Monthly Investment and Research Commentary – July 2015

Country Ranking

  • Magni Research upgraded Philippines for its progress in implementing improvements to its Fiscal Policy. The upgrade move Philippines up 5 places in relative rank, though it is still relatively low ranked with scores comparable to India, yet behind Indonesia.
  • Both the United States and Mexico were reviewed for changes in their adherence to key standards such as Market Integrity and Data Dissemination. The reviews determined that the prior assessments were still accurate and no scores were changed.
  • An analysis of changes in country scores over the last year yielded the same results as last month with the scores of South Korea, Japan, Spain and Philippines rising the most, while the scores of United States, Canada, United Kingdom, Colombia, Hong Kong, India, New Zealand, and Ireland having decreased. Over time Magni Countries Scores generally increase, though countries do experience temporary setbacks.

Chinese Financial Fragility

  • Chinese interference in the allocation of credit is causing fragility in the country’s financial sector. Terms such as unbalanced, repressed, costly to maintain and potentially unstable are being used by such important organizations as the World Bank. With control over almost all of bank assets, the Chinese government’s influence on banking is meaningfully at odds with international standards. The resulting lack of market forces distorts access to credit with state-owned enterprises being favored at the expense of small and medium sized businesses. The level of Chinese government control of banking is contrary to Magni’s Sustainable Wealth Creation principles and yet another reason why China remains one of the lowest ranked countries in the developed and emerging markets.

Is Samsung a Leading Indicator of South Korean Improvement?

  • Samsung has won a closely watched proxy fight with just enough votes cast in support of the company to meet the two-thirds requirement. The clash was instigated by a US hedge fund over corporate governance at Korea’s complex, family-controlled conglomerates, known as chaebol. The activist hedge fund had unsuccessfully attempted to block a merger of two Samsung affiliates and the merger resulted in the chairman’s son solidifying control over Samsung Electronics Co. This proxy fight highlights the power of entrenched practices and the challenges in improving corporate governance.
  • Despite Magni’s relatively high country score for Korea we, like others, observe the weaknesses in corporate governance across the country as hurting the country and resulting in the valuation disparity called the “Korean discount”. Though the effort by outside investors failed it may ultimately have a positive impact on minority-shareholder rights in a country long seen as weak in corporate governance (when compared to the developed world). Magni will continue to observe Korea for improvement in this important aspect of economic infrastructure.

Fallout from the Greek Crisis

  • The threat of “Grexit” appears to have been taken off the table for the time being, but the recent high stakes negotiations brought that possibility closer than most had thought possible with eurozone members for the first time openly talking about casting out one of their own. In the end the possibility proved too horrific for all involved and Tsipras blinked at the last possible moment agreeing to austerity terms that were in many ways harsher than those that had long been an offer during months of torturous negotiations.
  • Perhaps the most important and somewhat surprising result was the increasing tension between France and Germany. Germany and its allies have been steadfast proponents of monetary orthodoxy, whereas France and its southern European supporters have pushed for more relaxed conditions and have been more open to the idea of debt relief. French president Hollande has said the solution to the inherent contradictions embedded in the eurozone construct require, “more Europe, not less”. He is calling for the establishment of a eurozone government with its own budget and parliament, and he has promised to lay out a detailed proposal by the end of the summer. Magni believes such a move could have very beneficial impact as unresolved fiscal policy issues get addressed and eurozone countries are required to make further improvements to their economic infrastructure. The move is also likely to require significant time to accomplish and the elevated tensions between eurozone countries will need to be addressed before much can be accomplished.

Magni Update

  • Magni became a signatory of the United Nations’ Principles for Responsible Investment (PRI), joining many investment firms from around the world. The PRI were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance (ESG) issues to investment practices. The process was convened by the United Nations Secretary-General. You can read more at www.unpri.org.
  • Stay up-to-date with commentary during the month by following us on Twitter @MagniGlobal.
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