Toscafund Discussion Paper

Toscafund Discussion Paper 19 April 2013

Banking-on positive change in London’s property markets Executive Summary

Author: Dr Savvas Savouri In collaboration with GM Real

Contact information Toscafund Asset Management LLP 90 Long Acre London WC2E 9RA England t: +44 (0) 20 7845 6100 f: +44 (0) 20 7845 6101 e: [email protected] w: www.toscafund.com

By 2020 the global banking landscape is certain to be unrecognisable from today. Of the world's twenty largest banks I anticipate none will have their origins in the United States, Europe or Japan (map 1, black dots). The world’s mega-banks will instead be drawn from the New Growth Economies (NGE's) of Canada, Australia, New Zealand, China, Brazil and Russia, a group who as recently as 2006 boasted a between them solitary top twenty place (map 1, green dots). Crucially, what at present are parochial investment banking brands across NGE's are sure to have become global by 2020. Over the same period universally recognisable European and US bulge-bracket banking names will, for the most part, have retrenched to a mere regional presence. In some cases mergers and acquisitions amongst the "old banking order" will slow the evolution in the banking premier league, a repeat of the marriages forced upon Japan's once mighty banks; which in 1990 occupied 18 of the top twenty league places, but now just one (map 1, red versus blue dots). As then, enforced mergers may slow evolution, they cannot prevent it. Whatever rearguard effects are made amongst banks and mutual fund managers in the "old world", those across the “new” will assert themselves through significant asset growth. In large part this will be organic; GDP’s expanding and currencies appreciating in tandem (viz. in their respective times with the economies of Japan, Europe and the United States). Assets will also be lifted by opportunistic acquisitions – banks across the “new world” often buying divisions the “old” look to dispose of as they retrench.

Map 1: The changing origins of the world's 20 largest banks 1990 1998 2006 2013 2020?

Source: Bloomberg, Toscafund; largest by market capitalisation at each point in time

That brands from across NGE’s have not entered the bulge investment banking market through acquisitions to any meaningful degree should not be viewed as a reluctance to do so; rather a reticence across the old world to sell their operations to buyers they consider arrivistes. And if banks from the old world stubbornly continue to downsize or indeed entirely close their London Investment Banking (IB) operations, those from the new world are sure to cherry-pick displaced staff to expand their own IB platforms. For London's financial office market - essentially but not exclusively across The City and Docklands - this means one thing: the looming arrival of an entirely new collection of occupiers. And these will provide a repeat of previous episodes of job creation and office take-up, but on an entirely new scale. As before, London will grow in tandem with other emerging financial service hubs from São Paulo to Shanghai. More broadly London is set to experience growth across a wide range of sectors, strength in one area invariably feeding others. To claim it will see the creation of 500,000 jobs between now and 2020 is, I believe, perfectly credible.

1


Banking-on positive change in London’s property markets

Contents 1

Introduction ................................................................................................................................................................................................................ 3

2

Banking on change in London's occupational future ................................................................................................................................ 4 2.1

Mapping change: 1982-1990 .................................................................................................................................................................... 5

2.2

Mapping change: 1998-2006 .................................................................................................................................................................... 7

2.3

Mapping change: 2006-2013 .................................................................................................................................................................... 9

2.4

Mapping change: seeing how banking matters stand in 20/20, part I ................................................................................... 11

2.5

Mapping change: seeing how banking matters stand in 20/20, part II.................................................................................. 14

3

Insuring London's strong office demand ...................................................................................................................................................... 16

4

London’s timing is perfect .................................................................................................................................................................................. 19

5

Now, what about those elephants? ................................................................................................................................................................. 20

6

Summary .................................................................................................................................................................................................................... 22

7

Post script - A poem for London ....................................................................................................................................................................... 24

8

Appendix: Now, what about prospects for the UK economy?.............................................................................................................. 25

9

8.1

Heading towards that imposing London THING............................................................................................................................. 25

8.2

UK labour market bull ................................................................................................................................................................................ 26

8.3

Pathological thinking ................................................................................................................................................................................. 29 Appendix: Fear not, Japan is no role model for China ............................................................................................................................. 31

10 Appendix: London’s employment outlook by sector ............................................................................................................................... 32 11 Appendix: Currencies ............................................................................................................................................................................................ 34 12 Appendix: Top 100 Banks by market capitalisation .................................................................................................................................. 36 13 Appendix: Top 50 Insurance and pension companies by assets ......................................................................................................... 37

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1 Introduction This research continues with the positive outlook for the London office market I first aired in "An Employment Outlook for London in 20/20" (January 2010). The original research was it must be remembered, written at a time London’s employment was falling and the consensus was matters would worsen. Despite the contrarian nature of my view, I projected an increase of at least 100,000 in headcount across London’s financial service sectors from the point of writing to 2020. Since airing my optimism towards it, London has indeed seen the number of those in work across it hit record highs (charts 1) and within this employment across financial service sectors has been far more robust than widely predicted (chart 2). More broadly, practically all sectors are, I believe, set to record rising headcounts out to 2020 (charts 31 through 42), the demand for workers satisfied in part by arrivals from overseas. Chart 1: London employment: total

Chart 2: London employment: finance and insurance 0.48 0.46

5.5

0.44 0.42

Millions

Millions

5.3

5.1

4.9

0.40 0.38 0.36 0.34

4.7

0.32 4.5 0.30 2000 2004 2008 2012 2016 2020 2000 2004 2008 Source: ONS, Toscafund – vertical lines denotes release in January 2010 of our Discussion Paper “An employment outlook for London in 20/20”

2012

2016

2020

In this third piece on London’s outlook (I revisited the subject in a research piece released March 2012, “London 20/20 Update”) I make clear that not only do I standby my positive view, but actually feel my initial employment projections were modest. And in what follows I outline my reasons. I start in section 2 with a look at the change London has seen over recent decades in the origin of its large banking occupiers. In section 2.4 I turn my attention from the rear-view mirror to the windscreen to anticipate which banks will fill London’s offices, predicting many new arrivals yet to show themselves, but whose entry I claim will be as considerable as it will be a surprise to many. I move on in section 3 to consider how changing wealth patterns across the world will not only create a new-bankingpower-order but one across insurers and pension fund managers. This change too I claim will have a direct occupational and investor impact on the London office market and more widely across UK property. In collecting my thoughts, I reflect on the concern London will prove a victim of events across Europe, with matters made worse by decisions within it to become less welcoming to capital and labour. I go beyond dismissing such alarm to argue London will not simply grow despite events unfolding across Continental Europe but, in part because of them. In what follows I make no apology for drawing upon historic precedent whilst also claiming what awaits London is unprecedented. This seeming paradox is nothing of the sort; the precedent for London is what it has seen in the occupational and investor interest over many decades; through the 1980’s originating in a booming Japan, then through the 1990’s up to the fateful events of 2008, as surging fortunes across Europe and United States spurred on their investment banking sectors. Looking ahead, burgeoning wealth across NGE’s will spur their retail and commercial banks to expand aggressively into investment banking, and to seek an occupational footprint where such business is most actively undertaken. Moreover, competitive instincts between commercial banks will ensure that a first mover is soon followed by a rush of others (and sometimes the first mover will not be the largest bank, viz. Russia’s VTB’s already having an established London base when the larger Sberbank has yet to really show itself – although it does of course own the rather under-stated Troika Dialog). This is the precedent for London. What will be unprecedented is the scale of new occupational and investor arrivals; China, Russia, Brazil, Indonesia et al producing a quantum of interest far larger than has ever been seen before. Indeed, the reason so few share our positive outlook for London is that they have no precedent to draw upon. For us this is precisely why the rewards for being prepared for the unexpected will be unprecedented.

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2 Banking on change in London's occupational future Around the City one can identify place names that trace the Gates that once allowed access through the defensive “London Wall”, whose stonework can in places still be seen. And within the historic City of London there are institutions that have occupied the same "premises" for centuries. From the imposing Bank of England on Threadneedle Street to the seemingly timeless George and Vulture chop house in Castle Court, many date from the 18th century and some from long before. The idea, however, that the City of London is unchanging is not something one familiar at close quarters with it would accept. For all its apparent timelessness, the City of London has in fact been in constant evolution, with its buildings replaced with almost indecent haste according to some. Few aspects of the City’s architecture have seemed beyond limits: a large part of Sir John Soane’s original Bank of England demolished to make way for the Sir Herbert Baker creation I see today. Even the “City institution” that is the George and Vulture has come close to demolition. The reality is that whilst the names of its streets have become timeless symbols of its position in global finance, the City of London’s architecture has not simply matched contemporary design, but defined it. From the “Nat West Tower” opened in 1980, to the Lloyds Building first unveiled in 1986, to the Gherkin, eighteen years later, London’s skyline has been in constant flux, a rate of change which has only accelerated over time, creating a sense, in some cases, of architectural disposability. And with each new construction comes a new group of tenants, often ones that could not have been anticipated even a handful of years earlier. It is on the theme of the evolution in the occupational character of London’s office space that I wish to focus in this report. And whilst the emphasis will be The City and Docklands, it will not be confined to them. It extends more generally to the other business districts being developed, which, I am convinced, will not so much compete with traditional centres but complement them. Let me draw upon what I wrote in 2010 in the Discussion Paper “an employment outlook for London in 20/20”: “...if all goes to plan, London will enjoy noticeable improvements to its transport infrastructure over the next ten years. It can look forward to Crossrail and other (long overdue) upgrades to under and over-ground rail systems. By 2020 London will boast a number of impressive new business districts, centred on the transport hubs of Paddington, London Bridge and Kings Cross, the latter the embarkation and disembarkation point for the Channel Tunnel.“ Map 2: London’s old and developing business centres King’s Cross Euston Crossrail Paddington

City

Docklands

Battersea

Nine Elms

Source: Google, Toscafund; Development areas in dark blue, Cross rail in light blue (2018) & Northern tube line extension in grey (2020)

The delivery of HS2, Crossrail, the Northern line extension and other welcome transport improvements are all part of London’s future. Returning our focus to its past, one could chronicle the City of London’s history in global finance back many centuries, over which the nature and origin of its occupiers has changed and changed again. It is not however the gradual evolution through its long history that I wish to focus in this research, but the frenetic change of the past 30 or so years. And to best illustrate how the role-call of those occupying space across the City of London has altered and why, I will confine myself in the next section to modern era investment banking. In section 3 I will move to changing global patterns in pension and insurance wealth and their past and future – very positive - effect on London.

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2.1 Mapping change: 1982-1990 Let us cast our minds back to the early 1980s and compare the origins of the global banking behemoths then, with how much matters had altered by the end of a decade through which the Cold War was the major geo-political theme; the USSR and ‘Red’ China controlling Eastern Europe, Indo-China and more widely. For its part South Africa was still blighted by Apartheid, imposing hegemony over many of its neighbours. And across South America juntas imposed iron grips in Chile, Argentina, Brazil, et al. Were I to have ranked the world’s banks in 1982 – when much of the world was, as noted, still “closed” - I would have counted eight with their origins in Japan, the remainder sprinkled either side of the North Atlantic (see map 3). By 1990 however, Europe and the US banks had been supplanted by Japanese names with the exception of just two places in the top-twenty (see map 4). Map 3: Origin of the world's 20 largest banks by market cap – 1982

“CLOSED”

“CLOSED”

“CLOSED”

Source: Bloomberg, Toscafund; 1. Citicorp 2. Bank of America 3. BNP 4. Dai-ichi Kangyo 5. Credit Agricole 6. Credit Lyonnais 7. Barclays 8. Fuji 9. Mitsubishi 10. Nat West 11. Samwa 12. Sumitomo 13. Societe Generale 14. Deutsche 15. Midland Bank 16. Chase Manhattan 17. RBC 18. Industrial Bank of Japan 19. Mitsui 20. Tokai

The 1980’s were after all, or seemingly at least, a halcyon economic and financial period for Japan (see charts 3 and 4). With the yen having been unshackled by the Plaza Accord of September 1985, it surged and, in doing so, lifted the asset wealth of Japan’s households, banks, insurers and Government. This fuelled a consumption and investment boom, for which Japan’s banks were happy to provide the leverage needed. For Nomura, Dai-Ichi Kangyo, IBJ, Sumitomo, Mitsubishi et al., a burgeoning in assets was matched by growing global ambition. And it was London and specifically the “Square Mile” these chose to develop as their prime overseas hub. Indeed, many Japanese financial institutions outside the world’s top twenty were sufficiently keen to both show their growth ambitions and not be left behind by their larger competitors they built London office footprints. There was for instance the arrival in London of Yamaichi, Nikko and New Japan Securities along with Norinchukin and Daiwa banks et al. The result of their collective arrival was Japan’s banks repricing London office space. They also contributed to upward shifts in everything from residential property around their favoured parts of London, to golf course memberships; so too with fees charged from nurseries and private schools to "gentlemen's" clubs. Chart 3: Japanese key wealth indicators Chart 4: Japanese vs. US real GDP 8

215

600

7 195

6 5

175

% change, yr-on-yr

Indexed at 100 - January 1980

500

400

Japanese strength

155

300 135 200 115 100

4 3 2 1 0

-1

95

-2 0 1980

1981

Nikkei 225

1982

1983

1984

1985

1986

Japanese Land Price Index (rhs)

1987

1988

75 1989

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Japan

US Dollar per Yen (rhs)

US

Source: IMF, Bloomberg, Toscafund - Vertical lines denote the dates on which the Plaza accord (22nd Sept. 1985), Louvre accord (22nd Feb. 1987) & Black Monday, the Oct. 1987 crash)

5



Map 4: Origin of the world's 20 largest banks by market cap – 1990

Source: Bloomberg, Toscafund; 1. IBJI 2. Sumitomo Bank 3. Fuji 4. Mitsui Taiyo Kobe 5. Dai-Ichi Kangyo 6. Mitsubishi 7. Sanwa 8. Nomura 9. Long Term Credit Bank of Japan 10. Tokai 11. Nippon Credit 12. Bank of Tokyo 13. Deutsche Bank 14. Sumitomo Trust & Banking 15. Daiwa Securities 16. Daiwa Bank 17. Nikko Securities 18. Yasuda Trust & Banking 19. Mitsui Trust & Banking 20. American Express (which had merged with Lehman Bros. in 1984)

With hindsight we know Japan’s golden age ended dramatically from 1990; the Nikkei falling and property prices joining it, resulting in a sharp slowdown in the pace of GDP growth (charts 5 and 6). Japan was in effect consigned to a period of deflation and poor economic growth from which regular attempts at stimulation have failed to dislodge it. Chart 5: Japanese key wealth indicators

Chart 6: Real GDP comparison 8

180 110

7

160

6

90

120

80

100

70

Japanese weakness

80

% change, yr-on-yr


140


100

5 4 3 2

60

60

50

40

40

20

-1

0

-2

30 1990 Nikkei 225

1992

1994

1996

Japanese Land Price Index

1 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Japan US Germany

1998 US Dollar per Yen (rhs)

Source: IMF, Bloomberg, Toscafund

Few things more clearly and clinically illustrate Japan’s banking collapse than a ranking of the world’s banks by size a mere eight years after it boasted a 95% representation, and with this in mind I shift my focus to 1998.

6



2.2 Mapping change: 1998-2006 By 1998 of the world’s largest banks only two were Japanese, down from the 18 the nation had boasted in 1990. Of the others eight had their origin in the United States and nine across Europe (see map 5). Map 5: Origin of the world's 20 largest banks by market cap - 1998

Source: Bloomberg, Toscafund; 1. UBS 2. Lloyds TSB 3. Nations Bank 4. Citicorp 5. HSBC 6. Chase Manhattan 7. Credit Suisse 8. Bank of America 9. First Union 10. Bank of Tokyo-Mitsubishi 11. National Australia Bank 12. Deutsche Bank 13. Barclays 14. Banc One 15. Banco Bilbao Vizcaya 16. ABN-AMRO 17. Wells Fargo 18. U.S. Bancorp 19. Sumitomo Bank 20. Nat West

Of course by 1998 not only had Japan spent a number of years sliding economically but Asia more widely had suffered a sizeable monetary correction in 1997, something Russia faced the following year. For its part, South America experienced regular currency crises, Brazil devaluing in 1994 and again in January 1999, Mexico also having done so in 1994. And China, still largely a closed economy, was struggling with how to avoid a repeat of the Tiananmen Square crisis of 1989 and how to deal with neighbours who had become more competitive almost overnight following their currency collapses. As much as conditions in South America across to Asia and including Russia, had soured by 1998 for the US and Europe a favourable “new normal” seemed to have established itself. For the United States the flip-side of the devaluations that struck others meant a relative strengthening in the dollar, equivalent to considerable monetary easing - viz. Japan’s experience from 1985 – which American households latched upon to raise their spending. For its part, Europe was enjoying the spoils of being “at one” for the first time in generations, thanks to the drawing back in 1989 of the Iron Curtain and the opening up of entirely new markets for companies across the EU. Indeed, by January 2002 the euro had come into physical existence and after a difficult birth began to rally (chart 7) cementing, or so it seemed, Europe’s place as the new epicentre of global growth. And few parts of the world reflected the power-shift in global economics generally, and banking specifically, more than London. Chart 7: US dollar per euro

Chart 8: US vs. Euro-zone real GDP

160

Euro strength

4

150

% change, yr-on-yr


140

130

120

110

100

3

2

1

90

0 2000

80 2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: IMF, Bloomberg, Toscafund

7

2001 2002 US

2003

2004 2005 Euro zone

2006

2007



Across London’s traditional EC post codes, Europe’s ever more powerful banks began to make their presence felt, jostling for space with banking behemoths from the United States. Fast forward to 2006 and the "new normal" of the world’s economic and financial power base being split on either side of the North Atlantic seemed to have only increased (see Map 6). Indeed, that Japan’s banks had reclaimed two places in the world’s top twenty was not a banking renaissance but a consequence of forced marriages. In 2000 Mizuho was formed from combining Fuji Bank, IBJ and Dai-Ichi Kangyo Bank. And in 2005, BTMU emerged from the joining of Mitsubishi Tokyo Financial Group to UFJ. In short, by 2006 Japan’s position in global finance, dominant as it had been in 1990, had fallen away sharply. By contrast financial groups with their origins in the US and Europe were enjoying impressive fortunes. And against this backdrop London’s office landlords hardly noticed the evacuation of once important Japanese tenants. For from Germany’s WestLB and Commerzbank to Dutch financial groups such as Rabobank, across to Spanish and Italian banks, take-up activity increased; and so too with US brands from Fox-Pitt Kelton to Lehman and Bear Sterns. Demand for London office space seemed destined to continue rising thanks to strongly performing US and European banks, and their ambitions to grow their investment banking presence across London. That was of course until 2008. Map 6: Origin of the world's 20 largest banks by market cap – 2006

Euro zone 5

Source: Bloomberg, Toscafund; 1. Citigroup 2. JPMorgan Chase 3. Bank of America 4. HSBC 5. Mitsubishi UFJ 6. Crédit Agricole 7. RBS 8. BNP Paribas 9. Santander Central Hispano 10. Mizuho Financial 11. Wachovia 12. Sumitomo Mitsui 13. UniCredito Italiano 14. Barclays Bank 15. Wells Fargo 16. UBS 17. Credit Suisse 18. China Construction Bank 19. Deutsche Bank 20. Norinchukin Bank

As much as 1990 was a watershed for Japan’s financial sector, so 2008 proved a rude awakening for US and European banks. And, just as Japan’s banks rapidly expanded and then sharply downsized their London-facing investment banking activities, so in essentially the same fashion have followed many European and US banks. And this has unsurprisingly raised considerable alarm for those trying to form an occupancy outlook for London’s financial facing office market. I consider this alarm unwarranted. I have already shown how as banks from Japan were on the decline, those across Europe and the US were in the ascendancy. In the section which follows I chronicle how the latter two groups have been downsizing in their turn, but in tandem an entirely new collection of banks with ambitions in the investment finance world have been slowly building office capacity across London. Slowly until now but set, I am convinced, to accelerate from next year. In short what has been seen up to now has been the establishment of early bridgeheads of greater things to come.

8



2.3 Mapping change: 2006-2013 Continuing the exercise of tracking the origins of world’s largest twenty banks I notice in map 7 the significant change that has occurred from when I last considered how matters stood in 2006 (map 6). Of the world’s top twenty banks Europe’s representation has fallen from seven to one (I treat HSBC as essentially Chinese from now onwards) with Japan also down to a solitary name. Indeed, that the United States can still boast four representatives in the banking world's top twenty is largely down to the (shotgun) marriages in 2008 of Bank of America to Merrill Lynch and Wells Fargo with Wachovia; the American financial groups experiencing something the Japanese had only a matter of years earlier following their own fall from banking grace. Map 7: Origin of the world's 20 largest banks by market cap – 2013

Source: Bloomberg, Toscafund; 1. Industrial & Commercial bank of China 2. China Construction Bank 3. Wells Fargo 4. HSBC 5. JP Morgan Chase 6. Bank of China 7. Agricultural Bank of China 8. Citigroup 9. Bank of America 10. Commonwealth Bank of Australia 11. Westpac 12. Mitsubishi UFJ Financial 13. RBC 14. ANZ 15. Itau Unibanco 16. National Australia Bank 17. Toronto-Dominion Bank 18. Banco Santander 19. Banco Bradesco 20. Sberbank

It is against the backdrop of retreating US and European banks that many hold fears over London’s future role in global finance. After all, European bank after European bank with an operation in London is in headlong headcount retreat, and so too those with their origins in the United States. To make matters worse, even British banks are significantly downsizing their activities in investment finance (viz. Barclays and RBS). However, to focus solely on those banks downsizing their London activities is to ignore those which are growing or poised to build a presence there, unconstrained by “Glass-Steagall” type barriers being demanded of “old world banks” to separate their retail and investment finance operations. And no nation promises to provide a greater demand boost to London’s financial facing office market than China (charts 9 and 10). Let me spend a moment considering what impact China’s move to a more flexible currency will have generally on global finance and in particular London’s place in providing a base for activity in it. Aside from being exchangeable (at a controlled rate) against the US dollar, Japanese Yen and most recently the Australian dollar, the Chinese currency cannot be directly exchanged with other currencies. This said from 2014 controls will be significantly loosened on the remninbi’s level and limitations on the number of currencies against which it can be exchanged. And this happens a myriad of financial instruments linked to it will be created and subsequently traded. Whilst one cannot be precise on the volume of this activity it is likely to be on a considerable scale; the word unprecedented, so overused, would I believe be more than appropriate here. What I can say with certainty, is that London will feature as the crucial off-short hub for trading the remninbi and all the derivatives that will be born from it being far more freely traded. I know it will, because Beijing has told us as much, and the authorities there have delivered so well on what they have promised that I see no reason to doubt what they say. And it is because 2014 is looming that I hold such a positive outlook for global finance when so many others despair at its prospects and in turn view London so negatively. To repeat, Beijing has not designated New York or Frankfurt or Geneva as the off-shore hub for when it liberates its currency and begins to more freely sell its sovereign debt; it has given that privilege to London. As with China so too I am convinced with Russia, Brazil, Indonesia and many other NGE’s whose currencies have thus far been closely managed. With their currencies liberated these NGE’s will then truly capitalise on investor appetite for their 9



fixed assets, sovereign debt and the myriad of derivates created on the back of these. And as with China these nations will see their banks enjoy sizeable asset growth and as they do search for an off-shore hub from which to operate as a complement to their native business district – from São Paulo to Shanghai; I have no doubt London will be it.

Chart 9: US dollar per Chinese renminbi

Chart 10: Real GDP comparisons

130

12

% change, yr-on-yr


125

120

115

Renminbi strength 110

6

0

105

-6 2006 2007 Japan

100 2006

2007

2008

2009

2010

2011

2012

2013

2008 US

2009 2010 Euro zone

2011

2012 China

Source: Bloomberg, IMF, Toscafund

Inspecting map 7 one will see how once all-powerful names from Europe, the United States and Japan have been deemphasised. The point to keep in mind is this is just another turn in the wheel of banking time. We have after all seen how having dominated the global banking rankings, Japan representation has all but disappeared. Having moved around in often dramatic fashion from map to map, I am confident the dots identifying the location of the world’s banking titans will continue to shift, part of an ongoing evolution in global growth and banking, one which is very much gaining speed. In the next sub-section I make an attempt at predicting what the list of the world’s top 20 world banks might look like in 20/20.

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2.4 Mapping change: seeing how banking matters stand in 20/20, part I Let us contemplate the current list of the world’s top twenty banks (table 1). Next allow me to offer an assessment of which economies will see their GDP’s and currencies rise strongest (charts 11 and 14). Chart 11: Lands of rising currency dragons

Chart 12: Real GDP comparisons

350

10 9 8

250

% change, yr-on-yr


300

200

Strength against US dollar

150

100

7 6 5 4 3 2 1 0

50 2004

2008

2012

2016

US dollars per Chinese renminbi

US dollars per Brazilian real

US dollars per Australian dollar

US dollars per Canadian dollar

2013 2014 China

2020

2015 2016 Brazil

2017 2018 Australia

2019 2020 Canada


Chart 13: The dollar’s other future “weak” side?

Chart 14: Real GDP comparisons 4

Weakness in US dollar

3 % change, yr-on-yr


125

100

75

2 1 0 -1 -2

50 2004

2008

European euro per US dollars

2012 British pound per US dollars

2016

2013 2014 UK

2020

2015 US

2016

2017 2018 Germany

2019 2020 Japan

Japanese yen per US dollars


By using these two macro indicators I believe one can predict how the world’s banking super-league will essentially look in 20/20. The point I would emphasise is that it is not simply the origins of the world’s top twenty banks that will change, but their combined size; new mega-banks certain to surpass the sizes of previous titans but a considerable degree. In performing my exercise of creating a global banking super-league, I have measured size by market capitalisation. This is admittedly a far from perfect representation of size relying as it does on banks being fully-listed and their market value being “fair”. Far from perfect it may be, but still indicative, I would argue. Had the measure been assets under management, the essence of the argument would be the same. The important point is not the particular measure of size I use, but rather the “fair value” of the currencies that banks and their relevant assets, are valued in. My thesis is Brazil’s real, China’s renminbi, Russia’s ruble and indeed all other NGE currencies, are markedly undervalued against the dollar. And as this corrects in the years ahead so it will lift the value of banks and the assets they are home to across NGE’s. Moreover, far from stifling economic growth, strengthening currencies will lower the cost of capital, and so fuel domestic consumption. For London all of this can only provide for optimism towards its economic fortunes. I have chosen to include in Table 1 information on how much office space each bank currently occupies across London. What strikes me from this analysis is the under-representation of the new banking behemoths across London’s financial districts.

11



Table 1: London footprint (000’s sq feet) of world’s top banks (by market cap) 1

Top banks in 2013 ICBC

Origin China

Current Footprints 75 in King William st

2

China Construction Bank

China

18.5 in Canary Wharf

3

Wells Fargo & Co

US

50 in Fenchurch st

4

HSBC Holdings

China

5

JP Morgan Chase & Co.

6

Likely top 20 in 2020 (2013 rank) ICBC (1)

Origin China

Current Footprints 75 in King William st

China Construction Bank (2)

China

18.5 in Canary Wharf

HSBC Holdings (4)

China

1000 in Canary Wharf


Bank of China (6)

China

100 in Princes st

US


Agricultural Bank of China (7)

China

10 in Bartholomew Lane

Bank of China

China

100 in Princes st

Commonwealth Bank of Australia (10)

Australia 20 in Queen Victoria st

7

Agricultural Bank of China

China


Westpac Banking Corporation (11)

Australia 40 in Camomile St

8

Citigroup

US

750 in Canary Wharf

Royal Bank of Canada (13)

Canada

9

Bank of America

US

250 in Canary Wharf 600 in Newgate st

ANZ Banking (14)

Australia 30 in Canary Wharf

10

Commonwealth Bank of Australia Australia 20 in Queen Victoria St

Itau Unibanco (15)

Brazil

11

Westpac Banking Corporation

Australia 40 in Camomile st

National Australia Bank (16)

Australia 40 in 88 Wood st

12

Mitsubishi UFJ Financial Group

Japan

100 in King William St

Toronto-Dominion Bank (17)

Canada

40 in Old Broad st

100 in Thames Court 100 River Bank House

Banco Bradesco (19)

Brazil

10 in Old Broad st

100 in Thames Court 100 River Bank House

20 in Broadgate Tower

13

Royal Bank of Canada

Canada

14

ANZ Banking

Australia 30 in Canary Wharf

Sberbank (20)

Russia

No London presence

15

Itau Unibanco

Brazil

Bank of Nova Scotia (22)

Canada

40 in 201 Bishopsgate

16

National Australia Bank (23)

Australia 40 in 88 Wood st

Bank of Communications (28)

China


17

Toronto-Dominion Bank

Canada

40 in Old Broad st

China Merchants Bank (36)

China

1 in Cornhill

China Minsheng Banking (38)

China

No London presence

20 in Broadgate Tower

18

Banco Santander

Spain

30 in Ludgate 200 in Regents Place

19

Banco Bradesco

Brazil

10 in Old Broad st

Bank of Montreal (40)

Canada

Queen Victoria st

20

Sberbank of Russia

Russia

No London presence

Banco do Brasil (41)

Brazil

15 in Old Broad st

Source: GM Real, Toscafund

Japan

Europe

US

NGEs

Of course certain readers whilst readily accepting the changing global banking landscape, will challenge the idea London will benefit. I disagree. Those who in the early 1980’s doubted London would provide a major overseas hub for Japan’s banking sector would have failed to capitalise when they indeed did arrive in number. So again those peering into the rear-view mirror and seeing the deleveraging of banks from the United States and Europe will not see the approaching NGE’s though the windscreen. Banks from across the NGE’s will arrive and assure London’s occupational future, because as we have seen they are underrepresented across it. And I must emphasise, arrivals will not be confined to the world’s largest twenty banks. Whilst Africa may not boast a top twenty bank now or, according to our reckoning, in 2020, it will have a number in the top fifty, all keen to develop overseas hubs and almost certainly making London their first choice. There is for instance South Africa’s Standard Bank, which has interests across Africa and extends into Russia, Turkey and Argentina. For its part Old Mutual, is a majority owner of Nedbank, already operates in London. Moreover, whilst I have suggested neither India nor Indonesia will boast a top twenty bank by 2020, they are certain to figure in any broader ranking. There will be instances where mergers and acquisitions, often across borders, create banks with ever greater global critical mass, and ones with investment finance ambitions which can only favour London. To those who claim that the world’s new commercial and retail banking giants will not move to develop sizeable investment finance arms, my reply is they most certainly will. They will do so to serve the interests of their corporate and retail customers. The former will after all engage in M&A activity on an ever larger scale and will demand of their banks advisory and secondary capabilities. And having watched clients nurtured for many years engage in deals and listings advised by western investment banks who have pocketed the generous fees, one must wonder why commercial banks from the developing world will allow this absurdity to continue. For their part retail customers will require ever more generous returns on their savings. And yes, there will be future banking crises and indeed bank failures because that is the nature of such things. There will no doubt be those who whilst accepting that the world’s new banking giants will build investment finances activities, doubt London will play a role. To these I say where else? Once again I stress London will grow not at the expense of aspirational cities such as São Paulo, but along with them. The reality is such symbiotic growth has before been played out to London's benefit, and it will do so again. The difference this time is that London will benefit on a far larger scale and do so broadly; its real estate, its labour market and its wider service sectors. This scale effect will be because London will draw on more counter-party capitals than it ever has in the

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past, and of nations far larger and more rapidly developing than ever before. Those who doubt as much will have their scepticism exposed within a handful of years; for whatever pains still await much of mainland Europe, the NGE’s will continue to grow strongly. That many of the new banking behemoths have yet to establish an operation floor plate in London is, as I have repeatedly argued, a case of simply not yet. History has shown there is a delay between new commercial banking giants emerging onto the world stage and these embarking into building investment banking activities with a sizable hub in London. The simple truth is that the City of London specifically and the London office market more generally will be populated by a very different group in the years ahead to what it has been used to in its past. A past which has proven time and time again that buildings come and go, and so do those that occupy them. But with each departure come new arrivals and in each instance, the scale seems to grow. London has experience it with Japanese banks and seemed it with those from Europe and the US. And it will have it anew. The office premises these will be based in may be very different from those of past arrivals, but the historic premises this prediction is based on, are not. Whilst the City of London cannot expand outwards, it can, and has been doing so, upwards. A good job too, since the combined population of those economies doing today what Japan did in the 1980’s is a staggering twenty times larger. Having argued who I think will sit on the world’s top banking table by 2020 I return to our Map pinpointing their origins.

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2.5 Mapping change: seeing how banking matters stand in 20/20, part II I have presented my view of the world by splitting out what I have termed its New Growth Economies (NGEs). This captures the likes of China, Russia, Indonesia and Brazil. It also however covers Angola, Zambia, Chile and Peru. The collection extends to Turkey, Kazakhstan, Malaysia and Singapore, whilst also taking in Norway, Australia, New Zealand and Canada. I have excluded India with good reason: it is an economy that is flattering to deceive. Neither is there a place in my NGE list for South Africa or Mexico (for reason why see discussion papers “Cape Fear: South Africa’s chilling outlook” 18th March 2011 and “An outlook for Canada & Mexico: Seismic Continental drift” 10th November 2009). Even if I do exclude the population and topological giant that is India, the NGEs I have identified cover a significant part of the world. At the same time they are woefully under-represented in the roll call of London’s office tenants. And as the latter is corrected I have little doubt it will make us all realise that the UK too is in fact a NGE, with a growing population - chart 27 – and an rapidly improving economy. As with all things context is key and no nation offers more context than Japan. Between 1982, when it could count eight of its banks in the world’s largest twenty and 1990 when it could boast a staggering eighteen, Japan’s population was around 120 million, large for a sovereign nation but only representing 2½% of the World’s population. Next consider the EU and the United States who between 1998 and 2006 saw their banks supplant those of Japan for (a return to) global dominance. Their populations combined in 1998 came to three-quarters of a billion, or 12½% of the world’s population (by which time incidentally Japan’s share had fallen to 2%). Let us reflect now on what I have termed the NGE’s. This collection of nations - spread across all Continents - is currently home to over 2½ billion people, or one third of the world’s population; Japan incidentally is down to 1¾%. Over coming years NGE’s will be home to ever more people; for some immigration will provide a major population boost; Australia, New Zealand and Canada likely to double their populations within a generation. For Angola and Mozambique there will be an influx of Europeans, in their cases mostly from Portugal, whose ex-pats will also target Brazil (a favourable outlook for Espirito Santo justified by strength in former Portuguese colonies, and despite on-going weakness in Portugal itself). Spaniards will I believe be contemplating South America writ-large for their “escape”. The reality after all is that there will be widespread evacuating from an ever more troubled euro-zone, those departing taking their capital with them to NGE banks. And since many NGE’s have currencies which are either suppressed by intervention or mistakenly undervalued, their monetary power will only increase and as it does London will capitalise. A perfect illustration of how the market capitalisations of the worlds banks can be significantly influenced by exchange rates is the position of Japan’s pre- and post- the Plaza Accord of 1985. After convening in New York’s Plaza Hotel, central bankers from the US, Japan, Germany, France and the UK agreed to concerted intervention to raise the value of the yen and deutschmark, but especially the yen. The result was to super-charge all assets priced in yen; and inadvertently to sow the seeds of Japan’s financial collapse and descent into deflation. It was this surge in the yen which propelled Japan into taking 18 of the places in the 1990 league table of the world’s top 20 banks. Those concerned that, say, China will follow this “boom-to-bust” trajectory need not be. For, I believe Beijing is perfectly aware of the errors made by Tokyo in allowing the yen to rise too sharply, too quickly (see appendix 9, for a case study of Tokyo’s dire economic mismanagement). Whilst the renminbi will strengthen against the US dollar, it will do so more sedately than the yen did back in 1985/7. It will moreover strengthen against the dollar as other NGE currencies also do so (chart 11). Alongside a strengthening currency China - and those enjoying the fruits of its growth – will defy those claiming it will “land” and instead record impressive GDP growth (chart 12). Whilst many will doubt as much, I expect by 2020 none of the world’s top twenty largest banks will have its origin in mainland Europe, the United States or Japan. Rather by then China, Brazil, Australia, Canada and Russia will dominate the banking top table (map 8).

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Map 8: Origin of the world's 20 largest banks - 2020?

Source: Bloomberg, Toscafund; 1. ICBC 2. China Construction Bank 3. HSBC 4. Bank of China 5. Agricultural Bank of China 6. Commonwealth Bank of Australia 7. Westpac Banking 8. RBC 9. ANZ 10. Itau Unibanco 11. National Australia Bank 12. Toronto-Dominion Bank 13. Banco Bradesco 14. Sberbank 15. Bank of Nova Scotia 16. Bank of Communication 17. China Merchants Bank 18. China Minsheng Bank 19. Bank of Montreal 20. Banco do Brasil

To recap, in creating map 8 I have listed the top one hundred banks as they stand – appendix 12 - and then factored for certain macro-economic developments; notably changes in GDP’s and currencies - charts 11 and 14 – to anticipate how the top 20 may look in 20/20. Through maps 3 to 8 I have charted the pattern of banking dominance as it has shifted across the world, seeing its epicentre move from the North Atlantic to Japan, then back to the North Atlantic and more recently diffuse widely. I ended with a predicted map for 2020 suggesting none of the World’s top twenty banks would have their origins in the United States, Continental Europe or Japan. To recap Figure 1 captures in a single graphic the shifting patterns in maps 3 through 8. And even if I have been premature in “painting the major banking world” entirely blue as soon as 2020, the issue is simply one of timing. Figure 1: The evolving origin of world's 20 largest banks by market cap - 1982 to 2020 1982

1990

1998

Japan

2006

Europe

2013

US

2020?

NGEs

Source: Bloomberg, Toscafund; NGE’s are New Growth Economies.

Beyond its key position in their global banking ambitions London is in my estimation also certain to provide an essential hub for firms engaged in other key sectors. It will be important in the areas of law, IT and advertising, and for that matter across a raft of creative and service sectors; as already evidenced by the sizable occupational ambitions of Bloomberg and Google. The purpose of this piece however is the global financial service sector. And within this I have focused thus far on the evolution in global banking and London’s role in its history and it future. I turn next to flourishing pension and insurance markets across NGE’s, which are already delivering to London the occupational boost I anticipate will come through very soon from banks across it.

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3 Insuring London's strong office demand As the developing world grows at pace, and creates wealth for its large populations, these will naturally wish to insure everything from their assets to their lives, and I believe London will provide the major underwriting centre for this need. Before I look ahead I will repeat the exercise performed for banking and cast our minds back in time to see how the mutual landscape looked in the 1980’s. Map 9: Origin of the world's 20 largest insurance companies ranked by assets – 1986

“CLOSED”

“CLOSED”

“CLOSED”

Source: Bloomberg, Toscafund; 1. Prudential of America 2. Metropolitan Life 3. Nippon Life 4. Zenkyoren 5. Cigna 6. Equitable Life 7. Dai-Ichi Mutual 8. Aetna Life 9. Sumitomo Life 10. Prudential 11. Allianz 12. Nationale Netherlanden 13. New York Life 14. TIAA/CREF 15. John Hancock Mutual Life 16. Travelers Life 17. Meiji Mutual Life 18. Asahi Mutual Life 19. American International Group 20. Royal Insurance

As it was with banks in 1982 (map 3), the world’s largest mutual funds were confined to having their origins in the United States, Western Europe or Japan (map 9). This is no surprise since these were essentially where the major economies were based. Even by 2006 the picture had only changed in that Japan had lost all representation in the top twenty, with its lose proving the gain for Western Europe and North America; Canada gaining two places in the ranking (map 10). Map 10: Origin of the world's 20 largest insurance companies ranked by assets – 2006

Euro zone 6

Source: Bloomberg, Toscafund; 1. Allianz 2. American Intl Group 3. AXA 4. MetLife 5. Aviva 6. Prudential Financial 7. Generali 8. Aegon 9. Prudential 10. Zurich Financial 11. Hartford 12. Legal & General 13. Munich Re 14. CNP Assurances 15. Manulife Financial 16. Swiss Re 17. Allstate 18. Sun Life Financial 19. Swiss Life 20. Lincoln National

Even now (map 11), the picture continues to show only marginal change from where matters stood in 2006 (unlike the transformation with banks over a broadly similar period seen in contrasting maps 5 and 6). It is however in the years ahead that things are certain to change.

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Map 11: Origin of the world's 20 largest insurance companies ranked by assets – 2013

Euro zone 7

Source: Bloomberg, Toscafund; 1. ING 2. AXA 3. Allianz 4. MetLife 5. Prudential Financial 6. AIG 7. Generali 8. Legal & General 9. Aviva 10. Manulife Financial 11. Aegon 12. Prudential 13. CNP Assurances 14. Dai-ichi Life Insurance 15. Zurich Financial Services 16. Ping An 17. Munich Re 18. Hartford Financial Services 19. Power Corp of Canada 20. Standard Life

Identified in map 12 is where I believe the world’s largest – by assets - pension and insurance firms will have their origins come 2020. And as with banking, I anticipate China, Canada and Australia will see their representations grow, continuing this trend in the years after. The burgeoning in their assets will reflect increasing internal wealth -inflows and rising asset prices - and its denomination in ever stronger currencies (see chart 11). As well as being invested within “home” economies these assets will also be deployed overseas; and London property specifically and indeed UK real estate more widely is certain to find itself targeted. For those looking for a precedent one could point to Japan in the 1980’s and the Europeans from the late 1990’s. Map 12: Origin of the world's 20 largest insurance companies ranked by assets - 2020?

Euro zone 5

Source: Bloomberg, Toscafund; 1. ING 2. AXA 3. Allianz 4. MetLife 5. Prudential Financial 6. AIG 7. Generali 8. Legal & General Group 9. Aviva 10. Manulife Financial 11. Aegon 12. Prudential 13. Ping An14. Power Corp of Canada 15. Standard Life 16. China Life 17. Sun Life 18. AIA Group 19. Suncorp-Metway 20. China Pacific

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Figure 2: The evolving origin of world's 20 largest insurance companies by assets 1986 to 2013 1986

2003

Japan

2006

Europe

US

2013

NGEs

Source: Bloomberg, Toscafund; NGE’s are New growth economies

In short, from no representation only a few years ago (figure 2), mutual funds from the New Growth Economies (NGE’s) have appeared on the global top-table, at which they will only increase in numbers and importance. And as with their banking counterparts, I am convinced these and in particular their insurance and pension element will seek out an ever greater presence in London, to capitalise on its global insurance "franchise" as well as proving ever more generous investors in the UK’s property assets. There is also the issue that hybrid bank-assurers will grow in importance. Consider for instance China’s Ping An Group, which covers Ping An Insurance (currently 16th in the global ranking of insurers by assets, table 3) and Ping An Bank (centred in Shenzhen one of China’s largest commercial banks.). For the record “Britain’s” HSBC own a sizeable share of Ping An. Let us close this section with words taken from our Discussion Paper of January 2010, “An employment outlook for London in 20/20”: “…for new wealth economies to exploit their latent internal potentials they need to more readily extend banking and insurance to their households and businesses. The reality is that growing financial infrastructures with urgency is best achieved by targeting established centres, acquiring businesses and hiring people where capital markets are already developed. Moreover, for their commercial and investment banks to fully capitalise on fees they will have to be where their corporate names are listed and/or doing deals... …We have never - or apologise if it seems we have - suggested India, China, Brazil, Russia, or indeed any of the other nations set for growth bursts in their financial services sectors, will fail to develop these at home. We are in no doubt they will. What we have argued is this will be complemented by the movement into sizeable overseas hubs. Their actions will be motivated by pragmatism. To maintain the strong pace of growth to which these nations have become accustomed they will need to develop their internal economies, a crucial element of which is a mature financial service sector. However, they simply do not have time to wait for their local financial services infrastructure to reach a level which matches what exists in more developed markets.”

I turn next to considering to how alongside its other rarities, London offers a unique time-zone advantage for the world’s ambitious financial service companies, determined to be open 24/7.

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4 London’s timing is perfect Let me make clear there has never been a traditional of around the clock trading within the World's established financial centres. Despite undeniably long days - time spent preparing for markets to open, followed by trading, then the postmarket wind-down - finance facing offices DO close 'at night'. The reasons are simple, "graveyard shifts" can never attract the quality of staff of daytime shifts; not that is, without significant additional labour cost to compensate for anti-social hours. Rather than multiple shifts in one location, investment banks satisfy their need to be continuously open across the world by having multiple presences across time-zones. And no city has provided a more timing-perfect solution across Western and Eastern hemispheres than London (see map 13). Map 13: London timed to perfection 0900

1700

London · San Francisco ·

· New York

Beijing · Dubai ·

Singapore ·

· São Paulo

0100

0400 0930

· Sydney

0600

1300

1600

1900

1430

Source: Toscafund

Being the self-designated home of GMT ensures London's work day begins as activity across Far Asia winds down. Furthermore, London operates for a number of hours after dawn breaks over New York. In short, no other established financial centre sits better placed than London. Again I draw upon what I penned back in January 2010 in the Discussion Paper “An employment outlook for London in 20/20”: “London is perfectly positioned for global trading. One can, in a standard working day, straddle the US and Asian markets. Moreover, London’s air transport capacity is also extremely well developed. Indeed, there are very few places in the world that have regular flights to as wide a variety of destinations as London [whose] business districts can claim reliable links to five international airports. “ It is not a question of London building as a global banking centre at the expense of Shanghai, Singapore or Sydney, but in tandem with them; so too with Dubai and São Paulo. Just as staff have over the decades moved to and from London and Tokyo, Hong Kong and New York so London will exchange personnel with the world's new and fast growing financial centres. This cross-pollination will not only be helped by London’s convenient time-zone and (improving) air links, but the fact English is the recognised language of finance. There is also the fact London is an extremely appealing place to work for a host of recreational, educational and medical reasons. Men and women - single and with families - across New Growth Economies, will see a secondment to London as a prize not an inconvenience. This was the case with the Japanese in their halcyon 1980's and European and Americans when their banks were in their prime. So it will be with Chinese, Brazilians, Russians, Australians, Canadians and other professionals across NGE’s. Having motivated why I consider London the undisputed overseas banking hub for the world’s New Growth Economies, I then turned to another major financial sector, the mutual fund market, and argued there too changes globally would favour London. I now turn to what many readers may be thinking has been my biggest oversight, ignoring the large elephants in the room.

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Banking Banking-on positive change in London’s property markets market

5 Now, what about those elephants? I have presented a positive outlook for London's financial and wider business service sectors based on an upbeat view of the New Growth Economies (NGE's). This said I accept there are are a number of contingent risks. There is for one the possibility China's economy "lands" with a bump hard enough to force a reversal in any NGE optimism. Even was this possibility to be avoided (as in all probability it will be, be see appendix 9) there will be those claiming London's attractions might not glisten anything like I have suggested. There are after all a number number of elephants in the room. room There are caps on banker pay and bonuses; and there is the so called Tobin-Tax Tobin on financial transactions.. And there is increased banking regulation;; notably the imposition of a form of Glass-Steagle Glass Steagle forcing a separation of investment from retail banking. banking Whilst these have raised considerable disquiet over the potential for a “banker exodus” in the minds of o many, I would argue the impact should not be exaggerated. They should not be exaggerated because for one I have yet to see their implementation. And they should not be exaggerated because quite frankly even even if fully implemented these measure are unlikely to hit volumes or discourage scourage banks from operating from London or bankers from working there. The reality is the world is on the cusp of seeing entirely new financial instruments appearing appear and a great many more currencies becoming far more freely and sizeably sizea traded. As a consequence, transactional volumes across the financial service rvice sector and particularly what goes on in London will rise significantly, regardless of those imaged elephants. elephants Let me focus for a moment on restrictions to banker pay and bonuses. As those familiar with London's investment banking market can testify, recent years have been a struggle. st And as much as it is my conviction matters will improve, there is one legacy of this period which will remain, for a while at least: the downwards move in pay. For all the political and journalistic talk of "exorbitant banker bonuses", pay for both entry-level entry level and experienced staff isn't what it was. Where graduates once commanded generous salaries and permanent contracts, contracts, they now compete for prized prize internships. And where staff moves were rarely for less income, displaced brokers and bankers are now all too often willing to price-themselves themselves into a job. The reality is that as with so much else, political and journalistic perception is at odds with reality. ality. Those recommending bonus caps do not seem to appreciate that across large swathes of the investment banking market, pay has already been reined back. I made this very point in our Discussion Paper, London 20/20 - Update (March 2012): "For a new entrant ant into London's financial service sector staff costs will not prove a terribly demanding concern, and staff levels will rise to reflect such affordable hiring. We would would go as far to claim the time London lost support service jobs to Mumbai and Bangalore has past." As for the idea that London’s incumbent financial service professionals will decamp, I repeat now what I wrote back in 2010: “As well as the viability of alternative locations, there are the practicalities and costs of relocating. Those with children ldren of school age cannot simply uproot, whatever their misgivings over tax. The availability, affordability and quality of residential real estate elsewhere are also issues, as indeed is language. We are in no doubt that London will experience departures. departures. What we are saying is that these will be part of the normal process of a small number of the wealthy evacuating, rather than any significant exodus”. These sentiments were hardly received wisdom back in March last year and even less so over three years ago. a And they remain counter-consensual consensual still. Nevertheless, I am convinced the consensus will soon shift to my thinking. In short, the belief statutory restrictions on pay will force financial professionals to leave London will prove an elephant sized error. So S too in fact all the elephants casting shadows over London's financial facing office market. After all as European banks struggle to meet increased leverage ratios and reserve requirements we need remember the world is filling with banks whose financial fortunes are rapidly improving and so too their global ambitions. And these are banks after all that have little ittle regulatory problem with investment banking sitting alongside retail activities.

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Banking Banking-on positive change in London’s property markets market

Let us tackle the largest elephant in the room: concerns New Growth Economies cannot continue to grow as Old O World Economies conomies struggle. To all those who cannot accept the the former happens as the latter does, I will repeat the observation made three or so more years ago in response to the same concerns: "It It would take some shock to interrupt the economic juggernauts that are China, India, Brazil et al. Collectively the world's 's new growth economies promise something more robust than the fragile growth fictions that were the dot com and US sub-prime sub prime booms. Major geo-political geo shocks notwithstanding, we remain convinced that over the next ten years the world's new growth economies es will deliver commercial finance its best ever decade." My premise is the New World not can,, but already HAS decoupled from the Old. It will no doubt spark controversy to claim it unlikely in seven years any of the world's twenty largest banks will have their origins in Europe, the United States or Japan. Many will ask how one can possibly believe the banking titans that are Deutsche, Santander, JP Morgan, Bank of America and Citigroup will have lost their places in the world's premier league by 2020? My response is that rankings are e after all relative. This said there are a number of quite legitimate points of order to my reasoning. One of the more obvious ious is my decision - in maps 7 and 8 forr 2013 and 2020 - to place HSBC in China, when the world’s largest bank by assets remains, despite threats to leave, l very much head-quartered quartered in London. Also contentious is failing to identify another London-based London bank, Standard Chartered tered as a top 20 bank in 2020. It is after all currently the world's 26th largestt bank, and has what seems a perfect NGE pedigree to lift it swiftly up the rankings. Let us just reflect on its history. It was formed - in 1969 - when The Chartered Bank of India, Australia and China merged with Standard Bank of British South Africa (Standard ndard Bank of South Africa is I must add now wholly independent). independent) Furthermore, Standard Chartered boasts boast as its largest shareholder one of the Government of Singapore's sovereign wealth vehicles, Termasek Holdings. With all this in mind I recognise I may have h low-marked marked Standard Chartered. The reality however is that for the purposes of a positive London thesis it does not really matter where Standard Chartered is ranked precisely, or indeed whether we identify HSBC as more Chinese than British. The simple fact is that global fortunes of both are certain to be positive itive and so will ensure a favourable impact on the Dockland and City office markets where each has an important representation. representation It is also worth noting that HSBC owns one-fifth one of China's Bank of Communication, which I have placed sixteenth in the global top-20 by 2020 (see see Table 1 and Map M 8). Returning to the issue of where Deutsche Bank, Bank Citigroup and Santander will be in terms of their London investment banking occupancy by 2020, it is instructive to note one has a c20% stake in China's Hua Xia Bank (currently the world’s 114 largest bank by market cap), the second a similar holding of China Guangfa Bank (China Life the insurer – see table 13 – also owns one fifth of which) and the e third has a majority interest in Santander Brasil. Brasil I would go as far as to suggest both of these Chinese banks and the Brazilian are each ambitious enough to quite credibly reverse into the LondonLondon based investment banking activities of their foreign shareholders. Only time of course will tell. My point is that whilst I well recognise the specifics of my analysis for bank evolution are open to question, I have every confidence in the generality;; Western banks will be supplanted by those from NGE's and London will be their home from home, and NO elephant will stand in the way of this.

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6 Summary It is often instructive when considering an event that gains excitable attention to put it into historical context. And nowhere is this more relevant than the decision to scale-down the activity of BarCap and the resulting black dog mood that journalists and other “opinion formers” have caused to descend on London and its future as a sizeable investment banking hub. It is important to bare in mind this is not the first time Barclays has retreated from investment banking. In the late 1990s, it sold its BZW (Barclays de Zoete Wedd) equities divisions to what was then still known as Credit Suisse First Boston. At around the same time the once mighty NatWest Markets found itself unwanted by its parent NatWest Group, then like Barclays one of the world’s top twenty largest banks (see Map 5). For the record NatWest Markets was acquired by Deutsche Bank. However and to prove just how capricious banks can be, like Barclays, Nat West would return to investment banking. It did so not in its old guise admittedly, but in the form of RBS; which having acquired Nat West Group went on to - disastrously - buy ABN Amro which then boasted a sizeable London investment banking presence. My point is that brands come, go and often come again, from London’s investment banking market. Let us reflect on the crashes of RBS, Bear Sterns, Lehman et at with a repeat of our thoughts from our piece of 2010: “There is no denying London has been shocked by a series of financial sector failures. Once impressive brands have been badly tarnished, and some have disappeared entirely. There is also the threat by some participants to decamp. Whether London does suffer departures, history has proven that its finance and business sectors are bigger than any individual marquees. One has only to reflect on how many once great brands disappeared, from British & Commonwealth to Barings, to realise that London marches on, despite the initial shocks of losing such names. That London has lost a number of key financial brands should not distract from the fact "the club is bigger than its players". Over the years London has seen names come and go, with the emblems that once adorned buildings long forgotten. Crucially, new brands have always come to replace those lost, more often amply filling the place of the departed. Whilst we cannot predict which precise brands will top buildings in a decade’s time, we can be fairly certain where these names will originate: nations that up till now have barely been present.” The reality is London’s financial service sector experiences a cycle of life. As we watch Deutsche Bank, Credit Suisse and others scaling-down their investment banking activities across London we should remember they were once expanding as others were in their descent. Moreover, just as the Japanese came in large number only to then largely disappear, the demise of that particular national cohort could be explained by factors specific to Japan (see appendix 9), failings luckily for us the world’s New Growth Economies (NGE’s) do not collectively share. And as I write I am in no doubt senior managements of commercial banks across the NGE’s are deliberating how best to position themselves in international investment finance, many quite remarkably with currently no presence in the field, but with significant ambitions all the same. Their deliberations are certain to involve plans to develop sizeable overseas hubs, and there should be little doubt London is top of their target list of locations. If one analogy best captures my thinking on successfully targeting London's new major office occupiers, it is a fishing one. Specifically, the place to aim isn't at the fish you are stalking, but rather just ahead of it. To predict who will arrive and build office footprints across London one should look not to names going backwards in the ranking of the World’s largest banks but to those now outside the top twenty and moving swiftly forward. And what this exercise reveals is as much a startling under-representation of the new banking behemoths as an over-representation of the old. Matters become even more fascinating if we look at what the list of the World's top twenty banks may look like in 2020. Name after name is largely unfamiliar, with practically no investment banking franchise. And to those unconvinced these will develop such capabilities and make London their major overseas hub, I would ask why will they behave any differently from the Japanese in the 1980's or the Europeans through the 1990s? The precedent is, to me at least, compelling. From Russia's Sberbank to Commonwealth Bank of Australia, ANZ and Westpac that straddle Australia and New Zealand, and across to a raft of Chinese and Brazilian banks, a sizable London office representation is certain to soon prove a prized target. Returning to my fishing metaphor, as enticing as they are as a catch for London it surely seems sensible to help them get "hooked" by dangling desirable new offices and improved transport infrastructure ahead of them? Fortunately, this is precisely what is being done. I am not claiming profound prescience in anticipating a wave of new occupiers across London's office market. This belief is rather an understanding of a history which has shown that knowing how the world's ranking of banks IS altering provides a very accurate idea of how London's office occupancy WILL evolve. A revolving door is more appropriate an image than a fire exit. A revolving door: bringing in entrants looking very different from those departing; a revolving door where arrivals outnumber those departing; and, a revolving door where those arriving will be even more ambitious to grow their numbers than those departing once were.

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It is important to distinguish the way the world's new banking titans will engage with London from how its fast growing insurance giants do so. Sure the latter may well seek some direct occupational exposure. The more significant impact of the “new world insurers” will be in using London's long-standing underwriting expertise to reinsure their ever growing primary business. And as they do head-count across London’s insurance and reinsurance markets will - continue to - grow impressively. After all, as the wealth of the emerging world grows so will the need to protect it. Moreover, since a reliable income flow secured on acknowledged assets is actuarially desirable so one imagines British real estate will prove of interest (sic) to the world’s ever richer wealth managers. And whilst London property will be “prime” in this desire provincial Britain will attract increasing interest from overseas investors. One must also not underestimate the potential for rental growth over coming years, if occupational demand proves as strong as I suggest it might. In a number of areas demand will quite simply overwhelm supply, even where the latter’s speculative new build activity is thought by some to be arriving into a demand vacuum. I do not subscribe to this thinking. Let me repeat a point that I consider crucial: the commercial banking world is seeing old names replaced by new ones. And those rising up the rankings share the same ambitions once held by those sliding; to grow their investment banking operations to meet the needs of their corporate and retail customers; desperate to avoid being left behind by their local competitors. This was seen with the Germans, and the French and the Dutch and the Swiss. And we will see precisely the same thing with the Russians, Chinese, Brazilians, Australians and Canadians. If there is a burden of proof it rests with those who say it will be different this time. Human behaviour, particularly when it comes to finance, seems inviolate, repeating itself time after time. Let me draw to a close by again quoting from “An employment outlook for London in 20/20: “By our own admission there is no precedent for where the world finds itself, let alone London. One can, however, draw very loosely on past experiences. A part rehearsal for what awaits London was the wave of financial arrivals from Japan in the 1980’s. If the BRIC economies were to match the presence in London of Japan’s banks on a per capita basis, the number of incremental jobs would exceed 180,000, almost twice our estimate. This of course is extreme. What it illustrates however is just how high the stakes are.” This research has dwelt very much on the demand-side of London’s finance facing office market. It has done so precisely because this is the angle from which there is greatest uncertainty (read disquiet) over the outlook. This said, I cannot end without reference to prospects on the supply-side and for the final time I draw upon “An employment outlook for London in 20/20”: “We admit that if London's planning and development were solely in the hands of those who did not share our 20/20 vision of 100,000 new financial and business sector jobs, it would be unprepared for the windfall we predict. Fortunately a number of new business districts beyond the City of London are being made ready. At the same time the connecting transport infrastructure is being improved; long overdue yes, but improved nonetheless. Luckily for London, the invisible hand of good business seems to be at it again.”

23



7 Post script - A poem for London

Some see only challenges to filling London's speculative new build, I see widespread opportunities. Some see the UK and by association London, married to the “OId World” of Europe and the US, I see it being drawn ever closer to the new. Many sense foreboding about economic events unfolding across Europe and the United States, I prefer to see an A to Z of nations booming across all Continents, Some despair at the downsizing across London of European and US investment banks, I see the considerable potential created for new arrivals in this lessening participation. Many refuse to recognise precedent for where London's office market finds itself, I see many similar points in its recent past, when London saw an influx of new occupiers the names of which few would have predicted only a few years earlier. Some see increased banking regulation as a barrier to London's occupational growth, I see this not being relevant to many new arrivals, and the City anyway being the best placed developed financial centre to deal with it. Many fear each of London's new business districts will compete with one another, I see strength in numbers and synergies as rapidly improving transport networks better link them. Some obsess with the investment banking side of London's financial service sector, I see its insurance industry already flourishing, as its investment banking side will no doubt do again. Too many think of London's office market as the domain of finance, I see many other growing service sectors for which it is an important World hub. Some see little reason for the myriad of the new economies to use London as their main overseas base, I can identify nowhere more suitable. Many dismiss my optimism by pointing out the arrivals I predict have not shown themselves, My response is, not yet. Whilst some see London's commercial property glass as half empty, I see it ready to be filled by an extensive cellar of New World wines all coming to vintage.

24



8 Appendix: Now, what about prospects for the UK economy? Having focused on global economic issues and their impact on aspects of the London economy I consider more general growth prospects for London.

8.1 Heading towards that imposing London THING For many years I regularly travelled along the M4 from its beginning to end, and the only road-use charge I faced for the privilege was crossing the original Severn and subsequently the more robust Second Severn Bridge. Having visited friends in lovely but distant Pembrokeshire I must admit to seldom looking forward to the long drive home. Heading east I would journey along the A40 for close to two hours then, on arriving at its Welsh start around Swansea, I knew I would be on the M4 for at least three hours more. Towards the end of this monotonous journey I would always look forward to one particular road sign. This would tell me I was now only 44 miles from “LONDON THING”. Although not sympathetic to graffiti, I never failed to smile on seeing this particular instance of it for I quite frankly liked the idea of The LONDON THING. That graffiti has long been removed. The THING however, just seems to get bigger and bigger. Indeed, whilst concerns are growing that Britain will technically enter a triple-dip in Q1, few can seriously believe London is doing so. After all, much of the weakness in the UK’s GDP is due to maintenance disruptions to activity in the oil and gas extraction and refining sectors, not areas in which London has particular exposure. And if I am proven right, and recent UK GDP estimates are revised higher, the reason will be in the services LONDON has a special THING about. Chart 15: Gross Value Added: London versus “the Rest”

Chart 16: London: workforce

10

6

8

5 % change, yr on yr

6

Millions

4 2

4

3

0

2 -2 -4

1 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

London

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

UK less London

Total

Chart 17: London: population and household numbers

Chart 18: London: net-migration 90

4.5

8.5

Finance & business services

80

8

4

70

3

7

Thousands

3.5 Millions

Millions

60

7.5

50 40 30 20

6.5

2.5

10 0

6

2

-10

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Population Households (rhs)

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Source: ONS, Toscafund

I have long championed London’s positive economic outlook and nothing I have seen over recent months gives me cause to revise my view (see charts 15 to 18). Indeed, as resident in cities across Europe face up to significant economic challenges they must surely wish they were heading quickly towards that London THING. Having focused on global economic issues and more specific London ones, I now look at macro prospects for the wider UK.

25



8.2 UK labour market bull Judging from what one is hearing and reading, the UK economy remains seriously weak. I am told that whilst the UK may have emerged from its double-dip in Q2, this victory should be stripped from the records because its GDP was performance enhanced by the Olympics’. The UK economy, I am being told is weak across the board; in its manufacturing, construction and services. I am also told UK property is vulnerable; vulnerable on its residential side from weak mortgage lending and in its commercial side, from poor take-up in its office, retail and industrial space. And yet, the UK’s employment data doesn’t seem to want to play to this sombre mood music. According to official figures as many Britain’s are in private work today as have ever been; well over 30 million of us in fact, records being broken both measuring those who are employees and those self-employed (charts below). Chart 19: UK employees less public workers

Chart 20: UK self-employed

27 4.4

26.5 26

4.2

25.5

4 Millions

Millions

25 24.5 24

3.8 3.6

23.5

3.4

23 3.2

22.5 22

3 1990

1994

1998

2002

2006

2010

2014

1990

1994

1998

2002

2006

2010

2014


The data tells us there have been surges in self-employment and service sector headcount (consistent with the UK’s index of services, see chart 24). There has been a surge in the number of workers not born in the UK (chart 22) and more generally an impressive rise in employment across the private sector, countering the fall in the public (chart 25 and 26). As for manufacturing, the year-on-year move is positive. Indeed, some notable British based car makers have announced ambitious plans to expand capacity in response to strong demand from NGE’s. In fact, across Britain's engineering sectors, the complaint has been less poor order inflow, as a poor supply of skilled labour. All the more reason then to take heed of these words from the recent report by Michael Heseltine (“No Stone Unturned: In pursuit of growth”, October 2012): “The ideal solution is a well-managed immigration system that is open and welcoming to those who can address our skills gaps and add value to the economy”. Let us return to the here and now. There will be those pointing to recent data and warning it may be flattering to deceive for the future. Chart 21: UK-born employed

Chart 22: Non-UK born employed

27.5

3

27

2.5

26.5

Thousands

Thousands

2 26 25.5

1.5

1 25 0.5

24.5 24

0 1990

1994

1998

2002

2006

2010

2014

1990

1994

1998

2002

2006

2010

2014


Let me make clear I am not a naïve optimist and accept things can change for the worst. However, I see little reason why the UK labour market as a whole should begin to soften, unless hit by an entirely new exogenous shock. This said, there will no doubt be those who point to the gathering global economic storm as ominous for the UK. I would reply with these 26



two points. First, the global economic threat is being exaggerated because the capability of NGE’s to drive themselves forward is being understated. Second, the undeniable challenges facing mainland Europe will, if anything bolster the UK economy, as labour and capital evacuate into it and as they do provide a boost not a brake. To repeat, what has become something of a mantra of mine, the UK will do well not DESPITE the unpleasant economic events unfolding across Europe but BECAUSE of them. Chart 23: UK workers in manufacturing & construction

Chart 24: UK workers in services 35

6

120 Workforce employed in Services

30

5

100

25 4

80

Millions

Millions

20 3

60 15

2

40 10

1

20

5

0

0 1990

1994

1998 2002 Manufacturing

2006 2010 Construction

2014

0 1990

1994 1998 2002 Workforce employed in Services

2006 2010 Index of Services (rhs)


Chart 25: UK public sector workforce

Chart 26: UK private sector workforce

6.6

24.5

6.4

24

1.5 million

23.5

6.2

23 Millions

Millions

6 5.8 5.6

0.64 million

22.5 22 21.5

5.4

21

5.2

20.5

5

20 1990

1994

1998

2002

2006

2010

2014

1990

1994

1998

2002

2006

2010

2014


I cannot consider the UK economy without dealing with a part of it which has been a cause for weakness in employment and a major contributor to disappointing GDP; construction. Aside from the technical issues of how construction activity is measured and then accounted for within GDP data, there is this point to consider. There appears little shortage of large scale projects out there. From adding nuclear power capacity to the £8bn development of an iconic London power station, across to investing in rail, road and air transport networks. There are many other construction developments to consider from London’s South Bank along to Vauxhall, there seems to be a wide array of large projects in the pipeline across the UK. Yes many are in London. But London is a very large part of the UK; accounting for one third of its GDP in fact.

27



Chart 27: Population comparison: Germany vs. UK

Chart 28: UK employment: total vs services 36

Millions

31

26

21

16 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Total UK Workf orce

Total UK services

Source: UN Population division, ONS, Toscafund

I have already presented our outlook for the UK out to 2020 and indeed beyond in the Discussion Paper "Britain’s got Growth" (31st May). I will not repeat myself here other than to reprise one line from that piece: “Of all the measures that will capture Britain’s strength in numbers, few are more powerful than the fact by 2050 it will have overtaken Germany as Europe's largest economy by GDP and population.” To this I should have added overtaken Germany by how many people are employed across it. Let me close this short section with this thought. From 2014 the UK’s comparative economic recovery will I am convinced have been recognised, and so too the worsening problems across mainland Europe, including Germany. For its part the United States cannot continue as it is. And when the US does suffer a “monetary shock”, it will make Europe’s problems all the worse, since the euro will necessarily move ever more uncompetitively higher relative to the dollar. For the UK and sterling, strength can and will be coincident; and yes too can coincide as economic challenges grow across the “old world” of mainland Europe and the United States. In all my musings on London and the UK I have not considered the referendums that loom (yet more elephants!). I try to redress their omission next.

28



8.3 Pathological thinking The chart below is an unashamedly simple illustration of the paths the UK could follow over coming years. After all it faces one definite and a potential second referendum, contingent on the result of the next General Election. And there a chance the latter will have to be re-run in the event of an inconclusive outcome. Figure 3: Possible paths (shaded central-case & GDP forecasts based on central-case)

Source: Toscafund (*Outright or in coalition)

Not only can no outcome be entirely dismissed, each will no doubt be given a different probability according to ones viewpoint. Indeed, the probabilities as I see them today will no doubt change with time. Furthermore, one could include many other events to the figure, each with their own contingent outcomes, all of which with knock-on effects; for instance elections across Europe and the political changes that result. Even England qualifying – winning! - the World Cup in 2014 would have to be considered as having an effect on “nationalist sentiment”. Most important of all there is the issue of how events unfold economically, within the UK and across Europe. Allowing for all the fog, I am committing myself to the blue-shaded central case predictions captured in the figure above and predicated on the GDP forecasts for the UK and Germany shown in the background. My central-case (shaded blue in figure 3) begins with next year’s referendum resulting in Scots rejecting independence. This would of course mean Scotland still being in-parliamentary-play for the next General Election. When this is held in May 2015, its outcome will turn crucially on economic fortunes, and these I believe will be more favourable to the Coalition than they currently are. With a following economic-wind and a UKIP-neutralising EU referendum pledge, I expect David Cameron to still be Prime Minister once the counts are complete. Indeed, I believe Cameron’s prospects will be helped by developments within Scotland even in the wake of a No to independence and the continuation of Scottish seats in Parliament. Let me explain my reasoning. Having failed in its independence ambitions I am convinced the SNP will “dash for Dev-Max”, moving as many powers as possible from Westminster to Holyrood. In doing so MP’s representing Scottish constituencies would be expected, as a matter of protocol, to sit-out “West Lothian Questions” - Labour would of course resist. If this were indeed the case it would make even a slim Coalition/Conservative majority “workable”. I accept there is a chance May 2015 sees a repeat of February 1974, and a short-lived minority Government followed by a second vote, and unwelcome uncertainty in between. Only time of course will tell, but as I have said my expectation is David Cameron will remain as Prime Minister and press ahead with a referendum in 2017 on the UK’s membership of the EU. As for the idea the Liberal-Democrat Party shifts its coalition allegiance to the Labour Party, well, all I can say is such a change in partnership would be extremely unlikely were Nick Clegg still Liberal Democrat leader. There is of course the chance Labour wins an outright majority. From the perspective of the economics contained in this research this outcome would change nothing. 29



Returning to a continuation of a Cameron Government from 2015 I have little doubt a referendum on EU membership in 2017 would result in a vote for continuity, just as I expect it to be when Scots go the polls next year. However, I believe the backdrops for these two votes will be quite different. For Scotland, the decision to remain united will spur nationalists onto devolving as much power as they can. By contrast I believe the outcome of the EU referendum will be heavily influenced ahead of it by Westminster gaining considerable devolution of its own. So much then for my central-case, what some might of course see as the “pigs flying” scenario. What of others? However low I personally chose to put its probability, it is still possible Scots vote for independence in 2014 (and then depart the Union in March 2016). In fact in the event of this “tail outcome”, I would be forced to adjust the probabilities I attach to each subsequent branch of the decision tree in figure 1. Scottish succession would not actually make me revise lower the probability I attach to David Cameron remaining Prime Minister. In fact, few can doubt that his prospects would be helped by the absence of Scottish Westminster seats with their skew to the Parliamentary Labour Party, who hold 41 of the 59 seats north of the border. The Conservatives, by comparison, hold a solitary Scottish seat, and the Liberal Democrats 11, out of a total of 650 Parliamentary seats. The schematic below shows how, had Scottish seats been excluded in the 2010 General Election, David Cameron would have held a 9 seat majority. Figure 4: The 2010 Westminster election with and without Scottish seats

2010 General Election Majority 326 Conservative 306

Conservatives f all 20 seats short of majority

0

200

400

600

Conservatives achieve a 9 seat majority

305 Conservative

Majority 296

2010 Westminster Election (without 59 Scottish Seats) Source: Toscafund

Whilst not making me alter the course of the next General Election sans Scotland, the latter’s independence would force me to revise upwards the probability I attach to the rump of the UK voting to exit the EU; not making it probable, simply less unlikely. My reasoning is that Scottish independence could not fail to create a back-draft of English nationalism (Wales too seeing an upsurge). In fact, were London's economy to follow the impressive growth I expect, and ripple benefits outwards around England, this too would help the cause of EU-secessionists, claiming as they would, “we can go it alone economically”. Having covered “British issues” I turn now to an issue on which so much else hinges, China continuing to record impressive economic momentum, something which some observers claim is unlikely. I dismiss such concerns out of hand and argue that far from China imitating Japan’s boom to bust experience it will have learnt from it.

30



9 Appendix: Fear not, Japan is no role model for China I have penned this short appendix in an effort to reassure. Specifically to reassure those who whilst accepting China et al will replay (on a far larger scale) the occupational take-up across London’s office market once seen when the tenants were Japanese, European or US financial institutions, fear the same unfavourable denouement at some point in the future. Let me focus on why Japan in particular is no role model for China. Yes Japan’s economy and its financial institutions having grown and grown, then deflated along with the wider Japanese economy. And yes, this forced a retreat from London office occupancy. No, this is not a path China et al are certain to follow. They will avoid it precisely because they will have noted Japan’s errors. They will also be protected from a similar fate because, quite frankly, it is less a case of what Japan did wrong, as what little it did right during its economic boom years. There was for instance the failure to use its wealth to acquire “dirty assets”, the way we are seeing China do so. Rather than acquire resource wealth Japan chose to make trophy purchases, buying parts of Manhattan and Piccadilly, whereas China has been buying mines in Mozambique, Peru and resource assets more widely. And as much as vanity assets were all very attractive, they did not provide the resources Japan is so woeful in providing for itself. There was also Japan’s terrible demographic profile, a low birth rate combining with an aversion to immigration. For whilst there are those who see China’s demographics as yet another elephant in the room being widely ignored, I would claim this is one more illusion. Yes, China’s population will most likely peak by 2020 at c1.4billion before heading lower. But no, this will not prove the economic challenge some are suggesting. Indeed, my demographic concerns across “emerging” economies are directed more towards Mexico, South Africa and India, than China (see charts 29 and 30). Monetarily too Beijing has been handling matters far better than Tokyo did when it was being pressured by Washington to allow its currency to appreciate. Yes, Beijing has allowed the remninbi to strengthen over recent years (chart 9). But no, it has not allowed it to surge on the gradient Tokyo sanctioned from 1985 (chart 3). In terms of internal economic potential China is an entirely different proposition to the Japan of the 1980’s. For one Chinese households are as significantly under-consumed today as their Japanese counterparts were over-consumed in the 1980’s. Consequently, improvements to China’s terms of trade will result in more sustainable demand growth than was delivered from 1985 to a Japan whose homes were already filled with consumer durables. For another thing, a more flexible remnimbi will set in motion what is needed for China to develop a sovereign debt market and with it the huge potential for China to attract foreign capital on a scale not seen up until now. This capital will allow Beijing to continue its huge internal infrastructure building programme, one that will consume a considerable quantum of natural resources and so lift fortunes across NGE’s. Chart 29: Population comparison: India vs. China

Chart 30: Population comparison: Japan vs. Australia

Source: UN Population division, Toscafund

This then is my closing point in this section. Beijing's looming action on currency will not jeopardise China's economic growth. Rather it will ensure it continues (charts 11 and 12). This is not to say there will not be considerable collateral elements to a shift in the dollar-RMB exchange rate. From the perspective of the euro-zone the prospect is - and this will of course sound strange given events around its periphery - of the euro strengthening against the dollar – chart 49 - and so adding to the euro-zones severe economic pains, and those of its banks.

31



10 Appendix: London’s employment outlook by sector Chart 31: London employment total

Chart 32: London employment in finance & insurance 0.48 0.46

5.5

0.44 0.42

Millions

Millions

5.3

5.1

4.9

0.40 0.38 0.36 0.34

4.7

0.32 4.5 0.30 2000 2004 2008 2012 2016 2020 2000 2004 2008 2012 Source: ONS, Toscafund; chart 31 is the sum of charts 32 through 42. Vertical lines indicate date we issued “An employment outlook for London in 20/20”.

2016

2020

Chart 34: London employment in professional, scientific and technical activities

Chart 33: London employment in real estate 0.15

0.75

0.14

0.70

0.13 0.65

Millions

Millions

0.12 0.11 0.10 0.09

0.60 0.55 0.50

0.08 0.45

0.07

0.06 0.40 2000 2004 2008 2012 2016 2020 2000 2004 2008 Source: ONS, Toscafund – vertical lines denotes release in January 2010 of our Discussion Paper “An employment outlook for London in 20/20”

2016

2020

Chart 36: London employment in accommodation & food service activities

0.45

0.45

0.43

0.43

0.41

0.41

0.39

0.39

0.37

0.37

Millions

Millions

Chart 35: London employment in information & communication

2012

0.35 0.33

0.35 0.33

0.31

0.31

0.29

0.29

0.27

0.27


32

2012

2016

2020



Chart 37: London employment in administrative & support service activities

Chart 38: London employment in education 0.40

0.54 0.38 0.52 0.36

Millions

Millions

0.50 0.48 0.46

0.34 0.32

0.44

0.30

0.42

0.28


2012

2016

2020

Chart 40: London employment in retail trade; including wholesale, repair of motor vehicles & motorcycles

Chart 39: London employment in arts, entertainment & recreation 0.20

0.69 0.18

0.67

Millions

Millions

0.65 0.16

0.14

0.63 0.61 0.59

0.12

0.57 0.10 2000

0.55 2000 2004 2008 Source: ONS, Toscafund – vertical lines denotes release in January 2010 of our Discussion Paper “An employment outlook for London in 20/20” 2004

2008

2012

2016

2020

Chart 41: London employment in transportation & storage

2012

2016

2020

Chart 42: London employment in remaining* sectors 1.40

0.30

1.38 1.36

0.29

Millions

Millions

1.34 0.28

0.27

1.32 1.30 1.28 1.26 1.24

0.26

1.22 0.25 2000

2004

2008

2012

2016

1.20 2000

2020

2004

2008

Source: ONS, Toscafund – vertical lines denotes release in January 2010 of our Discussion Paper “An employment outlook for London in 20/20” * Remaining sectors include Agriculture, Mining, Manufacturing, Utilities, Construction, Public administration, Health and other activities.

33

2012

2016

2020



11 Appendix: Currencies Chart 43: US dollar per yen

Chart 44: US dollar per Indian rupee

0.016

0.030

0.014 0.025 0.012 0.020 0.010

0.008

0.015

0.006 0.010 0.004 0.005 0.002

0.000

0.000

2002

2004

2006

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2010

2012

2014

2016

2018

2020

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2016

2018

2020

2016

2018

2020

Source: Bloomberg, Toscafund

Chart 45: US dollar per Chinese renminbi

Chart 46: US dollar per Australian dollar

0.35

3.00

0.30

2.50

0.25 2.00 0.20 1.50 0.15 1.00 0.10 0.50

0.05

0.00 2002

0.00 2004

2006

2008

2010

2012

2014

2016

2018

2020

2002

2004

2006

2008

2010

2012

2014


Chart 47: US dollar per Russian ruble

Chart 48: US dollar per Brazilian real

0.06

1.20

0.05

1.00

0.04

0.80

0.03

0.60

0.02

0.40

0.01

0.20

0.00 2002

0.00 2004

2006

2008

2010

2012

2014

2016

2018

2020

2002


34

2004

2006

2008

2010

2012

2014



Chart 49: US dollar per Euro

Chart 50: US dollar per Canadian dollar

1.8

1.80

1.6

1.60

1.4

1.40

1.2

1.20

1.0

1.00

0.8

0.80

0.6

0.60

0.4

0.40

0.2

0.20

0.0 2002

0.00 2004

2006

2008

2010

2012

2014

2016

2018

2020

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020


Chart 51: US dollar per pound

Chart 52: Euros per pound

4.0

1.8

3.5

1.6 1.4

3.0

1.2 2.5 1.0 2.0 0.8 1.5 0.6 1.0

0.4

0.5

0.2

0.0 2002

0.0 2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2002


35

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022



12 Appendix: Top 100 Banks by market capitalisation Table 2: Top hundred banks by market cap in 2013 (bracketed numbers denote our expectation of top 20 in 2020) 51 Oversea-chinese Banking Corp ICBC (1) China 1 52 Banco Santander (Brasil) China Construction Bank (2) China 2 Wells Fargo & Co US 53 HDFC Bank Limited 3 54 Svenska Handelsbanken HSBC Holdings (3) China 4 JP Morgan Chase & Co US 55 Bank Central Asia 5 56 Malayan Banking Bhd Bank of China (4) China 6 57 State Street Corp Agricultural Bank of China (5) China 7 Citigroup US 58 United Overseas Bank 8 Bank of America US 59 Qatar National Bank 9 60 State Bank Of India Australia 10 Commonwealth Bank of Australia (6) 61 Societe Generale Australia 11 Westpac Banking Corp (7) Mitsubishi UFJ Financial Japan 62 Swedbank Ab 12 63 Intesa Sanpaolo Canada 13 Royal Bank Of Canada (8) 64 Unicredit Spa Australia 14 Australia and New Zealand Banking (9) 65 Bank Mandiri Persero Brazil 15 Itau Unibanco (10) 66 DNB Asa Australia 16 National Australia Bank (11) 67 Skandinaviska Enskilda Toronto-Dominion Bank (12) Canada 17 Spain 68 Turkiye Garanti Bankasi 18 Banco Santander 69 Bank Rakyat Indonesia Perser Brazil 19 Banco Bradesco (13) 70 Sumitomo Mitsui Trust Holding Russia 20 Sberbank (14) US 71 BB&T Corp 21 Goldman Sachs Group 72 ICICI Bank Bank Of Nova Scotia (15) Canada 22 BNP Paribas France 73 Grupo Fin Santander 23 Japan 74 Siam Commercial Bank 24 Sumitomo Mitsui Financial US 75 Standard Bank Group 25 US Bancorp UK 76 Akbank 26 Standard Chartered Switzerland 77 China Everbright Bank 27 UBS 78 Firstrand Bank Of Communications (16) China 28 UK 79 Credit Agricole 29 Barclays Japan 80 Grupo Financiero Inbursa 30 Mizuho Financial Group UK 81 Public Bank Berhad 31 Lloyds Banking Group Spain 82 CIMB Group Holdings Bhd 32 Banco Bilbao Vizcaya Argenta Nordea Bank Ab Sweden 83 Danske Bank 33 UK 84 Grupo Financiero Banorte 34 Royal Bank Of Scotland Group 85 Turkiye Is Bankasi China 35 China Merchants Bank (17) US 86 Ping An Bank Co 36 Morgan Stanley 87 Kasikornbank China 37 China Minsheng Banking (18) Credit Suisse Group Ag Switzerland 88 VTB Bank 38 89 Suntrust Banks Canada 39 Bank Of Montreal (19) 90 Caixabank Brazil 40 Banco Do Brasil (20) German 91 National Bank Of Kuwait 41 Deutsche Bank China 92 Bangkok Bank Public Co 42 Industrial Bank Co US 93 Banco De Chile 43 PNC Financial Services Group Capital One Financial Corp US 94 Fifth Third Bancorp 44 US 95 PKO Bank 45 Bank Of New York Mellon Corp Canada 96 KBC Group 46 Canadian Imperial BK Of Commerce Singapore 97 Bancolombia 47 DBS Group Holdings China 98 Resona Holdings Inc 48 Hang Seng Bank China Citic Bank Corp China 99 Yapi Ve Kredi Bankasi 49 China 100 Turkiye Halk Bankasi 50 Shanghai Pudong Development Bank

Singapore Brazil India Sweden Indonesia Malaysia US Singapore Qatar India France Sweden Italy Italy Indonesia Norway Sweden Turkey Indonesia Japan US India Mexico Thailand South Africa Turkey China South Africa France Mexico Malaysia Malaysia Denmark Mexico Turkey China Thailand Russia US Spain Kuwait Thailand Chile US Poland Netherlands Colombia Japan Turkey Turkey

Source: Bloomberg, Toscafund: Bank of China and Bank of China (Hong Kong) have been merged in this list

Japan

36

Europe

US

NGEs



13 Appendix: Top 50 Insurance and pension companies by assets Table 3: Top fifty insurance companies in 2013 by assets (bracketed numbers denote our expectation of top 20 in 2020)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

ING (1) AXA (2) Allianz (3) MetLife (4) Prudential Financial (5) AIG (6) Generali (7) L&G (8) Aviva (9) Manulife Financial (10) Aegon (11) Prudential (12) CNP Assurances Dai-ichi Life Zurich Financial (13) Ping An (14) Munich Re Hartford Financial Power Corp of Canada (15) Standard Life Swiss Re China Life (16) Sun Life Financial (17) Lincoln National Tokio Marine

Netherlands France Germany US US US Italy UK UK Canada Netherlands UK France Japan Switzerland China Germany US Canada UK Switzerland China Canada US Japan

26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Swiss Life Cathay Financial T&D Holdings MS&AD Samsung Life Phoenix Group Allstate Aflac AIA Group (18) Genworth Financial Ageas NKSJ Travelers Cos Suncorp-Metway (19) ACE Loews China Pacific (20) Shin Kong Financial Bâloise Group Storebrand Mapfre Hannover Re Korea Life Unum Group Fondiaria-SAI


Japan

Europe

US

NGEs

Table 4: Tenancy Agreement signees 20 Fenchurch Street (Walkie-Talkie) Amlin AON Corp Ascot Underwriting Kiln Group Liberty Insurance Markel RSA Tokio Marine

122 Leadenhall street (Cheesegrater) Amlin AON Corp

Source: Toscafund

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Switzerland Taiwan Japan Japan South Korea UK US US HK-China US Belgium Japan US Australia Switzerland US China Taiwan Switzerland Norway Spain Germany South Korea US Italy



Toscafund Discussion Papers Where in the world is this looming food price crisis? 1 March 2013 Britain’s Got Growth II: beating Germany on penalties, 17 January 2013 Seeing a quite different island in 20/20, 21 September 2012 Britain’s Got Growth, 31 May 2012 The building storm over Cyprus – Update, 18 May 2012 The Darkest of Greek Dramas: A Play for Survival, 16 May 2012 London 20/20 – Update, 30 March 2012 Update: Plotting North Korea’s path from regime-change to reunion, 20 December 2011 A Western Balkans crisis: A Europe wide problem, 2 November 2011 Plotting North Korea’s path from regime-change to reunion, 13 September 2011 Update: Scottish fiscal independence by 2015?, 13 June 2011 Cape Fear; South Africa’s chilling outlook, 18 March 2011 Scottish fiscal independence by 2015? 26 July 2010 Clouds darkening over Cyprus, 22 April 2010 Australia and Japan: The best and worst of the G20, 26 March 2010 Who could possibly laugh through a Greek Tragedy? 8 February 2010 An employment outlook for London in 20/20, 13 January 2010 An A to Z journey into the economic future, 14 December 2009 An outlook for Canada & Mexico: Seismic Continental drift, 10 November 2009 Taking lessons in history, 5 August 2009 The REAL interest rate story, 20 July 2009 Balkan Four pose a greater risk than the Baltic Three, 30 June 2009 Dissin’ the Dollar, 25 June 2009 Release the Baltic Three, 3 June 2009

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