Today I’m going to try & walk the walk as well as talk the talk. To be successful, you need to focus on what it is your customers want and how do they want it.

What will separate the winners from the losers in the banking sector, is the ability to recognize what it is that customers want and delivering it.

Likewise, this session will be driven by you. I will do my best to tackle the questions you want answered. So we’ll have a look at what’s going on, why is it happening, how far have we come, where are we heading and what can we do about it?

As well as deliver it in the way you want it – the presentation will be kept short..

Firstly – what’s going on?

Let’s start with the headlines..

• Banks are losing their grip on customers
• Jurassic Bank – Why banks will have to go the way of the dinosaurs
• Banks face wipe out in some financial services
• And the more positive.. Why ‪Fintech Start-Ups Aren’t Killing Banks.. Yet

McKinsey forecasts that between 10% to as much as 40% of bank revenues will be at risk by 2025. “those that do not seek to transform may well become somewhat digitized but likely stuck in the middle – outwardly modern, inwardly struggling, moving slowly towards extinction”. The Economist believes that “Bosses glimpse a future where customers use banks merely as a utility, depositing their money there but using unregulated startups to manage it.”

At the same time, investment in financial technology companies globally trebled to $12 billion last year. London is in perfect position – where, unlike having to travel between Silicon Valley, New York and Washington, as this audience proves – tech, finance and government are within walking distance. That’s why, while astounding, it’s not completely incomprehensible that of the $2.2bn invested into London’s tech start-ups, 75% was invested in FinTech.

We’ve entered a new era.. where the largest hotel company owns no property, the largest taxi service no cars… technology is providing access to services without the traditional high overheads.

Why is this happening? Let’s delve behind the headlines:

Demand, Demographics and Digitisation..

1. DEMAND 

• The old model of finance is no longer working. Previously it was all about selling or ‘pushing’ products. Keeping things complicated to justify high fees. The financial crisis exposed the flaws in this strategy – money wasn’t protected and the fees unjustified. Rather than selling products, people need problems solved. They don’t want their money shrouded in mystery, they want to be smarter and to certain extent do it themselves. A service built around their needs.
• There’s a real demand not being met – 5.4 million have enough money to invest but not enough to qualify for a financial advisor. Moreover, greater transparency on fees means millions of people will no longer access workplace advice, which they’d previously thought was ‘free’. Finally, the rise of ‘DIY’ (do-it-yourself) investor wants to have some input into their investment choices.

2. DEMOGRAPHICS 

• Millennials are the largest cohort in the US
• They will constitute 75% global workforce within 10 years.
• The majority can’t tell the different between banks
• 71% would rather go to the dentist than listen to their bank

3. DIGITAL 

• Trust: Americans trust tech firms more than banks for finance (73% trust ‪PayPal vs. 36% Bank of America)
• 73% would be more excited about a new offering in financial services from Google, Amazon, Apple, PayPal, or Square than from own nationwide bank.
• As Jamie Dimon, the CEO of JP Morgan, put it “Silicon Valley is good at getting rid of pain points. Banks are good at creating them. In a capitalist society, you better be looking for ways to do things better, faster & cheaper.”

So what progress has been made so far?

• Banks are struggling with legacy technology – software built by difference teams, in different languages, in different locations – complexity built upon  complexity. Costly to maintain let alone upgrade.
• Their physical presence is shrinking: Almost 2,000 costly bank branches have gone in the past 5yrs, according to the British Bankers’ Association. Customers can’t visit branches that don’t exist.
• Walls that until recently protected the banks are coming down. Historically, we only changed financial provider every 27 years, with switching bank accounts seen as a chore, shielded incumbents from competition.
• Pizza hammers the point home… Here’s the one image to remember… TISA’s research has discovered that it takes less time to get a pay day loan than it does for a pizza to be delivered. And far far longer than either, is the time it takes to start saving and investing for your future. Things have to change.

Where are we heading?

On the go, in the know & a quicker way to grow.

• On the go: 73% of all UK banking will carried out via a smart phone by 2020
• In the know: banks’ efforts to sell products to customers will be undercut by new financial firms able to pitch more suitable financial products, using accumulated data.
• A quicker way to grow: This is the UK’s once-in-a-century chance to be a financial technology leader as in contrast to the US – London combines finance, tech & government, as you can tell from the people in this very room.

What can we do about it?

Walk the walk not just talk the talk. 

• Evolve – Build what customers want. Capitalize on the access banks have to a wide customer base, and their data.
• Collaborate – to keep up with rapidly changing processes.
• Retreat – to more traditional basic financial services and as a ‘utility’ behind the scenes.

McKinsey estimates banks have 3 years to decide – the clock is ticking 

So.. in conclusion… hopefully I’ve managed to walk the walk as well as talk the talk today. To be successful, you need to focus on what it is that your customers want and how do they want it.

The one image to remember was the pizza man – hammers home how the industry needs to change. The one number was: 75%, around about:

1. 75% of London tech investment went to FinTech
2. Millennials will be 75% of the global workforce within 10 years
3. Almost 75% more excited by financial products from tech cos
4. Almost 75% banking will be carried out on a mobile by 2020.

We’ve tackled: What’s going on? Banks focused on selling products they wish to deliver in a way they wish to deliver it are under pressure.

Why is this happening? Financial services are becoming demand driven, with the balance of power in the hands of the customer. As demographics shift and with the rise of technology, their needs are not being met.

How far have we come? Pressure is building as walls previously providing protection from emerging competition are coming down.

Where are we heading? On the go, in the know and finding a faster way to grow.

What can we do about it? Build, collaborate or retreat – walk the walk not just talk the talk about being truly customer-centric – good luck!

Thank you.

Bad news for Europe, good news for investors

Investor hopes for ‘government bond-buying’ QE were raised today as Germany came under renewed pressure.

Germany has historically provided the biggest opposition, pointing out the constitutional limitations but in recent months softened their rhetoric from ‘opposition’ to ‘scepticism’ on whether the strategy could succeed in having a sufficient impact.

Germany is the key

The driver of this change is a deteriorating outlook for the country itself. As the data worsens, the more attractive some form of additional support becomes.

Therefore, today’s news that German factory orders fell for first time in 3 months in November, and by an amount steeper than predicted is important. Moreover, data revealed that the region’s unemployment remained above 11% and last month consumer prices fell for the first time since 2009.

The markets haven’t taken the turmoil in the region lightly. The EuroStoxx 600 is still down 3.4% from a December 5^th high on fears of a Greece exit and oil concerns.

So why does this matter? It makes two potentially profitable outcomes significantly more likely.

Greece more likely to stay in the euro… for now

Firstly, the European Central Bank will be more flexible in its efforts to keep Greece in the Eurozone. In fact, Germany announced yesterday that it is open to discussing debt relief with Greece’s next government. This is more likely to be an easing of terms rather than the write-off Greek officials are hoping for, but could still be called a victory by both sides.

Further stimulus back on the table

Secondly, there are fewer roadblocks in the ECB’s way for announcing further QE. Although, with the Greek election set for 3 days after the European Central Bank meets on Jan 22^nd, if anything were to be announced, we could still have to wait until the March meeting for details.

As an investor, the key takeaway is that policy is diverging. While the US contemplates tightening, Europe is exploring the opposite.

Euro will separate the winners from losers

The euro has slumped to 9 year low against the dollar. This helps European exporters and punishes importers. Goods sold by European companies in the US now cheaper are now cheaper in dollars. Moreover, US revenues for European companies are worth more when converted to back into Euros. After earnings in Eurostoxx 50 index dropped 3.8% last year, the currency move could provide a welcomed boost.

The risk of Greece leaving the Euro is looming large over markets as a ‘snap’ election nears on Jan 25^th. Threatening to reverse the austerity measures (spending cuts etc) required for bailout funds and remaining in the Eurozone, Syriza looks likely to lead any coalition government, if it does not win outright.

Feared it could be “Lehman Squared” (have a larger effect on markets than the collapse of Lehman Brothers), a Greek exit could be catastrophic. The country would be shunned from international markets, with a new/old currency that would devalue so severely that capital controls could be required and a make run on banks inescapable. It could be disastrous for an economy which is already contracting and struggling with high unemployment.

Nevertheless, the bigger risk for investors is that the turmoil spreads to larger neighbouring countries

Why then do the markets appear sanguine? The Italian government succeeded in refinancing €3 billion of sovereign debt at its lowest rate on record. Moreover, even the yield on Greek bonds remains far below historic highs.

The reason is that the following risks have not been widely recognised.

Investors are underestimating the possibility that the anti-austerity movement could gather momentum through the region. With elections due in Portugal and Spain, the Greek election results could spark resistance in larger economies.

Furthermore, there is a misplaced belief that the ECB has enough firepower to contain any turmoil from spreading. This is questionable and unproven.

Nevertheless, Greece is unlikely to give away the golden goose so quickly – the threat of leaving the Eurozone is the one bargaining chip they have. Therefore, the more likely outcome is they will continue with austerity, albeit to a lesser extent, which they can claim as a win.

Therefore, as the election nears and risks come to light, weakness in the shares of high quality international Spanish and Italian companies could provide attractive entry points. While the risk/reward trade-off in Greece remains unattractive.

How to keep your head when those around you are losing theirs.

• Firstly get better informed by asking 3 simple questions: What’s really going on? Why is it happening? What could happen next?
• Then work out how it could affect you with another 3 simple questions.

The recent turmoil in the financial markets is a great example. Investors seemed to be losing their heads.

1. What’s really going on? Stock markets were tanking (see below for more info)
2. Why is this happening? Investors worried the economy may not grow as much as expected, so companies may not be as profitable and their shares not as valuable.
3. What could happen next? Central Banks under pressure to enact policies to support growth to get things back on track.

How does this affect you:

• Will this matter over the longer term? If you’re investing for retirement or savings you won’t touch for a while then you can cope with something that may be a bump in the road.
• Is there a way you could benefit? When prices fall, you can buy at a cheaper level.
• What is it you wanted to achieve in the first place? If it’s to sleep well at night then investing in companies you have confidence will appreciate in value over the longer term will help you keep your head when others are losing theirs.

INVESTOR NOTE:

Reaction to the sharp stock market sell-off:

• WHAT? The S&P briefly erased its gain for the year, US Treasury dipped below 2% for the 1^st time since June of last year. The Greek market fall almost 6% yesterday and periphery bond yields are rising.

• WHY? Growth concerns (downgraded forecasts for global growth and data even out of the US has come in weaker than expected), with rising geopolitical tension and the Ebola outbreak compounding these fears. Investor complacency appears to be reversing – after seeming indifference to economic setbacks as stocks ground higher, volatility appears to be returning.

• WHAT NEXT? Pressure on Central Banks to remain accommodative – hopes will be raised for ‘conventional’ quantitative easing by the Eureopan Central Bank and some form of response by the Federal Reserve. Expectations for action could support markets, while any further disappointment would not be well received – noting that Central Bankers have tended to bark louder than they bite.

• HOW TO REACT? Maintain a long term time horizon. Focus on quality and investments strong enough to weather the storm. Market overreaction can be exploited (by buying attractive assets at cheaper prices) rather than feared… if you ‘buckle up’ in something you have confidence will appreciate in value over the longer term. Investing in companies that can maintain dividends and grow earnings regardless can help you weather the storm.

“In light of the naked celebrity photos doing the rounds, I’m going to tell you today how to tell who’s really naked in Silicon Valley and beyond.

We all know the story, the Emperor’s New Clothes… An Emperor who loves to buy new clothes and he hears about a thread that invisible to idiots. He sends his nobles and ministers and they all come back describing how beautiful it is. But when he wears an outfit made from this thread and travels through the town, a child says “look, he’s naked”, to which all the townsfolk agree.

Now there is a similarity and it’s this. We’ve seen technology companies list their shares for the first time and on the first day of trading they’ve done well – people scrambling to buy them – seen as exclusive for those important enough to get access and smart enough to understand the business models. Therefore the shares do well the first day.. but then they take a dive as the reality of the outlook for the company starts to sink in.

So how can we tell which companies are naked and which aren’t?

It comes down to this: Revenue is vanity, profit is sanity, cash flow is reality – cash flow ensures a company is not really naked.

What does this mean?

Revenues are the sales a company is making but really this is just a boast. If the cost of making these sales is high, then they’re not generating much profit. So put this to one side..

Now profit is a more sensible measure of the health of the company since it’s the income the company has generated, after costs are taken into account.

But cash flow which is more protected from ‘creative’ accounting is more tangible and can give more confidence in the outlook for a company.

So – revenue is vanity, profit is sanity, check out the cash flow to see who’s freely naked or not…

Thanks very much.”

(Click on the image below for a quick video clip summary)

2 Measures That Won’t Measure Up To Much…

Historic rate cuts by the European Central Bank may have moved interest rates to new lows, in an effort to make credit cheaper, but Spain and Italy can already borrow for less than the US (!) and there’s very little further movement possible.

The bigger headline was the launching of a scheme to buy assets, again to reduce borrowing costs, while pumping money into the markets. However, the amount of money out there has been contracting for the past 2 years, by 35%. There aren’t enough high quality assets that the ECB is allowed to buy, in order to reverse this.

Here’s The Big Problem – Boosting Supply Doesn’t Necessarily Boost Demand

These two measures are trying to make it easier to borrow (boost loan supply) in order to boost loan demand. The more companies borrow, the more they will expand, invest and hire; helping economic growth.

However, you can boost supply as much as you like but that doesn’t necessary mean demand will increase. While fundamental issues remain in the region, the confidence required for firms to borrow more is lacking. Put another way – you can put out as many cream cakes as you’d like, but if people aren’t hungry, they aren’t going to eat.

Expectations Are High

ECB President Mario Draghi has been highly effective with his words alone – moving markets with speeches and little action. However, by doing so he has also set the bar high and expectations for action are becoming the norm. With France and German data disappointing (the engine of Europe), the pressure is building.

More Needed

Europe needs to address its imbalances and integrate closer in order to be able to enact policies that will affect the region more consistently. Secondly, there needs to be greater incentive for investment. Thirdly, the obstacles to buying government bonds (in a more traditional form of stimulus) must be overcome.

A ‘Binary Trade’

Europe has become a ‘binary trade’ – one with two vastly different outcomes. Either the region could deteriorate, or a significant amount of support given that could rocket markets.

Be wary of low quality and overcrowded investments that investors rushed into to capture returns are those they will quickly exit when sentiment turns. Instead focus on companies with strong balance sheets and cash flow that can weather the storm and remember – it’s not where a company is headquartered but where it sells its products.

MORE CLIPS – Click images below:

Central Banks To Remain Supportive – how issues in Europe will affect the US

Europe faces an ‘uphill climb’

In the below clip, Smart Money Expert Gemma Godfrey quickly explains how to avoid another Madoff – how a Ponzi scheme works, how to spot one and how to be smarter with your money.

Don’t invest in something you don’t understand

• Beware anything that seems too good to be true, and
  

• Where no-one will tell you why it’s not
  

Here we’re talking about a Ponzi scheme. This is a scheme which uses new capital to pay older investors, rather than generating genuine profits.

This is important to understand since it’s not so easy to spot one. Over 4,800 ‘clients’ were invested with Madoff when his scheme was finally exposed.

So let’s break it down

Monday: I tell Adam that if he gives me one apple today, I’ll give him 2 apples tomorrow.

Tuesday: hearing of this wonderful deal, Bob gives me one apple hoping for the same. I take his apple add it to Adam’s original apple and now have the two apples I need to pay to Adam. I offer this to him but instead he decides to stay in the game.

Wednesday: Word has spread and Carl, Clive, Claire, Claudia and Colin all give me their apples. I now have enough to offer Bob back his original apple plus one day’s worth of returns and Adam his plus two. And so on it goes..

The lesson

Each time, new apples are used to pay older investors. Nothing is being created, only passed on.

And the problem arises when there aren’t enough new apples or older investors want take their apples out of the game.

What You Can Do

1. BEWARE ANYTHING THAT SEEMS TOO GOOD TO BE TRUE:

• Abnormally high returns, or
• Eerily consistent returns (across a whole variety of different environments)

2. BEWARE THINGS THAT NO-ONE WILL EXPLAIN TO YOU:

• Where the strategy is a secret
• Vague terms are used, keeping it shrouded in mystery
• When you hear the words: it’s “too complicated for outsiders to understand.”

 Don’t invest in something you don’t understand

• Beware anything that seems too good to be true, and
  

• Where no-one will tell you why it’s not

The global recovery does not fully account for the rise in markets, and the growth that would justify these elevated price levels is not guaranteed.

Firstly, central banks have kept policy loose, but as asset purchase schemes wind down, the support will weaken.

Secondly, “forward-looking” markets have been driven by expectation, not just evidence, of growth.

When it’s cheaper for Ireland to borrow than the United States, you have to be concerned by a disconnect between investor sentiment and economic reality. The US is still struggling with a lack of wage growth, with China reining in lending.

Grinding higher on low volume does not signal market conviction but that investors are staying away. Moreover, investor rotations out of growth stocks, and into value stocks and cash, are a sign of caution (selling the shares of companies that are more dependent on an economic recovery, and into ones that are more protected in times of weakness).

We’re still in a sweet spot of growth without an imminent rate rise. But the higher markets go, the more the risks will become apparent.

More at @GCGodfrey.

WHAT’S GOING ON?

The results of the world’s largest election will be announced on Friday, and while it has been profitable to ‘buy on the rumour’, it may already be time to ‘sell on the news’.

WHY DOES THIS MATTER?

With the business-friendly candidate looking likely to win, this could herald a new era for one of the world’s fastest growing economies, impacting competition with, or revenues for, US or European firms.

Of particular importance for global investors is that the majority of the recent buying of Indian stocks has been carried out by foreign investors i.e. outside of India itself. Foreign ownership of companies listed on the Indian stock exchange has reached a record 22%. Worryingly, domestic investors have already started selling.

WHAT’S THE RISK?

The ‘best case scenario has already been priced in, with preliminary polls indicating the business friendly candidate Modi will win the election. The Indian stock market has now outperformed the Emerging Market index by more than 7% year to date. However, these polls have historically proved inaccurate and there is still a chance for disappointment.

Further upside is limited because, while there is likely to be election excitement, when this dies down, it will take time for reforms to be implimented and impact corporate profitability.

Rumours have circulated that local brokerage firms have requested additional capital to be held aside when investments have been bought, to be able to offset bigger losses and implying a higher level of volatility is expected in the markets.

WHAT TO DO?

The key number to watch for is 272 – the number of seats that need to be won for a majority in government. Anything below 240 would be taken badly by investors. Nevertheless, it may be wiser not to wait for the results and already reallocate capital closer to home to generate returns with less risk taken.

As an investor, misunderstandings and overreaction can offer some of the best opportunities to profit. Here 5 widely held beliefs are challenged and attractive investment strategies revealed: There is no need to fear deflation; The stock market trade has reversed; It’s not too late to join the (small cap) party; Central Bank action will not achieve its goal; Turmoil in Ukraine unlikely to directly impact earnings…

1. There is no need to fear deflation, for now (watch on CNBC below)

More ‘lowflation‘ than ‘deflation‘, inflation has fallen but is not negative.

This means Europe is tackling prices that are rising less than they used to. This does not mean prices are falling, which would encouraged to put off spending so they can buy what they’re after later for cheaper.

Instead low inflation is a reflection of a more muted rise in wages.  With increases in labour costs limited, companies can become more competitive. This in turn is good for growth (as long as it’s only temporary and feeds back into higher employment, wages and consumption to keep fuelling the recovery).

The interesting thing to note is that with unemployment higher in Southern Europe than the North, their labour costs are cheaper. This ‘redistribution of competitiveness’ has helped  periphery countries relative to their northern counterparts and leads us onto the next point…

2. The trade has reversed, from investing in the core to the periphery (watch on CNBC below)

The terms ‘risk’ and ‘safety’ need to be re-examined.

A year or so ago, Italy was seen as ‘risky‘, with investors seeking ‘safety‘ in Germany. This was down to the dynamics of their customer base, and the argument has reversed.

During the financial crisis, when Europe was hit with recession, an ability to sell products to growing emerging markets was valuable. However, as growth in these developing nations could now disappoint, while demand in Europe is reviving, Italian firms selling their goods at home appear to be in a better position than German exporters.

3. It’s not too late to join the (small cap) party

Investors have been focused on buying not just the periphery for more accelerated growth and earnings upside but also on the small and mid-caps.

Smaller companies can offer better exposure to the domestic consumer and their shares have significantly outperformed those of larger firms.

The good news is this does not mean these shares have also become significantly overvalued. During the financial crisis they fell more than those of larger companies since they were perceived as more vulnerable. Therefore, compared with large caps and historical valuations, there could be further to go.

4. European Central Bank action could end up like a drop in the ocean

So, what does the future hold? What, if anything, can be done to ensure inflation doesn’t remain stubbornly low for too long?

The possibility of an asset buying program has been hotly debated. However, in a leaked document from the European Central Bank itself, it was revealed that as much as €1tn could boost inflation by as little as an additional 0.2%.

5. Turmoil in the Ukraine more likely to hit sentiment than earnings

Whilst tensions in the Ukraine have been hitting the headlines this quarter, any impact on corporate earnings in Europe is unlikely.

Instead, a strong euro may have been more damaging, and shaken global sentiment a bigger hit to share prices.