Spain, Better Positioned than Other Countries in the Face of the Imminent Economic Slowdown

The Spanish economy is weathering the onslaught of global slowdown better than expected. This is one of economist Emilio Ontiveros’s presentation at a recent event on Independent Management held in Madrid. Ontiveros is also the president of Analistas Financieros Internacionales (AFI).

Global Uncertainty

Ontiveros began by alluding to the latest indicators that put global growth at 3%, developed economies at 2% and emerging economies at 4%. This deceleration will affect the US, the Eurozone and China. The accumulation of uncertainties seems to be triggering this deceleration with some worrying data such as the surprising drop of -1.3% in the volume of world trade in September.

The main issue is the reduction of industrial investment, which generates stagnant productivity. There are key sectors such as the automobile sector, which is in crisis. Additionally, capital costs (interest rates) are at historic lows, which facilitates borrowing and further reduces investment.

In the case of Europe, it is directly suffering the consequences of the turbulent business environment, more specifically China. The demographic factor does not help either, with constant decreasing figures. And Germany, which is the most open Eurozone economy, is not growing. This market conditions the rest of the countries. German GDP fell in the second quarter -0.2%.

Spain Resists

In contrast to Europe, Spain is better able to withstand the impending slowdown. Its external sector continues to be the pillar that maintains an average growth, double that of Europe, in the last four fiscal years.

There are two reasons for this. The first is because, despite the high balance of payments deficit, Spain has a current surplus of 2%, i.e. a positive balance of exports of goods and services over imports. And secondly, because medium-sized Spanish companies have consolidated their export potential, it has led to increased diversification both in products and in destination countries.

Due to this factor, the external sector is key, although not the only element, which explains our resistance to the uncertainties of the economy.  We have a very solid business fabric and family economies, undoubtedly favored by the very lax financing conditions that drive the continuous deleveraging (debt reduction) of families and companies. In 2010, the national economy’s level of owned resources in hands of individuals and companies reached 43%; today it is 66%.

A Slightly Hard Brexit

As for the impact of Brexit on our economy, Ontiveros confirms that we will resist UK’s exit from Europe better than other countries. In fact, we have already internalized it, so the worst-case scenario, a GDP erosion of -0.6% as estimated by analysts, can be ruled out.

Because we are integrated into the Customs Union with the rest of the Eurozone countries, we are not going to assume excessive tariff costs in Spain. And the strength of our exports is especially evident in the United Kingdom, where we export mainly cars and commodities sector products.

However, tourism has not resented Brexit. On the contrary, there has been an increase in income generated by British tourists, an income that represents 21% of this sector. And the impact of the GBP’s depreciation against the Euro is very limited for our income, because the stock of Spanish products in the United Kingdom is large and diversified.

The British continue to be more concerned about issues such as the upcoming elections than about Brexit. And Spain continues to be one of their favourite destinations for travelling, living or investing.  385,000 English people live in Spain and the number of applications for residency continues to rise; in addition, 24% of British investments in Spain are direct investments. This trend will not change, as recent studies indicate that 63% of British companies continue to bet on the Spanish economy as a destination for their investments.

An Optimistic Outlook and Possible Threats

In conclusion, Spain has competitive advantages that favour our economy over others when it comes to adjusting to the slowdown when it occurs. Spain has advantages such as the quality of its companies, the greater volume of foreign direct investment or the reduction in risk premiums. And in Spain there are no political parties that are clearly committed to violating the Stability and Growth Pact of the EuroZone, something that is happening in other countries. Finally, there are no recession forecasts for any of the world’s major economies.

But, as Ontiveros says, does this mean that uncertainty has disappeared? Not at all, because there are still disturbing side effects. The first is financial vulnerability, which at the moment worries financial funds more than banks. Financing conditions have opened bans on other companies, such as technology companies, launching credit activities, and generating new risks for the economy.

And, secondly, the high level of public debt in emerging economies, affected by low growth and the dollarization of their debt. Both factors complicate the ability of these countries to cope with their liabilities, which is key to returning to the path of growth.

Javier Ferrer
Director of Financial Communication at Proa Comunicación

Communication for Fund Managers

The vigor of the asset management industry and the massive quantity of operators in the Spanish market reinforce the that the role of financial communication as a tool for positioning and support essential for this industry. Proa Comunicación offers an effective a specialized model of financial communication. We work to optimize our clients’ investment in us, differentiate their brand from competitors, and help drive their growth goals.

Private Banking: Models for Growth in a Complex Environment

Recent estimates published by DBK consultants on the Spanish private banking market confirm that it is still a very appealing niche for operators in this sector. According to their latest report, at the end of 2019, the total volume of the market will reach 480,000 million euros, and there will be 420,000 people with level of financial assets sufficient to swell the customer base in this segment.

Another conclusion from the DBK report is that three quarters of the market are managed by universal banking units, and the rest by a diverse range of formats and models: exclusive Spanish and foreign private banking banks, wealthtech, investment services companies, companies of insurance, family office, or investment banking.

Given this complex scenario, what is the ideal growth model to strengthen the businesses in an environment of reduced margins, the implementation of Mifid II, uncertainty in the markets, and political instability? The answer is that each model is based on a series of distinctive strengths that support its efficiency and its capacity to grow.  For this reason, it has strengths and weaknesses. It is most important to gain customer loyalty and trust.

The Strengths of Size

Universal banks, which manage 77% of the market, use segmentation as a criterion to identify and provide exclusive services to Private Banking customers, while sharing some resources with other segments of the customer base.  Size is one of the brand’s greatest strengths, because it distils intangible values that are highly appreciated by customers, such as solvency, solidity or security.

The other entities manage their own offer structure in order to be able to focus both on the key services identified in Mifid II (investment advice -independent and non-independent-, and discretionary management) and on other services: estate planning, marketing, or execution.  Very few provide financing and/or transactionality, which require a large balance sheet.

Non-Banking Models

Investment Service Companies (Securities Agencies and Companies, EAFs) are the ones that most need to adapt to the new environment. Some are immersed in merger processes, others have decided to diversify their structure into differentiated entities that provide distribution, management and advisory services. The offer of Independent Advice based on explicit payment to clients and without incentives, is proving to be complex for them.

The large insurance companies have decided to start offering Private Banking to their largest customers, taking advantage of the fact that, given their idiosyncrasies, they have built up over time a large base of loyal customers.  They rely on the distribution of IICs -funds and pension plans- and on discretionary management, as well as asset advice.

The emergence of cost-saving technology and its ability to improve the relationship between the customer and the entity is becoming an increasingly important factor. Bearing in mind that all entities must invest in technology to comply with Mifid II requirements, and that this environment reinforces disintermediation, offers have been launched that opt for automating distribution, advice and management.

These are models that provide managed portfolios, selection of sufficient funds to a predetermined profile, or investment proposals based on risk levels, among others. Products designed and managed with algorithms. Their main advantage is the substantial cost savings, although they are missing a fundamental element, the personal relationship between the client and the manager.

Banking Models

The exclusive banks of Private Banking, both local and international, continue to firmly believe in the potential of the Spanish market. Their efforts have focused on expanding the offer via open architecture, third party funds, and alternative assets such as venture capital, real estate assets, etc.

This strengthening of the offer is explained because the role of the relationship management is key, as a channel and sole intermediary who distributes client-tailored solutions. As a complement, and in order to avoid the impact of growing financial disintermediation, these banks sell products (mainly their own funds and those of third parties) through digital platforms or marketplaces.

Independent advisory services, as with ESIs, have not yet sufficiently penetrated their clients.  On the other hand, some international banks have management teams outside Spain, where only customer relationship managers work. A factor that therefore results in cost savings.

Other Models

Finally, there are operators who enter Private Banking from other businesses. Investment banking, due to advising services for corporate clients on mergers and acquisitions, expansion strategies, or financing, among others, has generated a sufficient level of trust among those clients who are owners and senior executives of the companies, to make them loyal to Wealth Management services.

The Family Office, entities that advise large fortunes in the selection of their investments and the integral planning of their assets, have positioned themselves as Private Banking for the largest family estates, insofar as they require full trust in the manager who acts as a channel for the best financial and non-financial solutions for a client’s estate objectives.

Javier Ferrer
Director of Financial Communication at Proa Comunicación

Financial Communication: A Tool for Business Growth

Javier Ferrer, Director of the Financial Communication at the agency PROA Comunicación, explains to whom financial communication is addressed, what does it contribute and what challenges are associated with financial communication.

To whom is financial communication addressed?

Financial communication is a supporting business tool for companies in the world of finance: banks, insurers, fund managers, portfolio managers, financial intermediaries, investment services companies and family offices.

How can financial communication help businesses?

It helps a business to position their brand as unique compared to their competitors, bringing the qualities of each particular business model into market and to different audiences – the media, social networks, consumers and institutions. It also serves to manage their reputation, providing transparency when they face difficulties and specialization when it comes to reporting on business results.

What does a financial communication service require in order to be effective?

It requires highly specialized teams in activities that generate income for financial institutions: investment advising and management, financial planning, transactional banking and financing. It also requires extensive knowledge both of the value proposition of the products and services a company offers as well as the distribution channels through which each business reaches its customers.

What are the challenges facing financial communication in the current business environment?

Digitization is a big one because it leads to significant savings in distribution costs, provides operational and consultative advantages for customers, thereby forcing business models to transform. The tightening regulations, in the Spanish case with Mifid II, is also important because it requires distributors and product manufacturers to change their revenue model as well as provide more effective protection of the client’s interests. Specific to banking, reputation management continues to be a challenge to improve an image damaged by the inefficiencies that caused the 2008 crisis and the subsequent restructuring in this sector.

Diversification and focus on business, values of communication specialized in asset management

According to Inverco figures, the market for Collective Investment Institutions (CIIs) in Spain has doubled in size in the last five years. Between 31 December 2013 and 30 June 2018, the total volume of Collective Investment Institutions (CIIs) (investment funds, pension funds, Sicav, real estate CIIs and foreign CIIs) increased from 344 Bn € to 591 Bn €, an increase of 58%.

According to the CNMV, in Spain there are almost 120 Collective Investment Institution Management Companies (SGIIC) registered. In addition, there are 36 international managers associated with Inverco that market foreign CIIs to national clients, both retail and institutional. These managers provide a volume figure of 164 Bn € at the end of June 2018, whereas at 31 December 2013 there were 25 managers providing a total figure of 55 Bn €.

The Spanish market is, therefore, a business opportunity for companies dedicated to asset management, both national and international. Advances in technology, open architecture, low interest rates and economic growth are among the factors that have driven investment in these financial instruments.

Its advantages, and its ability to optimize investment, are key to volume growth because the funds provide diversification that reduces risk, access through experts to markets, assets and geographical areas, a wide universe of products available, and favorable taxation.

Brand Qualities

Communication specialists ask ourselves: How can we help the business of management companies?  Getting distributors to choose funds from our management clients, as recipients of investment decisions for their clients.

The first step is to position the brand of the manager with the qualities that define it

  • What type of manager I am: national, international with a more or less extensive presence in the market, independent, belonging to a financial group, author’s manager, wealth manager…
  • How do I add value: What are my competitive advantages in terms of volumes, the markets I work in, the quality of my managers, the profitability of my products, the management styles I use, the quality/risk ratios of my products, whether I rely on active or passive management, costs, the breadth of my range, whether I co-invest with my participants, whether I am flexible in decision making…
  • What are the ways for me to grow: whether I target private clients, or institutional clients, and which segments (private banking, personal banking, retail, business); how and through what channels I want to distribute my products in the market.
  • How do I adapt my business model to a new regulatory environment that reduces retrocessions for the sale of funds to the distributor.

Communication actions

The second step is to choose the recipients and the communication actions to be carried out, in order to consolidate the perception of the brand that the manager wants to transmit.

To this end, actions should be diversified, depending on the audience and the content that achieves the greatest impact:

  • Mediators: Professionals such as bankers, financial agents, fund selectors, analysts, advisors, or managers working in EAFIs, private banks, commercial banks, securities agencies and companies, family offices, insurance companies, etc. The most efficient way is to hold events on market/asset/geographical vision and on products, which provides positioning and personal contact with the mediators.
  • Users of online distribution platforms: Actions to strengthen brand presence that highlights the competitive advantages of the manager in online media, SEO and SEM positioning in social networks, or specialized forums and blogs.
  • Final Investors: Actions to generate a more massive brand presence, highlighting the competitive advantages, and those of their products through marketing. Actions that can materialize in general and specialized online and offline media, social networks , blogs, forums, sponsorships, advertising, other marketing actions, etc.

In conclusion, a communication strategy specialized in content, diversified in actions and focused on the client’s business objectives, is the best response to the needs of those managers who want to take advantage of the strength of the Spanish fund market.

Javier Ferrer

Proa Comunicación Consultant specialized in the financial services industry