Hill+Knowlton Strategies

This week’s Friday Fiver looks at the implications of the unrest in the Middle East for investors, the week the AV campaign turned ugly, muses on the prospect of a new tech bubble, considers Lord Davies’ report on the gender gap and the pending public sector pensions report from Lord Hutton.  Thanks to Nick, Julie, Clare, DC and Linzi for contributions.  

Desert Storm…

Since the end of January, the global media spotlight has been fixated on the Middle East. First Tunisia… then Egypt… and more recently Yemen, Bahrain and Libya. Contagion, it seems, is the word on everyone’s lips.

The political and economic consequences of the past 6 weeks will be huge and enduring. Furthermore they look set to put serious pressure on investors to justify their position in the region’s emerging markets. Undoubtedly the fundamentals will remain. Huge populations, a growth in demand for consumer goods and an abundance of natural resources is an attractive proposition, but with instability and unrest set to continue against a backdrop of inflation, is the appetite for emerging markets beginning to wane?

Figures from the fund tracker EPFR Global suggest it might be, at least temporarily. Investors withdrew a net $5.44bn from emerging market equity funds during the week to Wednesday and since mid-January, $18.5bn has found its way out of emerging markets into developed market funds. With several key stock exchanges such as that in Egypt closed, investors seem to be getting increasingly jittery and frustrated.

However, debate has always raged about whether or not the emerging market bull run is coming to an end, but emerging markets are not a homogenous entity and there is significant momentum behind the inexorable rise of many markets. The world is a diverse place, and there will always be pockets of unrest and turbulence. The key for successful emerging market investors is understanding the markets they invest in and how to manage the inherent risks.

AV you seen this?

We are barely ten days into the campaign on the Alternative Vote (AV) referendum and already the battle is ugly. The ‘No to AV’ campaign has issued adverts in regional press of a sick baby with the claim that “She needs a cardiac facility not an alternative voting system” splashed across them. Complaints have been aired by individuals and the Yes campaign but these have failed to be upheld by either the Electoral Commission or the Advertising Standards Agency. Indeed the ‘No to AV’ campaign have re-affirmed their commitment to the adverts and intend to roll out similar ones in national press from March.

What is striking in all this is that the ‘No to AV’ campaign has so far focused on the fact that we can ill afford the £250 million cost of transferring to the proposed voting system. But is this really the best argument they can come up with? Thursday’s Reuters/Ipsos Mori poll showed two in five people (42%) back a change to AV, while a third (35%) oppose it. Clearly the ‘No to AV’ side need to up their game if we are to have a real debate on the future of our country’s voting system. Surely that cost is worth paying? 

$1bn for free music…

Music streaming service Spotify became the latest tech start-up to have a mouth-watering valuation placed on it this week. As The Telegraph reported, the company is looking for $100m in return for around a 10% share of the company – that gives it a total valuation of $1bn.

Spotify isn’t the first either – in recent weeks we’ve seen Twitter valued at $10bn, Groupon at $15bn and Facebook at a truly staggering $50bn. To put those into context, Apple is currently valued at roughly $335bn. Here’s the crucial difference though. In the last quarter of 2010, Apple had revenues of $26.74bn and made profits of $6bn. In the whole of 2009, Spotify had revenues of £13m and lost £16.6m – in other words, it lost more money than it actually put through the cash register.

Admittedly, the picture is better at Facebook where they are making a good profit – $250m in Q4 2010. But even so, it’s no surprise people are already asking if we’re witnessing a new tech bubble growing by the day. Opinion is split in our office on whether these valuations are genius or deranged (as they are elsewhere), but it’s one we’re going to monitor with interest in the coming months.

Less of the glass ceiling and more of the boardroom table…

In Norway public companies must allocate 40% of board seats to women or face possible closure. In the UK, however, a recent report has rejected this approach in favour of a stern warning. FTSE 100 companies now have until 2015 to ensure a quarter of their boards are women and if targets fail to be met only then will laws be introduced to rectify this.

But is this the right approach..? In 2010 female board membership rose a mere 0.3%. It’s clear that women are not sufficiently represented in top positions and unless companies have an incentive to hire more females it’s going to be a long, hard road to equality.

There is one big downside to this, a quota will not change attitudes only numbers. How can a female board member relish her position amongst male peers when she knows that her position may have been created only to meet regulations?

For the moment at least, Lord Davies’ report advocates allowing companies to organically reduce the gender gap whether or not companies will need that extra push is something we shall just have to wait and see.

Public Sector pension pressures…

In early March, the former government minister, Lord Hutton, will unveil a paper detailing changes to the pensions earned by public sector employees. Based on his interim report in October, we already know that things are going to change quite a bit as the Coalition government tries to make public sector pensions more affordable. This is likely to include workers paying more in and getting less out as a result.

As our client Hymans Robertson noted on Wednesday though, this is proving to be quite a tricky balancing act – change things too little and the cost of these pensions to the taxpayer remains too high. Change things too much though and lots of workers will opt-out of their pension plan altogether, which would actually make the cost problem even worse. Whatever Lord Hutton decides, getting people to save for retirement remains a tricky, time-consuming and very political problem.