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Peaks and Valleys in Global Capital Markets – Dec 2017

Author: Daniel Augusto Motta, CEO, BMI Blue Management Institute

The aggregate market value of publicly held companies and the number of IPOs are both important indicators when analyzing economic conditions. In the last five years, usually regarded as a period of recovery from one of the worst global financial crisis, major stock exchanges around the globe behaved in different ways.


In the US, the peak of 2014 has yet to be reached again, although average IPO proceeds in 2017 (USD 228.7 M) were above 2016’s (USD 179.0 M). It is interesting to note that in the last two years, even though the average proceeds were higher, the number of IPOs in the US was only one third that of China’s. Also remarkable is the continuous decline in the number of IPOs in Japan and Euronext – something that has already been reversed in the UK.


In Brazil, after three quiet years, there is an increase in IPO proceeds, while the market value approaches levels seen nearly five years ago. Our economic recovery is still slow while other capital markets are brightening up much faster.

Brazilian IPOs in 2017:
Carrefour BR
BR Distribuidora
Irbrasil Re
Azul S.A.
BK Brasil
Omega Ger

At the date of the publication, there were only 8 Brazilian companies that were public in 2017. BK Brasil went public on December 14th, after the publication of this article.

Bitcoin is not tulip: 4 factors that make us resist innovation – Nov 2017

Author: Guilherme Horn, Chief Innovation Officer LATAM, Accenture

Jamie Dimon, JP Morgan CEO, recently stated that bitcoin was a fraud. Weeks later, European Central Bank President, Mario Draghi, said that the crypto-coins stage was so initial that it did not deserve the attention of the ECB. Days later, the vice president of the same institution declared that bitcoin was not a currency, but a mere instrument of speculation. And he compared the cryptocurrencies to the Dutch tulips of the seventeenth century, responsible for the first speculative bubble in economic history.


Behind these attacks is the belief that crypto-coins are a wave that will pass at some point … just as experts strongly criticized the arrival of the first microcomputers to the market in the 70’s. Ken Olson, President and founder of Digital Equipment, the industry giant, said in 1977: “There is no reason for any individual to have a computer in his home.” Or as in the beginning of the Internet, which, without much content, did not present great value to the user and, thus many people thought that it would soon die. Robert Metcalfe, founder of 3Com, one of the great references in technological innovation in the 1990s, said: “I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.” When the iPhone was released in 2007, Steve Ballmer, then CEO of Microsoft, asked, “who will pay $500 for a phone?”


But why is it so difficult for anyone who is so involved in a sector to see the value of innovations, especially when they are, in fact, disruptive?


There are four main reasons that explain these reactions.


The first is that these technologies follow an exponential development curve, as described by Ray Kurzweil, founder of Singularity University. Because humans are trained to think linearly, we have difficulty projecting the future capacity of a product that develops exponentially. For example, when the first self-driving car appeared ten years ago, the automotive industry did not consider it a threat, mainly for two reasons: technology and price. The technology was still incipient, it had many problems; a driver had to be attentive and correct the software commands all the time so that the car did not get involved in an accident. And the cost of an autonomous vehicle was prohibitive, as only the hardware cost 10 times the value of a regular vehicle in the US. Thus, if it followed a linear evolution, it is likely that autonomous cars would take hundreds or thousands of years to become commercially available. However, evolving exponentially, this has become a reality in less than a decade.


The second reason comes from the action of a part of our brain, known as the ‘old brain’. This area is responsible for decisions and works as a survival machine. Act fast, aiming for defense. So we tend to look at something new and reject it, forming a very quick opinion. Most people do not go deep and study the problem in detail. Incredibly, companies also act this way. A collective thought is created and those who go against it are discriminated and under pressure for thinking differently. Blockbuster had the opportunity but decided not to buy Netflix in 2000 for $50 million. Years later it was swallowed up by the startup, which is now worth 1,000 times more than at the time it was rejected by Blockbuster. How much time do you spend to study something you do not believe in? Most of the time, the answer is ‘just a little’, compared to those subjects that we like and do not challenge us.


The third is because some innovations contradict our point of view, or more specifically our beliefs about that reality. The classic case is that of Kodak, who built a centennial business based on the chemical film. The digital camera went against the whole process of traditional imaging. And to think of digital photography as something doable was necessary to distance itself from the mental space in which the company was inserted and take an external look, without industry vision that the company had. Our bias to confirm our beliefs is so strong that we often despise numbers that may deny our beliefs. For example, if a person believes that on full moon nights babies tend to be born with breathing problems, she will ask the mothers of children who were born with this difficulty if the birth was on a full moon night. And every time you get a positive response, she will use this number as a statistical proof of her belief.


Finally, there is the situation where the status quo is threatened by innovation and it can pose a threat to the current power relationship. This is the case of taxi cooperatives fighting for governments to prohibit or impose stricter rules against Uber. Or the hotel networks struggling for cities to impose restrictions on Airbnb, as New York did, limiting the use of the platform to periods longer than 30 days. What these companies or people are trying to do is to preserve benefits guaranteed by the current system, and in this movement, they prefer not to see or admit that they are facing a powerful innovation. They face the new one by attacking it publicly, in an attempt to raise allies for their cause.


Therefore, it may even be that the bitcoin (and other crypto-coins) value is inflated. It may even be that its prices are adjusted in the coming months. But this does not mean that crypto-coins are a mania that will end after a drop in prices. Even though large oscillations have already occurred and they continue to grow (today there are more than 1,300 crypto-coins on the market). We must separate the discussion of the bubble and the application of technology. The fair price for bitcoin has nothing to do with its potential adoption in the market. The crypto-coins came to stay, just like the Internet. We are in version 1.0 of this whole transformation. Just like the autonomous car ten years ago when it needed a driver fixing the software so it did not crash.


To see the potential of cryptocurrencies, I recommend a guide with three very simple steps to help to form an informed opinion on the subject:

1- Have an open mind; address the issue in a positive way, without resistance and prejudice;

2- Have the patience to study the subject. Read and seek to deepen your understanding. Go beyond superficial arguments at the level of pros and cons. Go deeper into the technology, even if you do not understand all the technical details;

3 – Look at the cryptocurrencies time as the “deception” period of the exponential curve. At this stage, remember, the technology still has limitations and few applications. For example, a transfer of bitcoins from one user to another can take up to 20 minutes. But admit that this barrier will be overcome in the future; so do not let limitations like these influence your analysis. Remember that they are temporary.


Cryptocurrencies may suffer oscillations, but they will find the vocation that will bring them value – far beyond the fragile beauty of a tulip.

Eastern Supremacy in Global Financial Markets – Oct 2017

Author: Daniel Augusto Motta, PhD, MSc, CEO of BMI Blue Management Institute

The Eastern resurgence led by China and India permeates several dimensions, industries and regions. From increasingly mighty super conglomerates to international trade pervasiveness, the Chinese and Indians are essentially omnipresent in the world’s competitive environment, and they are challenging Western powers.


Financial markets are particularly suitable for analyzing the Chinese supremacy advance. Considering the evolution of the top 25 global banks in the last 20 years, we notice a remarkable growth rate among Chinese banks —27% yearly— more than twice the world average, 11.5% yearly.

Chinese share of the aggregate capital in these top 25 banks jumped from 3% to 37% between 1998 and 2017, to the detriment mainly of Japanese and European banks. Despite criticism of insufficient soundness of Chinese banks balance sheets —especially related to provisions for Public Sector credit default— it is impossible to disregard the entrepreneurial spur of banks such as ICBC and CCB.


The crucial next step in this race might take place precisely in Latin America. Natural resources, energy and food seem to be critical industries in Chinese global expansion planning, and Latin America has plenty of all of it. USA and EU will be increasingly challenged both in supply and demand sides of markets.


The growth in China’s economic engagement with the LATAM region in the past decade is impressive. Trade has increased by nearly 2,000% since 2000, leveraged by bilateral free trade agreements with countries such as Peru and Chile. China has also made billions of dollars in loan commitments across LATAM countries. And apart from the decline of the commodities boom, the Chinese government and private sector are not leaving anytime soon.

The next focus of Chinese interest in the region will probably switch from trade to investment. Since 2012, China has already become the third global source of FDI, after only the United States and Japan. China is also increasing its financing presence. From 2005 to 2014, loan commitments totaled more than $118 billion. And the critical question here is still on whether China is the right long-term partner or just a short-term predator.


Chinese and Indian growing presence doesn’t have to be a zero-sum game for LATAM countries. First, offers a growing opportunity for LATAM exporters to these huge Asian markets. Second, these super Asian powers also represent a growing source of financing. Third, the large scope for bilateral cooperation can leverage innovation in the region supported by Chinese and Indian enterprises. Naturally, these potential aggregate gains will be accompanied by some pain in certain industries, companies, and countries that might be negatively affected by the rapid growth of the two Asian gigantic economies.


From a Brazilian perspective, personally, I would challenge the rationale of allowing Chinese trading and energy companies to dominate agribusiness and energy industries. Land, food and energy are too sensitive matters for a nation to be controlled by foreign companies.

Optimism (in California) about Brazil – Sep 2017

Author: Stephen Scheibe, President All Abroad

While President Temer says Brazil is turning the corner and as Finance Minister Henrique Meirelles jockeys for a possible run for President in 2018 bragging in international meetings that Brazil has its lowest inflation in years and the economy is starting to grow after almost 3 straight years of recession. Indeed, the Brazilian BOVESPA is at record highs and the international investment community is beginning to see opportunity all over. With a broken economy, there are attractive valuations and the post-PT government is breaking down the national populist restrictions on oil and other natural resources. Still on the ground, things are bleak. Unemployment has barely budged. The state has resources only for political bargaining to guarantee that Temer finishes his mandate and all social and economic projects that were supposed to help the less fortunate have lost resources or are being dismantled.


In this scenario, it is curious and a bit paradoxical to partake in events that reflect favorably and show optimism for Brazil. I have attended all but one of the Bay Brazil Conferences that have been held in Silicon Valley over the past six years. Margarise Correa, the founder and catalyst for many a Brazil-Silicon Valley connection, and her staff, consistently put together an excellent event with an A list of speakers that always have strong and sometimes surprising connections to Brazil. Many are aware that Facebook’s Eduardo Saverin is from Brazil, but did you know Instagram founder Michael Krieger also grew up in Sao Paulo? This year’s speaker lineup was not an exception, as can be seen from the program:

Silicon Valley nests venture capital and while Brazil is always a challenge, VC firms seek talent, innovation, entrepreneurship and marketing that will lead to profits. In this search, there is no correlation between growth of GDP, political stability, and democracy and VC investment. So Brazil’s macro level crisis is of little import and money will flow where investors find a deal no matter the political economic situation.   This year’s event once again showed deals in Brazil and a growing maturity of Brazil’s VC environment. Since the early 2000’s, Brazil has completed numerous cycles of VC funding and the infrastructure for VC investment is favorable. We find a thriving VC community, accelerators, service providers, mentorship organizations, cloud services, corporate support and perhaps most important investors and success stories.


Fintech (High Tech Finance) was this year’s standout sector at Bay Brazil. The basic idea behind FINTECH is that the Brazilian banking and financial market while powerful; it is also replete with inefficiencies and therefore ripe for challenges and changes. The sector is notoriously concentrated and even oligopolistic with high spreads on some of the world’s highest interest rate and outstanding profit margins. The Fintech sector recognizes inefficiencies in the banks and is entering the sector offering major reductions in the cost of credit or funds by taking advantage of the Internet, reliable databases, robust platforms and the ability to evaluate potential clients in an expedited fashion that banks cannot match. Fintechs have found a niche in Brazil (reportedly the world’s second largest lending market) by offering money at a much lower cost and more quickly than the banks. The bank reaction has involved stages ranging from rejection, awareness, engagement, and finally collaboration and acquisition. Along this line, it is perhaps worthwhile to note that Christine LaGarde, the IMF General Director, recently questioned the future of banks with the emergence of electronic currencies and fintech endeavors. So Brazilian banks need to be aware that they also face the tech redefinition that has hit many other industries, i.e. hotels, taxis, travel agencies, newspapers, books and manufacturing, etc.