social and Governance (ESG) analysts
In April, business consultancy McKinsey published a comprehensive review of the global Private Equity (PE) industry for 2021.
Key players in the Private Markets that McKinsey was considering include: PE funds that invest in unlisted companies; the entrepreneurs who run those companies; and the investment bankers which help to list the companies on stock exchanges (usually) by way of an Initial Public Offering (IPO).
The Executive Summary of the report noted that some of these players
"are now tracking… ESG metrics in earnest. Some—a small but growing minority—have begun to use these "nonfinancial" indicators in their investment decision making. Whether this trend ultimately proves a boon for investment value (in addition to investors' values) remains to be seen, but one thing is becoming clear: our research increasingly suggests that the individual companies that improve on ESG factors also tend to be the ones that improve most on total return to shareholders (TRS). That, plus growing pressure from customers and shareholders alike, suggests that more focus here is likely. The message is clear: ESG will become even more important for listed companies too.
In conclusion, I'd add that Southbank's editors will be at their desks during July and August as well…
Until next time,
Andrew HutchingsManaging Editor, Southbank Investment Research
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