Upgrade Underway! - (19 September 2021)

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Transformation is hard. And yet, every time we go through one, there is nervous excitement. We sometimes find ourselves wondering later if it was worth it. But we are always better off: either in the outcome or in the learning from the process. This week let’s look at some makeovers which are underway.

Should the Ball Roll More?

The football world is split down the middle. The men’s World Cup has been held once in 4 years since 1930 (barring World War II). Now, a camp led by coaching great Arsene Wenger, who now heads global development for FIFA, has proposed making it a biennial event. And this has been backed overwhelmingly by the group of 80 former greats, including Ronaldo, Drogba, and Cahill, who met recently in Qatar.

The arguments are along expected lines: Wenger talks about better scheduling and an opportunity for younger talent to “shine”. Others, especially UEFA, claim it's “all about the money” (Jurgen Klopp, Liverpool)

OUR TAKE

This is the classic dilemma of visible revenues versus hidden costs. We know that USD 6 billion is raised with every WC, but we don’t know what the invisible costs are. The impact on the players’ career, on other football tournaments (needed to bring more players to the mainstream), and so on. With higher frequency, greater clarity should come on how FIFA will invest the incremental income, and how they will be directed to help the game. After all, as Pirlo said, “football is played with the head”.

New Versions Needed

A new study warns that the American Artificial Intelligence (AI) industry is highly concentrated in the San Francisco Bay Area and that this could prove to be a weakness in the long run. It might lead to unwanted concentration of power and increase in inequality, leading to a winner-take-most outcome. This also leads to loss of diversity and groupthink, which has been seen all too commonly in the financial services industry. 

India's IT hub, Bangalore, is another example: it forms ~40% of the total demand for IT professionals in India, and is considered to be the fastest growing city in the world with GDP projected to grow at 8.5% p.a. until 2035, while India's GDP growth is expected to be around 5.8% p.a. by 2035.

 

OUR TAKE

Governments have been investing to develop more IT hubs and IT firms have been turning to small towns for new talent. As technology creates more jobs, concentration of these in a few areas can result in economic inequity: over time entrepreneurship (and hence wealth) will also get focused in these areas. Only a concerted effort between local and national governments, corporations, educational and cultural institutions can address this.

Mr. Bond’s Much Needed Makeover

India is likely to be included in JP Morgan's global bond indices early next year. This could attract approx. USD 200 billion in bond inflows over the next decade.

Currently, the foreign ownership of Indian government bonds, which has been declining since 2018, is less than 2%. With increased foreign inflows, it is expected that the government deficit would reduce to 2.5% of GDP and consolidated deficit to reach 5% of GDP by FY29 from 14.4% in FY21. Also, this will have profound implications for the economy, forex, bond yields and equity markets. India's higher rate of interest makes a strong case to incentivize foreign investments. A year since China took meaningful steps to further open its bond market to international capital, inflows from foreign institutions rose 53% and also boosted secondary market liquidity.

 

OUR TAKE

The foreign inflows would reduce India's borrowing cost and enhance its fiscal position, further improving the economic growth. This is a seminal moment for Indian investing: this has the potential to increase the availability of capital for India’s growth. Debt investors need to keep in mind that this may lead to lower returns on portfolios, causing them to look at different instruments to boost yields.

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