European financial geography: personal experiences

The financial world isn’t flat. International firms tend to cluster in places where they are welcomed and where they find expertise. Here are some illustrations from my own financial transactions:

  • I bought Etherium in order to buy a tweet. My euros went to the bank account of Light Technology Ltd in Switzerland
  • I hired a designer on Fiverr (I’ll tell you why in the coming weeks). My payment went to Cyprus
  • I receive the royalties from the European sales of Bankers are people, too from an Amazon account in Luxembourg

Links spring 2021

Luxembourgish companies and their owners

OCCRP published a series of articles on “OpenLux“. French newspaper Le Monde scraped a database with the ultimate beneficial owners (UBOs) of companies registered in Luxembourg.

To check the register yourself, go to the Luxembourg Business Registers website, click Portail LBR, click RBE, click Rechercher un dossier RBE. (I cannot provide a direct link, as the URL is time-sensitive and would show up as broken.)

The investigation did not find anything that shocks me. There is quite some research that shows Luxembourg is a popular location for holding companies (in addition to it being an investment fund center and a banking hub).

Something to keep in mind when reading such stories is that Luxembourg is quite transparent relative to its peers:

“According to EU regulations, member states were supposed to adopt publicly available beneficial ownership registers by January 10, 2020, but most have not done so. Luxembourg is one of only five member states to have implemented a register that is free and publicly accessible. The others are Bulgaria, Denmark, Latvia, and Slovenia.

Though other EU member states also have registers, seven have put up paywalls and 17 have not made theirs available to the public. The U.S. Corporate Transparency Act, which passed last month, calls for the United States to set up a UBO register as well, but it will be made available only to law enforcement.” (source)

Why American stocks outperform

During the past decade, American stocks have far outperformed shares in the rest of the world.

Much of this gap is due to Big Tech (Apple, Amazon, Microsoft, Google, Facebook). Without these five stocks, the chart of the S&P 500 looks more like the world index.

But even if we exclude Big Tech, America still outperforms Europe. It’s easy to see why. Take a look at the Euro Stoxx 50. That Eurozone index is dominated by financial and industrial companies and utilities. They have few opportunities for growth, low profit margins, and they face structural changes (negative interest rates, electric vehicles, renewable energy).

The U.S. on the other hand has plenty of innovative companies with huge total addressable markets (TAMs). They are often software-as-a-service (SaaS) firms, e.g. Adobe, Netflix, Salesforce, Square or Zoom. Others reinvent existing services, e.g. Carvana, Peloton, Teladoc, Uber, Wayfair or Zillow. Or they have world class products with a strong brand name, e.g. Nvidia or Tesla.

You can find such companies in other parts of the world, but they are rare. Examples include Adyen and ASML (Netherlands), Delivery Hero (Germany), LVMH (France), Shopify (Canada) and TSMC (Taiwan).

Quantitative Easing Q&A

Who sold their bonds to the ECB?

Mainly non-resident investors, although there are national differences, as this graph by Marcello Minenna shows:

What did companies do with the money from the ECB?

Corporates used the attracted funds mostly to increase dividends, according to research by Karamfil Todorov.

Did QE ease financial conditions?

Yes. Karamfil Todorov found that the ECB’s Corporate Sector Purchase Programme (CSPP) “increased prices and liquidity of bonds eligible to be purchased substantially”1.

Can we trust central bank research on the effect of QE?

Central bank researchers face strong incentives to be positive on QE. Brian Fabo, Martina Jančoková, Elisabeth Kempf and Ľuboš Pástor found that “central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes.”

Green finance

Asset managers, bankers, central bankers1… Everybody in finance is talking about climate change and sustainability.

Source

But what do green investments mean in practice?

A report by Common Wealth found that some climate-themed funds invest in oil & gas companies such as ExxonMobil. More broadly, the largest holdings of climate funds were Big Tech and finance. Adrienne Buller, the author of the study, writes “what do these ostensibly climate-focused funds really contribute to combatting the climate crisis, reducing emissions or driving a rapid transition to low carbon economic activities? There is nothing in the specific labelling or remit of these funds that would require them to invest in the green economy, in financial instruments design to drive the transition of business models to lower carbon activities, or other similar investments.” (emphasis mine)

Source: Common Wealth

There are plenty of metrics by which providers assess climate risk. Given different methodologies and the complexity of estimating climate risk, there is some divergence in the metrics. However, Chiara Colesanti Senni and Julia Anna Bingler do find that “metrics tend to converge for companies that are most and least exposed to climate risk”.

Data and tools for monitoring climate change and financial assets:

Organizations promoting green finance:

Organizations advocating broader economic change, including green finance:

Interesting podcast episodes

Latest update: July 26, 2021

Random reads winter 2020

Small country, big financial center

Some countries and cities are crucial for international finance, despite their modest GDP and population size. Here are some European examples:

  • Geneva (with Zug and Lugano) handles up to 60% of the international trade in certain commodities (cereals, cocoa, coffee, sugar, metals, oil, cotton)1.
  • Luxembourg is the domicile of collective investment funds which combined hold assets worth more than 5 trillion dollars. Luxembourg is also a banking center.
  • Ireland is the global leader in aviation finance. It is also an international fund center, albeit smaller than Luxembourg.