Cybersecurity Thrives on Back of Artificial Intelligence

Defense Department boosts its artificial-intelligence programs

The Pentagon should know that opacity breeds criticism. Yet it has been largely mute on the artificial-intelligence initiative that it rolled out in mid-2018, hiding behind a “classified” veil. That changed last week when the Defense Department released a public version of its strategy. The 17-page document is short on detail; it should still cause a stir among technology insiders. In particular, protecting billions of dollars in artificial-intelligence capabilities is a steroid diet for US-based cybersecurity companies.

From Washington’s perspective, the news conference that broadcast the report underscored a sobering reality. There was a de facto admission that the United States may be trailing developments in China and Russia. In response, the decade ahead will likely see the Pentagon sponsor a stream of hefty, multi-million dollar projects in the artificial-intelligence sphere. There may be echoes of the 1960s space race between the United States and Soviet Union.

The report is a coming-out party for JAIC. The Joint Artificial Intelligence Center, likely to have three or four outposts nationwide, will coordinate expertise across military branches and vet individual projects valued at greater than $15 million. JAIC will also sponsor its own proprietary work.

One real-world example of where this artificial-intelligence focus may lead is Project Maven, launched in April 2017. The initiative is designed to help the Pentagon sort through video surveillance to support drone strikes. Key components were outsourced to Google; employees subsequently protested the weaponization of artificial intelligence. At a military level, though, early versions of Project Maven were so successful that the development budget was quickly expanded.

Large tech companies are not the only winners. We offer three practical recommendations for cybersecurity startups:

Build ecosystem ties. The Pentagon’s move will augment the already-robust startup ecosystem in Washington. At least metaphorically, cybersecurity firms should get better connected there by hiring an industry-specific public relations consultant or even opening a government relations office.

Get to know DARPA. The Defense Advanced Research Projects Agency is likely to play an important role in complementing the work spearheaded by JAIC. The longstanding Pentagon unit commonly awards prizes, rather than grants or contracts, that can spiral upwards into the millions of dollars.

Explore allied opportunities. In the vernacular, a Pentagon contract implies work on advanced military systems. The institution, however, has many facets, including healthcare and finance. The Defense Department’s move on artificial intelligence will transform these areas too.

One defining element of the Pentagon’s approach is to build out its artificial-intelligence capabilities on the back of infrastructure that has been put in place by big tech. There may be limits to that approach. Google, for instance, will no longer work on weapons-related programs, given the internal fiasco over Project Maven. But these large, cumbersome enterprises will be looking for bolt-on capabilities. Young firms in the cybersecurity trade could benefit from corporate venture capital, while more established firms could be fielding calls from a strategic acquirer or two.

The Defense Department’s attention is now centered on artificial intelligence, rather than cybersecurity, but the two are inescapably tied to each other. Cybersecurity is actually downplayed in the just-released strategy report. There is a passing reference which reads: ‘We will increase our focus on defensive cybersecurity of hardware and software platforms as a precondition for secure uses of AI.” As a call-to-action, the statement is subtle, but direct.

Our Vantage Point: Given the high stakes, the cybersecurity industry is set to benefit impressively from renewed emphasis by the Pentagon on artificial intelligence. Opportunities are not limited to headline military programs. They extend to defense administration.

Learn more at the US Department of Defense.

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Image: In America, the Defense Department boosts its artificial-intelligence programs. Credit: Kentoh at Can Stock Photo Inc.

Sports Venues Suffer From Mall Disease

The American mall is not the only part of discretionary consumer economy on the wane. There is a quiet rumbling among owners and operators of sports venues—stadiums, arenas, and the like—that their attendance figures are in secular decline. Football and baseball teams themselves may not care. In most cases, they make money whether their fans watch them in person or tune in at home.

The supply-demand equation is harder to pinpoint at large-scale sports facilities than at shopping malls. One reason: sports venues are often owned by municipalities. Politicians may be hard pressed to reveal the truth behind that jobs-for-money bond levy. In the world of shopping malls, by contrast, retail stores renew or cancel leases in beat with the economic tempo.

We are intrigued by what has been happening at the Daytona International Speedway over the past six years. Track officials have spent more than $400 million to revamp the facilities in response to a stunning $100 million drop in revenue they experienced between 2007-2012. The site is managed by publicly-listed International Speedway Corporation, requiring disclosure that may not be readily available from other venues.

The iconic NASCAR track was originally built in 1959 under a leasehold agreement with the City of Daytona Beach. And while there have been selected renovations since then, nothing has matched the recent torrent of construction, or rather deconstruction. Among the changes, track officials removed about 40,000 seats in the backstretch, where sightlines had always been poor. Those seats were not replaced as part of a “less is more” redesign. They also added multi-use entry points to the venue, which feature concessions and exhibition areas.

The attempt to improve the attendee experience aligns with what we have seen at shopping malls across America. A core survival strategy is business diversification. Increasingly, shopping malls are making their way through the retail apocalypse by turning themselves into entertainment centers, including virtual reality rides and vibrant food courts. Similarly, the Daytona complex—as part of its redevelopment effort—now heralds a high-end lounge above the speedway and its own “entertainment plaza” across the street. That area is framed by two hotels and a coordinated selection of retail stores.

The Rolex 24 Lounge above the Daytona track is set to be a lively profit center for the company. On its website, Daytona International Speedway now advertises a two-day lounge package for upcoming events at $1,200 per person. That sticker price includes buffet, bar, and seating, with free parking in the mix. Why bother with discounted ticket revenue from the hoi polloi?

Others in Florida and elsewhere in the country may mimic the effort in Daytona. But we believe the future for sports complexes is as hazy as ever. The commercial realities of running a massive site that is often underutilized do not make as much sense as they once did. Investors can blame lifestyle changes that have evolved from the consumer-electronics revolution. The largest metropolitan areas of course can support an outsized stadium. But second and third tier cities should accept the notion that the payoff from such facilities is akin to an intangible brand asset.

Our Vantage Point: The redevelopment effort in Daytona is an important case study for owners and operators of large-scale sports facilities. Some of these complexes may start masquerading as entertainment venues, when in truth, that are better defined as social infrastructure with community benefits.

Learn more at the Tampa Bay Times.

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Image: In the United States, stock-car racing ranks alongside golf in sports popularity. Credit: Alkir at Can Stock Photo Inc.

Houston Mega-Project Spotlights Local Incubator

Houston is among the largest urban areas in America

Rice University affirmed plans for its Midtown Houston property last month. The parcel—historically leased to a Sears store—will be converted into a so-called “innovation hub,” anchoring a technology district. While the future is bright for regional entrepreneurs, the masterplan for this corner of the city now looks more like an elaborate real-estate development than the core of a major startup ecosystem.

Part of the broader political impetus behind the university announcement is the fact that Houston lost its short-list standing in Amazon’s search for a new headquarters to Dallas and Austin. The decision by the Seattle-based giant was a blow to municipal leaders who have long sought to diversify the economy. Houston centers on the oil and gas industry, although it is a heavyweight in some technology-driven niches such as medical science.

The economic landscape of one of the nation’s largest urban areas is not likely to make a Herculean shift favoring the technology industry. A regenerative startup ecosystem will take a decade—or longer—to coalesce, even with the largess of Rice University at hand. The project committee no doubt gazes aspirationally at the vibrant Kendall Square area that abuts the Massachusetts Institute of Technology.

The announcement draws attention to Station Houston. The local business incubator is an obvious winner from the economic-development effort. In its project announcement, Rice University emphasized that Station Houston will run the public programming efforts at the innovation hub, offering a fresh, if not well-funded, platform for the business incubator’s array of startup-centered activities.

Station Houston stirred some controversy in the local venture community when it converted to a non-profit. The shift from its original role as a for-profit may appear subtle, but the distinction between the two institutional models can lead to very different outcomes for startup founders and venture capitalists:

For Profit. The incubator barters management skills for equity stakes, helping nascent companies to succeed in the commercial marketplace. The concept implies that these entities excel at identifying the best startups to back at any given point in the economic cycle.

Non-Profit. The incubator relies heavily on institutional grants and corporate donations to fund entrepreneur-centered programs. That approach suggests, at least academically, that the organization runs the risk of losing its “edge” in the deal marketplace. Such criticism, in our view, seems arbitrary.

Most of the top incubators across the country—typically defined by the amount of external capital they raise for their in-house constituents—are structured along the lines of a for-profit model. Two notable exceptions, as cited by Station Houston, are Chicago-based 1871 and Boston-based MassChallenge.

One differentiating feature of Station Houston’s work is that it is centered on energy, transportation, and industrial startups. Gabriella Rowe, who became CEO in August 2018, commented in a corporate blog post: “I think we are only scratching the surface relative to the resources, education, and collaborations we can bring to make Houston a groundbreaking city for long-term innovation and entrepreneurship.” The statement is corporate-speak, but it suggests that entrepreneurs should keep a watchful eye on trending developments here.

Startup founders looking for a supportive commercial environment should be aware of the distinction between the two incubator models. We hesitate to pass judgement favoring one over the other. Success in these sort of collaborative programs depends on many variables, including specific incubator expertise, ability to access affinity-driven mentors, and local industry involvement.

Our Vantage Point: Houston offers some points of light in technology world, but its overall reputation as a startup ecosystem lags other cities, curiously so. The move to develop a major innovation hub, with a switched-on business incubator at its core, will change both perception and reality over time.

Learn more at the Houston Chronicle.

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Image shows Houston skyline. Credit: Sean Pavone Photo at Can Stock Photo Inc.

Does the ‘Year of the Pig’ Tread on Muslims?

Red lanterns acknowledge the Chinese festive season

China and its diaspora are abuzz this month with festivities tied to the Lunar New Year, celebrating the last animal in the zodiac, the pig. And while that may not spark much controversy in many countries, it does at least raise an eyebrow acroww the Islamic world. Swine are identified as “haram” or “forbidden” in the Quran.

There have been isolated calls for an outright ban of the holiday in Southeast Asia. At least incrementally, those demands may have more traction in Indonesia because of volatile cross-communal ties between Chinese Indonesians and native Indonesians.

The commotion seems to be mitigated in part because last year was the “Year of the Dog.” While canines are not expressly identified as haram in Islam, they are controversial. Some conservative scholars apply the view that they are forbidden in the home. A story in the Quran explains how the angel Gabriel breaks a meeting with the Prophet Muhammad because a dog had wandered into the house.

Across Southeast Asia, the prevailing wisdom last year was that non-Muslims should be respectful of Islamic sensibilities and downplay New Year decorations that center on images of the dog. That view continues to hold sway, even more so, in the “Year of the Pig.” In Indonesia, Religious Affairs Minister Lukman Hakim Saifuddin affirmed the need to respect tradition.

Holiday vendors appear to be making the best of an awkward situation. The BBC interviewed one baker in Malaysia who asserted, “[Muslims] buy my cookies for Chinese colleagues and friends who celebrate the holiday. Some also order for themselves because they like the [pig-shaped treats].”

From a Western perspective, the debate highlights the cultural diversity of Southeast Asia. The fact that lively discussion on the matter is common in the public domain suggests tolerance for divergent viewpoints. This sort of exchange is in short supply in some parts of the Islamic world.

Our Vantage Point: Amid Lunar New Year festivities in Southeast Asia, hostility toward Chinese tradition by Muslims is muted. We gloss over sensationalist headlines.

Learn more at the BBC.

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Image: Red lanterns acknowledge the Chinese festive season. Credit: Topten22photo at Can Stock Photo Inc.

Theme Parks Benefit From Unexpected Investors

Tottering theme parks may find new life in corporate venture capital, largely for knowledge-transfer reasons. And while it may be too early to identify a trend, we are intrigued by the announcement that China’s Fuson Group will be buying a minority stake of the Dutch-themed Huis Ten Bosch park in Nagasaki, Japan.

Details of the transaction have yet to be announced publicly. But the arrangement appears to call for a 25% share in the Japanese amusement complex. The longstanding destination in southwestern Japan is now owned entirely by H.I.S., a Tokyo Stock Exchange-listed firm. The Japanese company is credited with turning around the park financially; Huis Ten Bosch declared bankruptcy in 2003. One new feature is a robot-operated hotel.

Shanghai-based Fosun may be best known in the entertainment world for its purchase of a chunky piece of Cirque du Soleil. The move was an early stepping stone in its desire to be master of the still-crude Chinese theme-park industry. The Huis Ten Bosch investment parallels that effort. The long-term strategy is to build, if not rethink the design of, expansive leisure complexes in China. We should expect to see other bolt-on, boutique acquisitions by this cash-rich corporation.

The dark side of this story is that US-based theme parks may be missing out on investment opportunities by Chinese firms. The lingering trade war between Washington and Beijing is likely taking its toll on the US leisure sector. We note that Chinese tourists now dominate the international travel business. Second-tier theme parks near major American cities could be lucrative targets. Until the political backdrop is more stable, however, Chinese capital will likely be deflected elsewhere.

Industry insiders acknowledge that the Chinese theme-park business is set to smolder for the foreseeable future, despite conventional wisdom on soaring growth. Dalian Wanda, another corporate behemoth, all but abandoned its expectations in this industry last year by selling off its theme-park assets. And while many analysts are looking for smoke signals from Shanghai Disney Resort, that campfire is still being kindled.

Our Vantage Point: Multinationals may look to bolster their entertainment-industry acumen by buying into the theme-park business. The move has less to do with generating cash from operations and more to do with knowledge-transfer possibilities.

Learn more at the Nikkei Asian Review.

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Image: Huis Ten Bosch builds on 400 years of trading ties between the Netherlands and Japan. Credit: H.I.S., Co. Ltd.

EU Points to Saudi Money-Laundering Issues

Saudi Arabia stiffened financial-crime penalties in 2017

Brussels is having second thoughts about embracing Saudi Arabia’s stature on the global stage, at least as far as the Kingdom’s money laundering protocols are concerned. The European Commission is poised to announce a “black list” of non-compliant countries. Saudi Arabia is prominent on a 16-nation list, which includes countries like Panama and Libya. These banking entrepots are the ugly stepsisters of international finance, according European officials.

Inclusion on the list, when finalized, will force European banks to scrutinize Saudi-based account holders more severely than others. The Financial Times notes, “Banks would be required to act on suspicions by steering clear of dubious transactions and passing any concerns onto the authorities.”

The EU list is a new initiative, running the risk of taking on a name-and-shame quality. As a result, it likely will not have the same teeth globally as the commonly-used Financial Action Task Force (FATF) criteria. But the announcement still stings, as Prince Mohammed struggles to put Saudi Arabia on an even footing with more economically-liberal nations. Apparently, the roll-out of stringent money-laundering penalties in the Kingdom in late 2017 was not enough to placate European officials. Under new Saudi guidelines, those convicted of financial crimes could be given as much as a 15-year prison term and fined almost $2 million.

The real message here may be one related to the October murder of journalist Jamal Khashoggi. These lists, after all, tend to be highly political. Consider this reality check: Russia is likely to be excluded from the European roster, despite using the Estonian Branch of Danske Bank as a full-service financial laundromat over recent years.

We should keep an eye on whether or not Paris-based FATF follows Brussels’ lead. For the record, Saudi Arabia is not categorized by FATF as a “high risk or other monitored jurisdiction.” However, a FATF report issued in September 2018 declared, “The Kingdom of Saudi Arabia is achieving good results in fighting terrorist financing, but needs to focus more on pursuing larger scale money launderers and confiscating their assets.”

Our Vantage Point: To borrow the Swedish expression, Saudi Arabia would like to slide onto the international stage “like a shrimp sandwich.” The Khashoggi murder makes that difficult, at least among Western nations.

Learn more at the Financial Times.

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Image: Saudi riyal is pegged to the US dollar. Credit: Trafawma at Can Stock Photo Inc.

How Should Investors Frame Kandy Riots?

Kandy is located in the mountainous interior of Sri Lanka

Some analysts dismiss the ethnic attacks in Sri Lanka last week as a purely domestic affair. Globalists should be less cavalier. The tragedy is a sobering reflection on our collective failures; it also is a jarring reminder of headline-grabbing violence elsewhere in the developing world. The threats and emergencies that sprout from these conflicts have important implications for global business strategies.

Mob violence broke out around the central city of Kandy last week. Longstanding tensions careened out-of-control when a Sinhalese truck driver was killed by a group of Muslim men in a road-rage incident. That confrontation quickly escalated to widespread attacks on the Islamic community. Muslims represent about 10% of the Sri Lankan population, but they control a disproportionate amount of local commerce.

News reports have identified three deaths. As many as 200 Muslim homes and businesses were sacked. Eleven mosques were damaged or destroyed. The government responded by announcing a nationwide state-of-emergency and deploying military units to civilian areas. About 150 provocateurs were arrested. A judiciary board has now been appointed to investigate the breakdown of law and order.

For cross-border investors, the Sri Lankan faultline spotlights three issues that are relevant both here and elsewhere:

Emerging-Market Companies Handle Risk Nimbly

The economic disruption from the Kandy riots will likely have a greater-than-expected impact. Sri Lanka is a trade juggernaut, but its domestic economy is heavily exposed to the volatile tourism industry. Fortunately, local corporations understand this risk because of the nation’s civil-war heritage. Most have diversified activities that backstop domestic stress. As one example, John Keells Holdings, the largest company in Sri Lanka, has reach to marine logistics and information technology, among other verticals.

Social Media Plays Huge Role in Developing World

Amid the Kandy riots, the government ordered a shutdown of Facebook, WhatsApp, Instagram, and Viber to control hate speech and false news. For investors, the action emphasizes the influence of social media in the developing world, in ways that we may not completely understand in mature economies. Consumer brands, including banks, have either skipped through the brick-and-mortar phase of the business lifecycle, or avoided it altogether. Major markets are behind that curve.

Investors Generalize News to Their Detriment

Although some outside observers may think that these now-dissipated riots are a country-wide phenomena, Sri Lanka is not ablaze. The violence has been largely contained to a single region in the middle of the island. We note that the Central Province—where Kandy is located—is materially smaller in population than the Colombo metropolitan area. The dominant economic corridor on the west coast, while not immune to social friction, has largely deflected communal violence since its own flare-up four years ago.

Sri Lanka attracts boutique portfolio and direct investors. The nation benefits heavily from capital flows sourced in the Middle East and Asia. Among Western names, the market opportunity tends to be overlooked in favor of the larger stories, but Sri Lanka does stand comfortably among regional rivals. One reason that stock-market allocators, for instance, have seen comparatively strong returns is because Sri Lankan companies are heavily exposed to the cyclical uptrend in the global economy. The broad MSCI index for the country has gained 5.7% in US dollar terms since the beginning of the year, including the dip provoked by ethnic clashes in Kandy.

Our Vantage Point: Conflict in Sri Lanka, while tragic, also provides a roadmap for investors to manage their exposure to the developing world. We caution about writing off the news as merely a local matter.

Learn more at Al Jazeera.

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Image: The Central Province has a population of about 2.5 million; Kandy is the largest city. Credit: Ziggymars at Can Stock Photo Inc.

Romania Adopts Its First Unicorn

Artificial-intelligence trends inform the software-bot business

UiPath may not be a household name, but the company is on a torrid growth trajectory. Over the past four months, the firm claims that it has doubled its workforce to about 600 employees across 14 countries to support its software-bot business. With the additional $153 million it just raised from venture capitalists, UiPath can continue that expansion. The firm is now based in New York; it originally hailed from Bucharest.

UiPath is an important player in the robotic process automation business. The company designs software to help automate back-office operations, especially for legacy computer systems. UiPath is noteworthy because it maintains a diverse, enterprise-level client list, including BMW, Exxon, and Huawei.

The latest funding round propelled UiPath to a $1.1 billion valuation, providing entrée to the so-called unicorn club. The term “unicorn” is tech industry jargon for companies that have achieved a valuation level of at least $1 billion. That milestone is an important, albeit arbitrary, rite-of-passage for founders and early-stage investors.

Private-sector valuations are tough to pull apart. Detailed financial data is not readily available, while assumptions about commercial operations are rife. From our arms-length perspective, there are likely two pillars for the UiPath valuation:

Hypergrowth in Revenue. The firm claims that its revenue grew eight-fold last year, following a similarly robust rate in 2016. Our concern here is that growth companies have a peculiar habit of talking about revenue, as if it is the same as profit. In a turbulent venture-capital setting, investors may quickly shift their attention to net income.

UiPath may aspire to dominate the worldwide market for robotics process automation with its muscular footprint. Outside of Europe and the US, the firm has offices in Dubai, Singapore, and Tokyo, among other cities. Yet we wonder whether the software-bot industry will evolve into a business for local service providers? UiPath may be chasing enterprise clients that will ultimately abandon them in favor of boutique companies, if not in-house development teams.

Potential in Office Automation. The broad-based market for office-automation technology may reach as much as $50 billion over the next five years, according to Forrester, the market research company, but the software-bot component may be less than 10% of that figure. Investors appear to be buying into robotic process automation firms as an entry point for the bigger office-automation sector. Yet the overall industry may turn into a free-for-all among the biggest tech players.

The software-bot segment capitalizes on the lack of transparency among competitors. In the trenches, UiPath is going head-to-head with business-to-business brands like UK-headquartered Blue Prism and US-based Automation Anywhere. There are many other firms in an industry where, somewhat irreverently, the key barrier to entry may be the ability to hire top-notch coding talent.

Less than a year ago, UiPath was worth a modest $110 million, according to data from Pitchbook. The issue at play, in our view, is the ever-voracious appetite among investors for artificial intelligence. Gartner, the tech-oriented advisory firm, maps artificial intelligence into the initial, innovation-trigger stage of its Hype Cycle for Emerging Technologies.

UiPath is worth singling out because it is more than just another story of a potentially-distorted valuation. We are enamored by the fact that firm traces its foundation to Bucharest. Romania is not widely recognized for its startup ecosystem. In our experience, venture capitalists tend to ignore small markets because of concern over scalability in limited-size hinterlands. Some businesses—like UiPath—easily transcend those borders. Off-the-grid opportunities may deserve closer scrutiny.

Our Vantage Point: In Silicon Valley, a unicorn-level valuation is a metaphor for sustainability and permanence. In truth, the figure can be merely a snapshot of current investor fashion.

Learn more at the Financial Times.

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Image: Robotic process automation helps to bring order to digital chaos. Credit: aLanaBlue at Can Stock Photo Inc.

Indian Elite Embrace Family Offices

Ganesha's elephant head makes him easy to identify

What do billionaires in India do with their money? The question is more practical than quaint. They can wrestle with myriad financial advisors, plow funds back into their established businesses, or go it alone, investing on a best-efforts basis in selected deals. The fast-evolving option, at least in India, may be to start a family office.

That approach to wealth management could be called pedestrian in the West. In America alone, there are as many as 5,000 family offices. Yet the landscape is different in India. The cohort of Indian billionaires is the first generation of Indians in history—outside of nobility channels—to accumulate such enormous wealth. These riches are largely tethered to domestic economic reforms that were unleashed in the 1990s.

Insiders estimate that there may now be more than 75 active family-office investors in India. That tally is somewhat less than the 100 or so billionaires in the country. The real growth in the number of family offices, however, will be propelled by those with less prominent net worth today. Credit Suisse estimates that there may be 245,000 millionaires in India. We can expect to see many of the sturdier fortunes nest in a single-family office or coalesce into multi-family offices.

Uday Kotak typifies the trend. Kotak is now setting up a family office to manage an estimated $1.2 billion. This capital was sourced from the sale of a portion of his shares in Kotak Mahindra Bank. The liquidation was forced by the Reserve Bank of India, which monitors founders’ share holdings. In context, Kotak started his bank in 1985 with a $50K loan from family and friends. Today he may be the eighth-richest person in India.

One feature of the family-office structure in India is broad family adhesion. Collective activity is derived from the traditional joint-family concept in which many generations of the same family live together in the same house. The arrangement can lead to common pooling of financial resources, with oversight by the family patriarch. These cultural traits are less evident today because of rapid economic development, but they still inform decisions in the modern workplace.

We are cautious about generalization. In India, like elsewhere, family offices have complex personalities. By way of example, we identify a handful of entities that set the tone for their peer group:

Burman Family Holdings is the private wealth arm of the Dabur Group, a leading consumer goods company. The Delhi-based firm is known to be an aggressive investor in sectors with a retail angle, including financial services, hospitality, and healthcare.

RNT Associates may be the premium name among Indian family offices. It operates from Mumbai as the investment channel for Ratan Tata, former chairman of Tata Sons. Often providing mentoring skills, Tata tends to make smaller investments across an array of internet startups.

Unilazar Ventures is the family office of Ronnie Screwvala. The Mumbai-based media entrepreneur invests broadly in the venture space, but typically outside of his core entertainment interests. The firm’s seed capital can be traced to a 2012 deal with the Walt Disney Company.

In a global context, we see two features of Indian family offices that distinguish them from those elsewhere. First, tax evasion is a headline issue in India. Firms are consequently hard-wired to their government accountabilities. Second, income disparity is staggering. The richest 1% cornered 73% of the wealth generated by the country in 2017, according to an Oxfam study. That reality can draw family offices into extensive philanthropic programs.

Our Vantage Point: We expect the number of family offices in India to grow rapidly over the years ahead. As a group, they are poised to become an unexpected, if not outsized, capital source on the global stage.

Learn more at Bloomberg.

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Image: Ganesha is commonly called the Hindu god of success. Credit: Curraheeshutter at Can Stock Photo Inc.

Bank Stocks Lure Investors to Colombia

Bogota is a high-altitude capital

The bombings in the northeast city of Barranquilla at the end of January are a savage reminder of the evolving political setting in Colombia. Despite the government’s signature agreement with the Revolutionary Armed Forces of Colombia, commonly called FARC, other terrorist groups continue to operate. In this most recent incident, the National Liberation Army, known as ELN, claimed responsibility for the series of attacks, killing seven police officers and wounding dozens. Cross-border investors are unnerved by these headlines.

Isolated terrorist incidents, albeit tragic, will not derail a strong economic story. In Colombia, GDP growth could reach 2.9% this year, well above the 2.0% or so expected on average in Latin America. Recovering commodity prices are a huge boost, so too are outsized infrastructure outlays. As a testimony to this growth outlook, the Colombian central bank announced that its 25 basis point interest-rate cut at the end of January would be the last for this easing cycle.

Global investors tend to focus on headline political developments in emerging markets in ways that local investors do not. Politically-motivated violence has been a recurring backdrop in Colombia for at least two generations. FARC, for instance, was formed in 1964. The stock market was volatile after the recent Barranquilla bombings, but that actually reflected oil-related trading patterns in Ecopetrol, the largest single stock by capitalization on the Colombia Stock Exchange. The broad-based Colcap Index is otherwise up a dollar-based 11% in the year-to-date period through February 2.

Ecopetrol is the local blue-chip benchmark. Colombia ranks as a top 20 oil exporter; its capacity is similar to the United Kingdom or Azerbaijan. Ecopetrol controls a dominant portion of the domestic business, although it is not a strict monopoly. Among cross-border investors, Ecopetrol is considered a more conservative portfolio holding than Pemex and Petrobras, the Mexican and Brazilian oil giants. If the oil price continues to improve, Ecopetrol’s stock price should also be buoyant.

The real gem in Colombia, however, may be the financial services sector, representing the largest component of the domestic economy at about 20% of GDP. One reason for that largess is that the country runs a mandatory pension-contribution system. The combined market capitalization of the major bank stocks is near one-third of the total stock market, or about twice the size of Ecopetrol.

Global investors should be encouraged by the fundamental story among Colombia banks, the largest of which is Bancolombia. You can scratch the classic emerging-market stereotype of slow-to-innovate financial institutions that are dogged by government regulation. As a group, these banks are altogether different. We see two trends worth watching, both of which should propel bank stocks over time:

Asset Growth. Financial inclusion rates are low. According to the World Bank, only 39% of the Colombian population over 15 years old has a bank account. Compare that to 68% in Brazil and 63% in Chile. As the volume of bank accounts grow, the role of credit in the economy should also expand.

Financial Technology. The major Colombian banks are highly profitable, empowering them to go on a startup acquisition binge, especially among local fintech players. Average return-on-equity among the major banks is close to 15%, compared to about 10% among US banks. The ratio is lower in Europe.

The fintech angle deserves attention. Colombia has the third largest number of fintech companies in the region at 124 firms, compared to 230 in Brazil and 238 in Mexico, according to Finnovista, a venture-development consultant. Take-over expectations may be one reason why valuation levels among some Colombian startup companies are so lofty, in our view. Acquisitions by traditional banks of fintech companies could have a further impact on enterprise innovation.

The dark shadow lingering over the investment story is the May presidential election; there is also a March parliamentary vote. President Santos is constitutionally barred from running again. He is also deeply unpopular. One reason is that many feel the FARC deal is overly generous. Another is ongoing corruption scandals. A prominent case involves bribes paid by the Brazilian construction giant Odebrecht to Colombian officials.

Santos’ weak approval rating opens the door to emerging national politicians. The front runner is Sergio Fajardo, a recent governor of economically-powerful Antioquia Province, where the city of Medellin is located. Yet Fajardo is vulnerable. Provincial debt levels ballooned enormously under his leadership. The opposition is likely to paint him as a fiscal profligate. Adding texture to the race, the former FARC guerilla commander Timochenko is now set to run in the May election.

The political setting could upend interest in the stock market over the next few months, but we are still drawn to the opportunity because of the underlying growth potential. A primary focus is the robust banking sector. We are prepared to look beyond sporadic violence. Local companies can probably manage that risk better than distant analysts.

Our Vantage Point: Global investors may be surprised at the upside potential in Colombian equities in 2018. We expect to see most of those prospective gains in the second half of the year, after investors are more comfortable with now-uncertain election results.

Learn more at The New York Times.

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Image: The capital city of Bogota has a population of about 8 million. Credit: Ostill at Can Stock Photo Inc.

Startup Scene in Vietnam Turns Chaotic

Vietnamese cities are cluttered with motorcycles

The entire country of Vietnam is fast-transforming itself into the Silicon Valley of Southeast Asia. One reason is rapid economic growth; another is the youthful population. Those fundamentals are coalescing into venture anarchy as the volume of startups overwhelms the ability of the domestic ecosystem to support them. Constrained access to global capital may be a result of the poor quality of many startups, at least on a comparative basis, rather than lack of awareness by international investors.

Economy. Since 2014, Vietnam has been registering annual GDP growth at 6.0% or better, making it one of the best stories worldwide. The IMF expects that rate to continue through 2020. One key factor has been the government’s ability to attract foreign direct investment, especially in manufacturing.

Demographics. The population of Vietnam is close to 95 million, ranking it slightly smaller than the Philippines. The key metric is age structure: about 40% of the population is under 25 years old. The average age is near 30, some 10-to-15 years lower than in most developed nations.

That dynamism is leading to a surge in startup activity, at least in the headlines. Some prominent firms here have been built by the Vietnamese diaspora. Yet, many startups are founded by university graduates who cannot get jobs in established corporations. By one estimate, Vietnam is currently generating about 100,000 engineering graduates yearly, consistent with the figure for France and about 40% the number in the United States. Most of these aspiring executives lack the experience to run a successful company.

The government is actively supporting policies to turn Vietnam into a “Startup Nation” by 2020. The target is to have as many as one million firms registered as startups over the years ahead, supported by tax incentives and public-sector incubators. That buzz is infectious. But we are not sure that an economy now about the size of Pennsylvania needs that many tiny firms fighting over defined market share.

Vending sandwiches on the streets is not a startup. But selling sandwiches via smartphone apps is a startup.

Do Duc Kha
Deputy Head, Vietnam Institute for Entrepreneur Training and Development

On an up note, two major events in 2017 affirmed that select Vietnamese startups can compete for global capital. These developments injected even more life into the Vietnamese technology sector:

Public Listing. VNG announced its intention to list its equity on NASDAQ, although it may take a year or two before we actually see the IPO. The Ho Chi Minh City-based unicorn is active in gaming, social media, and mobile services.

Acquisition. Singapore-headquartered Sea bought an 82% interest in Foody. The Vietnamese firm runs a meal-booking and food-delivery service. The estimated value of the transaction was about $64 million. Sea is a NYSE-listed company.

Among investors, the case for Vietnamese startups may resonate best with those who have an affinity interest in the market. Key opportunities tend to be locally-adapted approaches to business models known elsewhere. Chinese billionaire Jack Ma highlighted the potential here with Alibaba’s investment in regional e-commerce firm Lazada and local payment processor Napas. Yet investors looking for fresh developments in artificial intelligence and blockchain may want to look beyond Vietnam.

Our Vantage Point: Startups can play an important role in driving economic development. But they are only one component of a broader growth strategy. In Vietnam, the mix is increasingly out-of-balance.

Learn more at VietNamNet Bridge.

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Image: Triip.me is a travel-related site started in Vietnam. Credit: Kyolshin at Can Stock Photo Inc.

Saudi Arabia Drills for ‘White Oil’

Mada'in Saleh is near the modern city of Al Ula

Tourism has never been a priority in Saudi Arabia, ostensibly because of visitors’ lack of sensitivity to local customs. Peripatetic businessmen are one thing; individual or group travelers wandering about the country are quite another. Better to focus government energies on Muslim arrivals at Jeddah, en route to Mecca and Medina.

All that is about to tilt differently. Prince Khalid Al-Faisal, Governor of Mecca Province, contends: “Tourism is our white oil.” The sector is an important catalyst in Riyadh’s Saudi Vision 2030 master plan.

As part of its diversification from an oil-based economy, Saudi Arabia will announce standards for tourist visas by the end of March. Official statements indicate that tourist visas will be tied to Umrah, a religious pilgrimage that can be undertaken at any time of the year. That constraint limits the universe of applicants to those Muslims who otherwise have access to the country. Informal conversations suggest that the move is a stepping stone to marketing the nation more broadly as a vacation destination.

Official tourist-visa guidelines are overdue, amid speculation on the forthcoming framework. There was a rumor in circulation earlier this month that Saudi Arabia would allow single women travelers to enter the country. The report proved to be only partially correct. Those under 25 years old will still be required to have a male chaperone.

Foreigners of course will be drawn to Saudi Arabia. Expect to see a new wave of Red Sea resorts built to accommodate the influx, as well as a surge in environmental travel to sites like the Al Wahab Crater. The crown jewel of Saudi Arabian tourism, at least from an archaeological perspective, may be Mada’in Saleh, an ancient Nabatean city tucked away in the western desert. Think Petra before Indiana Jones.

The government wants to bring 30 million Umrah-based visitors a year to the Kingdom, representing about a 275% increase over current levels in a 12-year period. For context, that future number is about the same as now seen by Thailand. The Saudi Commission for Tourism and National Heritage might reach that figure. Or not. It took Thailand about 20 years to achieve its level from a similar base, yet with a truly global market for its hospitality sector.

Authorities have their work cut out for them. The draw of Dubai is inescapable among local and regional tourists; while the lure of Egypt dominates international travel agendas. Saudi officials will not budge on the country’s strict no-alcohol policies, given the proximity of many tourist venues to Mecca and Medina. There are staffing and training challenges. The key may be Saudi Arabia’s ability to promote itself among non-Arab visitors, including the middle classes of Indonesia, Nigeria, and Pakistan.

Our Vantage Point: Growth in the Saudi tourism is likely to pace at a moderate speed. While we are wary of unbridled fanfare, industry momentum could offer sustained benefits for cross-border investors.

Learn more at Gulf News.

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Image: Mada’in Saleh was at the crossroads of the incense and spice trade. Credit: Brizardh at Can Stock Photo Inc.

Bitcoin Abets Terrorism. Maybe.

Cryptocurrency market is borderless

Zoobia Shahnaz is a name that you may read about again. In December 2017, she was arrested in New York on a string of terrorist-finance charges. The federal indictment clarifies that she purchased Bitcoin with fraudulently obtained credit cards, wiring the proceeds to ISIS-related groups in Pakistan. The case spotlights a hole in the global financial system that authorities worldwide would like to plug.

Yet identifying a hole in the global financial system is different from uncovering a trend. Objectively, the debate over cryptocurrencies supporting terrorism may be one-sided. Existing evidence is anecdotal; examples are isolated; talk is speculative. Terrorists, awkwardly, already have many well-established channels to fund their work.

The London-based Royal United Services Institute, an established think tank on security affairs, argues against random and arbitrary policy moves. In a March 2017 commentary, it emphasized: “Treating cryptocurrencies as an exceptional threat creates the misleading impression that more conventional financial products are not already equally, or more, vulnerable to terrorist exploitation.”

Some degree of measured response is appropriate. Most early-stage regulations are focused on know-your-client and volume-reporting standards:

United States. Bitcoin exchanges are required to document the beneficial owners of their accounts using new customer due-diligence criteria. We expect to see headlines tied to government enforcement of these rules after the May 2018 deadline. In that context, about 100 firms have now registered with the Treasury Department’s Financial Crimes Enforcement Network as money transmitters.

European Union. Germany and France have called for G-20 involvement in cryptocurrency regulation, placing it on the agenda for the March 2018 meeting of the group’s finance ministers. The approach avoids piecemeal oversight on a nation-by-nation basis, affording consistency in the borderless world of cryptocurrencies. Regardless, the EU will likely adopt a compliance model similar to the United States.

Emerging Markets. Industry news from the United Arab Emirates suggests that commercial banks are delaying some customer-initiated transfers to cryptocurrency exchanges. Malaysia published draft guidelines for the industry in December. Fear of being locked out of US dollar clearing capabilities is likely to drive hardened rules across the developing world.

Regulations are often problematic because most countries do not recognize cryptocurrencies as legal tender. That acknowledgement, at least philosophically, would upend the notion that countries have a sovereign right to control their money supply. Still another issue is that policymakers do not understand the asset class, viewing it with prejudice. Fortunately, recent expansion in the cryptocurrency market is alerting them to positive features of business, such as financial inclusion, despite near-term concerns over price volatility.

There are some nations that may be in a bigger hurry to implement far-reaching rules than others. Indonesia, for instance, has been an outspoken critic of cryptocurrencies. It bans their use by those fintech companies tied to payment systems. One reason is that Bahrul Naim, a Syria-based Indonesian, likely funded terrorist activities in his home country through Bitcoin. He is considered the mastermind behind the January 2016 attack that killed seven in central Jakarta.

Our Vantage Point: Pushing through capricious cryptocurrency regulation may inadvertently squelch the development of the fintech marketplace, while distracting authorities from monitoring more prominent terrorist-finance channels.

Learn more at rusi.org.

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Image: Terrorists use a broad array of financial products to fund their activities. Credit: Ixus at Can Stock Photo Inc.

China’s Middle Class Sours on Cruise Industry

Woman sits on deck watching sunset

The sky was the limit. According to the China Cruise & Yacht Industry Association, the number of cruises from Chinese home ports grew from 28 in 2008 to 927 in 2016. As recently as May 2017, Bloomberg ran an article entitled, “Cruises Boom as Millions of Chinese Take to the Seas.” That outlook is now being re-written.

The trade bulletin Cruise Industry News estimates that cruise traffic in China will fall from 2.8 million passengers in 2017 to 2.4 million in 2018, representing a 15% decline. The figure is likely to be conservative. Wealth trends are rapidly favoring independent itineraries over group arrangements.

As a sign of failed optimism, Royal Caribbean is withdrawing ships from the Chinese market, while Carnival is rethinking its China-built ship orders. Norwegian, the other mega-player, just announced a broad management reshuffle for its Shanghai- and Beijing-based operations. The impact on local operators is opaque.

What went wrong so quickly? The industry misjudged its risks, failing to decouple the cruise business from impressive growth trends in the overall tourism sector. Consider these points:

Political Risk. In March 2017, China issued a ban on cruise travel to South Korea to protest the installation of a US THAAD missile system. Ports of call included Busan, Jeju, and Seoul. The ban knocked out prime destinations, realistically leaving Hong Kong and Japan as the other short-haul options.

Business Risk. Cruises lines are prohibited from selling tickets directly to the consumer in China. They are required to use an ever-powerful cabal of online travel agents—key names include Ctrip and Qunar—further depressing tight profit margins. Tickets are sold to these distributors in bulk.

But the overriding issue may be how swiftly travel preferences have evolved. Where the Chinese market was once characterized by standardized group travel offerings, consumers are now drawn to tailored, personal experiences. The cruise industry missed that shift, relying on generalized penchants for gambling and shopping.

Our Vantage Point: Investors based in the West tend to parrot the idea that an expanding middle class in emerging markets will drive investment opportunities. In practice, that concept overlooks the local character of many consumer-based industries.

Learn more at Skift.

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Image: In China, the cruise industry missed an overnight shift to individual travel. Credit: Gyn9988 at Can Stock Photo Inc.

Investors Mesmerized by Cybersecurity

Hackers are perceived as sinister

Headlines are one reason cybersecurity is trending among venture capitalists. The Equifax and Uber hacks, among others, are de facto marketing campaigns for the industry. Ransomware headaches like Bad Rabbit and WannaCry remain prominent. At the local level, hackers continue to be lured to school districts and hospitals.

In 2017, investors poured some $7.6 billion into cybersecurity startups, across 548 deals, according to data from CB Insights. That is a 100% increase in value over the previous year. While momentum may subside, investors will likely remain spellbound by the industry.

Cybersecurity firms are not household names. Prominent publicly-traded players can be found in the constituency lists of focused ETFs like HACK and CIBR. Over the past year, Pitchbook identified two privately-held firms with unusually large funding rounds: Rubrik at $180 million and Illumio at $125 million. Both of these California-based companies appear to be valued at more than $1 billion each.

What macro-trends will continue to propel the industry over the year ahead? Intensified activity by state-sponsored actors is a given, but more nuanced points include:

National Regulation. The European Community is leading the way with its Global Data Protection Regulation. The law will come in force in May, levying heavy fines on companies for inferior data management practices. GDPR may quickly become the gold standard among countries worldwide.

Public Relations. Companies will become more astute at managing hacks promptly with customers and constituents. Case experience, such as the fumbling at Yahoo, is guiding development of ready-to-go crisis management strategies by in-house teams and outside consultants.

System Maintenance. Patching and updating is an obvious, low-cost measure to prevent cyberattacks, but the practice remains weak among businesses, especially smaller ones. Executives who are hesitant to roll-out pricey defense programs may latch onto lower cost maintenance activity.

Our best guess on a red herring influencing the industry outlook is artificial intelligence and machine learning. Quickly isolating attacks with next-generation technology sounds like a sure win for investors. But black hats can use the same capabilities to infiltrate government and commercial systems. Pavlovian-like reliance on artificial intelligence and machine learning could mean that some breaches are missed altogether.

Our Vantage Point: Expect macro-trends to further amplify the cybersecurity business. Heightened national regulation and elevated system maintenance, in particular, are likely to sustain revenue potential for industry players.

Learn more at CSO.

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Image: Hacking is an epidemic. Credit: BeeBright at Can Stock Photo Inc.

Africa Forges New Billionaires

Shop in Accra displays traditional fabric designs.

Private wealth in Africa continues to gain momentum. According to Forbes, there are now 23 billionaires on the continent. Eight of them reside in South Africa, six in Egypt. The overall number increased by two over the course of 2017. In context, the number of billionaires in Africa is consistent with the number who live in Paris. Forbes estimates that there are over 2,000 billionaires worldwide.

Richest Individual. The wealthiest man in Africa is Aliko Dangote (est. $12.2 billion). His considerable fortune is derived from cement, food processing, and real estate. The Dangote Group runs its operations from Nigeria, but interests stretch throughout West Africa. He is an ethnic Muslim.

New Addition. An interesting newcomer to the list this year is Strive Masiyiwa (est. $1.7 billion). The native Zimbabwean controls Johannesburg-based EcoNet Group. Its subsidiaries include firms in the telecommunications and banking industries. Masiyiwa is active in philanthropic circles worldwide.

Wealthiest Woman. The richest woman in Africa is Angola-based Isabel dos Santos (est. $2.7 billion). Her fortune was largely sourced from her father, José Eduardo dos Santos, the Angolan president between 1979-2017. Known locally as “the princess,” she once ran Sonangol, the flagship conglomerate.

President Trump may want to spend more time befriending his billionaire colleagues in Africa once he leaves office. Assuming that his net worth is valued at near $3.1 billion, he would now rank somewhere between Naguib Sawiris (Egypt) and Koos Bekker (South Africa) on the African list, effectively making him the seventh wealthiest person on the continent by current estimates. Among American tycoons, he ranks only at 248th place, tied with 15 other US billionaires, according to October 2017 data compiled by Forbes.

Our Vantage Point: Like elsewhere, emerging markets in Africa are generating pools of private wealth that are seeping into capital markets. Cliché-ridden views are out-of-place in this increasingly buoyant region.

Learn more at Forbes.

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Image: Traditional fabric designs convey the diversity of African culture. Credit: Malajski at Can Stock Photo Inc.

Is America on the Cusp of an Infrastructure Plan?

Highway projects linger for months

The White House appears to be making a major shift in its infrastructure approach, somewhat unexpectedly. Rather than roll out infrastructure improvements through public-private partnerships, the president seems prepared to think in terms of outright fiscal expenditure. Details remain sketchy.

That tone should satisfy key Democrats who have been critical of over-emphasizing private-sector cash because of concerns over the widespread impact of user fees. Never mind the fact that some major states would balk at any infrastructure-related federal matching requirements. New Jersey and Illinois, for instance, have some of the lowest state credit ratings in the country.

At its core, infrastructure is a bipartisan issue. Insiders are hopeful that common ground can be found this year for a package that may total at least $200 billion in federal funds. The amount could be much larger by the time Congress repackages any White House proposal. But can the federal government afford such investment? Some economists argue that the just-passed tax bill already causes undue budget pressure over the years ahead.

There are also latent concerns about over-stimulating the economy. With a solid growth trajectory now in place, do policymakers run the risk of cyclical overheating if they dump too much money into the economy too fast? Any plan would presumably have to pace infrastructure outlays over time. Some analysts argue that the government may want to withhold certain investment as an antidote to potentially-weak economic activity in the future.

A brewing issue is one of perception. The Trump administration, which has only offered sweeping generalizations about how it defines infrastructure, is likely to be thinking in terms of outsized greenfield projects. But the real need may be maintaining and improving existing structures, given the age of the nation’s roads and bridges, among other elements of the infrastructure mix. Repairing and managing what we have may be much cheaper and more effective than new construction.

Regardless of what a bipartisan agreement looks like, we should brace for the overt politicalization of any infrastructure bill. Comments by President Trump in January 2018 at the American Farm Bureau Annual Convention in Nashville are a prelude to future rhetoric. He claimed, “We are proposing infrastructure reforms to ensure that our rural communities have access to the best roadways, railways, and waterways anywhere in the world. And that’s what’s happening. We’re going to be spending the necessary funds, and we’re going to get you taken care of. It’s about time.”

Our Vantage Point: Infrastructure may be a bipartisan issue, but we will see months of political wrangling on Capital Hill. The shift away from outsized private-sector funding acknowledges the low-return nature of many infrastructure projects.

Learn more at PBS.

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Image: In America, tight budgets can limit states’ ability to maintain and improve existing infrastructure assets. Credit: Dbvirago at Can Stock Photo Inc.

Geography Lessons Are Expensive

Shanghai has a population of about 24 million

Marriott usually excels in diplomacy. It has hotel properties in more than 120 countries and territories. However, the worldview held by one corner of its marketing department has landed the firm in hot water. Chinese authorities shuttered its local website, albeit only for a week, over an online survey. On the form, Marriott listed Tibet, Taiwan, Hong Kong, and Macau as separate countries.

Nationalist sentiment seems to have overwhelmed Marriott’s attempt at damage control, given the degree of public shaming on Weibo, a Chinese-language service similar to Twitter. Market regulators have opened an investigation into suspected violations of cybersecurity and advertisement laws. Marriott’s chief executive, Arne Sorenson, rallied with an apology: “We don’t support anyone who subverts the sovereignty and territorial integrity of China and we do not intend in any way to encourage or incite any such people or groups.”

Marriott is not alone in this mistake. Coca-Cola, Burberry, and Apple, among others, have stumbled in the treacherous terrain of Chinese sovereignty. Other multinationals may repeat the error in the future. The interesting twist in the Marriott case is the degree of outcry over social-media channels. That sort of groundswell will ultimately impact the bottom line more than a traditional reprimand from public officials.

Our Vantage Point: When operating in emerging markets, multinationals sometimes forget that routine effort can become an act of lèse-majesté. One reason is that developing-world nations are unusually sensitive about Western perceptions of their countries.

Learn more at Asia Times.

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Image: Shanghai is among those Chinese cities where Marriott is rolling out its Fairfield brand. Credit: SeanPavonePhoto at Can Stock Photo Inc.

Let’s Do Crypto. Or Blockchain. Or Both.

Kodak joins the fintech revolution

Kodak declared this week that it was getting into the cryptocurrency and blockchain business. The announcement was thin on details and big on splash, suggesting that the investor relations staff was far ahead of the corporate strategy team. The move is a daring one for the Rochester, New York-based company. Its total miss of the digital-photography revolution was probably one of the great corporate blunders of all time. Apparently, its current management is dead set on reversing that legacy.

Investors gorged themselves on the move. Kodak stock closed at $10.70 after the announcement, representing a more than 300% gain over its previous value. The frenzy suggests that some investors have gone off the rails. Implementation of a blockchain-based photographer rights platform is unproven; the company is merely licensing its name to another firm to develop it. And the use of soon-to-be minted KodakCoin to pay for those usage rights seems to be a stretch, when traditional payment mechanisms or broadly-accepted cryptocurrencies would suffice.

The parody-like development appears to be an act of desperation for the faltered company. Jeff Clarke, Kodak’s chief executive officer, was a c-suite executive with Compaq at the peak of the dot-com bubble in 2000. His high-risk fintech strategy is informed by those dizzying years in which investors shoveled money at internet-related firms. What he may not recall is that those companies that survived the dot-com crash were largely those that eschewed hype and micro-managed their profit margins.

Our Vantage Point: Issuers and investors seem to be drinking the same potion, as they maneuver to exploit the crypto-craze. A likely meltdown in the market will set back fintech innovation by many years.

Learn more at The Verge.

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Image: Fast-evolving cryptocurrencies are a controversial asset class. Credit: Violka08 at Can Stock Photo Inc.

US Dollar Outlook Lacks Spirit

Greenback is set to remain under pressure

Currency traders may have a dull year in 2018, with the US dollar seeing sluggish movement. Optimists anticipate that rate hikes by the Federal Reserve will buoy the currency. That information, however, appears to have already been digested by the market. And developments surrounding the Trump administration are likely to cast a pall over any latent demand for the greenback.

Many currency specialists missed the downside in the US dollar last year. Indices that measure activity against the major currencies saw a decline of about 10% in 2017, delivering the worst annual return since 2003. One key reason is that attention shifted to Europe, where domestic demand led to unanticipated strong activity. According to the IMF, real GDP estimates for the European Union will moderate from 2.4% in 2017 to 2.1% in 2018, but there may continue to be healthy growth revisions.

The relatively weak US dollar is good news for equity investors. US corporates will continue to benefit from ongoing pricing power in global markets. That benefit will be mirrored in those emerging markets where currencies closely track the US dollar, such as those in Asia.

We do not see an impact on bond markets over the year ahead. US inflation remains persistently low because of globalization; currency weakness will not change that reality. Most interest-rate pundits expect the Federal Reserve to roll out tighter policy in a predictable manner, although there is lingering debate on the number of rate increases to be seen in 2018.

We are puzzled by the argument that US tax reform will drive currency strength. Some cash will make its way back to America, as US corporates consider the benefits of earnings repatriation. The tax on overseas income is now reduced from 35% to 15.5%. But most of that offshore capital is already banked in US dollars. At best, the repatriation argument could impact economic growth, leading to more enthusiasm for domestic opportunities, but the tax measure is not a tax holiday. Repatriation moves are likely to be drawn out over time.

The medium-term outlook for the US dollar is even more murky. The currency may turn volatile over a two-to-four year span as investors fret over federal borrowing and political vagary. Those issues may drive foreign investors exposed to US assets to liquidate their historically-high positions.

Perhaps the most interesting aspect of US dollar analysis right now is academic. Can Bitcoin and other cryptocurrencies take the shine off the currency as a reserve unit? While it is easy to discount moves in these assets as faddish, we look beyond now-thin activity to see if a larger trend evolves. Momentum could be driven by a greater willingness in the developing world to use cryptocurrencies as a replacement for national fiat currencies.

Our Vantage Point: Those searching for prominent investment ideals should look beyond the US dollar, at least over the year ahead. Aside from a meltdown in Washington politics, there appear to be few currency-market surprises on the horizon.

Learn more at Reuters.

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Image: US corporates will continue to benefit from the weak dollar. Credit: Feverpitched at Can Stock Photo Inc.

Cybersecurity is the New Deal Metric

Pacemaker business in the US is regulated by the Food and Drug Administration

The intersection between cybersecurity and medical technology is the pacemaker, at least this week. The Food and Drug Administration has forced NYSE-traded Abbott Laboratories to recall some 465,000 pacemakers due to software vulnerabilities. It seems that the black hat across town could actually change a heartbeat. The news is not a windfall for hospitals; a programming patch can be installed wirelessly at a cardiologist’s office. But the headline emphasizes a new area of technology-based business risks. Abbott just acquired its pacemaker business from St. Jude Medical for some $25 billion. The liability could be extreme in the case of hacked pacemakers, never mind the direct and indirect costs of the outsized, if not embarrassing recall. Board members and shareholders alike may be asking uncomfortable questions about what the firm discovered—or chose to ignore—in conducting due diligence on the transaction. Perhaps Abbott should have paid closer attention to its white-hat allies. The health-care giant responded obliquely this week by asserting, “We are resolving all old St. Jude medical issues.”

Our Vantage Point: Due diligence once centered on governance and profit analysis. Executives ignored cybersecurity, in part because they did not understand it. They now do so at their peril.

Learn more at the Chicago Tribune.

© 2017 Cranganore Inc. All rights reserved.

Image: Three companies—Abbott, Boston Scientific, and Medtronic—control the US market for pacemakers. Credit: Khuruzero at Can Stock Photo Inc.

Robots Streamline Air Travel

Check-in queue frustrate passengers

Airlines are getting serious about robots. Think ticketing kiosks on wheels, turbocharged with Siri. Air New Zealand just finished a test that involved using a robot to check-in passengers. The flag carrier is not the first to use robots to revamp customer service. There have been similar experiments in Seattle and Amsterdam. Eva Air uses them routinely in Taiwan. The idea is to help airlines manage the ebb-and-flow of flight schedules and the chaos of flight disruptions. Robots are programmed to issue boarding passes, answer flight questions, and provide gate directions, among other tasks. The story, however, may be less about tech-based investment and more about airline cost savings. Replacing customer-service agents with robots has allure for airlines, given the replicable and predictable nature of many requirements. But the use of robots may decimate any lingering pretense of brand loyalty among consumers, at least with economy-class passengers. The day is nigh when only premium ticket holders will have ready access to traditional ground staff.

Our Vantage Point: Robots provide a further opportunity for airlines to cut costs, er, manage passenger-related operations. But we are not sure how their widespread adoption will grow corporate revenue.

Learn more at the New Zealand Herald.

© 2017 Cranganore Inc. All rights reserved.

Image: Robots are set to take over many airport check-in formalities. Credit: Casanowe at Can Stock Photo Inc.

Beijing Closes Cash Spigot

Gambling is the primary industry in Macau

China is now a less hospitable destination, at least for certain dealmakers. Ernst & Young estimates that Chinese outbound investment is set to reach $100 billion in 2017, representing a sharp decline from the $183 billion seen last year. Beijing blames this decline in part on growing hostility toward Chinese firms in the US and Europe. There is some truth to that point. The bigger issue is that officials are resolved to mitigate the volume of leveraged deals and address attendant imbalances in the domestic economy. Earlier this month, regulators outlined new rules on outbound investment. They specifically targeted excesses in property, film, entertainment, and sports, while advocated investment in infrastructure, oil and mining, agriculture, and technology. This policy clarification streamlines the deal-making process in favor of traditional industries, if not lower risk alternatives. But the macroeconomic context suggests that Chinese investors are likely to move forward at a far more measured pace than in the past.

Our Vantage Point: China remains a dominant player in cross-border investments worldwide. But the integrity of the domestic finance sector is a primary concern, given the muted outlook for economic growth.

Learn more at the Nikkei Asian Review.

© 2017 Cranganore Inc. All rights reserved.

Image: Investment in Macau-based companies has raised the ire of Chinese officials. Credit: Vichie81 at Can Stock Photo Inc.

Bikinis Deflected From Indonesian Airspace

Indonesia is the largest economy in Southeast Asia

Vietnam-based Vietjet is no ordinary airline. It has carved out consumer awareness of its brand by featuring bikini-clad flight attendants. The gimmick has worked for its female founder; Nguyen Thi Phuong Thao became a billionaire after the airline’s initial public offering in February. But minimalist uniforms are not export-friendly, at least to the Islamic world. In tandem with growing Vietnamese-Indonesian ties, Jakarta airport authorities looked for assurances that bikini-clad flight attendants will stay grounded on Vietjet’s soon-to-launch Ho Chi Minh City-Jakarta route. Vietjet obliged—and announced it will include halal meals in the service mix. While the lesson may be deference to cultural values, it is also one in business strategy. Vietnam is chasing Indonesia to propel its torrid growth rate of 6%-to-7%. Tourism is a key component in the mix. According to Mastercard, outbound Indonesian travel is one of the fastest growing hospitality segments in Asia, with outbound trips set to grow by almost 9% a year over each of the next few years.

Our Vantage Point: Wealth generation trends in the Islamic world offer enormous profit potential to multinationals. But the character of that business needs to side with conservative halal lifestyles.

Learn more at The Jakarta Post.

© 2017 Cranganore Inc. All rights reserved.

Image: Stable rupiah is one outgrowth of Indonesian economic wherewithal. Credit: Caputrelight at Can Stock Photo Inc.

Tech Metals Ignite Mining Industry

Salar de Uyuni is the largest salt flat in the world

There may not be enough tech metals worldwide to meet soaring demand. In most cases, mobile phones and solar panels are produced with lithium or indium. Other essential metals for tech-related industries include cobalt and lanthanum; the list is perplexing. The problem is that most of these resources do not trade freely in liquid markets. Rather, they are controlled narrowly by government or commercial interests. Even China—a dominant player in this corner of the commodities business—has resorted to deep-sea mining to meet demand. Does that mean investors should jump at the next neodymium deal? There is merit to diversification. Tech-metal opportunities are red-hot at this time, but tech manufacturers are looking hard at production alternatives. And supply metrics can change abruptly. Consider that aluminum was more valuable than gold throughout the 1800s. Then prices collapsed, as supply soared, when aluminum foil came into common use.

Our Vantage Point: Tech-metal deals should be viewed as high-risk opportunities. Apparently-generous returns could evaporate quickly, as advances in manufacturing up-end demand.

Learn more at the Financial Times.

Note: We use the term “tech metals” generally. It includes so-called rare-earth metals, such as neodymium, as well as those metals that are by-products of base-metal production, such as cobalt.

© 2017 Cranganore Inc. All rights reserved.

Image: Lithium does not occur freely in nature, but is commonly extracted from brine. Shown here is Salar de Uyuni in Bolivia. Credit: Cristiborda at Can Stock Photo Inc.

Caribbean Passport Programs Hit Speed Bump

Marigot Bay is popular destination in St. Lucia

Many nations have citizenship-by-investment policies to entice deep pockets, but Caribbean nations have been under fire for their relatively low hurdles. The tiny island of Dominica, for example, offers its passport to globetrotters for $100,000. While these policies have been a cash drop for smaller economies, Western governments have been less enamored by their propensity, at least in theory, to attract tax cheats and terrorists. Canada just made headlines by terminating visa-free travel from Antigua and Barbuda, requiring nationals to apply for their visas through a regional embassy in Trinidad. The lawyer-dominated citizenship-by-investment industry is likely to dismiss the Canadian decision as caprice, but high-net-worth investors should be less cavalier. Shifting geopolitical sentiment suggests that a so-called “golden passport” may be a less prominent reason to allocate funds to the Caribbean. The good news is that the return-on-investment on many projects in the region justifies the allocation risk, regardless of citizenship dividends.

Our Vantage Point: Investors based in the developing world should focus their Caribbean deal activity on project due diligence, rather than potentially-mutable passport benefits.

Learn more at Antillean Media Group.

© 2017 Cranganore Inc. All rights reserved.

Image: St. Lucia is among those Caribbean nations which attracts foreign investment. Credit: Dbvirago at Can Stock Photo Inc.