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Europe’s gas crisis: What is the near-term corporate impact?

The old song in a new voice – the first Monday of September again revived concerns in Europe about energy shortages. The reason was again the suspension of Gazprom’s supplies via Nord Stream 1 – this time for an in definite period. The result: gas prices rose nearly 30% in early trade, oil rallied again, European stocks sank, and the euro hit a new 20-year low against the dollar.

Let’s start with the gas. After natural gas prices on August 29 reached a record 345 euros per megawatt hour on the Amsterdam stock exchange, within a few days the quotations returned by almost 40% to 215 euros on Friday 2nd September. The reason for the decrease in prices may be the filling of reserves in European countries and the increase of supplies from the USA, but another turn of Russia has changed the situation again, Reuters said. The price of natural gas (for delivery in October) is currently around 278 euros per megawatt hour.

The price of oil also rose on Monday. Both main types of oil – WTI and Brent – rose in price by about 2.5%. After oil reached nearly $120 a barrel in June, the market calmed down. Since June, the raw material has fallen in price by nearly 25%, with prices returning to pre-Russian invasion levels. On the one hand, the slowdown in growth in China, on the other hand, high prices at gas stations reduced demand during the summer period, when it is usually highest. All eyes today will be on the OPEC meeting in September, but it is unlikely that the cartel will decide on an increase in supply, which, given the cur rent situation in Europe, explains why the price is rising again.

Uncertainty in the energy industry has had an impact on the stock markets of the Old Continent. Stocks in Paris, Frankfurt and London traded almost entirely in negative territory. Germany’s DAX index opened the session down around 3%, while in France and the UK the down ward movements are more limited – around 1-2%, so far. The pan-European Eurostoxx 50 lost around 2%. Among the few companies enjoying growth, understandably, are energy companies Total, Schell and British Petroleum.

It appears that the change in sentiment from today has not yet reached the US as futures are not showing a decline, but it is very likely that volatility will spill over into the US markets as the day unfolds and domestic trading commences. During the week, the decision of the ECB regarding the increase of interest rates in the

Eurozone was awaited with interest, which will have an additional impact on the performance of stock markets around the world. The US Federal Reserve has already raised interest rates four times this year, while its European counterparts lagged behind with just one hike of 0.5% in July, before this week’s increase. According to which, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increa sed to 1.25%, 1.50% and 0.75% respecti vely, with effect from 14 September 2022. Things could get worse before they get better, especially if we’re on the brink of a recession, as some analysts fear, sugges ting a more challenging investment envi ronment ahead,” hedge strategists from First Eagle Investments wrote in an August note to clients : “We could be wrong, but we believe the market has underestimated the risks of higher interest rates and a potential recession.”

According to Rhizome Partners, the world is currently entering the next stage of reces sion. The next stage of the bear market will most likely involve lower corporate ear nings due to a more challenging business climate and reduced access to capital, war ned analysts at hedge fund Summer Value Partners.

Whether the economists will be right remains to be seen. But what is the real and concrete impact on the investment funds market? Europe’s precarious gas supply situation has been a prime focus for markets ever since Russia’s invasion of Ukraine at the end of February.

The European Union (EU) and partner countries were quick enough to apply sanctions to Russian oil. However, gas is a more complicated matter given the reliance of major European economies, most precisely Germany, as per its usage of natural gas from Russia. The situation became even more critical when a major supply pipeline, the Nord Stream 1, was closed for maintenance in July this year. While the pipeline has now come back onstream, gas is being supplied at a redu ced volume and even partially stopped. Gas demand became lower in the sum mer, but this reduced supply puts in peril the EU’s aim of filling gas storage sites to 75-80% capacity in November this year, and to 90-93% in 2023. What is the full impact on gas prices in this case and how the derivative products on that assets are strongly influencing those?

Schroders investment experts have their outstanding analysis of what this means for Europe’s economies and markets, including the investment funds one obviously, which is a clear mirror of world economy situation without a doubt. «Europe is facing an 18–24-month period of very high gas and electricity prices», said Mark Lacey, Head of Global Resource Equities. «Europe has become and will remain the premium market for gas over this period, with prices above those in Asia or the US. This premium will last until we start to see meaningful new volumes come onstream from 2024/25.»

High prices can be tackled through two methods: a decrease on demand side or an increase on supply one. European countries are taking steps to tackle the demand side for the time being.

Azad Zangana, Senior European Econo mist and Strategist, said: «EU member states recently agreed to a voluntary 15% reduction in the consumption of gas, but this could become mandatory if supply continues to be disrupted. While energy inflation fell back from 42% year-on-year to 39.7% in the latest reading, we expect further price increases to keep energy and headline inflation elevated in the second half of this year, which in turn will reduce the spending power of households.»

The high prices may in themselves cause demand to drop as users limit their gas consumption at European level, and this starts to look like a generalized picture in several countries already.

Mark Lacey even added: «Following a price increase of around 400% year-on year, it is inevitable that some element of demand is destroyed. Gas demand in Europe will likely fall around 10% in 2022. Even at lower prices, it is unlikely to grow significantly in 2023 given the risk of recession.»

What is the near-term corporate impact?

Germany’s reliance on the Nord Stream 1 pipeline, and lack of alternative options, means it is the major economy most at risk of gas shortages. Earlier this year, the German government unveiled a three step plan for gas rationing that could see supply reduced to industry in order to ensure availability for households and critical institutions like hospitals.

Under such a scenario, energy-intensive sectors such as metals production and chemicals would be the most affected in the short term.

Arianna Fox, European Equities Analyst, said: «The chemicals industry is one that is directly exposed to gas shortage risk given how energy-intensive it is and how so much of the industry is concentrated in Germany. The government could introduce rationing but there are still many questions as to how this would play out.» For example, would all indus tries face the same level of rationing? It might be the case that the government would try to protect industries such as food & beverage production, or healthcare companies. If that’s the case, then other industries like chemicals would have to meet a larger burden, hitting their production harder and in a more consequent way.

«The trouble is that chemicals are used in so many products, industries and processes. Ultimately, every industry would feel the impact of reduced supply or higher prices for chemicals. Businesses could try to import the chemicals they need from outside of Europe but supply chains are still disrupted post Covid, and there’s no guarantee that plants outside Europe have spare capacity.»

Despite the 2,5-year crisis we are cur rently living, since the debut of Covid-19, the war in Ukraine and the consequently gas prices rally, the private equity, ven ture capital and real estate investment funds are blooming. According to the last update from the Commission de Surveillance du Secteur Financier (CSSF) for July 2022, we observe an increase of 4% of the assets under management (AuM) for Luxembourg based UCI, com pared to the figures from June 2022. The “other” assets category is the one pulling the AuM of the funds to those higher skies and is the one all investors’ eyes are staring at in those difficult times for the European economy.

Investing in vineyards – a booming asset class

Exactly like a great piece of art, vineyards are the asset of dreams or pleasure, but which need to be very carefully analyzed if the investor targets a performance and not just leisure. Buying a prestigious wine-growing estate and producing your own wine that goes on to prove a certain success in Europe, but also around the world can be one of the greatest adventures of a lifetime for many of us. Beyond the way of life and the passion for wine, an exceptional vintage is now a very highly prized and rare type of asset.

Subscribing to a fund investing in vineyards means combining very often a high quantity of passion with an entrepreneurial venture, as the final product of the investment is a tangible and testable product. In order to best meet the specific characteristics of this market, we at Thales Solutions, have created a specific investment vehicle responding to in vectors’ demand and needs.

Such a passionate and sustainable asset class deserves some explanations, so that investors receive some keys of how their investment choice needs to be guided. A properly structured and man aged vehicle can offer the possibility to seize rare and exclusive opportunities while providing support in the acquisition of European wine-growing assets and companies in the industry. The vehicle ideally must act as a real estate and private equity fund, globally investing in vineyards (real estate) and vineyard related assets (private equity) such as vineyard management companies, wine storage facilities and global wine distributors securing steady returns to investors from the production and global distribution of highly marketable wines.

A team composed of professionals from the wine and investment funds industries are on hand to assist throughout the acquisition process, and in disclosing the business plan required prior to any investment. The vineyards investment holds its premises from events and trends, we have been observing for a certain period of time, Marc Schiettekat from Le Wine Group Belgium said. In the last decade, the wine market has evolved enormously both in terms of production and distribution. Within the Old World, a quality-driven and native Italy rivals more than ever with the historically dominant France.

Spain, Portugal and Austria are also constantly showing their vast potential. These countries are increasingly focusing on their native grape varieties. In fact, these grape varieties are now also being planted more and more widely in the New World wine countries. Climate change also plays a huge role in all this. Native grape varieties

are often more resistant to the local climatology. They have a better natural resistance to climate variations, produce more acidity in the region where they are historically anchored and ultimately deliver more elegant and balanced wines.

Climate change and the reduction of CO2 emissions are a major challenge for the wine world, perhaps even bigger than the once disastrous phylloxera plague in the late 19th century. In wine producing countries, vineyards cover on average less than 10% of the agricultural area, but in some cases represent 25% of pesticide use. The viticulture of the future is one with a vision in which organic farming would only be too simple a summary of the problem. It also makes little sense to measure yourself to a clear conscience by planting a hectare of forest for every new hectare of vineyard you create. This is often just a window dressing, so to speak. Like we can imitate sugar for our own body and metabolism, we can also give signals to the land and nature so that it responds positively to our presence and the crops we plant.

Respecting the land through, among other things, regenerative and diversifying plantations helps our CO2 footprint further and faster than afforestation compensation or the sometimes-insufficient rules and commercial compromises of the organic standards. We do not only focus on the indigenous grape varieties and their natural environment, but we are also so cially committed to get the local population fully involved in the regeneration of their land, in regaining their self-esteem and to help them believe in their own natural potential. Despite the climate change, Spain and Portugal offer unprecedented opportunities. The fact that large parts of ideal situated land still can be cultivated and sometimes even have to be discovered, means that entering the market and making the necessary investments can still be done at very favourable prices.

It’s not just the wine production which is undergoing an enormous transformation, the historical distribution channels are also being put under pressure and are being forced to reinvent themselves continuously or disappear. The disruption of the traditional wine trade is even worse than 30-40 years ago when supermarket chains started offering wine to their clients. Initially, the reactions of the specialist wine trading companies were pitying. However, some of the most established values from father to son ran into problems because of habituation, lack of dynamism and not growing with the changing market standards of customer service. Claiming exclusivities both in terms of product and distribution regions made their world smaller and smaller, up to the point where large-scale distribution has now taken over up to 85% of trade in many countries.

And history is simply a never-ending story

The digital network and the online business would only play an informative role for the wine world. The customer would surely always want to taste. True for a part of the online sales but the major part is sold in three clicks because of the offer being presented super attractive and claims to be a bargain. Even before Covid and the hectic 2020-21 period of lockdowns, or the current war in Ukraine, it was already clear that wine online would not be a business in the periphery. It’s here to stay and we did not see its entire potential yet!

Through the various underlying structures of a fund, we have a solid relationship and connection with all distribution channels worldwide and we are on board with retail, discount, specialist retailers and the larger online players. Along with the shifting of wealth, the consumption of wine will also shift. Most markets in the world are already used to the consumption of beer and other alcohol. Within alcohol consuming markets, appreciating fine wine is a process that often coincides with softening the culture in its prosperity. A few of the largest countries in the world are at that tipping point and, in addition to the already existing Western wine market, will soon become top customers for premium wines.

Example of target investment for a Vineyard Fund

150Ha property, consisting of 80Ha vineyards (mostly old vines) and 70Ha other (olive trees etc.). Buildings comprising a wine cellar storage, a bodega, a medium capacity bottling installation, office space and all necessary agricultural equipment are included. The company is operational and produces 4,500 hectolitres of medium quality wine annually (the equivalent of approximately 600,000 75cl bottles). Real value of the property with worldwide distribution of its wines is estimated at EUR 7,4M including EUR 3,7M real estate value. The lack of a good distribution drops the value of a project very quickly. In this particular case it goes down to EUR 4,7M.

A proper distribution of produced wines is primordial and represents the major problem of many weakly-known wine producers which results in limited interest on the buying side for the property. In the near vicinity there are additional parcels of vineland plots, ranging from 1 to 15Ha, and totalling hundreds of hectares that may be purchased at an average price of EUR 8,000 per Ha. It is extremely important what the location of the property is. Being in an area with historical sufficient rainfall and no major historical agricultural catastrophes, only brings an added value since the beginning of the project.

Based on the history of the property and its books, a business plan is established in a pure financial manner. The maximum price the fund is willing to pay for this property is roughly EUR 3,5M including relevant costs and taxes. The production of 4,500 hectolitres is initially reduced to 3,600 hectolitres through pruning to produce better quality fruit and higher quality wines. 3,600 hectolitres equate to 480,000 75cl bottles. Approximately 20% or 96,000 bottles are to be used for promotions which is a market practice frequently spread. 384,000 bottles are to be sold with a profit of EUR 1.20 per bottle. Short-term estimates bring the profit to EUR 1.50 – EUR 2 after 3 years of exploitation. At EUR 1.20 per bottle (net profit registered), the revenue target is EUR 460,800. The relevant ROI of the presented investment is comprised between 13.55% and 15.36% based on the above purchase price range for the property.

Additionally, the fund can rapidly ac quire 150 Ha of surrounding vineland at an average price of EUR 8,000 totalling EUR 1,2M (inclusive of all costs). The additional extra production totals 6,750 hectolitres or 900,000 75cl bottles. The latter minus 20% or 180,000 of promotion bot tles totalizes 720,000 bottles to put on sale. At EUR 1.20 of net profit per bottle the ROI hits EUR 864,000 or 72% over the purchase price of the extra vineland.

The rationale is that the reward on extra parcels of vineland is much higher than on the initial vineyard where the purchase price includes buildings and material needed for wine production.

Gold price rally reduces the impact of US-Government bonds

The price of gold on 6th Junehas started to rise, which is due to the decrease of the value of the US Government bonds. At the same time, the mar kets are waiting for the start of the series of summits at some of the biggest central banks in the world. The figures show that the price of the August gold COMEX futures at New York stock exchange has in creased by 0.43% or 8 US dollars, to 1,853.40 US dollars per troy ounce. At the same time at the spot mar ket, gold is trading at 1,854.71 US dollars per ounce, informs Reuters. 

The price of July futures for silver for instance, has increased by 1.78% to 22.29 US dollars per troy ounce. The yield on the ten-year US-Government bonds (US Treasury) fell to 2.95% compared to the previous close of 2.955%. The US government bonds are an alternative investment to gold, so their quotations, as a rule, are following a multifaceted dynamic. A negative correlation is clearly identifiable.

Market analysts note that the price of gold will continue to be influenced by factors related to the monetary policy of the world’s central banks.

Following the very recent report on the official unemployment figures in the United States, the participants in the market will remain very sensitive to all kind of signals regarding the future policy of the central banks. The said report from the

Bureau of Labor Statistics (BLS) shows that total non-farm payroll employment rose by 390,000 in May 2022, and the unemployment rate remained at 3.6%. Notable job gains occurred in leisure and hospitality, in professional and business services, and in transportation and warehousing. Employment in retail trade declined.

In May, the unemployment rate was 3.6% for the third month in a row, and the number of unemployed persons was essentially unchanged at 6 million. These measures are very slightly different from their values in February 2020 (3.5% and 5.7 mil lion, respectively), prior to the coronavirus (COVID-19) pandemic. Signal sent is strong and relevant.

Among the major worker groups, the unemployment rate for Asians declined to 2.4% in May. The jobless rates for adult men (3.4%), adult women (3.4%), teenagers (10.4%), Whites (3.2%), Blacks (6.2%), and Hispanics (4.3%) showed little or no change over the month.

Among the unemployed individuals, the number of permanent job losers remained at 1.4 million in May. The number of persons on temporary layoff was little changed at 810,000. Both measures are immaterially different from their values in February 2020. In May 2022, the number of long-term unemployed individuals (those jobless for 27 weeks or more) edged down to 1.4 million. This measure is 235,000 higher than in February 2020. The long-term unemployed accounted for 23.2 percent of all unemployed per sons in May.

The extreme granularity of the report clearly displays that U.S. employment increased more than expected in May, while the unemployment rate held steady at 3.6%, signs of a tight labor market that could keep the Federal Reserve’s foot on the brake pedal to slow down the demand. The report also showed solid wage gains last month, sketching a picture of an economy that continues to expand, although at a moderate speed. The Fed is trying to dampen labor demand to manage inflation, without driving the unemployment rate too high. U.S are giving a certain example, and it is very interesting how Europe will react, as per economists polled by Reuters this week.

This week was held the relevant summit of the European Central Bank, and the next week will be held similar ones at the Federal Reserve of the United States, England’s Central Bank and Japanese Central Bank. It is expected that the world’s central banks will be able to tighten the paper’s policy, which traditionally

supports the national currency. More concretely, the price of the US dollar will limit the value of gold, which in this case will be less accessible when it comes to transactions of it in other currencies.

Interest rates volatility and US dollar strength abridged gold’s performance in April 2022 

What are the observations? 

– Despite equities and bonds falling amid spiking volatility, gold fell slightly in April as rates and the US dollar shot higher – Inflows into gold ETFs totaled USD 3 billion in April, according to Bloomberg, less than 2% away from all-time tonnage highs, while US Mint coin sales were lower than the incredible growth of the first quarter of the year.

What would come next? 

– US dollar strength and higher yields are generally headwinds for gold, but their movements could be exaggerated. – Central banks’ monetary policy – in particular – along with inflation and geopolitics are impacting gold in the current second quarter.

Rates volatility has hurt asset performance globally 

Throughout the month of April, gold remained among the best performing assets in 2022 up 5% in US dollar terms – yet it ended the month 1.6% lower at 1,911 US dollars per ounce. April was marked by significant weakness across most assets, macroeconomists say, including equity and bond market, as well as heightened market volatility. All these events strengthen the position of the gold as a safe

haven for investors keen to discover the commodities world, if not yet done. US dollar strength has been a detriment to the gold price in recent months. Although less persistent than in recent years, there is often a negative correlation between a stronger US dollar and the gold price.

It has been nearly two decades since the dollar index (DXY) has held above 100 for more than a few months, and additionally the trade-weighted nominal US dollar index is near all-time highs. Slightly lower than the brief period during the initial stages of the pandemic in the beginning of 2020 when it achieved a higher level. Given the challenges from rising rates and a strong US dollar, the fact that gold was only slightly lower on the month is quite compelling and restrictive.

All of us being part of the current ESG and green wave invading world markets and business, the evidence is that gold as a pure and simple investment asset is not sufficient anymore in numerous cases. What investors are looking for is a green certified, sustainably extracted and produced, free of war conflicts, gold bullion. Very rare are the producers who are able to follow a certain sustainable chart, complying with the requirements pension funds, family offices or other professional investors are ready to put on the table.

The GOLD FOR GOOD campaign is one of the events which will very likely transform the way investors and not only, are looking at the gold. It is not only an asset, but a way to impact the world level of poverty in a positive way. Stay tuned, changes are coming!

How to properly and sustainably invest in Gold?

By Ivaylo MARKOV, Managing Partner of Thales Solutions

Investing an important part of their savings in physical gold can be challenging for investors more habitual to trading stocks and bonds online through brokers or banks. When it comes to physical gold, people are generally interacting with dealers outside traditional brokerages, and they often need to pay for storage and obtain insurance for the processed investment. If we determine the three main possibilities offered to invest in physical gold, they are bullions, coins and jewelry.

Historically only very few investments have rivaled gold in its popularity as a hedge asset against almost any kind of problematic situation on the investment markets, starting with inflation, to economic dislocation or currency volatility, to war and any geopolitical earthquake we are currently living. When you think about investing in gold, you don’t have to restrict yourself to simply buying physical gold, like coins or bullion. Alternatives to invest in gold include buying shares of gold mining companies or gold Exchange Traded Funds (ETFs). Investors can also invest in gold by trading derivative con tracts obviously, but a product which takes the lead, if it is properly and professionally structure, is a fixed income note with physical gold as the underlying asset.

The primordial part of the deal is to understand how your invested money will help the country you invest in and its population. ESG principles and the 17 Sustainable Development Goals of the United Nations, take all their importance and became tangible. What do you have to understand when you invest in physical gold are the steps of the whole process between the subscription you’ve done to the final product sold on the market, creating the income for each investor. We need to integrate the fact that investing “money for money” era has ended five years ago, when the financial industry itself comprehended the evidence that we only have one planet.

– Gold Bullion 

When most people think about investing in gold, bullion is what they think of, a big massive gold bar locked away in a vault. Gold bullion comes in bars and it’s commonly available as 12,4kg or 1kg bars. Given that the current gold price is around $1,852 per ounce (as of May 2022), this makes investing in gold bullion an expensive proposition. And unlike stocks, there is no possibility to get a fractional piece of a gold bar, unless the investment is a tailor made, like a fixed income note for example. A summarized presentation of the process, including the involved parties and jurisdictions in terms of production, refinery and sale transactions, are available upon request at Thales Solutions. But how does it concretely and technically work?

Gold bullion comes in bars of 1kg and 12,4 kg

1. Identification of the producing mines. The selection/qualification is based on 2 key criteria: known quality of brute (ore), that is a medium to high low odour of at least
2. 15 grams per ton, and best adherence to basic ESG principles as per established guidelines.
3. As per defined and signed contract, the ore is purchased with chemical testing at site to confirm the quality (value) on a pricing per LBMA daily fix price). It is then transported in secured lorries to rel evant plants.
4. The ore/brute is crushed, further processed and ultimately manufactured as dore bars (85% gold purity and above but less than bullion grade).

5. The dore is then transported by global logistic partners (Hermes/Brinks) for ex port via the same logistics companies’ air crafts to United Arab Emirates (UAE). 6. The dore is cleared at UAE’s customs by the same or another international logistics and transported to one of the 3 LBMA approved refineries for refining into bullions.

7. The bullion (99.99% of purity) as per LBMA’s good delivery lists is sold into the market.

These operations are always hedged either by physical gold, the production of the ore itself or even crypto assets recently. Subscriptions in crypto are accepted by some promoters, with whom we at Thales Solutions, are currently working.

Investment Strengths:

– Accent is exclusively concentrated on protection against negative real rates, inflation, market valuations and complacency.

– Exposure to the sovereign risk of the gold mines jurisdiction

– Semi-annual payment of coupon rate with purchase possibility of underlying asset

– Risk-adjusted returns enhanced over some Physical Gold ETC by 11-12% for the last two years.

Investment Risks:

– Volatility of gold value – Moderate to high risk

– Illiquidity of instrument – Strictly limited risk

– Sovereign Credit Risk – Moderate (if selected jurisdiction is part of the stable South American states)

– Legal risk – Strictly limited

Current priceperounce is USD 1,852

– Gold Coins

The most common gold coins weigh one or two ounces, though half-ounce and quarter-ounce coins are also available. Collectible coins, such as South African Krugerrands, Canadian Maple Leafs and American Gold Eagles, are the most widely available type of gold coins. Gold coin prices may not entirely align with their gold content. In-demand collectable coins frequently trade at a premium.

– Gold Jewelry

Investors may also opt to buy gold they can wear in the form of gold jewelry, sometimes with sentimental and often financial value. Investing in gold jewelry, however, hides some risks that investing in pure gold does not contain. The primordial part here is to carefully select the jewelry purchases process and involved agents, as not all second-hand jewelry is sold by reputable counterparties. Authenticity is the key, as it’s an asset which will be definitely resold once gold price reaches a certain limit, investors deter mined preliminarily.

An amount of markup will be required, based on which company designed and manufactured the jewelry. The bracket here is quite large and may be comprised between 20% to even more than two to three times the gold raw value.

Jewelry’s purity, or what percentage gold does it contain is another main point which needs to be covered. Gold purity is calculated based on karats, with 24 karats being 100% gold. Lower purity decreases the piece’s melt value and the possibility for it to be sold afterwards. According to Forbes and a recent analysis of their advisory team, some extra choices are avail

able, giving a certain flexibility in the gold investment. Namely, stocks in gold mining companies, ETFs and derivatives, all of those possibilities we develop below.

– Invest in Gold by purchasing stocks in gold mining companies

Investing in the stock of companies that mine, refine and trade gold is a much more direct proposal than buying physical gold. Since this means buying the stocks of gold mining companies, in vestors can invest using their brokerage or bank accounts, Forbes advised. In vestor needs to keep in mind, that the shares of stock of gold mining companies are strongly correlated with gold prices but also are related to basics of each company’s current profitability, capital and liabilities, concretely their financial statements. The latter brings us to a conclusion that investing in individual gold companies roughly carries similar level of risk than investing in any stock on themarket. Single stocks may experience a serious level of volatility and do not pro vide their investors with the security of diversified funds or other alternative asset vehicles.

– Invest in Gold ETFs and Gold Mutual Funds

Investing in gold ETFs and mutual funds can provide investors with exposure to gold’s long-term stability, offering simultaneously more liquidity than physical gold holdings and more diversification than individual gold stocks. Strategies can include passively managed index funds that track industry trends or the price of gold bullion using derivative products. Actively managed funds, on the other hand, aim to over perform the returns of passively managed index funds. Expenses are at a very high level as an exchange of that. In such gold in vestments, the purchased asset is a document backed by debt or equity of mining companies or futures and options contracts for physical gold bullions. This means the value of gold mutual funds and ETFs may not entirely match up with the market price of gold, and these investments may not perform the same as physical gold, especially in a rally period.

– Derivative products to invest in Gold

This is by all means the riskiest way, as trading derivatives is a certain a form of speculative investing. As futures contract is an agreement to buy or sell the underlying asset for a determined price on a certain date, independently of the current market situation, it hides an immeasurable risk for the finances of the investor. An options contract, meanwhile, is anagreement that gives you the option, but not the obligation, to purchase or sell the underlying asset, which is the gold in our case, if it reaches a certain price on or be fore a certain pre-defined date.

People who choose to invest in gold via options or futures contracts need to actively monitor their holdings so they can sell, roll over or exercise their options be fore they expire worthless. In addition, each of these derivative products includes a certain degree of leverage, or debt, non negligible by default, so in vestors who overuse them and experience market losses can see their losses climb quickly and exponentially.

Do the investment vehicles adapt to clients needs and behaviour?

AIFMD II, DAC 6, Solvency II, ESG, SFDR, CBDF, etc… . seem to the investors like inexplicable acronyms which can impact their investments. But is that true and what do the investors really need from funds? Three to pics can give us some elements of response, ESG investment, fund distribution and relevant data management. 

What we observe is that the fund industry is generally moving in the same direction globally, all regions confounded, there are some interesting regional differences when it comes to the rate of adoption of new technology and establish the relevant strategic priorities and targets. Some of these are due to the legacy infrastructure and different demographics of jurisdictions, as well as the relative maturity or immaturity of the relevant investment markets and the high speed adoption of new technology.

One of the least surprising findings from a recent survey published by Funds Europe and Calastone for the future landscape of investment funds, is the universal appeal of ESG funds. Not always for the right reason, but it is a fact and we cannot ignore it. The future of the funds industry entered into a new era, the one of sustainability and data management.

The famous British designer Vivienne Westwood was militating against the climate change already 50 years ago, but the financial world was too blind to see it and deaf enough pretending not to hear it. We, at Thales Solutions Luxembourg, are trying not only to provide a quality service

to our clients by structuring their investment funds, but educate them simultaneously of how and when their projects will impact the economy and the planet. This is how the totality of 315 ManCo and 57 Depositary banks in Luxembourg shall act when fund promoters push their doors and present their projects. 21 century’s investment vehicle has to go even further and include into its TER, at GP, SPV or fund level a percentage which is granted for social or environmental improve ments, independently of its investment policy and strategy.

The average TER for UCITS in EU is at 1,68% and with the 2% of management fees for the AIF, the margin for action is important. A simple extra basis point per fund out of the EUR 5,545 billion of AuM in Luxembourg funds, could split an annual amount of roughly EUR 550 mil lion for social and environmental projects. Which is the value of dividends distributed by companies in Luxembourg in 2019. It is a pure common sense. We, at Thales Solutions, have determined the bracket to be 5%-10% of our annual income, dona ted to such initiatives. There is no other possible exit than sharing of competences, time, experience, wealth. And the fund industry has a tremendously important role to play in that process. Let’s more focus on achieving long term sustainable returns, to create a positive footprint in people’s futures. This is what will save us. As the deputy PM of Luxembourg François Bausch said “There is no vaccine against the climate crisis”, we have to create it by acting in the right way at less the right time, as we are quite late even, some say.

When asked for the factors driving firms’ distribution strategy, ESG was one of the most frequently retrieved one by all regions, Calastone survey says. As ESG standards develop, such as the brand new Europe’s Sustainable Finance Disclosure Regime (SFDR), there will be a greater focus on data for fund managers, service providers such as depositaries, and investors.

Partly designed to eliminate greenwas hing, SFDR disclosures aim to make it easier for investors to compare ESG funds and select the one corresponding to their target, plan, wealth and ambition. But how to properly select it? I have always said that a person’s life is determined by 5 main components: innate intelligence, family environment, education level, personal ambition and people met all the way long. This postulate can be used for funds selection too, adapting the terms and actors. That’s why it is extremely important to have your own idea of what type of vehicle you want to create or invest in, correctly surround yourself with the right providers and give yourself the means of your ambition.

Another obvious constatation is that we do not invest enough in the land, properly speaking. Not to build up a huge residential real estate project on it, but develop the land. Like vineyards, agriculture. Climate change and the reduction of CO2 emissions are a major challenge for the world, way bigger than the disastrous Covid pan demic we are currently living. In wine producing countries, vineyards cover on average less than 10% of the agricultural area, but in some cases represent 25% of pesticide use.

The viticulture of the future is one with a vision in which organic farming would only be too simple a summary of the problem. It also makes little sense to measure yourself a clear conscious by planting a hectare of forest for every new hectare of vineyard you create. This is often just win dow dressing, and most of the time only a plaster for a wooden leg, if we go further. Like we can imitate sugar for our own body and metabolism, we can also give signals to the land and nature so that it res ponds positively to our presence and the crops we plant.

Respecting the land through, among other things, regenerative and diversifying plantations helps our CO2 footprint further and faster than afforestation compensation or the sometimes-insufficient rules and commercial compromises of the organic standards we have all established and are currently still following.

Digitalisation’s role in the funds industry is purely primordial. We are only at the beginning of a trend that will strongly accelerate as companies keep expanding the capability of their systems and front office weight. The initial idea behind is cost and risk reduction, but also to extract back office data, adapt it and fully use it to enhance client applicationss and systems in the front office, where the game is

played. Despite the global move in the same direction of the fund industry, some disparity occurs between regions and countries. For some of the markets, we clearly see a much greater move to direct to-consumer policy. Consequently there is a higher demand for advisory services in those relevant markets. We, at Thales Solutions being in the advisory business, distinctly observe an increasing demand from clients to propose them such services.

The new technology has another positive impact on the investment fund markets which is the fresh horizon it opens to asset managers to go to unexplored places offe ring more data, opportunities, clients and a lower level of expenses.

How to attract and acquire clients continue to be a true challenge for the investment funds market. It is not just a cost point, but complexity as well, with AML/KYC obli gations to be met. It starts to be clear that a simpler client onboarding could be one of the keys to a higher accessibility to the funds market for investors.

The tokenisation of the shares of invest ment funds is another milestone we shall take into consideration. Only few of them are tokenized today in Luxembourg, but the journey began. There are already some companies which are committed to toke nisation and developing products into that direction. Tokeny is definitely one of them and we are lucky to have it in Luxembourg. They have put tokenisation at the centre of their business and are loo king to develop a personalised service, making it available on a much larger basis. Data management, connectivity, market access and time to market are all becoming more important for companies, with the cross-border market growing, establishing a higher connectivity between all stake holders involved in the life cycle of an investment fund.

Interview with Ivaylo MARKOV, Managing Partner, Thales Capital Luxembourg “Investors expect solid and robust projects”

Could you briefly introduce Thales Capital Luxembourg?

Thales Capital Luxembourg is a licensed, in dependent advisor with an average 20 years of experience for its members, specialized indelivering the tailored, turn-key solutions, so requested by clients, including full connec tivity to the banking and investment systems and providers, both in Luxembourg and worldwide. We have an office in the Nether lands and are currently opening a new one in Mauritius, in order to meet an increasing demand from clients, keen to establish a service bridge between Europe, Africa and Asia.

What services does your group offer?

We offer a large range of services and act as the famous one-stop-shop whatever it may mean for each of us as professionals. Namely, fund structuring, governance, banking connectivity, fiduciary services, purchase and sale of companies, licensing and capital raising. 100% of our clientele is based outside of Luxembourg and our strategy is to act as ambassadors of the country, proposing them the Grand Duchy as an extremely business-friendly market where our clients can find any type of service they may need.

What do you think are your strengths and what really sets you apart from your competitors?

Thales Capital builds confident relationships, assist ing its clients in meeting requirements, keeping their investors informed and meeting all the needs of their relevant stakeholders. In other words, we give our clients the support they need to be effective today, stay competitive tomorrow and create a long term value for the future. What does really set us apart in three words is profound expertise, reliabil ity and loyalty to customers. Then obviously our tai lored pricing on a case-by-case basis helps a lot to attract the right clientele and please it at the end.

In your opinion, what are the main assets of Luxembourg for your sector?

That is a great transition from your previous ques tion. Luxembourg offers three essentials, which are political stability, a large choice of service providers and a world-class regulator. All those create a com fortable business environment that is priceless for any company willing to establish a piece of its busi ness in Europe. Then we can obviously talk about the technology, which is a precious string to Lux embourg’s bow, but cannot exist without the three elements mentioned above.

Which products that Luxembourg offers interest the foreign clientele?

There is a list of products which interest the foreign clientele and it’s the proof that all Luxembourg’s au thorities look in the same direction and act as one. More preciously, what our clientele searches, is the facility to setup an investment vehicle under many different forms, with the revival of the ELTIF for example, but also master-feeder structures, securitization vehicles, quality fiduciary services, insurance products, etc…

The list may be really long, and this is what surprises our clients a lot, as we can basically offer them unexpected business horizons.

What is your overall view of the current economic situation?

Without a doubt we were and still are liv ing the last three unpredictable years of our history with the Covid-19 pandemic and the war in Ukraine, at the entrance to EU. Luxembourg can be cited as an example for the management of those human and economic crisis, largely vaccinating its population, directly helping Ukraine, and welcoming its refugees. The war in Ukraine has widened global geopolitical fractures, and potential risks of more fragmented capital markets over the temporal horizon. Governments and corporate decision-makers will more focus on searching for safety and reaching for resilience, increasing the defense spending. We clearly see some economic inefficien cies and inflationary pressures which are the conse quence of what happened in the last years, and the war in Ukraine is not the main reason for it. The risk of recession is looking over our shoulder, so the eco logical transition may be the key for a brighter future.

How do you assess the energy crisis in Europe and its impact on investor decisions?

I have recently read an analysis that once a significant proportion of the public can’t afford to eat out or properly socialize anymore, the situation will get much worse, and that’s the evil truth. Basically, businesses will close and jobs will be lost, this is already even happening partially. Straight answer to your question is that the energy crisis is clearly beneficial for the energy companies, but a normal economic logic simply shows us that it’s harmful for an economy overall, if one part does well (energy compa nies), and it is clearly to the detriment of others, such as consumer goods and services.

Using the energy price crisis as an example, British Pe troleum reported its biggest quarterly profit for 14 years, delivering a 10% increase in its quarterly divi dend. Investors do not really confirm this is truly sus tainable, certainly as households face huge increase of energy bills in most EU countries. Voices are raising so that windfall profits of energy companies should help funding the energy transition. Investors are ex tremely sensitive on that point and suddenly ESG aura takes all its importance in a concrete situation. The world economic turmoil will speed up the process of creation of ESG investment vehicles ready to respond to investors’ awakened conscience.

What is the real and concrete impact of this crisis on the investment fund market?

In couple of words, the energy crisis has three main impacts on the economy, such as the increase of oil prices, financial downturns and it offers the opportunity to develop renewable energies. Oil reserves are decreasing, which has the effect that the oil prices rise immediately. The nature and size of policy responses and their funding will reflect the path of wholesale prices and the reliance of each country’s energy mix on gas and dependence on Russian imports. Crisis would be a crucial catalyst for increased investment in climate infrastructure and renewables. While the construction costs of renewable energy are going up, they are not rising nearly as much as the costs of power generated by fossil fuel. With current disrup tion and profitability challenges, the demand for renewables will be even strengthened. For investors, the current uncertainty may provide opportunities across all parts of the low carbon economy value chain, and this is where they are starting to redirect their funds. Time has come.

What is your view on recent central bank decisions?

This was a needed act from ECB perspective. The ECB’s role is to maintain the inflation at 2%, and it was failing to do this for years. Some neighbor coun tries of Luxembourg, like France for instance, were in situation of deflation since 2015, a deflation being a situation where there is i) no inflation, ii) tiny growth, iii) high private debt and iv) decrease of money cir culation speed. Inflation in the EU is estimated at 8% in 2022, with more than 10% for several countries of the euro zone and even 20% for some of the Baltic countries. Nevertheless, the real answer to the current economic situation with rising private debt (120% of GDP in Italy, 150% in France, etc…) and the economic suffocation of the EU, will be a possible public debt cancellation. The public debt held by ECB, which is approximately EUR 2,100 billion.

In a context of inflation and rising interest rates, what are investors waiting for today?

Investors are always waiting to have the right an swers to their constant three questions – What is the risk? What is the cost? What are the earnings? The se cret to each promoter is to be 100% transparent with them playing cards on the table. In the current phase of the inflation process investors are looking for a cer tain resilience, by staying invested for a long period of time for the returns to compound. The speed at which the money doubles increases drastically the more time you stay invested, it’s not a secret to any body. Therefore, investors expect solid and robust PERE projects, with lower multiples maybe, but as suring them the required resilience. Investing in tan gible assets is a piece of the jigsaw.

In an article recently published in our monthly edi tion, you explained that we do not invest enough in the territory, for example agriculture, vines… Why?

That is the absolute truth. It is very trendy now to talk about reforestation and buying carbon credits, which many polluting companies are fond of. Agricultural and farmlands are the basic asset, and we see its importance in such stormy geopolitical times of war as the ones we are currently living. Developing a raw land to increase mainly its use and therefore its value at a later stage, is an investment in the circular economy. In our current economy, we take materials from the Earth, make products from them, and eventually throw them away as waste – the process is linear. In the circular economy, which must be our final goal to all, by contrast, we stop waste being produced in the first place and close the cycles.

What do you offer in this area?

What we propose here is an investment vehicle named PAN-EUROPEAN OPPORTUNITIES FUND SCA SICAV-RAIF, with its first compartment EUROPEAN VINEYARDS FUND. The latter is investing in the acquisition of vineyard estates with care for nature, the environment and preserving biodiver sity, which are important business responsibilities to us. Companies that deal with us must take a precau tionary approach to environmental challenges, pro mote greater environmental responsibility, and encourage environmentally friendly technologies. The Fund excludes companies from its screen which are deemed to have severely and systemically breached UNGC (United Nations Global Compact) principles regarding the environment. Our Fund has a recom mended 10-year investment horizon with a diversi fied portfolio of vineyards in Spain, Portugal, Italy and France, and a certain appetite at a later stage to some new wine producing countries (Chili, Argentina, South Africa). The Fund is not only an activist for the environment protection but is also a solid response to the inflation flooding the world economy.

How do you assess the impact of new technologies on investment fund markets?

This is not even the future, it’s already the present, and will allow us to go way further in the treatment of clients and their business needs. We were talking about robo-advisory more than ten years ago and started using it. Upgrading the investment cycle of clients, making quicker, more informed decisions with integrated risk management technology is being done. Today, new technologies make processes easier, more efficient, reduce errors, improve communication, and change how consumers see and interact with their money and the whole technical business process.

What do you think will be the main challenges for the fund industry in 2023?

2022 was already a challenging year, but the indus try, thanks to its robustness, faced it successfully. Sanctions, energy prices rally, change in client’s ap petite, were only part of the events that the invest ment managers and fund professionals had to deal with. What would 2023 bring us? SFDR becomes mandatory on 1stJanuary, that’s a very important milestone and challenge equally. Private equity will explode bringing retail investors into the game. This sector holds more than USD 3,000 billion as dry powder, waiting to be invested, so definitely some new industries will attract an important piece of the cake. It will be a real challenge to successfully face such an interest to PE. Greenwashing defense will be another one, and we all have our responsibility in that one, because we can eradicate this dubious and unhealthy practice only if we act as one against it.