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Review
USIS
•	 Apple: A trillion dollar company?
•	 Dubai Expo 2020: beneficial or nightmare?
•	 Transitioning to renewabl...
Contents
Contents USIS Review March 2015
Editor’s Letter							3
Special Report
Apple: A 	trillion dollar company?					 4
...
Editors,Contributors & Sources
A Word from the Editor
It is my absolute pleasure to be able to welcome you to the third ed...
4 USIS Review March 2015Special Report
Technology
Apple: A trillion dollar company?
Analysts believe Apple Inc.(NASDAQ: AP...
Special Report
Technology
USIS Review March 2015
can be achieved in the electric car market.
Apple has viewed this as a tr...
Economics & Global Affairs USIS Review March 2015
Dubai Expo 2020: benifical or a nightmare?
Hosting the World Expo 2020 m...
7
der to meet the rising demand will lead to
increase in noise pollution. This will also
be at the expense of further infl...
Economics & Global Affairs USIS Review March 2015
Transitioning to renewable energy
Countries’obstacles with transitioning...
Economics & Global AffairsUSIS Review March 2015 9
New hope for Greece?
Bailout for Greece extended to June,still leaving ...
10
Tough regulations for payday loans companies
The payday loan landscape has drastically changed due to the FCA implement...
11
Payday Loans
USIS Review March 2015
Only 6 months ago, in June of last year, the
FCA found Wonga guilty of sending fict...
12 Banking & Finance USIS Review March 2015
ECB faces backlash and credibility issues
“Againstthebackdropofanunstablegloba...
13USIS Review March 2015 Investments & Strategy
Retail
The decline and fall of the Tesco empire?
What does 2015 hold for B...
USIS Review March 201514
Stock Market
Investments & Strategy
Is now a good time to invest?
With welcoming signs of a stron...
USIS Review March 2015
Alumni
15Spotlight
Sheffield to Goldman Sachs : Robert Pulford
The University of Sheffield graduate...
Review
USIS
Editor
James Carne
Deputy Editors
Mehr Hussain| Ross McWhir| Thomas Wilson
Copyright © 2015 The University of ...
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  1. 1. Review USIS • Apple: A trillion dollar company? • Dubai Expo 2020: beneficial or nightmare? • Transitioning to renewable energy • New hope for Greece? • Tough regulations for payday loan companies • ECB faces backlash and credibility issues • The decline and fall of the Tesco empire? • Is now a good time to invest? • Sheffield to Goldman Sachs: Robert Pulford March 2015 UoSInvestment.com
  2. 2. Contents Contents USIS Review March 2015 Editor’s Letter 3 Special Report Apple: A trillion dollar company? 4 Economics & Global Affairs Dubai Expo 2020: beneficial or nightmare 6 Transition to renewable energy 8 New hope for Greece 9 Banking & Finance Tough regulations for payday loan companies 10 ECB faces backlash and credibility issues 12 Investments & Strategy The decline and fall of the Tesco empire? 13 Is now a good time to invest? 14 Spotlight Sheffield to Goldman Sachs: Robert Pulford 15 2 Our Partners
  3. 3. Editors,Contributors & Sources A Word from the Editor It is my absolute pleasure to be able to welcome you to the third edition of the USIS Review. The USISReviewwasdesignedtocultivateanenvironmentthatinspiresnewstudentstoengagewith Finance and our global economy. After a hiatus in publishing, the USIS Review team decided to re-launchwiththisedition,thatwehopetoinspiremorepeopletojoinourteam.Iambeyondim- pressed with the editors and contributors to this publication, being able to put it together within such a small timeframe.This issue is a credit to them and their hard work.Without the effort that each of our contributors put in,a publication on this scale simply wouldn’t be possible. This month’s Special Report looks at Apple Inc.to see if a trillion dollar valuation is possible.With the upcoming launch of the Apple Watch (9th March 2015) and rumours of an Apple Car in devel- opment, this may not be out of the question. The Economics & Global Affairs team focuses this month on Dubai and the upcoming Dubai Expo 2020. They also look at the transition to renewa- ble energy and if there is any hope for Greece,given their four month bail out extention. The Banking & Finance team have looked at payday loan companies and new regulation that threatens the business as well as the backlash the European Central Bank faces. Our Investment & Strategy team have looked at the decline and fall of the Tesco empire and if now is a good time to invest. We cap this edition off with a bio on Robert Pulford, a University of Sheffield alumni, who is now a partner at Goldman Sachs. We hope that you enjoy this edition of the USIS Review. James Carne Editor Editor’s Letter USIS Review March 2015 3 Editor: James Carne Deputy Editors: Mehr Hussain,Ross McWhir and Thomas Wilson. Contributors: Aida Akhmetova,James Burton,Simon Cummins, Mehr Hussain, Tireni Ladega,Stephen Li,Ross McWhir, Matthew Smith,Andrew Quarmby and Thomas Wilson. Layout & Design: Ryan Bassindale Sources: Bloomberg,Bloomberg Businessweek,Thomson Reuters, Financial Times,Economist,Investors Chronicle,Wall Street Journal,Investopedia,Mergermarket,Yahoo Finance,Company Press Releases,Company Annual Reports
  4. 4. 4 USIS Review March 2015Special Report Technology Apple: A trillion dollar company? Analysts believe Apple Inc.(NASDAQ: APPL) are set to eclipse Google (NASDAQ:GOOG),Microsoft (NASDAQ:MSFT),Cisco (NAS- DAQ:CSCO) and Alibaba (NYSE:BABA) in terms of Market Valuation. Recently, the tech giant’s share price has begun to ascend to lofty heights. Apple are well on their way to an unprecedented trillion dollar valuation. Individual share prices have accelerated to $133 per share. This has allowed Apple to push towards a market cap of $770 Billion. With the recent announcement of the Apple Car, the Apple Watch and the latest iPhone sales statistics, many analysts have come to the general consensus that this can allow the company to expand rapidly in order to achieve this coveted trillion dollar valuation. There have been compelling movements in Apple share prices over recent months which is indicative of a firm that is perform- ing strongly. Apple's current share price at the time of writing, stands at US$130.40. In order for Apple to have a trillion dollar market capitalisation, its share price must rise to just over $170 per share.This remains within the realms of possibility. To achieve a trillion dollar valuation requires share prices to rise by 28%. With the advent of the Apple Watch, the rumours circulating in Silicon Valley of the iCar and investments being made in Europe and in the US this is realistic. ‘Apple emitsanauraofexclusivity’ Putting the size of this market cap into per- spective,$1trillionamountstoasinglecom- pany being larger than major economies, such as Indonesia, Turkey, Saudi Arabia and the Netherlands. To analyse whether Apple can achieve this requires analysis and evaluation of Apple’s rapid and meteoric rise from a $13 billion company in 2004 to a $770 billion company in 2015, a staggering percentage increase of 5823%. To assess this requires one to look beyond the headlines, by looking at the trend lines. Apple’s growth is driven by consumer spending and investment in order to main- tain growth and sustain longevity. Further- more, their sheer financial strength and strong balance sheets have allowed the company to amass a $150 billion cash for- tune. This is plunged into developing new products and ensuring they retain the best engineers, the best marketers and, most re- cently, the growing importance of the best lawyers, particularly, with the $533 million fine it is legally obliged to pay. However, Apple is not the only company that is close to a trillion dollar valuation. Hedge fund analysts believe that Google, CiscoandMicrosoftarealsoextremelyclose to this target. Despite its lack of longevi- ty, Jack Ma’s Alibaba has seen exponential growth figures since its Initial Public Offer- ing (IPO) in September 2014. Surging iPhone sales, robust earnings, a vast buyback and dividend programme, and continuous innovation has led to a strong performance in the company’s share prices. The graph clearly indicates that the share price of Apple over the past quarter has soared from an initial $110 per share in January 2015 to $133 per share in February,a percentage increase of 20.9%. Since reports surfaced concerning Apple's plans to invest in the auto industry, Wall Street firms have reacted strongly and ag- gressively by buying large blocks of shares. This has contributed to a surge in demand, which has consequently increased their share price. TheAppleCar–Realisticorasteptofar? Elon Musk’s, Tesla (NYSE: TSLA) has shown the world the revolutionary concepts that
  5. 5. Special Report Technology USIS Review March 2015 can be achieved in the electric car market. Apple has viewed this as a tremendous and potentiallylucrativemarket.Ithastherefore reacted accordingly, by aggressively pursu- ing Tesla engineers for many months, offer- ing lucrative contracts and large bonuses to jump ship. However, despite Apple’s strong and robust performance in terms of share prices over the past year, there remain sev- eral serious constraints to pursuing this objective. Despite Tesla’s emergence as a major player in the electric car market, it remains highly illiquid, as most car manu- facturers are. With the objective of offering electric cars affordable to the average con- sumer,Teslahasalongwaytogo.Pricingfor the Tesla 3 is around $35,000, without any Government subsidy. Despite the attrac- tiveness of this market, data could be mis- leading for Apple. Tesla has halted produc- tion and this has meant that demand now appears to be stronger than it actually is. Additionally, Apple’s issue is less to do with financing this endeavour, but it is much more about production and logistical is- sues that may emerge. For a company that outsources a vast part of its manufacturing base to Asia, it would take a radical restruc- turing and evaluation of both Apple's in- novative, design-oriented, liquid business model. The question is then posed: Why would Apple want to become illiquid and less highly valued? If current trends persist than Apple’s strong growth and sales is expected to drive growth and share prices towards the $1 tril- lion mark. Matt hew Smith BA Economics 5
  6. 6. Economics & Global Affairs USIS Review March 2015 Dubai Expo 2020: benifical or a nightmare? Hosting the World Expo 2020 might be the thing for Dubai to make it one of the world’s fastest growing cities in the next 10 years. 6 The World Expo is a key meeting point for the global community to share innovations and attempt to address issues that are vi- tal to the modern world. Moreover it pro- vides a platform for countries to promote prosperity and encourages international cooperation, improvements in education, and a vision of future innovation and col- laboration and improve standard of living. It allows people to glimpse into the coming decadesandthepotentialtechnologicalde- velopments that can be achieved. One can evensaythatthechangesintechnologycan bring about dynamic changes in efficien- cy in both secondary and tertiary sector of Dubai. The Expo is a catalyst that happens every five years for economic, cultural and social transformation and generates impor- tant legacies for the host city and nation. It attracts millions of people from all around the world and what makes Dubai so special isthat‘TheWorldExpo’hasneverbeenheld in the Middle East, Africa and South East Asia in the history of the event. Personally speaking, living in Dubai for nearly all my life, getting a chance to host the Expo 2020 is a step forward for Dubai in trulybecomingaglobalcity.Goingbackthis summer I saw vast amounts of construction in order to be ready for this amazing Expo 2020. This made me think of whether the World Expo is really beneficial not only for Dubai but the whole of the UAE. Moreover whetherthejourneytowardstheExpo2020 is a nightmare for the residents of Dubai. And how much pressures will the econo- my face in order to live up to expectations? These are just some points at issue that will be analysed in this report The first major benefit is that the Expo will bring large amounts of money into the country which will help the economy grow further and have a great effect on the country’s current balance of payments. The reason the Expo has become such a big deal in Dubai is because analysts believe it will boost tourism and other parts of the econ- omy. The Government has forecasts which show that it intends to spend a predicted $7 billion on infrastructure. This may provide many growing industries to benefit from the ‘trickle-down effect’. Moreover, this spending of large amounts of money will equate to a 0.5 percentage point increase in GDP in the years 2016-2019, according to Bank of America Merrill Lynch. As for the whole of the UAE, there will be a 4.5 per- centage point GDP growth in the UAE and an extra $10 billion of private sector cash will be injected into the Gulf Coast Coun- tries (GCC). In the end, Dubai authorities say the Expo 2020 will bring in around $23bn (£14bn, €17bn),whichwillfurtherboostGDP.Dueto therelativelysmallsizeofDubai’seconomy, theeconomicimpactwillbequitelargeand significant in comparison. This will cause hotels and logistics to become the biggest beneficiary sectors as the tertiary sector will benefit the most, as a result of hosting the World Expo which is truly,a global event. Furthermore, the Expo is creating job op- portunities, further improving living stand- ards and boosting the economy further. Dubai authorities predict that 277,000 jobs will be created as a result of the Expo; a big number given it equates to 20% of the cur- rent workforce of 1.3 million, according to Capital Economics. Many of these jobs are anticipated to be turned into permanent positions, creating further demand on the emirate’s housing supply and pushing up prices even more. However, one might fear due to an increase in housing supply, Du- bai might be in danger of a housing bubble burst and in the end might face an eco- nomic recession, with high unemployment in the construction sector. This will be dev- astating on its economy as Dubai is highly dependent on tourism through the help of real estate. The increase in housing construction in or- Middle East
  7. 7. 7 der to meet the rising demand will lead to increase in noise pollution. This will also be at the expense of further inflation as house prices gather increasing momentum going forward over the next decade. The government will therefore need to consider various policies which aim to reduce these fluctuations in order to stabilise the econo- my. Moreover, it will create congestion due to increase in vehicle circulation, which will be a huge problem for current Dubai resi- dents and so there are vast environmental concerns as a result of the World Expo over thelongterm.Thisisbecausethediversions created will further slow down traffic and increase stress levels in the current popu- lation as they wait for longer to reach their destination. In addition, some preparations are already underway in the form of a series of expan- sions and upgrades. Dubai International Airport is currently undergoing US$7.8bn [Dhs28.6bn] of renovation which will even- tually allow the facility to cope with 90 mil- lion passengers per year.Some of the major infrastructure projects expected over the next few years include the expansion of the Dubai Metro Red line; new concourses at the recently opened Maktoum Internation- al Airport; interchanges on the Sheikh Mo- hammed bin Zayed road; and the construc- tion of the main Expo 2020 centre close to the Maktoum International Airport. These are major changes to Dubai’s land- scape and all of this will cause quite a big disturbance in people’s daily routine. For example, changes to the interchanges on Sheikh Mohammed bin Zayed road will cause the most dramatic change as it is the mainroadinDubaiforallresidentstoreach theirdestinations.Constructiononthisroad means that there will be huge diversions causing the stream of traffic to slow down andhinderpeople’sdailylife.Thismightset back the economy in terms of efficiency in the short term, until all the construction is completed for the Expo 2020. Another problem the government needs to address is that any infrastructure they are building needs to have a purpose beyond the event. A significant column in Dubai’s Expos 2020 bid is the site in Jebel Ali itself, which will be spread over 438 hectares and developed with a raft of new hospitality and tourism facilities. Dubai needs to plan everything in a sustainable manner so that nothing in the end goes to waste and caus- es more environment pollution. One of the backup plans is that after the fair, the expo sitewillbereusedforresearchcentresanda university, but it is still not confirmed what directionthegovernmentwilltake.Sustain- able development should be a number one problem the government need to tackle in order to present Dubai in a good light not only during the Expo 2020 but also after that. Every development and event such as the Olympics or the FIFA World Cup has a posi- tive and negative effect on the host country. Sometimes the merits overweigh the draw- backsandviceversa.IntermsofDubaihost- ing the Expo 2020, the general consensus amongst analysts is that the Expo will have moreofapositiveimpactonthepeopleand the economy. In the short term, residents will face difficulties. On the other hand, in thelongrun,theamountofexposureDubai will get, not only culturally but economi- cally, will be tremendous and worthwhile. Dubai will move on to be one of the main financial hubs of the world. In addition, not only Dubai will benefit but an increase in activity in the UAE will lead to a spill over of economic benefits to the rest of the region, sustainingjobsandeconomicgrowthinthe GCC. Mehr Hussain BA Economics and Politics Economics & Global AffairsUSIS Review March 2015 Middle East
  8. 8. Economics & Global Affairs USIS Review March 2015 Transitioning to renewable energy Countries’obstacles with transitioning from conventional to alternative energy production and the current solutions 8 The atmospheric concentration and various industrial gases are constantly increasing, causing an upward shift in the surface tem- perature as well as changes in precipita- tion, cloud cover and wind patterns. Global warming is one strong driving force behind theincreaseduseofrenewableenergytech- nologies worldwide. The production of the clean energy using renewables seems an ecological solution, which might further result in a positive economic growth, how- ever the results of such transition provoke a heated debate regarding the analysis of the social and economic consequences. Renewable energy constantly relies on the weather for its source of power. Hydro generators need rain to fill dams to sup- ply flowing water as well as wind turbines need wind to turn the blades and solar collectors need clear skies and sunshine to collect heat and make electricity. So, it is difficult to generate the quantities of elec- tricitythatareaslargeasthoseproducedby traditional fossil fuel generators. This may mean that we need to reduce the amount of energy we use or simply build more ener- gy facilities. According to UK National Stat Agency, 45 billion pounds were invested in the past 4 years, with an annual investment of 8 billion pounds in the energy facilities that now generates 15% of the country’s electricity. One of the greatest solutions for this problem came with an invention of the energy storage technologies, where Cali- fornia and New York have already adopted energy policies that will make it possible to economically deploy storage systems,while technology advancements have boosted performance and trimmed costs. For the firsttimeinhistoryitwillbecomefeasibleto storeelectricenergy.IEAestimatesthatChi- na, EU, US should invest $380 billion in new electricity storage capacity by 2050 to sup- port decarbonisation. In addition, pumped storage hydropower (PSH) currently repre- sents the vast majority (99%) of installed electricity storage capacity. Therefore, PHS, compressed air energy storage and some battery technologies are the most mature technologies with flow batteries, whereas superconducting magnetic energy storage and other advanced battery technologies are at much earlier stages of development. Energy storage will change the world.It will have a big effect in Europe and the U.S., but its impact in Africa, Asia and Latin America will even be greater. Over 1.4 billion people don’t have access to the grid due to ineffi- cient and expensive infrastructure. Storage will finally make electrification a global phenomenon in the truest sense of the word. The changes we see coming will have the same sort of impact as computers, tele- phones and antibiotics. Anotherstumblingblocktheworldisfacing today is the current cost of renewable en- ergy technologies that is also far in excess of traditional fossil fuel generation. This is because it is a new technology and as such has extremely large capital cost. Further- more, initial investments are quite high in case of building renewable energy plants. Theseplantsrequireupfrontinvestmentsto build,havehighmaintenanceexpensesand require careful planning and implementa- tion. To meet up with the large quantities of electricity produced by fossil fuels, large amount of solar panels and wind farms need to be set up. For this, large tracts of land is required to produce energy quanti- tiescompetitivewithfossilfuelburning.For example, Germany is the leading country, which produces 30% of their energy sup- ply using renewables, however, despite the fact that transition has been successfully implemented, energy consumers’ electric- ity bill is going to increase to 5.3 cents to 6.5 cents per kilowatt hour, which is almost 20% rise.According to government sources, the surcharge to finance the power grids will increase by 0.2 to 0.4 cents per kilowatt hour next year. On top of that, consumers pay a host of taxes, surcharges and fees thatwouldmakeanyconsumer'sheadspin. This year, German consumers will be forced to pay €20 billion for electricity from solar, wind and biogas plant. Despite uneasy transition from conven- tional to modern energy solutions, coun- tries around the world are trying to find ways to smoothen the process by offering investment support and organizing inter- national events in order to raise the clean energy awareness. For example, World Fu- ture Energy Summit 2015 will take place in Abu Dhabi, hosted by the world leading energy developer and investor Masdar, Abu Dhabi's multi-faceted renewable energy company. In 2014, Abu Dhabi Fund has pro- vided loans to support new projects in Sier- ra Leone, Mauritius, Ecuador and Maldives with an estimated $41 million. Moreover, in October 2014, Masdar has signed a deal to build a $125m large-scale wind farm in Oman. Finally, one of the biggest upcom- ing events that might help to accelerate the renewable energy development is the Energy Expo 2017, which will take place in Kazakhstan. The main goal of this Expo is to promote and discover sustainable,global energy solutions,result of which we will see in the near future. Aida Akhmetova BSc Economics with Finance Energy
  9. 9. Economics & Global AffairsUSIS Review March 2015 9 New hope for Greece? Bailout for Greece extended to June,still leaving fears of an EU exit Greece's economic revival has taken small steps forward this week as reports have emerged that the Eurozone finance minis- ters have approved reform proposals sub- mitted by Greece, a condition which was essential for extending the bailout package by four months. Greece's bailout package was due to expire at the end of February and with their financial situation still very much unstable, fears of Greece leaving the euro would have been revived had the deal collapsed. Greece's financial problems stretch back to the late 2000s during the time of the infamous credit crunch, where high pub- lic spending and widespread tax evasion forced Greece into a financial crisis where they entered and remained in recession for a staggering six years. Record high unem- ployment figures and an economy which has shrunk by a quarter of its previous size has only emphasised the consequence of such a catastrophe. However, new hope began to emerge for the Greek population when the anti-austerity, left-wing Syriza coalition won the European election in May 2014.ThiswasfollowedbyAlexisTsiprasbe- ing elected prime minister in January 2015, his aims being to persuade the European Union and the IMF to ease the terms of the bailout and even possibly achieve a portion of the major debt to be written off despite the reluctance of the European Union to do so. One of the first challenges Alexis Tsipras faced was to try and extend the bailout package that Greece had currently been receiving. Despite reaching an agreement with the European Union over a four month extension, a reform proposal was required subject to approval by international credi- tors. Concerns began to arise when Greece requested to delay the announcement of their reform proposals. Despite officials claiming 'Greece had given no good reason', the European Union agreed to the delay.Af- termuchanticipation,thereformproposals had reportedly been accepted, a step in the right direction for Greece as they continue to launch their financial recovery. Such proposals involve fighting corruption and collecting overdue taxes, a result of the reluctanceofpreviousgovernmentstoclose loopholes regarding tax evasion. Greece also aim to save costs by reducing the num- ber of ministries from 16 to 10 and lowering the fringe benefits of ministers in addition to other officials. The humanitarian crisis within Greece has also been targeted with proposals to provide housing guarantees and medical care for the unemployed free of charge, all without increasing overall public spending. Reforms also include la- bour market changes which lower the in- centive for early retirement.Greece plans to increase the minimum wage level over time in an attempt to maintain employment prospects; however, such a policy is costly and could also lead to an adverse effect on unemployment. With the current revelations regarding Greece's bailout extension, it seems that the country has achieved only a short-term solution rather than a long-term answer. In four months time when the country is in a similar, albeit slightly better situation, Greece will be at the centre of attention yet again. Greece have 'won the battle, but not the war'. The acceptance of their reform proposals is a small victory for Greece but there is a long road ahead of them. Only time can tell what is next for Greece. James Burton BSc Economics Stephen Li BSc Economics Europe
  10. 10. 10 Tough regulations for payday loans companies The payday loan landscape has drastically changed due to the FCA implementing regulations that inform and protect consumers. The high-cost short-term credit market has grown significantly in recent years,with the latest figures from the past 12 months showing that the industry generates reve- nue of over £2 billion,with approximately 10 million loans issued annually.Despite vast growth within the industry,there have been many critics suggesting the payday loan corporate model simply consists of expensive credit–at an APR of around 5000%–to people who are unable to get money through conventional,cheaper avenues. Calculations suggest that if an individual borrowed £400 from Wonga, the market leader, at their standard rate for 12 months, it would lead the individual owing close to £20,000. Given this, it is unsurprising that the coalition government has ordered the Financial Conduct Authority (FCA) to se- cureanappropriatedegreeofprotectionfor borrowers against excessive charges in this market. TheNewRegulations Following a significant amount of research, detailed in consultation paper CP14/10 re- leased in the summer of last year, the FCA found that excessive charges for high-cost short-term credit were harming a signifi- cant number of consumers. Because of this, the FCA will, as of January 2015, have intro- duced a cap on payday lending meaning that interest and fees must not exceed 0.8 per cent per day of the amount borrowed. The introduction of such a cap will mean that someone taking out a typical loan over 30 days and repaying on time will not pay more than £24 per £100 borrowed. As well as a cap on daily interest charges, newregulationsonmaximumchargeshave also been introduced in a bid to protect bor- rowers from escalating fees and charges on longer loans.The total cost cap of 100% will be introduced, meaning that even if a bor- rower defaults, they will never have to pay back more than twice the amount they bor- rowed. In addition to the FCA caps, new Competi- tion and Markets Authority (CMA) propos- als, due to be finalised later this month, suggest that payday loan companies will be mandatorily required to provide full details of their products on price comparison sites. The reasoning behind this move for greater transparency being that it will help in as- sisting prospective borrowers to purchase the best product for their circumstances. Speaking on behalf of the Payday Lending Investigation Group, Chair Simon Polito said,“Greater price competition will make a realdifferencetothe1.8millionpaydaycus- tomers in the UK. At the moment there is little transparency on the cost of loans and partly as a result, borrowers don’t generally shop around and competition on price is weak.” Implicationsforpaydaylending The significance of the new regulations for both established companies and potential new entrants to the market is clearly lower profits and increased competition within the market. Along with other research into the effects that the introduction of daily in- terest caps will have on the market, the FCA stated it believed that the expected cost to industry revenue would be £420 million a year. Furthermore,FCApredictionswouldappear tosuggestthatalikelyresultoftheevolving market conditions would be a quarter of current firms ceasing to operate. In con- trast, The Consumer Finance Association, which represents 12 payday lenders making up 60% of the £2 billion industry, said the new regulations could encourage up to half of firms to leave the market. The uncertainty surrounding market con- ditions and lower revenues comes at a time when the industry has seen its largest play- er, Wonga, post profits significantly lower than previous years because of mounting negative publicity and numerous scandals. Banking & Finance USIS Review March 2015 Payday Loans
  11. 11. 11 Payday Loans USIS Review March 2015 Only 6 months ago, in June of last year, the FCA found Wonga guilty of sending fiction- al letters from fake law firms to customers in an attempt to unfairly panic them into repaying debts. The scandal involved Won- ga having to pay compensation to 45,000 customers, amounting to a total payout of £2.6m. This was in addition to the company having to compensate 200,000 customers who had been overcharged due to a ‘tech- nical issue’. Such issues cost Wonga a reported £18.8m and were included in the 2013 financial statements due to the fact that some wrongdoing dated back to early 2008. Although the number of loans may drop significantly, it is hard to guarantee that demand will reduce at the same rate. If this is the case, the question of where this de- mand is redistributed to becomes an issue. Commentatorsonthenewregulationshave suggested that while the FCA’s caps are wel- come, there must be greater action to help lower income individuals simultaneously. Failure to do this, and allowing unmet de- mand to persist, is likely to result in an in- crease of undesirable consequences such as criminal loan sharking. Across-countrycomparison The introduction of caps on payday loan interest rates are not uncommon in a vari- ety of overseas consumer finance markets. The majority of Australian states, including New South Wales and Victoria, have im- posed a 48% APR cap on payday loans, and as a result, firms within the market have been shown to reduce their lending to low- er income families that are likely to default. At the beginning of the 21st century, the Japanese government implemented a cap of 20% APR on the payday loan industry, commenting that the regulation made pay- day loans an affordable short-term solution for nearly all the country’s residents. De- spite experiencing a sharp increase in loan- sharking and relation crime, Japan seem- ingly controlled the growth in the payday loan industry to promote better financial management. While the new FCA regulations are a wel- come step in managing the growth of the UK’s payday lending market, the ramifica- tions are likely to conflict with the CMA’s proposals. With the number of payday loan companies expected to reduce, the effects this will have on competition within the market seem rather undesirable. In light of this, it may be a perfect time for a more benevolent and customer focussed firm to offer payday loan services, and it could po- tentially encourage the banking industry to offer more short-term loans in a bid to attract new customers. Ross McWhir BA Economics and Philosophy Banking & Finance
  12. 12. 12 Banking & Finance USIS Review March 2015 ECB faces backlash and credibility issues “Againstthebackdropofanunstableglobaleconomicrecovery,theECBhasbeendeterminedlypursuingitsmandateofmaintainingprice stabilityoverthemediumtermfortheeuroarea.”–Mario Draghi Tumultuous times lie ahead for The Euro- pean Central Bank (ECB). The Bank’s focus is to maintain price stability across the Eu- rozone, in order to ensure complete trans- parency in the product and labour markets. The ECB also acts to administer and imple- ment monetary policy in order to keep the financial system regulated. This allows the various financial regulatory bodies of each individual nation to be adequately super- vised, to ensure that they have strong Cap- ital Adequacy Ratios (CAR). In recent years, the ECB has been attempt- ing to rehabilitate an ailing currency bloc, using various instruments of monetary pol- icy. A shortage of credit and exceptionally low inflation, indicate a threat of deflation in a locked up financial system. The European Central Bank president, Mario Draghi, stated his intentions during the annual meetings of the IMF and the World Bank in Washington D.C. The ECB in- tends to purchase Asset-Backed Securities (ABS) and securities which are backed by mortgages,also known as‘Covered Bonds’. A strong and robust response is required to the Liquidity Trap in the Eurozone. Any further development in monetary policy may prove to be ineffective in stimulating consumer spending, due to fears of defla- tion and a preference for saving. Additional injections into the financial system are ab- sorbed as idle balances, due to the fact that interest rates cannot, realistically, fall lower than 0.5%. This causes a fall in the velocity of circulation of money and means that an expansionary monetary policy appears to become impotent. If monetary policy is ineffective in stimu- lating demand, the solution may be to use more structural remedies such as fiscal pol- icy or further unconventional methods, to stimulate demand and output in an econo- my rife with deflationary pressures and low expectations. The bank is looking to add sufficient li- quidity to the financial system, by boosting lending and lift flagging economic growth across the Eurozone. The recovery is likely to continue to be dampened by high un- employment, sizeable unutilised capacity, spending cuts and continued negative bank loangrowthtotheprivatesector,particular- ly in Greece. The ECB are aiming to address the esca- lating issue of tumbling prices. It makes it harder for Eurozone countries to reduce huge public debt and become more com- petitive in the global economy –thus it is more difficult to maintain price stability. The Bank needs to continue to remain vig- ilant,especially with the threat of deflation. The risks to the inflation outlook will re- quire close monitoring, which include pos- sible repercussions of dampened growth dynamics. The Eurozone is currently in a cardiac arrest and hemorrhaging economically and po- litically. This is in no small part due to the Ebola epidemic, the conflict in Syria and Ukraine and the terrorist threat from ISIS. TherecentdeclineintheEuroarea’sgrowth, in addition to heightened geopolitical risk, could restrict private investment with con- fidence following suit.The ECB needs to get thebloodpumpingabitmoreenergetically, using economic steroids and vast stimulus to rebound. Draghi’sdiagnosisfortheEurozoneisbleak, at best, he does not envisage a resurgence in the Eurozone, even with his armory of monetary policy instruments. The Presi- dent of the ECB has received a strong vote of confidence from Christine Lagarde, man- aging director of the IMF. In a statement, Miss. Lagarde made it clear that she backs the ECB’s decision, ‘We strongly welcome the measures taken by the ECB, which will help to counteract the dangers posed by an extended period of low inflation.’ Critics, especially in Germany, say it was complex financial derivatives such as ABS which were the root of the US sub-prime crisis in 2008, and the Bank’s decision to increase its exposure to such assets is ex- tremely dangerous. The current decline in economic momen- tum may postpone the resumption in pri- vate sector investment. Resilient and con- sistent implementation of fiscal policy in an increasingly expansionist manner, should contribute to supporting confidence in the near future. It deserves to be underlined that the down- ward trend in inflation has to a large extent been driven by the weak level of aggregate demand, which suggests Draghi’s policies need to focus on the demand side of the economy, instead of using fiscal policy to alter the supply-side of the economy. One must remain extremely careful in assessing these risks. Matthew Smith BA Economics European Central Bank
  13. 13. 13USIS Review March 2015 Investments & Strategy Retail The decline and fall of the Tesco empire? What does 2015 hold for Britain’s largest private sector employer? TheDecline Pulling out of the US, via their firm “Fresh and Easy”, in September 2013 began a neg- ativetrendthatcametocharacteriseTesco’s experience of 2014. On its own, this move cost £1.2bn and ended a 20-year profit in- crease streak. This continued with the reve- lationofa£250million"blackhole"inTesco's expected half-year profits; currently being investigated by the Serious Fraud Office, which city lawyers warn could take as long as seven years to resolve. In the wake of this revelation, Tesco's share value dropped to its lowest level since 2003. TheFall? Predicting the end of a company of Tesco’s size is always problematic. Michael Clark of Fidelity Enhanced Income Fund, points out that even a loss of “£250million is not going to sink a company…[with profits of]..£2bn”. Behemoths die slowly and their large re- serves provide significant opportunity for a turnaround. Many,includingMr.Clark,havedrawnanin- teresting comparison between Tesco’s cur- rent predicament and that of Sainsbury's a decade ago. In the early 1990’s, Sainsburys steadily lost market share to both Tesco and ASDA. At the end of the 1996 fiscal year Sainsburysreporteditsfirstprofitdeclinein 22 years. The company’s fortunes improved significantly after they hired five thousand more staff and improved customer services. Today, Sainsburys is a healthy company in the top ten of the YouGov’s General Brand- Index for the first half of 2014. Can Tesco follow a similar trend? Their re- sponse has been to fire, rather than hire, and cut, rather than expand. Dave Lewis, CEO, has announced that plans for 49 new stores are being shelved, head office costs will be reduced by 30%, and £250m will be shaved off annual running costs. Job loss- es are expected to be substantial. “Drastic Dave” Lewis is applying to Tesco the same overhaul model that worked for him as Chairman of Unilever UK, based around strategic cuts and a reduction in product range. However, Lewis’ approach does not direct- ly challenge the fundamental reasons for Tesco’s decline. Top fund manager Richard Buxton argues that: ‘"there is still a lot of footfall, but its customers are just not buy- ing as much as they used to. If Tesco can improve the company will start regaining market share and profitability”. The central issue is public image and marketing, not structural inefficiency. Tesco should have appointedArchieNorman,ratherthanJohn Allen, as Chairman as Allen’s strength is in logistics rather than brand rehabilitation. A recent increase in sales (0.3%) which has been publicised as a return to “business as usual” under new management is more attributable to shoppers generally taking advantage of both lower fuel prices and the ongoing price war among supermarkets. Figures from Kantar Worldpanel show that in the 12 weeks ending 1st February 2015 the grocery market, in general, grew 1.1%. In addition, although discounters, like Aldi, seem to be slowing their overall growth theyarestilltakingmarketshareawayfrom the “big four”, including Tesco. Aldi’s share rose 0.8% in the 12 weeks leading up to the 1st of February 2015. Consequently investors are divided in opin- ion. Some, such as Richard Buxton, are beginning to invest again in the hope of a return to profitability as sharp as Tesco’s de- cline.Some,suchasanalystsatEspiritoSan- to, believe that all that is left to do is write a multi-volume book attempting to clari- fy which long or short-term factor finally humbled the mighty Tesco Empire. Simon Cummins BA History and Philosophy
  14. 14. USIS Review March 201514 Stock Market Investments & Strategy Is now a good time to invest? With welcoming signs of a strong recovery in the UK,is now a good time to invest in UK equites? With the news that the FTSE 100 reached its highest closing figure since the dot com boom of 1999 this week, hitting 6949.63, it is worth considering whether now is a good time to invest in UK equities. This news has generally been welcomed by many as a sign that the UK is experienc- ing a strong recovery at last. Following the 2008 crash, the FTSE fell to a low of 3926, following recent favourable macroeco- nomic conditions for the UK, it has recov- ered strongly to above pre-crisis levels. The FTSE has recently benefited from positive unemployment data; capital outflow from the Eurozone following negative news and an appreciating pound (particularly good for a net importer). Furthermore, the sus- tained expansionary monetary policy has encouraged savers to invest in riskier assets such as UK equities than low return bonds and current accounts.The oil price decrease since the summer has acted as a huge tax cut to UK firms and consumers,allowing for greater profits and confidence in UK equi- ties. Whilst this is positive news for the UK econ- omy, as an investor this occurrence should be treated with caution. Although the herd mentality would suggest that while asset prices are still rising there is a temptation to investinthemfurther;lessonslearnedfrom previous bubbles should encourage a more measured approach. Warren Buffet fa- mously professed that investors should be “greedy when others are fearful and fearful when others are greedy”. Should investors therefore be fearful of assets falling follow- ing the positive FTSE news to avoid a repeat of the‘dotcom’crash of 1999? A good starting place here is PE (price/earn- ings)ratios,whichshowthemultipleshares are trading at relative to their earnings per share. High PE ratios are indicative of over- priced stocks that are due a correction in their price. What qualifies as high depends on an equity’s value relative to its industry competitors. For instance, emerging indus- tries that currently make low profits but are expected to make high future returns could have high PE ratios across the industry. Thus, what is considered a reasonable ratio in this industry may be considered too high in a more established sector which has less capacity for profit growth. PE ratios across UK companies are currently at 16, which is similar to the long run average of 15 and far below the 1999 pre-crash figure of 30. Meanwhile, when comparing to Shiller’s PE ratio (a measure of US stocks’ PE ratios), which is above average at 27 and similar to pre-2008 levels, UK stocks look more rea- sonably priced. While a record high FTSE could imply over- hyped stocks,the PE ratios don’t seem to re- flect this. It appears that the increase in UK equity prices is a justified increase based on increased profits (partly caused by the oil price fall) and prosperity of UK firms.None- theless, it is important to be wary of market corrections and accept that further growth from here is likely to be slower than that experienced in recent weeks. Thus, I would recommend holding current UK equities but approaching further investment with caution. Thomas Wilson BA Economics
  15. 15. USIS Review March 2015 Alumni 15Spotlight Sheffield to Goldman Sachs : Robert Pulford The University of Sheffield graduate who got to the top in an unconvential way Robert Pulford graduated from the Univer- sity of Sheffield in 1994 with a Bachelor of Arts in Business Studies. Pulford contem- plated a variety of career paths after Univer- sity including accountancy and managing a Safeway branch.However,after graduation, Pulford began working for Midland Bank (now HSBC) which was his first job within the financial services industry. Through hard work and dedication, in Feb- ruary 1997 Pulford joined Merrill Lynch Wealth Management (now a division of Bank of America) and was appointed to be- come a managing director. After 10 years with the firm, Pulford left to join Goldman Sachs in July 2007. Robert joined just be- fore the financial crisis of 2008,and when it occurred, it brought about a variety of chal- lenges. This was not made any easier being a new employee in a position of significant responsibility, but he was able to weather the storm and be promoted to Partner last year. Pulford first worked in the Leveraged Fi- nance Group, where he structured and ex- ecuted leveraged loan and high yield and mezzaninefinancingsforcorporateandpri- vate equity clients across EMEA.In 2008,he became the industry captain for Leveraged Finance across the consumer, retail, health- care and natural resources industries. Pul- ford moved to his current role in the Finan- cial Sponsors Group in 2010. In this role, Pulford manages the firm’s re- lationships with a number of private equity and related portfolio company clients such as Blackstone, Apollo and Advent. In 2014, Pulford was made partner at Goldman Sachs, joining a select group of 380 and attaining one of the most prestigious titles within the Investment Banking Industry. The University of Sheffield were luckily enough to be able to have a talk by Robert Pulford, courtesy of Sheffield Management School, and it became clear how much he treasured his time at Sheffield. Through- out the evening Robert gave great pieces of advice regarding how to enter and suc- ceed within the banking industry. He said “the most common mistake of applicants is that they do not prepare thoroughly, and this becomes apparent to interviewers, so whenever you have an interview prepare thoroughly”. Robert outlined the fact that you need to come across as excited, enthusiastic and interested in your interview. Furthermore, you need to know why you want to work in banking, and if you can’t come up with a good answer to that question, then the industry probably isn’t for you. He also said “It’s important to be honest with yourself, if you’re going into banking purely for the financial benefits you’re not likely to enjoy it,banking is hard work but when you enjoy your job it makes it easier”. Pulford explained that he was inspired by entrepreneurship at the University of Shef- field, and it drove him to reach the levels that he has today. Despite his incredibly successful career, Pulford still has his own ambitions for entrepreneurship saying “I will run a company one day”. He urged stu- dents to develop an entrepreneurial nature and to be innovative in their careers. Robert emphasised the need to take risks,“without taking risks you won’t go as far as you can, I took a risk and with good fortune and some wheeling and dealing and I landed a job at Midland Bank, and it led me to get where I am today”. Robert shed some light into the working culture of Goldman Sachs. Pulford de- scribed Goldman Sachs as a collegiate and respectful environment, it is a difficult, competitive and demanding but there is a great desire to give back at Goldman Sachs, and if you don’t have a good team ethic it is unlikely you will last there long. Pulford has enjoyed his time at Goldman so much so, that his only regret with the firm is that he didn’t join sooner than he did. He cites working with some of the most talented and smartest people in the industry as one of the best aspects of his job. Working in banking especially since the financial crisis has brought a series of chal- lenges, particularly in terms of public per- ception of the industry. In the immediate aftermath of the crisis, not many people would admit to working in the industry due to the stigma attached to Investment Bank- ers,however most of the stigma has gone. Outside of his career Robert has a huge pas- sion for football, supporting his hometown team Nottingham Forest, and lists Stuart Pearce as one of his role models. He even has a photo of Pearce, celebrating wildly af- ter scoring a penalty on his office wall as a sourceofmotivation.Robertalsohasadeep involvement in education, and sits on the Board of Governors of the William Davies School in Eastham. Tireni Ladega BA Economics Andrew Quarmby MEng Electronic Engineering
  16. 16. Review USIS Editor James Carne Deputy Editors Mehr Hussain| Ross McWhir| Thomas Wilson Copyright © 2015 The University of Sheffield Investment Society Any unauthorised reprint or use of this material is prohibited.No part of this publication may be reproduced or transmitted in any form or by any means,electronic or mechanical,including photocopying,recording,or by any information storage and retrieval system without express written permission from the publisher.All opinions expressed within are those of the respective contributor and do not represent the views of The University of Sheffield Investment Society,the USIS Review or our Partners.

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