Bric & Back

Anyone who knows me will tell you that I have eclectic tastes when it comes to travel. It has always been a passion of mine, and stems from the encouragement given by my parents back to when I was in short trousers. No matter how hard the times – and we’re going back to the early 1970’s here – a holiday was always on the agenda.

It might have been a camping trip in Brittany, just 30 miles from our home in Jersey, but it was abroad. We were taken everywhere and encouraged to speak the language, eat the food and interact with the locals. No namby-pambiness allowed in our household. You want to try an oyster? There’s a franc, go and ask the fisherman on the slipway. Imagine being allowed to do that now! Nevertheless, the training served me well and all these years later I have visited over 100 countries in total.

So in order to celebrate the significant birthday that has just befallen me, we were fortunate enough to spend a week in one of the most exciting, vibrant (and exhausting!) cities in the world – Hong Kong. It wasn’t my first visit but I saw more of the place this time than ever before and we met several friends who now live and work there. One of them goaded me. “So you’re planning to stay in Gibraltar, then, are you?” he said. “Are you sure Europe is really for you? I mean the old world’s finished really isn’t it? This is where you want to be. It’s all about BRIC countries now, well BRICS actually”.

The last point got me thinking. Europe is on its knees – and I imagine will be so for some considerable time. But are people in the so-called BRIC countries really so much better off than we are here in Europe? Are they so economically superior that we should all simply up sticks and emigrate. To borrow The Sun newspaper’s famous headline from Election Day 1992, “will the last person to leave please turn out the lights”.

Let’s pause for a moment to consider what BRIC (or BRICS) stands for and why the four countries concerned are grouped together in this way? It was the economist Jim O’Neill, chairman of Goldman Sachs Asset Management, who originally coined the term BRIC in 2001. Standing for Brazil, Russia, India and China, the acronym is used to describe the shift in global power and influence away from the old world economies – chiefly the G7 countries – toward the developing world. Some economists estimate that BRIC as a group will overtake G7 in less than 15 years. So what is that final capital “S” all about?

I should say at this point that my Hong Kong-based friend was born in Jo’burg so perhaps it should not come as too much of a surprise that the “S” stands for South Africa. Economists at a Reuters’ summit two years ago decided against BRICS – Jim O’Neill himself said South Africa’s economy was simply not large enough to be included – but, despite this, the political association formed by the four BRIC countries in 2008 invited South Africa to join them in 2010. So BRICS does now exist as a real body representing almost three billion people (some 40% of the world’s population) and 25% of the world’s land surface. But let’s return to the original four BRIC nations.

The idea then is that these massive economies are showing the Old World the way forward, right? Well maybe – but surprisingly perhaps, it’s not all unadulterated good news. Despite the undoubted influence that BRIC now exerts over the rest of the world, all four countries rely on exports and these have been falling due to the their exposure to markets in the “Old World”, the eurozone in particular. Put simply, we are no longer buying as many of their goods. For example some 30% of total BRIC exports are to EU countries; in the case of Russia (which relies heavily on fuel exports) this figure is closer to 50%. Clearly then the on-going European financial crisis continues to exert a negative effect on these BRIC countries and indeed elsewhere.

At the same time, the BRIC countries are experiencing a reduction in domestic demand that is in large measure due to stubbornly high inflation rates. When combined with rising interest rates, it is not surprising that their economies have slowed as a result. In order to stimulate demand, interest rates have been cut in Brazil and more recently in China. The hope is that this should translate into healthier domestic figures during the second half of 2012 and into next year.

The stark contrast between the “Old” and “New” worlds is perhaps best illustrated in terms of my favourite statistic – Gross Domestic Product or GDP. Regular readers may recall that GDP is defined as the market value of goods and services produced in a country over any given period. Normally expressed quarterly as a percentage increase on the previous three months’ numbers, a positive figure indicates a country’s growth rate whilst a negative figure indicates a decline. Two successive quarters of negative numbers is deemed to be a recession. This is the unfortunate position in which the UK and several other European countries now find themselves and, of course, a shrinking economy makes it even harder to turn things around again.

Contrast the gloomy European position with that in the BRIC states. Leading business commentators focussed on the fall in the Chinese growth rate for the first quarter of this year. At 8.1% it was the slowest growth rate in three years. In India, which posted a “mere” 5.3%, one has to go back to 2003 to find such a “low” growth rate. Although not of the same magnitude, strong positive growth rates of 5% and 3.5% are also forecast for 2012 in Russia and Brazil, so one can understand why inflation – always the scourge of booming economies – is such a real concern.

So let us return to my South African friend’s advice that I should be moving to live somewhere in the BRIC(S) bloc. As I have written many times previously, although Gibraltar has been able to insulate itself from the worst effects of the crisis the economic outlook is not exactly rosy in our region – and no doubt there is more pain to come. So as I returned home to Gibraltar from the other side of the globe was I tempted to head straight back?

Perhaps, if I were 20 years younger, I mused. But then as I stared up at our Rock of Gibraltar , I knew immediately where I’d prefer to be. BRIC or even BRICS might represent the new exciting global financial order but I am a passionate supporter of Gibraltar so give me my little corner of the Mediterranean anytime.

None of this is meant to minimise Europe’s problems but it’s disingenuous to write the continent off entirely. We can’t all live in new uber cool cities such as Hong Kong, – or come to that Shanghai, Delhi, Sao Paulo or Moscow – although many of my colleagues at Sovereign choose to do so and it’s often part of my job to persuade – or encourage – yet another to make such a move. Of course, BRIC countries are great to visit (and I have been to them all) but the Rock, and all it has to offer, suits me very well indeed, thank you very much. Not everyone has such a choice of course but I know many people living in this region who think as I do and wouldn’t change it for the world – no matter how much greener the grass might seem to be.

Are you aware of the role of offshore companies in property investment?

Introduction:

Dubai Land Department have recently announced, (as of January 1st, 2011) that it is has banned the registration of Dubai property in the name of virtually all "offshore companies" or companies not registered onshore in Dubai. The one exception to this "offshore company ban" is the Jebel Ali Offshore Company. This new rule does not affect individuals, only foreign or "offshore" companies looking to purchase property.

The following Q&A is to inform non GCC purchasers and investors, of the implications of the Land Department’s new rules, and how the recent changes will affect foreign companies purchasing and registering property in Dubai:

Why would one use a company to purchase a property in Dubai:

There are a number of good reasons why the use of Offshore Companies has become so popular when buying local Dubai property. The most obvious reason would be the avoidance of complicated inheritance procedures. A company does not die. If your property is held in a low cost offshore company, you (and your partner or partners) can own the shares of the company as you see fit. So rather than have your individual names on the title of the property, you have a company name. This is a very easy method for joint investment, for confidentiality, and for organising ones assets under a manageable structure (and in many cases, in a Common Law structure).

So the only "Offshore Company" that I can currently use to buy property in Dubai, is the Jebel Ali Offshore Company?

Correct. This applies only in Dubai. For example, you can still buy property in Abu Dhabi through a BVI company.

The Dubai Lands Department decision of Jan 1st 2011, has confirmed that it will NOT register property title to any foreign company, unless that company is registered offshore with the Jebel Ali Freezone.

But can a foreign company own the Jebel Ali Offshore Company?

Yes. You can for example, use a BVI company, or a common law Trust, to hold the shares of your Jebel Ali Offshore Company. You will still need to clearly show the Lands Dept evidence of the ultimate individual owner(s), with attested share certificates and passport copies.

What about if my property is not yet delivered? I have signed the purchase agreement before January 2011 in my personal name, can I now switch to a company name?

The Dubai Lands Department have an interim property register, and main property register. Until your property is listed on the actual main property register (which happens after handover), then

it is possible to change the title from an individual name to a Jebel Ali Offshore Company, providing you can show that there is no change in the beneficial ownership (i.e. the same individual on the initial agreement, is the same owner behind the company).

But will there be an additional transfer fee, if the sale and purchase agreement is not currently in the name of a Jebel Ali Offshore company?

In order for the registration of title to take place, the developer of the property must issue a No Objection Certificate consenting to the registration in the name of the Jebel Ali Offshore Company. As mentioned above, normally the developer will want to see clear evidence that the person named on the sale and purchase agreement, is the same person as the beneficial owner behind the new Jebel Ali Offshore company. The developer normally charges an administration fee, which should not be more than Dh3-5,000, to issue the No Objection Certificate.

If the developer and Jafza both issue NoCs to the Land Department authorising the registration in the name of the Jafza offshore company, it is normal that the registration can be completed without charging an additional transfer fee, again provided that the ultimate beneficial owners of the new Jafza offshore company are the same as those mentioned in the original sale agreement.

What if my BVI company already holds the title deeds to my property in Dubai?

The recent changes to the policy only apply to registrations of titles taking place from January 1, 2011, and do not affect any that took place prior to that date.

Does Jafza allow offshore companies to own property anywhere in Dubai?

From the 2006 Circular that Jafza issued, it stated that Jebel Ali offshore entities could own property in any project in Dubai that were owned by Dubai World, Dubai Holdings and Emaar Properties.

Whilst we understand that there is no restriction on any freehold property, Jafza offshore companies must still obtain a "No Objection Certificate" from Jafza, in order to register title at the Land Department.

To date, we have not ever had a refusal for an "NOC", when clients are looking to own property outside the projects listed on the 2006 circular.

How is the Jebel Al Offshore Company set up, how much will it cost me?

Set up is fairly straightforward, with the normal due-diligence required on all proposed Directors and Shareholders. It will take about 4-5 days in incorporate, and requires the shareholders of the company to visit the freezone and sign (or provide a Power of Attorney to someone to act on their behalf).

The cost at set up is USD$4,950, and annually there is a registered agent fee of $1950. Sovereign Dubai is one of the oldest registered agents with Jafza, and we have a dedicated corporate services department of 25 people who are there to assist with all company formation enquiries.

What if I want to sell my property, and it is owned by the company, how do I do it?

You have two choices here, you can either sell the property OUT of the company, by simply signing the sale documents as a Director of the company, or you can sell the shares of company, (assuming the company only holds one asset, which is the house). The Lands Dept WILL need to be notified of the change in beneficial ownership of the company, with certified documents to be provided from Jebel Ali Freezone (all of which we can assist with).

Gibraltar

Ian Le Breton is Managing Director at Sovereign Trust (Gibraltar) Limited. He explains why Gibraltar can no longer be characterised as an “offshore tax haven”.

When Gibraltar’s new income tax regime came into force on 1 January 2011, it signalled the end of a long journey to reposition its financial services centre from an offshore tax haven to an onshore European Union (EU) finance centre.

The new regime brought Gibraltar into compliance with the rest of the EU by doing away with the previous exempt status tax regime. The new Act ended any discriminatory distinctions between onshore and offshore business by introducing a single 10% corporation tax across the board.

As an onshore EU country with competitive rates of corporate and personal taxation – as well as the absence of capital gains, value added, inheritance, wealth or gift taxes – Gibraltar now offers opportunities that few other international finance centres, or specialised finance centres as Gibraltar prefers to be known, can match.

Gibraltar firms engaged in financial services are regulated by the Financial Services Commission. Implementation is critically important and by all measures, Gibraltar benefits from excellent regulation. The Gibraltar government is highly responsive; recent changes to legislation have allowed the industry to develop in such vital areas as insurance, funds and investment management. 

When considering financial services, professional advice should be sought at the earliest opportunity.  Options can be explored but it is critically important that corporate or trust structures comply with reporting requirements and that any tax implications are carefully considered. 

One way to demonstrate international credibility is to appear on the OECD Global Forum’s “white list”. The main criterion for achieving such a cherished position was for a jurisdiction to have entered into a series of bilateral Tax Information Exchange Agreements (TIEAs). Demonstrating the willingness of the two signatory countries to exchange information relating to a taxpayer, Gibraltar has engaged fully with the process and entered into such accords with 20 separate countries. 

Gibraltar competes effectively with its peers within the diverse sectors that make up the finance centre. Several global banks are represented providing a full range of banking services and investment management is another important cog in the wheel. In particular, Gibraltar benefits from Experienced Investor Fund (EIF) legislation and its funds regime has a well-deserved excellent reputation globally. Insurance is another vitally important component of the finance industry. 

Under EU “passporting” rules, regulated Gibraltar firms are permitted to expand across Europe in respect of insurance, reinsurance, banking and investment services.

The establishment of companies, trusts and other structures remains core to firms such as Sovereign. The larger firms have diversified into other areas including investment management, accounting and insurance services. A few also able provide marine and aviation services including registration of yachts and aircraft. In our own case, established a quarter of a century ago, we boast 25 offices around the world. With over 70 staff, Gibraltar remains our largest office hence we are well placed to provide the services and advice international clients will need.

Overall then, Gibraltar has a good story to tell. The next time you come across lurid reports about international tax havens, rest assured that Gibraltar is now recognised as a preeminent onshore EU finance centre and all of us in the finance industry are striving to ensure that this story can only get better in the future.

Trust & Company Management: International reach and depth of service

Milestone GRP - The main trend over the last decade has been global integration and compliance. How has this im- pacted  Gibraltar's economy and how has it impacted  the Trust and Company Management industry in particular?

Mr. Ian Le Breton - Looking at compliance, we are regulated by the Financial Services Commission (FSC) with a strong but, at the same time, cooperative hand. They have turned what could otherwise have been extremely onerous, difficult to im- plement policies, into something that remains costly and time consuming, but is  done with a cooperative spirit with them. From  time to time we have discussions  with them,  and the relationship is good. I describe it as a hand in hand approach, not a hand in glove one. It is a partnership type of approach. There is lot of new regulation to take on, and other internati- onal groups, the OECD, IMF, the EU, are going to impact us.

You need to have a pragmatic view and simply live with this, and even the Government cannot  do anything about it. We work with this, whether we like it or not, we have to move with the times  and we do it fairly successfully. That means  that Gibraltar can look to the world and say that we comply with all these groups; we are signing all these TIEAs, we might soon have double tax  agreements, and we’ve moved from being considered an offshore financial centre to what  it is now an international specialised financial centre.

Milestone GRP -  Gibraltar and the  Government  are often described as agile and nimble. Do you agree with that cha- racterization?

Mr. Le Breton - It is very true. Agile and nimble, but also po- sitively reactive is the type of word  to describe it. Proactive too, as we tend, in Gibraltar, to identify trends and adapt to them. That is what we do in Sovereign and a number of firms with whom we share the space in Gibraltar, too. We need to reinvent ourselves as we go along, and any firm like us that does not have this approach is going to find themselves falling behind because legislation and rules are changing all over the world at all times. So if you cannot be agile and nimble then you are lost. That  takes us back to our small but  perfectly formed nature.

It is not difficult to talk to the Government's departments, even to members of the  Government themselves, if we need to, quickly. Obviously legislation changes take time but we cer- tainly have a good rapport with these people and that means that we can be agile and nimble.

Milestone GRP - How has the global downturn affected the growth of the company? What  areas are you are develo- ping?

Mr. Le Breton - We have certainly seen growth  despite the economic downturn. In the last 4 years our staffing has grown by 10%  or more.  As  for our product  here, it is certain that

there is an increasing depth to our services. We do a certain amount of work on the personal pension side, particularly the UK transfers, the  Qualifying Recognised Overseas Pension Schemes (QROPS), and Qualifying Non-UK Pension Schemes (QNUPS), which is a different model altogether but has simi- larities. We are  expending our marine division that is based in  Gibraltar, looking at yachts, and last year we  established an aviation division. Again looking at clients with big jets, big yachts: these are the  types of clients we need to approach anywhere. So our strategy is to use these subsidiary groups to look at markets in a slightly different way.

Milestone GRP - How have Gibraltar’s infrastructure deve- lopment contributed to  these specific opportunities, such as the registration of yachts or aircraft?

Mr.  Le Breton -  The growth  of Gibraltar's  infrastructure  is extremely useful to us. For Sovereign it is important that the infrastructure continues to develop in Gibraltar, not just for the business itself, but also for our staff. It is important that they continue to find this an attractive place to live and work. From Sovereign's point of view, we are one of 25 offices, so whilst we were established here in 1987 and here is where everything started and it continues to be our largest base.

Milestone GRP - Are there any limitations to operating here?

Mr. Le Breton - There are limitations. We are never going to land a jumbo jet at the airport, so are we going to set up direct links with New York with 300 people on board  a plane? No, we will not. But, using this as an example, we have infrastruc- ture that is not right here but just a short drive up the road in Malaga where we have  a full international airport, so that is not a real limitation.
We have a wonderful  time  zone advantage,  the  climate  is great, and this is important since people are attracted to Gib- raltar for its climate and lifestyle. A lot of people like our firm are doing what they can to build it up. We have a lot of compe- tition out there, but generally overall we are doing a good job. I encourage executives from wherever they are in the world to come and have a look.
Milestone GRP - As a well established foreigner in Gibraltar, what do you see as existing misconceptions about the place?

Mr. Le Breton - One area I want to work on is the impression that Gibraltar is just open for the British. That is not the case. Brits make up a percentage of the client base, but just a  per- centage of it, and that is a message I want to get across. We are ready to build our market from around the world. Europe is obviously a main area of course, but there are advantages for other parts of the world, too. Gibraltar is a good place to headquarter a company and maybe the CEOs from around the world may want to start considering that, and then come to talk with us when they do.

Partnerships in today’s world

We keep hearing governments across Europe tell us that “we’re all in this together”. British newspapers in particular seem to take great delight in reporting examples of how some of the more wealthy members of the current cabinet are “out of touch” with ordinary people. The recent story about whether or not to charge VAT on hot “pasties” was just one example. But in general, it seems that most people in the UK realise that by working together – in partnership if you will – things will eventually get better. Certainly the huge deficit is being reined in although there is a long way to go.

Since the last edition, I have had the pleasure of attending the long awaited wedding of two good friends. It was a lovely affair; my partner and I had a very jolly time and we wish the newlyweds a long and above all, a very happy, marriage.

Going to the ceremony got me thinking – weddings do that, don’t they? – and all the talk of partnerships led me down several paths. What constitutes a partnership anyway? And when we hear the term in a business context, is it based on the same principles as two people who call themselves “partners”?

A simple definition of partnership is that it is an arrangement where parties agree to cooperate to advance their mutual interests. But let’s go back a little to explore the term used by individuals in their personal lives, rather than the business context.

Years ago, if one was neither married nor engaged but still committed to another person in a steady relationship, the words “boyfriend” or “girlfriend” seemed to do perfectly well (although I accept it sounded rather odd when describing people old enough to be one’s parents). The term “common law marriage” was one taught to me by my mother although I used to get alarmed at the level of vitriol in her voice when she said “common” – as if there were something dreadfully wrong about it all.

Fast forward 25 years and the word “partner” seems now to be the in-phrase. Time was, just a few years ago in fact, that if I had referred to my partner in polite company, there’d be a short intake of breath for it was taken as read that I had to be referring to another man. In these days when so many people maintain a relationship without ever entering into marriage, the term partner could just as well refer to a girlfriend of several years’ standing. It’s all become rather confusing.

In the UK, it was the Labour government that took the politically brave and potentially risky decision to enact civil partnership legislation in 2004. Possibly soon to be extended to Gibraltar, the legislation set out clear guidelines for the first time relating to the responsibilities of partners and the benefits to be gained from entering into such an arrangement. Aimed at same-sex couples, there have been complaints of discrimination ever since from straight couples who do not wish to enter into marriage but seek the financial and legal benefits of a partnership arrangement. So far the government has maintained that such people can simply get married but sometimes it’s more complicated than that.

The civil partnership legislation is very clear. In exchange for a series of undertakings and legal definitions of what constitutes the partnership between two people, several important benefits arise. The most important implications from a financial perspective are probably those dealing with succession issues and inheritance tax in the UK and the setting out of new rules relating to next of kin and a lot more besides. Sadly – but inevitably – it also goes into considerable detail about how such partnerships should be dissolved.

These new rules in effect brought into force for individuals important aspects of legislation that had previously only been available in a corporate setting. Business partnerships, as we shall see, are nothing new. Legal partnerships come in several shapes and sizes but they all follow a similar pattern. It is also now very common to see the initials LP (standing for limited partnership) or LLP (limited liability partnership) appended to the name of many of our large firms, legal and accountancy in particular.

But hang on. Surely partnerships – law firms, doctors and so on – were not supposed to be able to limit their liability. Wasn’t that the whole point? In exchange for the comforting knowledge that the partners in question, whether they were drafting a contract or diagnosing a condition, were putting not just their professional reputations on the line but also their assets. Of course, insurance was used to mitigate some of this risk but ultimately their judgment, and that of their colleagues, was backed by individual partners’ wealth.

In several jurisdictions, many of them based on English law, partnerships as a separate legal entity have become far more popular in recent years. Essentially the intention was to retain the benefits of partnership whilst allowing at least some protection associated with limited liability. But this concept is not restricted to English law and is certainly nothing new.

In the third Century BC, Roman societates publicanorum exhibited many similarities to the company structures we see today – but at least one partner had to be included who was fully liable for the entity’s debts. Across the Islamic world too, such arrangements became common. In Europe, the Italian commenda of the tenth Century were the forerunners of the LPs and LLPs we see today.

As always there are differences across the various jurisdictions where such structures can be established but the general principles are similar enough. A limited partnership may typically have up to 20 members, at least one of which is a “general” partner. This general partner has the power to bind the partnership by entering into contracts and so on and also assumes unlimited liability for the debts and obligations of the partnership. This potential liability can itself be mitigated if the general partner is itself established as a limited company.

In these circumstances, the other partners could enjoy “limited” liability in respect of the partnership in much the same way that shareholders in a company know that their financial risk is limited to the amount of capital that they have invested into the company. It follows that these limited partners may not take part in the management of the company nor are they able to bind it contractually. The limited liability partnership differs in that there are limitations in liability for all partners.

Assuming such partnerships are properly structured from the outset, limited partnerships can be extremely flexible. Within reason, they are able to do anything a “natural person” – that is someone like you or me acting in an individual capacity – can do. A partnership can enter into contracts, own assets and, importantly, it can carry on in existence despite any changes in the status of the individual partners. In other words, in many ways such partnership “entities” are much more closely related to companies than a traditional partnership of old.

Tax advantages are likely to result because, generally speaking, these types of structures are established so that profits are taxable in the hands of the partners rather than the partnership itself – in the US, this is often referred to as “look-through treatment” because the taxman will “look-through” the partnership structure to assess the individual partners. Additionally, limited partnerships allow for the issue of shares in cases where other corporate facilities may not be desirable.

In summary, partnerships can offer the managers of businesses a more flexible, modern approach to liability and risk management in general. Their benefits were there for the Romans more than 2,000 years ago and I imagine the law relating to partnerships will continue to develop further in millennia to come. They are not necessarily simple to establish so, as always, professional advice should be sought at the earliest stage.

And so back to those friends whose marriage we have just celebrated. I happen to know that they read The Gibraltar Magazine – at least I hope they do for the lady in question happens to be the magazine’s editor. From my own partner and me and on behalf of my colleagues at Sovereign too, I say congratulations and we wish you a long and happy partnership.

Investing in today’s uncertain climate

People reading my piece last month about the state of the world’s economy may have detected a more pessimistic tone than in previous issues. This was not accidental. It came about as a result of the continuing Eurozone crisis in particular and other areas of concern in general that suggest it is going to be a considerable time yet before things start returning to normal.

In particular, one of my Spanish readers took umbrage at my rather negative comments on the position in his country. But the truth is that we see record levels of unemployment in Spain – the highest in Europe – the end of the construction boom and painful austerity measures adopted by the new government. The intention is to reduce the sky high deficit in what is after all a contracting economy – i.e. one that is clearly in recession. Developments since my piece last month have simply confirmed the negative outlook.

And when I say it will be some time before things start “returning to normal” I do not mean “back to where we were before”. One thing this crisis should have taught us is that simply adding to the debt mountain to pay for current expenditure is plainly not sustainable. But as I also tried to make clear last month, it’s not all unadulterated doom and gloom. There are distinct signs of improvement in certain economies – or should that be in certain sectors of those economies – that provide real evidence that growth is returning as opposed to a financial commentator’s sense of optimism.

For example, there is real evidence that many of the stronger companies in Europe and across the Atlantic in the US are building up huge cash reserves. It is all too easy to be totally negative when reading reports on practically a daily basis that this company or that has either announced losses, collapsed into administration or filed for Chapter 11 bankruptcy protection – the curious American convention that broadly speaking allows a bust company to carry on trading whilst conveniently ignoring its creditors, at least for a while.

The reality however is that capitalism relies on investment, mainly into companies be they private or public, and there is still a great deal of investment going on. As usual when discussing investment related topics in this column, anything I say is my personal view and should not in any way be construed as advice. So is this the time for those private investors who may have stood back from the markets in the last few years to start considering their investment options?

After all, individuals in the happy position of having savings or maybe cash released from sales of property, other assets or perhaps those in receipt of an inheritance are not going to see decent returns from bank deposits any time soon. True, some of the banking institutions are currently offering more interesting products whereby returns are considerably higher than the pittance offered on regular bank deposits, but with inflation in Gibraltar and other areas stubbornly high, due in very large measure to constantly increasing energy prices, the net return (that is the real increase in the value of one’s investment after one deducts the effect of inflation) is still disappointingly low.

I was minded to have a look at the investment climate for private investors when preparing this piece, not least because of the publicity generated locally in recent weeks concerning the changes in the EIF rules here in Gibraltar. The acronym stands for Experienced Investor Fund and the original legislation was enacted here in 2005. The funds can be used to invest in a wide range of asset classes and can also be established using what is known as a Protected Cell Structure for even more flexibility. New rules have been agreed that will enter force next year. These will enhance significantly the appeal of the Gibraltar EIF which is of course good news for local firms and the employment they generate. For a summary of the recent changes that should lead to increased international interest in Gibraltar, I refer readers to the excellent article penned by Grant Thornton’s Adrian Hogg in the May 2012 edition of The Gibraltar Magazine.

Gibraltar is well placed to compete in this area and with the infrastructure and industry experience to be found here, I can see significant growth opportunities. Gibraltar is of course a full EU member so can exploit its ability for investment firms to “passport” their services, something not so readily available to competing jurisdictions such as the Channel Islands and Cayman.

So this is all very well and good but let’s step back a moment. Is an investment fund a suitable way for ordinary people like you and me if we are considering investing or is it just something for these “experienced investors”. What about the rest of us?

There are many thousands of investment funds to choose from and they come in all types of shapes and sizes but the broad principles are straightforward. There are a number of very good reasons why a new investor might want to consider using a fund when thinking about their options.

By using a professional fund manager, an investor will benefit from years of experience and access to the world’s financial markets that are simply not available to the general public. Depending on the fund, they may provide diversity by asset class or geography while the level of risk involved can be matched to the deemed risk appetite of the investor. Every private investor will be different. It is easy to see why someone a year or two away from retirement will have a very different investment outlook than a single thirty-year-old with no dependents (Incidentally, most 30-year-olds will probably say they have no spare money to invest anyway but, as I was told, “it’s never too early to start”.)

But would anyone want to invest in the markets these days? It would be all too easy to say no, stay away, but times of uncertainty are also times of opportunity. Certainly, careful selection is needed and above all professional advice should be sought right from the outset. It is altogether too easy to look, say, at the (fictional) Ruritanian stock market and see that it has gone up by 60% in the last 12 months. But if the Ruritanian currency – the Cowrie Shell – has depreciated against the pound by 50% over the same period then it starts look rather less attractive. Add to that the problem of researching the right investments in Ruritania, the dangers perhaps of nationalisation or civil strife, and one can begin to see the inherent risks involved in such international exposure.

So if you do wish to invest in that particular country, it is better to do so as part of a regulated fund in which you are investing alongside others. In this way, the costs and the risks are spread and there is a professional team to make sure that investments are properly managed, monitored and administered.

So here’s my summary. If you are considering investment possibilities, there should always be markets somewhere that should be attractive. Many economies around the world, particularly in Europe, are still struggling and may do so for some time. Despite this, or maybe because of it, there are going to be opportunities for future growth or recovery. And with virtually zero returns available on deposits, if nothing is ventured then nothing will be gained.

The World PLC is Unwell

“World plc” is unwell. Before anyone gets the wrong idea – this is after all the Finance Column – I’m not about to stray into areas medical, psychological or spiritual. But after a period of extreme economic intoxication and dissipation, it seems appropriate to echo The Spectator magazine which, whenever the lifestyle of its late “low life” correspondent took its inevitable effect on his health and reliability, would simply post the notice "Jeffrey Bernard is unwell" in place of his column.

Conventional wisdom tells us that the onset of the present financial crisis dates back to 2008. But that only tells us when the disease presented – the symptoms were certainly there well before 2008. In Spain’s case, for example, the housing boom that ended in such a spectacular crash had been building for a decade or more.

It’s clear that World plc remains on the sick list – and parts of it are still in a critical state. As with any illness, it took a while before any doctors were consulted and still longer to think about taking the nasty medicines they prescribed. Second problem. The doctors were faced with so many competing symptoms when World plc was admitted for treatment that it was difficult to know what to tackle first. These and other questions have plagued world markets ever since. Now that we are fast approaching mid-2012, I thought I would step back and consider where we are now (My “plain English campaign” also demands that I try to explain, in passing, what on earth is meant by a “haircut”, quantitative easing and the LTRO).

It won’t surprise readers that when considering the overall state of World plc’s health, my first answer is to say that it depends on which bit one is considering. Before looking at those countries that affect us most here in Gibraltar, let’s start with the worst European case. Greece’s problems have been gripping the financial markets. Readers could be forgiven for thinking that Greece is now sorted. After all, a haircut has been ordered, EU funds lent and austerity in place. Problem over, right? Err, no – not exactly. Read on.

In March, Greece finally secured backing to cut over €100bn from its total government debt. The vast majority of Greece’s creditors accepted the terms – this is the so-called “haircut” on bond yields ­– and, as a result, the EU and IMF have agreed to the latest bailout worth €130bn. The objective is to cut Greece’s government debt from 160% of GDP to a little over 120% over the next eight years.

All seems well and good. The Greeks are off the hook and those who have had to take losses on their bonds seem to have accepted that this is better than a complete default. EU politicians are preening themselves at a job well done. All jolly useful given imminent French elections and the fragility of the German coalition.

The problem is that the crisis hasn’t gone away. Sure the Greeks owe substantially less now than before – but it’s still a debt mountain that will be impossible to finance in an economy that is not growing. And Greece is certainly not growing – it is contracting at an alarming rate. As tax revenues shrink and welfare costs rise, it is difficult to see how Greece can comply with the new debt restrictions. Unless of course there is a third bailout and Greece contemplates leaving the euro. Nothing much changes does it?

Closer to home it is said that Spain is nothing like Greece, and in many ways that is true. Spain is quite simply “too big to fail”. The economy is not contracting at anything like the same rate and the recently-installed Spanish government has just brought in an austerity budget more radical than anything seen before. As a consequence, officials admit that 2012 is likely to be the most difficult year yet for Spain since the onset of the crisis

Normally bullish, in recent months I have become rather more pessimistic about Spain’s chances and whether this “austerity” medicine is going to work. Firstly, after 25 years of spending, the Spanish don’t like austerity. Look at the shiny new airports, motorways and AVE trains criss-crossing the country at 200 mph. The collapse in the property market has been astonishing. Literally millions are out of work with little or no chance of imminent re-employment. In places across Spain one person in three is out of work. Nationally the official rate is more than 23%.

Aside from increased welfare costs, another result of all this is that hundreds of thousands of Spain’s young are moving abroad to find work. London is just one example where the Spanish diaspora has grown exponentially in the last couple of years. Those leaving are more likely to be better educated, perhaps bi-lingual and more skilled. None of this bodes well for the future.

Across much of the EU, particularly across the Mediterranean, recovery is as far away as ever. The problems confronting Portugal, Italy and others remain. During a recent competition aimed at stimulating ideas on what to do about the Eurozone crisis, 11-year-old Jurre Hermans from the Netherlands got it about right. Singled out for a special mention as the youngest entrant in the recent Wolfson Economics Prize, his suggested solution for sorting out the crisis in Greece used slices of pizza as an analogy with Greeks exchanging their euro for “new drachmae”. It remains to be seen whether this will happen but in an effort to ease the strain elsewhere, the EU has joined the US and the UK by increasing market liquidity. Oh dear, jargon time again.

“Quantitative easing”, as undertaken by the US and the UK, is quite simply the issuing of government debt that is then purchased by the government. The result is that more money is pumped into the economy. National debt rises but the idea is that this is better than the alternative scenario. The EU’s version is called the Long Term Refinancing Operation (LTRO). Under this initiative, hundreds of billions of euro are lent to banks at extremely low interest rates for three years in an effort to facilitate bank lending. Even if the intended lending doesn’t happen, the banks have at least used the facility to shore up their balance sheets – so easing the strain during the crisis.  

So how about some good news? There are signs of a fragile recovery in the US and it is perhaps to be expected that it is in the States that the global recovery will begin. After all, there’s the small matter of a US presidential election to distract us between now and November. Another country that has actually taken a strong dose of the austerity medicine is the UK.

The British government is faced with a slowing service sector, a limited manufacturing base and a massive public debt burden. There is little or no room for manoeuvre in areas such as reducing interest rates or raising taxes. Yet one can point to several areas where the UK economy is starting to recover – albeit very gradually and vulnerable to external shocks. The UK’s currency floats freely depending on the world’s view of how Britain is doing, which is not a luxury available to the eurozone. This is one reason why all of us in Gibraltar take a keen interest in the UK and the impact seen on the euro exchange rate.

And in Ireland, there are some real signs that the recovery may be happening. Earlier this year Taioseach Enda Kenny said that by nature he was an optimist and that “Irish people are very pragmatic”. Ireland was the first EU country to approach the EU for assistance. Its banking system collapsed and several years of painful austerity lie ahead. But the “pragmatic” Irish are taking their medicine and, by all accounts, it is starting to work.

We have also come to realise that the US is no longer the only “superpower”. The effects of China’s insatiable appetite for natural resources can be readily seen in Australia, Africa and Latin America. Add to that the impact of Middle Eastern money – “sovereign” or state funding – that is buying up assets from Western banks and factories to hotels and football clubs, and we can readily see that the world economic order has changed for ever.

Contemplating just these few examples, my conclusion is that the economic prognosis is a very fragile version of the Curate’s egg – good in parts, but still pretty bad in others. And here’s the rub. Globalisation means interdependency. Those countries that are seemingly in better shape than others are dependent on growth elsewhere to create a market for their goods. There is still a long road ahead and we’re all in this together. I can’t tell you when the medicine will start to work but I know it has to work, eventually. As the editors of The Spectator surely appreciated, it is all very well to say “get well soon” but it may be better just to say “get well”.