Emerging market investors had a rough ride in 2013, with the asset class down 2% over the year compared with positive returns in the 30% range for developed markets. Any hopes of a recovery in 2014 now look pretty slim with all eyes on Russia and how its involvement in the Ukrainian crisis will unfold. For investors diversified into emerging markets, the ride looks set to get a whole lot rougher.
We’ve already seen the Russian Micex index take a tumble and interest rates in Russia rise in order to prop up the rouble, but the big concern now will be the butterfly effect on other emerging markets.
Mainly, will we see an exodus of money from wider emerging markets if investor confidence in the asset class falls, precipitating a prolonged collapse of returns?
Also, let’s not forget Russia’s rising political and economic base and the power it can exert on developed markets. In my book, geopolitical uncertainty doesn’t differentiate between emerging and developed markets and this latest political crisis certainly has the capacity to put a spoke in the wheel of recovery in Europe.
Forthcoming money laundering directive
Which brings us neatly on to Europe and the EU’s Fourth Money Laundering Directive due to come into force by the end of 2014.
Originally proposed to strengthen laws and improve transparency on private companies being used as money laundering operations, the idea of having a public register of beneficial company owners gradually grew to including beneficiaries of private trusts.
Although this regulation creep was opposed by UK Prime Minister, David Cameron, he was unable to convince the rest of the EU that private trust structures in common-law jurisdictions are standard financial planning tools used in the main to protect the assets of the next generation.
It’s sort of easy to see why the argument didn’t work, taking into account that the vast majority of the EU operates by civil law, with only the United Kingdom and Ireland as common-law jurisdictions. In civil law, trusts are seen as opaque structures that defy forced-heirship rules and, oh yes, avoid tax.
Up until this point, regulations to improve transparency have relied on professionals at the coal face working to ‘know your customer’ regulations, information logged with relevant local regulatory authorities and access to this information available through a growing number of international transparency deals.
Indeed, despite mostly being outside of EU jurisdiction, offshore centres have spent a lot of time and effort working to comply with EU transparency legislation as a sign of their qualification to sit at the top table of international financial centres.
In terms of financial planning and the use of trusts, the reaction to a public register from non-EU financial centres that use common law, yet are keen to stay on the EU’s good side, will be interesting.
Looking further down the line, are we witnessing a more intrusive change of direction on transparency legislation from the EU in which the battle lines between civil and common law use in financial planning are being mapped out? If so, what next?
David Howell is chief executive of Guardian Wealth Management