Business and Markets in 2012: What We Have Learned

The UK economy was flat.

Share prices and government bond yields ended the year roughly where they started. Oil still costs more than $100 a barrel. Glencore/Xstrata aside, there were few big mergers and acquisitions. At face value, 2012 was an uneventful year in the world of business and markets. In fact, plenty happened – often with big implications for the year ahead.

Mario Draghi is very good at kicking cans

The president of the European Central Bank turned markets on a sixpence in July when he said his institution was ready to do whatever it takes to save the euro, adding "and believe me it will be enough". Until that point, betting against Spanish and Italian bonds had been an easy gamble.

Two-year yields were touching 7% in Spain, a ruinous rate if sustained, and a euro break-up was a possibility. Politicians seemed unable to move as fast as the markets.

Draghi's intervention relieved the pressure. For the first time in the crisis, the policy prescription lived up to the hype. The central bank vowed to buy unlimited quantities of the debt of distressed eurozone members who requested help. There was a catch, of course: the recipients must adopt austerity measures and structural reforms.

But the promise of "unlimited" purchases was heard by markets. Spanish yields fell so far that Madrid has not (yet) had to summon help.

Can this happy position last? Probably not. The eurozone is back in recession and even the German industrial powerhouse has been spluttering. The euro has not been saved definitively.

But Draghi, depending on your point of view, has either usefully bought time or prolonged the agony. His launch of the ECB's outright monetary transactions programme was 2012's single biggest financial event. Even the German chancellor, Angela Merkel, despite the reservations of the Bundesbank, became a fan.

The central bank gameplan is changing

Quantitative easing has run out of out road, or at least that appears to be the concern among central bankers. Say hello to new tricks, and be ready for a world where the primary goal is to generate growth and where fighting inflation comes second.

Ben Bernanke at the US Federal Reserve pledged to keep interest rates close to zero until unemployment falls below 6.5%. Unemployment was 7.9% when he made his pledge. This was an enormous shift in policy, doubly significant for being undertaken at a moment when the US economy was growing. Meanwhile, Mark Carney, the next governor of the Bank of England, has wondered about the usefulness of ditching inflation targets and concentrating on nominal GDP.

These developments do not mean inflation is about to roar – higher, but not vastly higher, inflation seems more likely. Markets are sanguine but even a modest turn in the dial could prove significant next year. Will bond investors really be happy to lend to the governments of the US, the UK and Japan at less than 2% for 10 years if they start to believe that inflation could run at, say, 5% for several years?

Tax matters – for companies and government

Starbucks was surprised by the anger that greeted the revelation that it has paid very little corporation tax in the UK in its 14 years of operation in the country. The company insisted, convincingly, that it has played by the tax rules. But in gifting £20m to the taxman it admitted, in effect, that legal and ethical behaviour are different things, at least in the public's mind.

Just as Starbucks was ill-prepared for the new mood towards tax avoidance, so too is the government. The tax system, by treating multinationals so favourably, is the real villain. The public accounts committee told the government to "get a grip" on large corporations which generate significant income in the UK but pay little or no tax.

Does the government have a plan? The chancellor's autumn statement was full of warm words about clamping down on tax avoidance but it hardly amounted to a promise that the likes of Google and Amazon will pay more. The coalition's headache on this issue will intensify – anger over amoral corporations could easily be replaced by fury at government inaction.

Banking culture was worse than we thought

Choose your favourite scandal. Was it Libor rigging, as practised within Barclays, UBS and others? Was it HSBC's failure to prevent money laundering by Mexican drug cartels? Or maybe the lax controls at UBS that allowed Kweku Adoboli to lose £1.5bn in fraudulent trading? Or perhaps the revelation that the board of HBOS, circa 2008, was in a state of deep delusion about the bank's solidity?

This collection of tales was extraordinary. One broad lesson is that the go-go years for casino-style investment banking are history: investors will not cough up the cheap capital that allowed those games to be played with abandon. Thus UBS and others have made deep cuts in staff. Maybe rich pickings await long-term survivors at the investing banking table but, in the short term, pay and bonuses must fall further. Barclays provoked outrage by handing £2.1bn in bonuses to staff and only £700m in dividends to shareholders. It will not get away with such an uneven division of the spoils again.

Bank of England governor's eyebrows must be watched

Bob Diamond's downfall after Barclays' Libor scandal had a farcical sub-plot. The chairman, Marcus Agius, fell on his sword but 24 hours later had to "unresign" temporarily when he realised that Diamond, the chief executive, was the man the regulators wanted out. It remains a mystery as to why Lord Turner, chairman of the Financial Services Authority, wasn't able to deliver the "correct" resignation on his own. Sir Mervyn King had to finish the job. The governor of the Bank of England delivered a blunt message to Agius that the regulators had lost faith in his chief executive.

The Treasury select committee worried that "the return of the 'governor's eyebrows'" raised questions about governance safeguards and accountability at the Bank. Fair comment, especially since the Bank only takes charge of regulation next year. A shake-up of the court of the Bank of England – akin to a board of directors – is overdue and will probably happen as King departs in June.

Institutional shareholders need more prodding

Do not be too exited about the so-called "shareholder spring". Only a handful of company pay reports were voted down and City institutions showed a baffling tendency to vote for one thing while wanting something else. For instance: Andrew Moss at Aviva won 90% support for his re-election but was out within days after shareholders explained that the 54% vote against the insurer's pay report was really an expression of no confidence in the chief executive.

Why such a convoluted expression of discontent? Because most fund managers remain timid. Indeed, the overhyped springtime "rebellion" looked too much like a belated attempt by the industry to impress the business secretary, Vince Cable, and deflect the government from legislation.

In the end, a fudge was produced. Cable introduced a binding shareholder vote on pay, but every three years instead of annually as originally intended. As lobby group Fair Pensions argued, this appeared to be a compromise between a government keen to give shareholders more power and institutional investors reluctant to assume these powers. There are, it should be said, some vigorous and active fund managers. But are there enough of them? Next spring could be a washout.

Social media IPOs can flop

The post-flotation crash in Facebook's share price was something to celebrate: it was evidence that the US market does not always lose touch with reality when a battalion of investment bankers tries to persuade the world that a seven-year-old company can be worth 100 times its annual profits. Facebook is a social phenomenon but the IPO price was ludicrous given the challenge of retaining punters' loyalty while pushing unwelcome adverts at them.

Big business has George Osborne on negative outlook

The UK's AAA-rating remains, but may be going. The same might be said about businesses' assessment of the chancellor. Osborne has lavished gifts, notably deep cuts in corporation tax, but the mistakes are remembered. The pasty tax was a disaster and had to be reversed. The shares-for-employment rights scheme was launched in face of general apathy (and high-profile mockery from Justin King, boss of Sainsbury's).

Then there are the grumbles with government – like the failure to address aviation policy or set out a vision for infrastructure. These have added to a sense in the business community that, at mid-term, the government and the chancellor are drifting, unable to make bold decisions because of the overshoot in borrowing. The basic charge is lack of dynamism. FTSE 100 bosses were making it more strongly at the end of 2012 than at the beginning.

Powered by article was written by Nils Pratley, for The Guardian on Wednesday 26th December 2012 16.55 Europe/London © Guardian News and Media Limited 2010


image: © Dan Moyle

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