Category Archives: Deep Dive

The Sur: Implications and Challenges in a Modern South America

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Brazil and Argentina have recently unveiled plans to create a common currency. The move would see a monetary union between the world’s twelfth and twenty-seventh largest economies respectively, and the two largest on the South American continent.

With plans to later expand to neighbouring countries, it could create the world’s second largest currency bloc, second only to the Euro. The eurozone currently accounts for 14 per cent of global GDP, while a currency union involving all Latin American nations would account for 5 per cent. 

As the euro was for the European Union in 1999, the currency may serve as the unifying economic force for the Mercosur trading union. The ‘sur’ (meaning ‘south’) would initially run in parallel to the Brazilian real and Argentine peso, and would help in removing reliance on the US dollar.

Confusion 

Originally, Argentine Minister of the Economy Sergio Massa announced the currency as a common currency, akin to the Euro or the CFA Franc. Such a currency would see Brazil and Argentina abandon their own currencies, the real and Peso respectively, and see them both adopt the sur, which would be overseen by a new form of Central Bank. 

President da Silva of Brazil later said that what is planned for now is not a move towards a common currency, but rather a “trading currency,” so that transactions between them could move from peso, to sur, to real, rather than peso to USD to real. This would aid both countries, particularly Argentina to sever its reliance on the USD and would prevent fluctuations in the USD’s value relative to either currency affecting trade, essentially streamlining trade between the countries and giving them greater control. 

The original announcement of a common currency was met with surprise by many investors and financial analysts. While Brazil continues to grow and is set to become one of the world’s preeminent powers, Argentina continues to be stricken with high debt, high inflation, and a struggling economy with a weak industrial base. 

Argentina’s Continuing Woes

A common currency would see the largest economy on the continent shackled to one of the continent’s most troubled. Last year, Argentina had the sixth worst inflation rate in the world, behind only Zimbabwe, Lebanon, Venezuela, Syria and Sudan. 

Argentina has been wracked with financial difficulties for decades, and has been largely restricted from access to international markets following its 2020 default. Inflation now stands at 100% and depositors continue to abandon the peso in favour of more reliable currencies like the USD, weakening the peso further.

Argentine Government debt in September 2022 was 238% of nominal GDP. Successive governments have failed to tackle spiralling prices and continue to borrow and spend. Instead of taking the necessary actions required to control inflation, this worsens the situation. Argentina is now in negotiations with the International Monetary Fund to prevent further default, as it seems unlikely it will be able to meet its 2023 goals for foreign currency reserves, taking into account the war in Ukraine and a drought effecting large exports like soy and meat.

Realignment

The move is part of President Lula de Silva’s attempt to reassert Brazil’s influence in the region and reaffirm ties, which had been strained under the tenure of his predecessor, Jair Bolsonaro. Bolsonaro had a strained relationship with Argentina’s left-wing President, Alberto Fernández. The announcement came at a conference to encourage further economic integration in the region. The sur is seen as a possible means to bolster this integration, while helping Argentina in its struggle to replenish its Dollar reserves. 

Argentina is Brazil’s third largest export partner and fourth largest import partner, behind only China and the United States. Meanwhile, Brazil is Argentina’s largest export market, and largest import market. The sur would allow Argentina to continue purchasing Brazilian industrial goods, by better controlling the purchasing power of the peso relative to the real.  

Many believed that the announcement was nothing more than a theoretical project doomed to fail, given the disparity between the two nations. Even with the less ambitious plans for a trading currency, there are significant challenges. Brazil and Argentina proposed a similar currency in 1987 called the ‘gaucho.’ That plan never went passed the declaration.

The Pharma Industry: Where next?

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As Covid-19 returns to being an endemic disease, the pandemic has taken a back seat in recent weeks as other, more pressing crises come to the fore. While certain pharmaceutical companies benefited greatly from the pandemic, as illustrated by Astrazeneca’s 41% rise in revenue for 2021, the irony holds that the industry failed to gain in equity markets as much as firms in other industries (E.g. in hospitality/catering), from the re-opening that they enabled. That said, in the US alone the Pharma industry is valued at approximately $2.8 trillion. Given this, alongside the impressive speed of vaccine developments, and the heightened importance placed on what pharmaceutical firms can offer by the pandemic, the potential for growth exists if it can be capitalised on. The pharmaceuticals industry is highly volatile and hugely speculative, with history illustrating that news of final-stage trials, testing success, or acquisitions, can cause huge share price swings. Therefore, this article is meant to be a conversation-starter, and provide food for thought, rather than provide any investment advice or know-how, regarding what is next to come for the pharmaceuticals industry. 

A Deep Dive Into Some Pandemic Performers:

Astrazeneca: Potential to grow

AstraZeneca’s development of the Covid-19 vaccine broke headlines in late 2021, leading the company to become a household name. While the firm’s promise of providing vaccines at cost boosts its ESG commitments, since November 2021 it has backtracked on this policy, taking minor profit from advanced economies, but remaining not-for-profit for low-income countries. This is an understandable policy not only as Covid-19 begins to become endemic, but also for Astrazeneca’s own business model (its core vaccine rivals Moderna and Pfizer have always sold Covid-19 vaccines at a profit). Despite this policy, Astrazeneca’s revenues were still very strong in 2021, meaning that in February 2022 they increased the annual dividend for the first time, as sales are forecast to be just as strong, if not stronger, for 2022 – notably from new cancer and kidney disease drugs, alongside its research into rare conditions. The latter of these stems from Aztrazeneca’s acquisition of Alexion Pharmaceuticals in July 2021, which would serve to boost its experience in rare diseases. Interestingly, from 7,000 rare diseases today, only 5% have treatments that are certified by the FDA, illustrating the room for growth and development within this sector, something that Astrazeneca is certainly capitalising on. While this suggests promise to this firm, the earnings per share (EPS) have dropped to very low levels (0.04), meaning there may be concerns towards future profitability, particularly in a competitive, volatile market – and one where fast development and adaptivity is required. Furthermore, the price to equity ratio is (by historical standards) very high, suggesting the share price is overvalued, and further signaling that the market has concerns about Astrazeneca’s future profitability. Therefore it is worth exploring whether this is a common trend among other Covid-19 vaccine suppliers. 

Pfizer: Consistently strong performer

Having paid a quarterly dividend for more than 83 years, and increasing this by 25% for the past 5 years, Pfizer was performing strongly prior to the Pandemic, which only certified its status as the world’s leading pharmaceuticals company (by revenue) in 2021. Furthermore, its stronger EPS, at 3.83, alongside its much more promising price-equity ratio (compared to AstraZeneca’s), symbolise that perhaps some pharmaceuticals firms are emerging out of the pandemic in a better position than others. Pfizer are utilising some of the lessons learned during the pandemic to complete its aim of delivering 25 drug breakthoughs by 2025. This ambition is possible due to Pfizer’s size, meaning that while the Covid-19 vaccine was a boost to revenue, it did not have as significant an impact compared to its core rivals. This diversification and broad range of interests means that Pfizer has a lot of room to grow with fairly minimal risk. Meanwhile, its strong ESG awareness and policies illustrate a focus on sustainable growth, alongside solid investment opportunities in an age of impact investing. Finally, Pfizer’s partnership with BioNTech in vaccine development is symbolic of the collaborative possibilities held by the firm, illustrating further room for growth and opportunities for research and development.  

Moderna: Vaccine-focussed

This is in contrast with Moderna, which saw a colossal rise in revenue between 2020 and 2021, from $803 million to $18.5 billion, largely driven by its Covid-19 vaccine development. However, this illustrates its dependency on the vaccine’s development, which, as the Pandemic begins to subside, risks impacting revenue drastically by 2023. Furthermore, Moderna are striving to replicate their Covid-19 mRNA vaccine success into other areas, focussing on adapting and developing vaccinations with a similar technology. However, this lack of a broad base is highly risky, particularly in pharmaceuticals, where trials may not be a success. Therefore, the question of whether Moderna can continue performing into the future depends on whether it is able to adapt and perhaps diversify its interests slightly, to ensure its ability to compete with its major rivals.  

Johnson & Johnson: A more streamlined approach

In a differing strategy, Johnson & Johnson (J&J), like many large firms, have recently decided to streamline operations and heighten their focus through divesting multiple sections of its core business. This could see a profits increase, as is anticipated next year. Notably, while morally contentious (potentially impacting its ESG ratings), J+J recently divested its talcum powder business into its own company (which subsequently filed for bankruptcy), reducing the impact of its asbestos-related liabilities on profits. Additionally, plans to make its consumer health unit a standalone entity next year would leave the company focussed on pharmaceuticals and medical equipment. The latter gained increased sales of almost 18% in the last year, and the former is also one of the firm’s fastest-growing units, illustrating the potential for growth when focussing on these sectors. Furthermore, J&J are currently inundated with late-stage clinical trials, meaning that imminent breakthroughs are highly possible, providing the potential to rack up profits in the coming year. 

What to Watch: 

Given that pharmaceuticals stocks have slightly outperformed the overall market over the past twelve months, it is unsurprising that the above companies are not the only strong contenders in this promising industry. Alongside Pfizer, which has held a strong 12-month trailing total return, other firms, namely Amphastar Pharmaceuticals and Intracellular Therapies, the latter of which focuses on neurological disorders, with a particular focus on Alzheimer’s Disease (illustrating strong room to grow in an aging world), have shown high momentum in the past year, with the possibility this could continue. Furthermore, Dynavax’s revenue grew 897.8% in the last year, a firm that specialises in immunotherapy. Given this, alongside its interest in vaccine production, Dynavax could capitalise on the lessons learned over the Pandemic, namely regarding immunology and vaccine production, to continue this path towards revenue growth. 

In a dynamic and well-contested market, growth and a focus on research & development are crucial for Pharma firms, and drawing on lessons learned from the pandemic to ensure adaptability and innovation will be key. Additionally, given the presence of potential lawsuits, alongside the long-term focus (due to the amount of time taken to create a new drug) for many pharmaceutical companies, ESG considerations in this industry are particularly key, and should be at the forefront of competitive firms’ decisions. Thus, the pharmaceuticals industry still has a lot of room to grow, and as long as firms can capitalise on this, perhaps streamlining their R+D in a particular area, while ensuring strong ESG commitments, then the industry shows a lot of promise.

Shoring up Businesses in the Face of Inflationary Pressures

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Annual inflation hit its highest point in twenty years in November 2021, with consumer prices up 5.3% year-on-year. EY reckon this trend could be lasting, with inflation expected to average 3.3% next year. Considering the EU target inflation rate of 2%, the severity of these figures is clear. Similar statistics are seen internationally, with the European Central Bank (ECB), Federal Reserve (Fed) and Bank of England all preparing to quash inflationary pressures over the coming months. For example, the Bank of England recently announced increased interest rates to 0.25% , the Fed has signalled to end their bond purchases (heightened during the Pandemic) in March and plan to enact three interest rate rises during 2022. In a differing response, the ECB will continue bond purchases for at least 10 months, before scaling back the procedure. They also ruled out raising interest rates next year, illustrating the ECB’s viewpoint that inflation should fall in 2022. With these actions taken by various central banks in mind, businesses ought to prepare to minimise the potential costs of inflation.

Reasons Behind the Rise 

McVities’ recent announcement that some family favourites such as Hobnobs, Jaffa Cakes and Penguins could see price increases of up to 5% illustrates the direct impact of these inflationary pressures on consumers’ pockets. The UK Managing Director at Pladis Global, owner of McVities, attributed this to Covid-induced staff absences and the rise in input costs, with double digit percentage increases on ingredients such as cocoa beans, alongside higher labour costs.

The vaccine rollout and the economic recovery is also releasing pent-up demand from the pandemic, causing demand to outstrip supply in the economy and prices to rise; this is also known as demand-pull inflation. Another view, as McVities shows, suggests that weakened supply due to labour shortages, aggravated by Covid-19 induced absenteeism and the new Omicron variant, could be driving inflation. Other supply-side issues include the rising costs of core ingredients, perhaps due to supply chain disruption (as a result of the pandemic). This is known as that cost-push inflation, whereby an increase in the costs of wages and raw materials is passed onto consumers in the form of higher prices, is boosting inflationary pressures even further. The rise in inflation can be viewed from both the demand and supply-sides, illustrating its pervasiveness.

Costs of Inflationary Pressures on Firms 

Rising costs due to inflationary pressures means rising uncertainty amidst a backdrop of an already unstable trading environment. This means that firms are less likely to invest in research and development, alongside technological changes for longer term production, hence negatively impacting long run growth rates. Furthermore, the impact on profit margins is ambiguous, and dependent on whether firms will be able to pass higher input costs on to consumers. The more price elastic a good/service is (i.e. if consumers reduce their demand a lot, given a small price increase), then the less likely a firm will be able to pass their rise in costs onto consumers. In this event therefore, profit margins for businesses are likely to fall, a clear cost of inflation on business owners. Additionally, the current business environment, with large staff shortages and absenteeism, means employees have stronger negotiating power regarding their wages. Therefore, despite both the Bank of England and the ECB suggesting there is little current risk of a wage price spiral, labour costs for firms could rise, thus aggravating this fall in profit margins. Ultimately, the costs for firms encompasses the uncertainty of the trading environment, and the resulting impact on long-term growth, alongside the potential fall in profit margins – the extent of which is dependent on the price sensitivity of their consumers. 

Shoring up Businesses

With inflation clearly upon us, it is vital for firms to be aware of their business’ sensitivity to price changes. Despite being a challenge to accurately calculate, awareness of a products’ price elasticity, alongside forecasted and current inflation means that firms can be better placed to react to any price changes and minimise the impact on profit margins. Additionally, awareness of competitors can also help firms respond to rising inflation; if the competition raises their prices, it becomes easier for smaller firms to increase their prices without losing too much demand. Thus, awareness of the competition’s actions, alongside a focus on the business’ unique selling point to make it stand out from the competition, are vital to reduce the impact of inflation. With much of inflation because caused by shortages on the supply side, international diversification can reduce supply chain risk and diminish the impact of rising costs. Indeed, the evaluation of supply chain risk alone, alongside analysing the necessary responses to these risks, can help prepare firms, enabling them to better respond to crises once they arise.

Furthermore, issuing debt can allow firms to diversify their financial portfolios in a way that reduces the impact of rising prices. Since inflation erodes the real value of money, businesses ought to reduce their cash holdings and instead buying capital assets or equipment that promote long-term growth and help businesses ride through the uncertainty. The ability to take out a loan to fund these investments depends on interest rates. Despite the Bank of England’s announced rise in interest rates to combat inflation, rates still remain low; the ECB, for instance, has thus far decided to keep rates at their low. Hence, as long as rates do not rise further to combat the inflation, businesses will be able to pay back their loan cheaper relative to what they borrowed it at. If this loan is used to promote long-run growth through solid investments, then businesses could use inflationary pressures to their favour. Furthermore, stockpiles could be used as long-term buffers, better preparing firms for the rise in inflation. Additional long-term buffers could be sought through locking-in long term contracts at current prices – taking advantage of futures markets to reduce the costs of inflationary pressures.

Ultimately, for businesses to respond well to the current pandemic-induced inflation pressures, forecasting and preparing for all scenarios, alongside acknowledging their competition, price sensitivity, and reassessing their investments is crucial to shore themselves up against rising prices.

Levelling Up the Labour Market and the Impact on Firms

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Britain’s recent fuel crisis, owing more to a shortage of lorry drivers rather than fuel itself, symbolises the wedge between supply and demand for labour within the economy. While the fact that the number job vacancies in Britain between July and September rose to above one million for the first time could be due to a fall in migration since Brexit, a walk around Dublin – with vacancy signs in almost every shop or restaurant window – shows that this labour market shortfall might not be nation-specific.

Supply Shortages

While Ireland’s job vacancy rate is not as high as in other European countries like Belgium (4.2%) or the Netherlands (3.8%), it rose nonetheless in Q2 of 2021 to 1.1% (from 0.7% in Q2 of 2020). However, perhaps most concerning is the OECD’s recent report which suggests Ireland will not recover to pre-Covid unemployment levels until the middle of 2024, putting its labour market rebound among the worst in Europe. This is likely due to labour market tightness alongside a fall in the job finding rate, with those unemployed prior to Covid only returning to their job search now. Meanwhile, this is aggravated by a reshuffle of the employed, as many have reevaluated their career paths, or find out their jobs no longer exist. In fact, in Ireland, almost 30% of the hospitality sector have moved into other job roles since the pandemic began. Ultimately, the current shortage of workers, most acute in hospitality, healthcare and agriculture, is likely to have a large impact on firms and businesses. To solve this mismatch between supply and demand, it is helpful to further explore the causes of this situation.

Why So? 

Covid-19 gave workers a chance to re-evaluate their job roles and career paths. Despite the fall in Scotland and Northern Ireland, the rise in nursing applicants in England this year illustrates a re-evaluation of career prospects and perhaps a wish for some to enter more rewarding job roles since the pandemic began. Higher expectations of worker satisfaction has caused a huge shift in the labour market as people move away from jobs which do not suit their lifestyle. The fact that the catering industry is particularly vulnerable to shortages is not surprising given the unsociable hours that bar staff and chefs work alongside the heated and stressful kitchen environment for minimal pay. Similarly, despite the evident shortage of truck drivers plaguing Britain, the UK has 600,000 people with an HGV licence who do not drive for a living. This is largely due to the poor working conditions, the negative health impacts of lonely work away from home, and poor pay that truckers face; all these factors are pushing many out of the industry.

The roles that people are shifting out of were arguably always unpopular. However, only now after the pandemic – in an economic environment of rising inflation – has the bargaining power shifted towards the supply of labour within these struggling industries. This suggests that those working in these industries have been under-remunerated for their work; only now can they bargain for higher wages as supply becomes scarce.

The pandemic has also uprooted the housing market, with house prices in rural areas increasing as people sought more green space during the various lockdowns. This means that commuting times for workers are rising, adding another factor to account for when applying for and accepting jobs; this also affects their willingness to work in certain job roles. Indeed, jobs in industries such as catering often require late nights, which, in the absence of nighttime public transport to rural areas, becomes an issue for those living outside urban districts.

Finally, the transition to a high-skilled economy is also a factor impacting the supply shortages. The ability for individuals to shift from a low to a high skilled job role can be challenging, particularly if firms begin asking for too much from candidates. For example, in Ireland the requirement that a waiter have their HACCP qualification, alongside 1+ years of experience is often seen, which is a huge barrier to entry for new workers. The mismatch between workers who think they have the right skills for a job and employer expectations means that firms are oftentimes inadvertently worsening their own supply shortages.

What Does This Mean for Firms?

These barriers to entry for roles which are facing particularly acute shortages are only furthering the labour supply crisis. This means that firms could be more proactive in filling the shortages. This would be through accepting unskilled or newer workers into the industry and train them with the necessary skills for a role. Therefore, firms could work to improve training programmes and lower their own barriers to entry to reduce the shortage.

Perhaps the most obvious way to address this shortage would be to increase wages and add additional benefits, such as a scheme rewarding/providing bonuses to non-salaried workers who work over-time for a firm. However, this rise in costs for firms is likely to exacerbate the current period of rising inflation. While consumers are likely to feel the pinch of this cost-push inflation, a rise in general cost of inputs for firms, many of whom’s balance books are already struggling post-Pandemic, is likely to bring additional accounting challenges.

While increasing pay for workers will help to bring the labour market to a new, temporary equilibrium level, whether through seeking capital replacements for labour, using their staff more productively and efficiently (while also maintaining staff health and welfare), being willing to implement new training schemes or changing their business structure, firms need to use innovation and knowledge of their business environment and industry in order to react to this changing labour market.

Big Tech: The Precarious Balance Between Algorithmic Governance and Democratic Accountability

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by Rachel Carr

Over the past months Amazon and Alphabet have reported phenomenal earnings for the second quarter of 2021. These figures were largely driven by Google skyrocketing advertising revenues, which grew by 69%, along with Amazon’s advertising income which increased by 87% from the year ago quarter. These results reflect the central role that social media and technology have played in society over the last year, not only in offering a much-needed escape from the boredom of COVID-19 lockdowns but also in their newfound role as public forums. Last April, when the Italian Prime Minister decided to address the nation on the latest lockdown measures, he elected Facebook as his chosen medium of communication. Similarly, the British government requested Amazon’s assistance in distributing emergency medical supplies and Google leaped at the chance to assume its role as a mouthpiece for public services announcement across the globe. 

However, as the “Gordian Knot” that entangles Big Tech with its societal consequences tightens further, we should consider the motivations behind the growing presence of these tech heavyweights in our lives. What exactly are these  tech giants selling to their customers and what are the potential consequences?

To understand what triggered the phenomenal rise of Big Tech superpowers we must first cast an eye back to April 2000, when eager dot com investors watched in horror as the stock market imploded and the value of their portfolios plummeted. As the mirage of many of Silicon Valley’s superstar valuations began to evaporate, it became clear that in a text-book case of irrational exuberance, venture capitalists had been so blinded by the lure of the internet’s potential, that they had wildly overestimated the intrinsic value of their investments. 

Surviving tech firms, struggling to justify their value to furious investors, began to search desperately  for a port in the storm as the turmoil raged. Amongst them was Google, today’s search-engine giant,  which had been incorporated a mere two years prior. According to Shashona Zuboff, the Harvard Business School professor and author of ‘The Age of Surveillance Capitalism,’ the dot com bubble triggered Google’s understanding that its true value lay not in the licensing deals it had been selling, but rather in its vast stores of behaviourally rich data. Despite the company’s founders previously condemning search engine advertising as “inherently biased towards the advertisers and away from the needs of consumers”, the firm went on the capitalize on just that, with Facebook, Amazon and Twitter soon following suit.

Zuboff has coined this commoditization of the data of individuals into behavioural products that can be sold in ‘predictive futures markets’, as surveillance capitalism. In recent years the cautionary tale of “if you aren’t paying for a product you likely are the product” has been widely circulated. Of this the general public seems to be reasonably cognizant: an hour spent on Skyscanner will likely flood your feed with holiday advertisements and a trip to the ASOS homepage will litter your desktop’s ad space with outfit ideas. However, it was what the “FAANGS” discovered next, and the lucrative source of the last decade’s soaring tech valuations, that is likely to induce the most surprise. Google and its peers deduced that while it could use its data to predict the future behaviour of users with reasonable accuracy, the easiest way to guarantee the precision, and thus value of those predictions, was to influence the behaviour of users to match the algorithm’s forecasts.

An example of the application of this insight was the addition of a number of emotional reactions to Facebook’s ‘like’ button. While this modification poses as a harmless quirk designed  to allow users to further engage with the platform’s content, it also assists Facebook’s algorithms in accurately identifying and collating data on human emotions. The opportunities resulting from the utilization of this data are massive. Users can be shown posts designed to induce feelings of discomfort or sadness, followed by sponsored content intended to take advantage of this vulnerability. Along a similar vein, Google has been known to display ads for a specific restaurant and then reroute a user’s map  journey to take them past the suggested establishment: a perfect example of the use of surveillance  and behavioural modification to maximise profits at the expense of individual autonomy.

The implications of these privacy infringements extend beyond the encouragement of the occasional impulse purchase. In 2017 the autonomous hoover ‘Roomba’ came under fire when the company announced its proposal to sell floor plans of customers’ homes, scraped from the device’s mapping capabilities. Later that same year the curtain fell on the infamous Cambridge Analytica scandal, revealing the role the data analytic firm had played in manipulating the data of 87 million Facebook users to manipulate the outcomes of both Trump’s 2016 Presidential the Brexit vote. This proof of intentional cyber manipulation, designed to promote the so-called ‘splinternet’, revealed the power of Big Tech behavioural nudging to distort democratic processes. In fact, in 2019 Mark Zuckerberg’s former advisor Roger McNamee publicly criticized Facebook for its relentless pursuit of  customer data through increasingly illicit means claiming that the company’s algorithms were, ‘’honed to manipulate user engagement with practices that were eventually commandeered by bad actors to infiltrate the national (US) consciousness and disfigure political discourse.” Earlier this year Zaboff subtitled her New York Times article with the ominous statement, “We can have democracy, or we can have a surveillance society, but we can’t have both.”

Whilst the extent of the influence of Big Tech on the democratic process is yet to be determined, it is undeniable that  tech companies have amassed vast stores of behavioural data which can spell danger in the wrong hands. As a result, there is an argument for putting certain social obligations on companies with such data privileges; in other words, “With great power comes great responsibility” . Covid-19 revealed Big Tech for what it truly is: a 21st century public forum. Due to their wide-reaching social impacts, large technology companies should be answerable to the governance of regulatory bodies. If banks, electricity, water and utilities companies are regulated because of the impact of these services on a nation’s citizens, then there is reason for Big Tech to no longer be able to evade such scrutiny.

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