Low interest rate environments (or Debt: Double or Quits)

by ⋅ Leave a Comment

leverageWhat a doozy of a global environment we live in. A highly leveraged society is now being asked to lever up again so that we can maintain perpetual growth. Perpetual growth is something that is unobservable in the natural world/universe – just something for you to consider.

Low (and negative) interest rate environments are supposed to stimulate growth through encouraging new or additional leverage. Nothing necessarily wrong with that (unless you’re a fixed income investor) but it does introduce a new spectrum of risk. That risk is exacerbated by the fact that developed, and developing, societies are currently burdened with a surfeit of debt.

Banks have long been required to have certain risk management protocols in place because of the highly-leveraged nature of their activities. These are referred to as Basel I, II & III (we get a new one after every major crisis to try and avoid a repeat). The current set (Basel III) introduces many features that would be well adopted by non-banking businesses, especially if their leverage increases in these days of cheap money. Companies with any amount of leverage should introduce internal capital adequacy, funding & liquidity and market risk metrics to identify, measure and manage risks related to their various exposures. Obviously, this should be on top of (i.e. incorporated into) their existing ERM framework that addresses their specific risk appetite, business strategy, industry exposure and operational issues.

These are some complex risk exposures that may not seem significant to your business in terms of probability of occurring or relevant to your industry. However, the consequences make it a worthwhile proposition (see footnote). With the right tools, you can even enhance your strategic management and decision making, gaining a new awareness of your business.

Morpho Advisory can help your business implement risk identification, measurement and management processes for your capital, market, liquidity & funding risks.

 

Footnote: In the picture above, imagine that P = debt, F = equity, and W = your business. Everything is working well until something causes the energy behind the force of debt to reduce or stop, resulting in a swing back the other way. Result: Your business crashes to the ground destroying your equity. Quantify your exposure to these external forces and develop processes to identify, measure and manage these risks!

Morphing the ownership mindset

by ⋅ Leave a Comment

We live at a pivotal time in history. A time where human interaction is changing from that of generations past, leading to significant cultural and behavioural change.

Technology is helping drive this transformation. Like Marshall McLuhan said, “the medium is the message.” Increasingly, people are connecting online rather than face to face. This enables us to stay continually connected whilst having a greater geographic reach. But it is also driving another change. Connectivity is altering our behaviour in relation to asset ownership. Take, for example, the younger generation’s eschewing of motor vehicles, which are seen as an unnecessary expense. In fact, technology is enabling people to efficiently share such resources. Car owners can now use an app to rent out their vehicle for short-term use when they are not using it, and others can enjoy a better, more reliable vehicle than if they had to buy it themselves.

I believe we have only begun to see the beginning of this trend. I foresee it extending to housing, employment and other spheres. And therein lies the challenge to current mindsets. The ‘need’ to own everything must change. Be it owning assets or ‘owning’ a particular skill set. Businesses will increasingly begin to engage a particular skill rather than employ it as the drive for profitability encourages a more efficient use of resources.

This is where Morpho Advisory comes in. Why employ a highly skilled treasury/markets/risk management function for 365 days of the year when, in practice, your business may only need those skills for a percentage of that time? Sure, you will be paying more on a daily rate basis than if you ‘owned’ these skills, but in absolute terms you will be saving a significant amount every year. Not to mention saving on administration and the hidden costs of holiday pay, sick leave, paid maternity leave, Kiwisaver, ACC levies, insurance, equipment, training & office space. Better still, by being more strategic in your utilisation of skilled resources you will also benefit by engaging more experienced people.

Seek engagement rather than employment and retain the best skills that are not just competitive in terms of cost, but deliver real value to your business.