Category Archives: Finance & Economy

The State of Foreign Investment in Japan: Stock Market Records & Economic Policy Shifts

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Kathleen Pusch

The Nikkei 225 index surpassing its 1989 peak last Thursday, 29th February and closing above 40,000 points on Monday, 4th March is a startling but welcome surprise. While partly fuelled by robust corporate earnings, a weaker yen favouring exporters, and an influx of foreign investments seeking refuge from the downturn in Chinese markets, the surge has primarily been led by higher-tech sectors like microchip production. 

Nikkei Stability: Past & Present

Investment analysts, particularly in the Japanese sector, are sceptical however over the stability of such a short-term high. Trauma lingers in the bones of corporate Japan, as shareholders still maintain a socioeconomic conservatism in the wake of the economic bubble burst in 1989. The composition of Japan’s market today, however, differs significantly from its status in 1989. 

According to recent statistics by Reuters, the P/E ratio for Nikkei companies rose to about 60 around the bubble peak in 1989, meaning it was overvalued and accounted for more than 40% of global equity values. According to that same report, the Nikkei today has much less further to fall in the event of a bubble burst. It’s also noted that the P/E ratio for the Nikkei rests at 16 and only makes up less than 6% of global equity values. Although volatile fluctuations are expected while the market adjusts to sudden change, foreign investors are still optimistic Japan will be a top performer through the 2024-2030 period.

Shifting the Japanese Investment Lens

The Japanese government echoes this optimism, evident in recent policy changes to its NISA (Nippon Individual Savings Account) programme. Inspired by the UK’s ISA program, NISA aims to encourage investment among younger generations away from cash holdings. The adjustments implemented appear to have been somewhat successful in sparking an interest in investing among the more pliant younger generations of Japan, who, not having experienced the repercussions firsthand, are less deterred by the risks associated with a potential bubble economy collapse. 

These funds generally have more long term investment horizons, reaching out to ten years ahead or more. Because of this, most funds are centred around foreign securities with a longer history of stability. But a report by Mizuho Securities analysts drafted in December, still estimates the revamped NISA will attract an additional 0.3 trillion yen (1.9 billion usd) annual investment into Japanese securities alone, with an additional 0.2 trillion yen increase in foreign security investments is also expected. Such an increase in general indicates a growing investment-optimism attitude amongst Japanese households, a faith that has been lacking in Japanese society for the past thirty years.

BOJ: Inflationary Status

However, the longevity of this economic resurgence hinges, as always, on the Bank of Japan’s (BOJ) locked jaw on negative interest rate policy. The BOJ has been stubborn in the face of market pressures and a weakening yen, resolutely determined not to tighten its monetary framework until the economy achieves a stable 2% inflation rate. Such a change is necessary to solidify Japan’s economy, and provide stable conditions under which the yen can grow in value again. 

That being said, the reign of stagnant terror may in fact be drawing to a close at last. While inflation did reportedly slow for a third consecutive month in January, it still held at the 2% threshold. Additionally, recent talks with major corporations have resulted in wage increases for workers starting in April, promising to stabilise the trend. Therefore, there is not very much objectively standing in the way of the BOJ relinquishing its hold on negative rates, with some even counting on an early move to do so as soon as March, if not April.

A Penney(s) for your Thought: The Economics of Penney’s 

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Ayesha Ahmed 

When I think of Dublin-based retailer Penneys, I think of a quote by Tesco’s founder Jack Cohen: “Pile it high, sell it cheap”, something he says when referring to having a successful business. I have yet to learn about Tesco’s economic practices, but Penney’s has taken this to heart and astutely follows this mantra. Penneys (known as Primark outside of Ireland), founded in 1969 in Dublin by Arthur Ryan, has become a global retail phenomenon. With its headquarters on Mary Street, the company has built a reputation for offering “Amazing Fashion, Amazing Prices.” Customers flock to Penneys stores worldwide, including loyal Trinity students who visit weekly to get their “Penneys fix.”

Company Background

Firstly, it is important to obtain some background information on Penneys, which is a subsidiary of Associated British Foods known for selling both food and apparel. Conversely, Penneys, as anybody familiar with the brand would know, has everything in abundance from clothing, accessories, beauty, footwear, and my favourite, homeware. The product line caters to women, children, pets, and men. According to their website, they employ over 79,000 people, and between 2017 and 2018 opened 16 new stores creating over 4,660 jobs. As a company, they provide in-house employee training programmes, from formal induction to customer promise training for retail employees. Today, ABF’s subsidiary has more than 374 stores globally, maintaining a presence in the Republic of Ireland, the UK, Spain, Germany, Portugal, Netherlands, Belgium, Austria, France, Italy, and the Northeast region of the USA, with more to come. 

The business model of Penneys is centred around delivering value to consumers by offering high-quality products at the lowest possible prices; the high-quality label is self-proclaimed and often highly contested. However, such a claim is achieved through tight control over the supply chain and a high-volume, low-margin production strategy. Penneys can minimise costs and pass on significant savings to customers by negotiating favourable contracts with suppliers and maintaining highly efficient distribution channels.

There are various reasons why Penneys is a success story at a time when competitors like Forever 21 filed for ‘Chapter 11 bankruptcy protection’ or the end of Payless ShoeSource. This false ‘luxury’ shoe shop made numerous influencers fall for it in the United States;

the company strategically changed its name from Penneys to Primark to expand its reach beyond Ireland as the name “Penney” was trademarked by JCPenney. Fortunately for the brand, Primark is a high-performing retailer, and JCPenney is dealing with constant store closures. Another success factor can be attributed to the day when Arthur Ryan convinced Galen Weston, ABF’s kingpin, to try his hand at apparel, which was a life-altering decision for the future of Primark and helped secure its financial future. 

Areas of Weakness: Online Presence, Fast Fashion & Ethics

No company is without weakness, and Penneys has three significant areas of concern, mainly limited online presence, unethical labour practices, and a negative environmental impact. Penneys has been criticised for its limited online presence by many critics, from the Irish Times to the Financial Times. This lack of presence may hinder its ability to reach customers in remote locations or adapt to the ever-changing consumer preferences. However, in recent news, Penneys did introduce a click-and-collect trial for kid swear and women’s clothing (in the UK). Penneys has to differentiate itself from competitors; it is essential to consider the long-term implications of this strategy in a rapidly evolving retail landscape. Nevertheless, accounts filed with the Companies Registration Office showed that Primark Limited made a profit before tax of €394 million in 2022. This was a significant increase compared to 2021’s pre-tax profit of €19 million, which was affected by the COVID-19 pandemic. Total turnover for the year was €3.2 billion, up from nearly €2.4 billion in the year before. 

Additionally, Penneys distinguished itself from other fast-fashion brands by having a transnational strategy approach due to their goal of achieving a balance between global integration and local responsiveness. Primark’s ability to source products from Asia and some parts of Europe allows it to provide its diverse range of items at such low prices. Customers can find items such as a pack of three stockings for less than five euros, a testament to the company’s commitment to affordability. Additionally, Penneys quick turnover of styles, wide product range, strong physical presence, and economies of scale contribute to its success. The company’s dependence on brick-and-mortar stores, however, makes it vulnerable to changes in consumer preferences and regional economic shocks. On the flip side, it increases loyalty. The brand has a loyal customer base and enjoys strong brand recognition; the 10.4 billion euros in sales revenue for 2023 can be a testament to its customers’ love for it. Each company is different, and not every new change in the market favours each company. Unlike their €1.50 mittens, they are not one-size-fits-all. 

While Penneys has gained popularity for its affordable fashion and home goods, it has faced criticism and controversy regarding its ethical practices. These concerns can be examined using the company’s annual reports and public disclosures. One striking area of ethical concern is labour practices. Penneys has faced allegations of unethical labour conditions such as low wages, poor working conditions, and exploitation of workers. An infamous example is a Bangladeshi supplier called Rana Plaza in 2013, which had a structural collapse. Penneys has since then tried to address these issues by implementing a Supplier Code of Conduct and building safety programs in five countries, including Bangladesh, to prevent another disaster.

Another ethical concern is the negative environmental impact found in the fast-fashion industry. As mentioned, Penneys’ business model is centred around offering high-volume, low-cost products, contributing to overconsumption, disposal of clothing and environmental degradation. It is essential to assess Penneys’ sustainability initiatives and their effectiveness in mitigating these impacts. The company recently launched a circular product collection scheme based on the Circular Product Standard, highlighting a step in the right direction. However, it is essential to evaluate the scale and impact of this collection on Penneys’ overall product range to determine if it is a substantial effort or merely a form of greenwashing. The percentage of products from this collection relative to the company’s overall product range will provide insight into the scale and impact of Penneys’ sustainability efforts and whether they are substantial or merely tokenistic.

The Future for Penneys

Looking ahead, Penneys has several opportunities for growth and improvement. Despite its rejection of e-commerce expansion, some critics say it might have helped with brand differentiation in an overcrowded market. With growing eco-conscious values augmenting amongst consumers, Penneys could introduce initiatives to improve its ethical and sustainable practices, like competitor H&M’s ‘Conscious’ line. Market expansion is another avenue for Penneys’ future growth. Exploring new markets in Asia, Latin America, and Canada could help the company reduce its reliance on European markets and explore more environmentally friendly operations. 

Penneys can take its sustainability efforts to broader contexts by aligning operative standards with Sustainable Development Goals (SDGs) and potential legislative pressures the company may face. The SDGs, adopted by the United Nations, provide a framework for sustainable development globally. Evaluating Penneys’ initiatives in light of relevant SDGs can highlight areas where the company aligns with or falls short of international sustainability targets. For example, initiatives related to SDG 8, Economic Growth and SDG 12, Responsible Consumption and Production, are particularly relevant to Penneys’ ethical and sustainability concerns; providing concrete evidence of working towards these goals could shift the brand away from its controversial market status. Furthermore, legislative pressures and regulations in the fashion industry, such as extended producer responsibility (EPR) policies and regulations on waste management can impact Penneys’ future strategies from an external perspective. Analysing potential legislative risks and challenges will provide a more holistic understanding of the factors that may influence Penneys’ sustainability efforts and shape its future success.

Could SHEIN Become London’s Biggest IPO?

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Chloé Asconi-Feldman

In November 2023, SHEIN, the controversial fast-fashion Singapore-based brand filed an initial public offering (IPO). While initially planning on listing shares in New York, the UK chancellor has recently met with the SHEIN executive chair and it is now rumoured that SHEIN will become a listing in London. What is the reason for this sudden change, and what does this mean for LSE?

Why London?

The switch from New York to London may be in part due to the unlikeliness that the US Securities and Exchange Commission would approve its IPO. Despite the great efforts the company has made to shift its reputation in Washington and beyond, by spending millions of dollars on lobbying and meeting privately with lawmakers, it is predicted that the US will not approve its IPO. This is because of Shein’s supply chain and its ties to the Chinese Communist Party; Senator Marco Rubio stated in a letter to the Securities and Exchange Commission (SEC) that they should enhance disclosures when dealing with SHEIN compared to the protocol with an average company, and urged them to protect U.S. investors by blocking SHEIN’s offer. 

Founded in China, SHEIN has been accused of using forced labour to produce their clothing where costs start as low as a couple of dollars for a t-shirt. With manufacturing focused in the Xinjiang region, the company continues to deny these allegations, claiming they have a zero-tolerance policy for forced labour. Although the company is considering Hong Kong and Singapore as potential markets, the benefits of a Western stock listing in London would position the company differently in the eyes of investors, implying higher levels of transparency and corporate governance. 

Economic Impact: SHEIN Revitalising the LSE?

According to data compiled by Bloomberg, last year the UK raised about $1 billion through IPOs which has been the lowest level in decades. Struggling to stay afloat as a global financial centre after leaving the European Union, the majority of the companies that have come to market are trading below their IPO prices. A major cause for this is due to companies leaving the London Stock Exchange in favour of the Nasdaq in New York for its lower listing fees and constraints. Due to this decline, there have been developing reforms to boost the UK as a destination for listing, making it easier for companies to list more quickly, and in the case of SHEIN, go through less scrutiny than they would in New York. Despite the steady decline, there is still significant value in the market, having a wave of private equity takeovers of UK-listed companies. 

If SHEIN were to go ahead in London, this could be huge for the city and the country’s standing as a global financial centre. Such a listing could even place the IPO in record books, as Bloomberg reports that the company would raise more than $10.7 billion by selling shares to the public, distinguishing it as the biggest British IPO ever. With such a title, this could profit both London as a financial centre and SHEIN as a company, increasing the amount of companies that may choose to list in London by augmenting confidence in non-Western firms looking to enter new markets.

Small Businesses: How Hidden Price Increases Arise from Seemingly Nowhere

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Kitty Harburn

Following the recent closures of some favourite local spots, including Kale+CoCo, All My Friends pub and many more, the future is undistinguished for small businesses across the country. With January nearly behind us, the landscape for these SMEs seems to be filled with nothing but ever-rising costs, as business owners face constant uncertainty with price volatility. In 2023, the SME count in Ireland was approximately 309,000 with 91% of these accounting for micro-sized businesses, employing between 1 and 9 people. Yet, according to a survey by PwC in the last quarter of 2023, approximately 650 businesses are expected to close this year due to “market disruption” and rising running costs. 

The ICOB (Increased Cost of Business Grant) for 2024, which entails once off payments to 193,000 businesses, has increased to €257 million following the release of Budget 2024. However, even with these grants, businesses are still struggling to meet ends when it comes to covering the many bills they incur. 

Dublin’s “All my Friends” pub, based in Smithfield is a prime example of the struggles associated with running a small, independent business in the current Irish, commercial environment. The pub opened its doors in the summer of 2022, and less than 2 years following, closure was announced due to the ‘punitive tax system’ as described in their statement, highlighting the ever-increasing costs of running an independent small business in Ireland. Kale + CoCo, another favourite in the Stoneybatter area, closed its doors in December due to similar financial constraints. As reported in the Irish Independent, “Nowadays, it’s not enough to just be a cafe”, with “so little reward”. 

Following the Government debate on 14th February, these increasing costs were noted as Accountancy Ireland recommended a limited increase in the minimum wage due to the increased costs of doing business and inflation. The increasing financial pressure on SMEs is hard to narrow to one specific area. The issue is not unique to Ireland, with many global geopolitical factors at play: shocks to supply chains following Brexit and the crisis in Ukraine are namely impotent, with global circumstances taking their toll on markets across the globe. 

SMEs facing financial difficulties are inevitably raising consumer prices to meet ends’ need, but naturally the overall inflation rate is taking its toll on the economy. The public are now much more aware of their spending habits and their role in keeping businesses flowing, yet increased selling prices are taking their toll on demand. As a college student, a notable change we can all vouch for is the costs of a cup of coffee and a pastry. Two years ago, friends and I would regularly treat ourselves to some of our favourites, most often comprised  of small, independent coffee shops. In the last few months however, this has not been so economically feasible. These small, generally family-run businesses have unfortunately had no other choice but to hike up prices, and the tangible impacts on daily expenses, like the rising cost of coffee, underscores the urgent need for comprehensive solutions to sustain the vital ecosystem of small, independent businesses in Ireland. 

The precarious landscape for small businesses in Ireland mirrors global inflationary challenges, and while the ICOB grant increase offers some relief amongst other actions taken by the government, it falls short of addressing the broader economic issues to which are harder to control. Geopolitical factors, supply chain disruptions, and inflation are just some of the difficulties for SMEs in Ireland today, prompting price hikes that impact consumer habits.

Navigating the Green Economy: Transition Risk, Regulatory Measures, and Investment Opportunities in the Era of Climate Neutrality 

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Caoimhe Kennedy

From a corporate perspective, transition risk encompasses the uncertainty surrounding the pace of achieving carbon neutrality. On a broader scale, EU nations aspire to become the world’s first climate-neutral economy and society by 2050, as outlined in the Paris Agreement. Advanced economies must reduce their CO2 emissions from 8.8 to 3.8 tonnes per capita by 2030 to stay within the 1.5°C threshold. Yet, the current trajectory suggests a perilous 3°C increase in global heating. Aligning portfolio structures with evolving EU policies is crucial for financial institutions as they navigate the imperative shift toward a low-carbon economy. This transition holds the potential for substantial ripple effects on financial systems, prompting sudden reassessments of assets. 

The European Central Bank has heightened regulatory measures, compelling financial institutions to disclose climate risks as per the 2023 directives. As such, increasing scrutiny will place growing pressure on portfolio managers to adjust their portfolio exposures. Non-compliance with the new regulations, resulting in a failure to disclose climate information, not only signifies a breach of EU law but also triggers supervisory action. Furthermore, with an expected surge in the size of the wealth management industry due to demographic shifts and rising consumer demands for increased investor involvement in promoting sustainable business practices, financial institutions must reshape their portfolio compositions to contribute to a carbon-neutral world. 

In the realm of financial stability, long-term institutional investors play a pivotal role in the recalibration and redistribution of carbon transition risks. Mitigating the escalating threat of natural disasters is facilitated through the utilisation of hedging instruments, such as catastrophe bonds. Additionally, various financial tools, including green stock indices and green bonds, emerge as valuable mechanisms for redirecting investments towards environmentally sustainable sectors. Furthermore, the world’s excessive dependence on oil, primarily sourced from politically unstable authoritarian regimes, presents a compelling case for the urgent redirection of funds towards renewable energy sectors. Historical patterns reveal that hikes in oil prices frequently precedes recessions. To bolster stability in the financial sector, a strategic shift away from investments tied to oil holds significant benefits. 

The green economy opens a world of opportunities for investors. Climate change, with its far-reaching impact beyond the EU, underscores the need for a global approach. If the green transition remains confined solely to Western nations and China, projections suggest that by 2050, South Asia, Southeast Asia, and Africa could contribute to a staggering 64% of global emissions. This scenario makes the achievement of Paris Agreement goals virtually impossible without substantial investments in green technologies within emerging markets. Notably, a mere 14% of green investments in these burgeoning economies are privately funded, in contrast to the 81% in developed nations. This evolving market, coupled with innovative investment instruments, provides a fresh avenue for investors to generate alpha returns. Simultaneously, it offers the strategic advantage of hedging portfolio risks by diversifying exposure across different global regions.

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