Who Holds Sovereign Debt and Why it Matters

Economic

Summary:

Globally, government debt has increased substantially since the onset of the Covid-19 pandemic and geopolitical tensions. This columns asks who the investors that hold government debt are, and whether the ownership composition matters. Overall, as debt increases, non-bank investors, in particular investment funds, take up more of this debt than other investor groups. Emerging market sovereign investors are highly vulnerable to the presence or absence of non-bank investors. The behaviour of such investors is thus crucial for understanding sovereign debt sustainability.

The ability to issue debt is an important instrument at the government’s disposal. Sovereign borrowing can help buffer the economy from the impact of adverse macroeconomic shocks, but can also make a country vulnerable to financial distress. The sharp increase in fiscal expenditures and debt issuance during the pandemic period, as well as concerns from the fallout of war, have brought more urgency to understanding how a government can borrow.

Despite a diverse set of investor groups in the sovereign debt market, the academic literature has typically focused upon individual creditor groups in isolation. For example, the sovereign-bank nexus (‘doom loop’) literature focuses on domestic bank investors (e.g. Perez 2014, Bocola 2016, Fahri and Tirole 2018, Chari et al. 2020, Baskaya et al. 2024). Similarly, the emerging market (EM) debt literature tends to focus on the role of foreign banks (e.g. Eaton and Gersovitz 1981, Arellano 2008, Mendoza and Yue 2012, Arellano et al. 2020). A further area focuses on explaining foreign official investors (e.g. Wooldridge 2006, Ghosh et al. 2017, Bianchi and Sosa-Padilla 2024). Nevertheless, these various literatures leave some important questions open. Who are the investors that hold government debt? And does this ownership composition matter? In our recent paper (Fang et al. 2024) we address these questions.

Who holds sovereign debt?

To establish who holds sovereign debt, we assemble a dataset that distinguishes the holders of each country’s sovereign debt into foreign and domestic investors and then into three subgroups within those categories: banks, other ‘non-bank’ private investors, and official creditors consisting largely of central banks. Assembling these data series provides annual holdings by investor groups for 101 countries over 1990-2018.

Figure 1 highlights both the growing importance of government debt as well as how the investor base varies in our data set. Panels (a), (b), and (c) show the aggregate investor holdings-to-GDP shares for advanced economy, emerging market and developing economy debt, respectively. These figures show distinctive differences within the groups. For all groups, the foreign bank and non-bank shares have been stable over time. However, Panel (a) of Figure 1 shows that the proportion of foreign official holdings has become larger for advanced economies, as central banks have increased their holdings of safe haven government debt presumably for reserve purposes. Moreover, Panel (b) illustrates how the proportion of foreign official creditor holdings have declined for emerging markets. By contrast, the advanced economy holdings of domestic central banks has expanded over time, tied to the use of unconventional monetary policies and other programmes.

Who Holds Sovereign Debt and Why it Matters_1

These trends raise an important question. When the size of debt increases, which investors absorb the additional amount? To answer this question, we calculate a measure of the proportional increase in holdings taken up by each investor group when the amount of debt increases. Since we have measures of all investor holdings, this percentage increase in debt must add up to one.

Figure 2 depicts the percentage change across the six investor groups. As the figure shows, domestic non-banks (DomNB) and foreign non-banks (ForNB) take up the highest proportional increase at 39% and 23%, respectively. Importantly, foreign non-banks play a much stronger role in expanding holdings in response to new debt than do foreign banks that take on only 5% on the margin. Moreover, these marginal holdings responses by non- banks are larger than their average holdings shares, given by the orange circle. By contrast, domestic and foreign banks take on less than their average holdings. We find that these patterns are robust to decomposing country groups, splitting subsamples, and evaluating crisis periods.

Who are the non-bank investors?

This finding raises the follow-up question: who are these non-bank investors? To shed light on this question, we turn to more disaggregated data sets that provide investor holdings of (i) US Treasuries, (ii) UK gilts, and (iii) euro area securities holdings.

In Figure 3 we use the US and UK data to examine how much debt is taken up on the margin by the domestic non-bank subgroups. As shown for US Treasuries in Panel A, do- mestic non-banks are the primary marginal absorbers of US Treasuries ($0.56 of every dollar issued). But Panel B also shows the share of this response further broken down into sub- groups of: (a) money market funds (MMF), (b) household and hedge funds (HH/HF), (c) insurance and pension funds (I & P), (d) other financial institutions including investment funds (OthFin), and (e) non-financial corporations (NonFin). These measures show that in- vestment funds are the most important group since money market funds (MMFs) together with hedge funds (HF/HH) correspond to 68% of the pick up of sovereign debt by domestic non-banks.

Figure 3, Panel C shows a similar decomposition for holdings responses of UK gilts but with a different domestic non-bank group into only three categories: (a) investment funds and other similar institutions (Funds & Oth), (b) insurance and pensions (I&P), and (c) non-financial corporations (NonFin). For the UK market, the insurance and pensions sector plays a much larger role for non-bank holdings than found in US Treasuries, accounting for about half of the marginal absorption of the domestic non-bank sector. Funds and other non-bank financial institutions account for the other half.

Who Holds Sovereign Debt and Why it Matters_3

To understand the responses of foreign nonbank groups, we consider holdings by euro area investors of non-euro area government issuers.

As shown in Figure 4, other financial institutions that are largely investment funds represent roughly 80% of the marginal response of variations in holdings of non-euro area holdings regardless of whether broken down into advanced economy or EM issuers. Insurance and pensions are the second most important, but non-financial corporations and households are essentially unresponsive to the outstanding debt variations.

Who Holds Sovereign Debt and Why it Matters_4

Why does ownership matter?

We showed above who holds sovereign debt and how the composition of investor holdings varies when that debt expands on the margin. Overall, as debt increases, non-bank investors take up more of this debt than other investor groups. In our paper, we further consider how these investors respond to the price of debt, finding that non-bank investors are also more responsive to reductions in the price of debt. We then ask how much these differences matter to sovereign borrowers, focusing upon EM borrowers.

Figure 5 shows the impact on the funding cost of an average EM sovereign in our sample from a hypothetical 10% increase in debt. Based on the ”Actual” ownership composition in the data, the first column shows an increased borrowing cost of 51 basis points or, based upon the average yield for these countries of 8.8%, an increased cost of about 5.8%. Alternatively, the next column shows that if sovereigns only source debt from investors that are not banks (”No Banks”), then the cost impact would be an average 4.6% increase in financing costs. However, if the non-bank investors are not present, as in the last column (”No Nonbanks”), the costs would rise by 74 basis points, reflecting an 8.4% increase. As these measures indicate, EM sovereign borrowers face significant vulnerability to losing non-bank ”investment fund” investors.

Who Holds Sovereign Debt and Why it Matters_5

Concluding remarks

The rising levels of government debt worldwide in the wake of the Covid crisis and geopolitical tensions have made answers to questions about their repayment urgent. At the front of those questions is: who holds this debt and does it matter to borrowers in this market? Based upon our analysis, the answers to these questions are striking. First, private financial institutions that are not banks absorb substantially more of the variation in outstanding government debt than other investor groups. Further decomposing this non-bank investment group using country/region-specific data, we find that investment funds are the primary drivers of this larger group. We then identify the propensity to provide funding for EM sovereigns across investor groups and use these to calculate the cost of financing sensitivities to EM sovereign borrowers.

These countries face the greatest sensitivity of financing cost against losing non-bank investors compared to any other investment groups. We conclude that EM sovereign investors are highly vulnerable to the presence or absence of non-bank investors. Thus, the behaviour of non-bank investors is crucial for understanding sovereign debt sustainability.

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IFS

Economic

The UK’s economic performance over the past two decades is hard to describe as anything other than a policy failure. Productivity growth has been dire – with per-worker growth over the past decade the weakest on average since at least 1850. The innovative engine behind the UK economy seems to have stalled. In 2014, a little under 6% of all firms in the UK (14,000) were ‘high-growth firms’ – employing at least 10 people and growing their headcount by more than 20% per annum for three years running. This has fallen to just under 4% now. Macroeconomic resilience also seems to have suffered as low growth, low investment and weak income growth have all fed back into one another.

The growing global challenges surrounding ecological and geopolitical transition should add to a sense of urgency. These imply further economic headwinds to growth in the years ahead, alongside heightened volatility. More physical investment will be required to ameliorate these effects. But this does not constitute a strategy for addressing the UK’s existing growth shortfall. High debt levels, a structural external financing gap and elevated rates volatility mean the stock of outstanding debt is a growing vulnerability. In this sense, the UK likely finds itself in a worse position than the US or the Euro Area.

The UK needs to lift growth despite these growing challenges, in the context of limited policy space. Here we think the focus should be on boosting intangible and ICT investment, alongside broader efforts to improve diffusion from the technological frontier. Both growth and resilience will need to be areas of focus. The UK, as a small open economy, remains particularly exposed to future shocks. Efforts to bolster resilience, as well as better coordinating monetary and fiscal policy, will be crucial to navigating these shocks better in future. In our view, without countercyclical ‘burden sharing’ between monetary and fiscal policy, structural efforts to lift trend growth are unlikely to be successful.

The cyclical outlook we present here is one of near-term ‘sogginess’ and medium-term optimism. Globally, we think the near-term outlook is likely to remain somewhat weak. Supportive factors for demand – in particular, significant fiscal support – are beginning to fade. Continued structural uncertainties in China – recent stimulus notwithstanding – remain a headwind across Europe. And US growth exceptionalism does appear to be gradually fading as the impact of tighter monetary policy feeds through. We expect global activity to fall back in the second half of this year. This implies fading external support for UK growth as we move into 2025. External inflationary influences are also likely to continue to fade.

The UK economy has surprised to the upside since the start of 2024. We now expect real GDP growth of 1.0% this calendar year, compared with a forecast of just 0.1% back in January. But these welcome improvements are not yet indicative of a secure economic recovery. Instead, they primarily reflect transient improvements in capacity as energy prices have fallen back. For now, the outlook for the core domestic demand engines for the UK remains subdued. A sharp improvement in real incomes since the start of the year has not yet translated into stronger consumer spending. Firm sentiment and investment intentions have improved but remain on the defensive side. And public consumption is likely to prove constrained. We expect growth to remain positive but weak in the near term, with real GDP increasing by 0.7% next year.

A procyclical monetary policy approach risks slowing the recovery in our view. Structural changes have slowed the transmission of monetary policy into economic activity. The effects of higher interest rates may become more material as many parts of the economy are forced to borrow once more; around half of the cumulative effect of monetary policy is still to be felt. This will suppress demand, just as the supply side of the economy begins to recover. Better news in the latter case reflects lower energy prices, and rebalancing between labour and non-labour inputs in production. This is cause for optimism, although monetary headwinds will make it difficult to capitalise immediately. We expect growth to accelerate markedly through 2026 and 2027 as monetary and fiscal constraints are eased.

The outlook for the household sector should improve modestly in the months ahead, although household sentiment remains somewhat defensive. Much will depend on developments in the household saving rate. The ‘cash’ saving rate – i.e. excluding the imputed equity of pension funds – has climbed from 3.4% just before the pandemic to around 8% now. This has been pushed higher by a combination of uncertainty, consumption smoothing and balance sheet impairments. In the months ahead, we think the saving rate may come down modestly as uncertainty dissipates – although we expect the rate to remain elevated as households overall are significantly less well off now than before the pandemic. We expect private consumption to increase by only 0.6% in 2025, compared with 1.5% in the Bank of England’s baseline estimate. The outlook for firms should improve as supply growth picks up and costs decline, though any gains will come from a weak base. Business investment should recover gradually as interest rates fall.

Excess labour demand – present through 2022 and 2023 – has now been eliminated. We think most recent data suggest the labour market is continuing to loosen. Vacancies have continued to trend down over recent months, if perhaps at a more moderate pace than last year. Private employment dynamics also look weak, at least according to the PAYE data. As public sector employment growth slows, we think the unemployment rate will increase to 4.9% next year and 5.3% in 2026. The risks here seem broadly balanced, although a flattening in the Beveridge curve would, if anything, imply a faster pass-through from lower vacancies into higher unemployment from here. We expect a modest loosening of the labour market to weigh on wage growth and consumer confidence into 2025.

The UK’s inflation process over recent years has been primarily ‘conflictual’ in that high wage growth and services inflation both reflect efforts to make up for large losses associated with an adverse terms-of-trade shock. This, we think, has contributed to sticky wage and services price inflation over recent months. But increasingly we think there are signs that these effects are beginning to fade, with the real income loss associated with the shock now having been more than fully absorbed. Evidence of further ‘agitation’ around either inflation or nominal wage growth seems limited, and confined to a few specific quarters. And forward expectations for both wages and prices are now broadly consistent with the inflation target. The natural decay in the UK’s inflation processes primarily reflects the relatively high ‘cost of conflict’ rather than the demand-destructive impact of higher rates. Inflation seems to have broadly returned to target without much direct input from monetary policy. To the degree that the latter now weighs on demand and slack, we expect to undershoot the inflation target through 2026.

The Monetary Policy Committee (MPC) remains in an inflation-averse state of mind. Having cut rates for the first time in August, we expect the committee to ease policy only gradually over the coming months as evidence around inflation continues to accumulate. However, if the labour market does loosen through the first half of next year, we think that is likely to signal the committee should pick up the pace. In our view, a continued focus on the upside risks around inflation, while understandable, is increasingly inappropriate. We expect the MPC to cut rates into accommodative territory through 2025–26 as policy refocuses on the risks around the labour market, and monetary policy is forced to correct for a procyclical monetary and fiscal stance through 2023 and 2024.

After two decades of stagnation, change is needed. The outlook is for a period of near-term sogginess, followed by a more robust cyclical acceleration as supply-side improvements continue to materialise. This may provide a window of opportunity. Already, in the past decade, the gap between what the UK economy can support, and what has societally been promised, has widened. This is combined with the potential for an intermittently binding external liquidity constraint that also poses more acute risks. In a context of growing international rates volatility, the UK does not have time to spare.

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Alex

Economic

Malaysia’s landscape is dotted with special economic zones (SEZs) — such as the Northern Corridor Economic Region (NCER), East Coast Economic Region (ECER), Johor-Singapore Special Economic Zone (JS-SEZ), Sabah Development Corridor (SDC) and Sarawak Corridor of Renewable Energy (SCORE) — each designed to catalyse economic growth, attract foreign direct investment and foster industrial development. These zones encompass a diverse array of sectors, including digital technology, high-value manufacturing (green and biotechnology) and ecotourism, alongside specialised industries like aquaculture (SCORE), commodities (SCORE), oil, gas, petrochemicals (ECER, JS-SEZ, SCORE) and logistics (JS-SEZ, SDC, NCER).

All SEZs share a common challenge around skills and industry-ready talent, which is especially pronounced in technologically advanced sectors like green technology, biotechnology, digital technology and logistics. As they wrestle with infrastructure, connectivity challenges and market outreach among other issues, if the critical skills gap is not adequately addressed, the economic viability of the SEZs will come into question, resulting in bottlenecks in achieving development objectives and attracting investors.

The skills required in digital technology and artificial intelligence (AI)-exposed jobs are changing 25% faster than in less AI-exposed jobs, according to PwC’s 2024 Global AI Jobs Barometer, presenting an urgent need for adaptive training programmes and other interventions. Technical and vocational education and training (TVET) is increasingly seen as a potential solution to bridging the skills gap, with an increased allocation of RM6.8 billion in Budget 2024, along with an additional RM200 million in June 2024 to encourage more youths to participate in TVET programmes.

The Madani government has also taken steps to rebrand TVET through greater public awareness initiatives and shape societal perceptions of technical education. The recent proposal for the Forest City special financial zone (SFZ) to be included under the JS-SEZ also raises interesting observations around how TVET can complement initiatives to attract skilled workers.

It is encouraging to note the opportunities in TVET to address the skills gap in the SEZs, particularly around specialised skills.Targeted TVET programmes, driven by partnerships between industries, educational institutions and government, align with market needs. Work-based learning, apprenticeships and soft skills training ensure students gain practical experience, enhancing their employability and assuring companies of a competent, skilled and adaptable workforce — key to attracting investment.

Observations from other economies can be a useful reference point. This includes the Asean-ROK TVET Mobility Programme, which builds on South Korea’s successful economic transformation experience. The programme has facilitated robust public-private partnerships through collaboration between educational institutions, industry stakeholders and government agencies, paving the way for the development of industry-related curricula and skills training programmes, among other initiatives, and providing participating companies access to a global skilled workforce. More recently, the Emirati Human Resources Development Council (EHRDC) signed a memorandum of understanding with the Jebel Ali Free Zone Authority (Jafza) in Dubai to establish a framework to enhance the employment of Emirati nationals in companies operating in Jafza. The partnership is expected to promote participation in practical and vocational training among Emiratis, ultimately bolstering the United Arab Emirates’ position as a global trade and logistics hub.

Plugging the fundamental issues at the heart of TVET growth

Despite TVET’s potential, implementing it across the SEZs comes with several obstacles. One of the most significant challenges is funding, especially when considering the comprehensive ecosystem required for effective TVET programmes. To maximise TVET’s impact, the next budget can focus on addressing sector-specific needs by decentralising TVET governance. This would allow funding to be directed more efficiently towards SEZ-specific industries within their respective zones or states. Furthermore, fostering innovation and competitiveness will require increased investment in sectors demanding high technical expertise and innovation potential, such as digital technology, green technology and high-value manufacturing.

Targeted and practical incentives would need to be in place, including subsidies for employers hiring TVET graduates, as well as funding for workforce development and grants aimed at encouraging digital adoption among businesses.

The speed of change and expectations for new skill sets is another issue that employers need to grapple with. To address the demands of having regular curriculum updates and alignment with industry changes, it will be helpful for industry stakeholders to be incentivised for public-

private partnership efforts where businesses can co-develop curricula, provide mentorship and real-world experiences. An area of opportunity could include developing innovative financial incentives in the form of tax credits or deductions for companies that invest in educational programmes or workforce training initiatives. The Human Resource Development Corporation (HRD Corp) funds and levies can be strategically utilised to encourage more industry-led educational collaborations.

For a more sustained outcome, companies can be incentivised to increase their training budgets by introducing fund schemes where HRD Corp matches the investment made by companies in developing and delivering training programmes. In addition, dedicated industry partnership grants can be developed for TVET institutions that partner with industry players to develop and deliver joint training programmes. These grants can cover costs related to curriculum development, equipment and instructor training. To ensure TVET programmes are focused on relevant skills and competencies, TVET institutions should develop competency-based training frameworks in collaboration with industry players.

A critical issue hampering TVET implementation concerns regional disparities in TVET access and quality, particularly in remote areas such as SCORE and SDC, which exacerbate the skills gap. Without equal access to high-quality TVET programmes, these regions risk falling behind in terms of development and competitiveness.

A possible approach is to standardise training practices through cross-SEZ collaboration. By sharing best practices and resources, SEZs can work towards the standardisation of skills and qualifications, promoting a consistent level of expertise across the country. For industries across these SEZs to be able to quickly identify new skill requirements, robust talent architecture with supporting GenAI integrated skills could be applied. Initiatives like student-trainer exchanges between SEZs can also foster adaptability and enhance learning experiences.

Iterative approach to change

Addressing the skills gap in Malaysia’s SEZs is critical for long-term success and competitiveness. The various SEZs have tremendous potential for driving economic growth and attracting investment. To effectively realise value from TVET opportunities, we need to address the talent-related challenges that are currently slowing its growth while ensuring that its execution is both meticulous and strategic.

To ensure the successful implementation of initiatives, it is crucial to establish a dynamic tripartite task force comprising government representatives, education institutions and industry leaders. This collaborative approach will ensure that TVET programmes are well aligned with industry demands, fostering continuous feedback and improvement. Drawing lessons from the TVET approaches of other economies and implementing targeted policy recommendations can pave the way for SEZs in Malaysia to become a model of economic dynamism and innovation.

Source: The edge markets

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SAXO

Economic

Market on edge: 6 key tactics to prepare for earnings season

Earnings season is here again, a crucial time for investors as companies reveal quarterly performance and provide updates on forward guidance. This period offers valuable insight into how individual stocks and sectors are performing. For long-term investors, earnings season isn’t just about short-term price fluctuations; it’s about assessing whether the underlying fundamentals of their holdings are intact.

The earnings kickoff: early insights from PepsiCo

The earnings season began with PepsiCo (PEP), which often provides an early glimpse into consumer spending trends. PepsiCo’s recent report exceeded Wall Street expectations, with strong demand for beverages and snacks despite inflation. This positive signal helps set the tone for consumer discretionary and staples sectors, reinforcing the idea that companies with strong brand loyalty can outperform even in times of uncertainty.

For many years, however, Alcoa (the aluminum giant) was the “unofficial” start of earnings season. While its importance has waned, Alcoa’s results were closely watched because aluminum’s widespread use across industries made it a key barometer for global economic health.

Preparing for earnings season

Review current holdings: has your long-term outlook changed?

The key question for long-term investors is: Has my long-term outlook for any of my holdings changed? Earnings reports provide backward-looking data and forward guidance. If a company significantly adjusts its guidance or reveals concerning trends, it could change the investment thesis.

For long-term investors, individual quarterly earnings are less critical than a fundamental change in the company’s position. If you own a stock like Apple (AAPL), and management signals strong demand, short-term dips can be noise rather than a reason to sell.

Actionable tip: Before earnings season, review your portfolio. Identify companies where the long-term outlook may have shifted. Are there rising risks (e.g., sector disruption, management changes) that make you question holding the stock over the next 3-5 years?

And, as you review your holdings, keep in mind that not all information moves the market right away. There’s something called the post-earnings drift—a phenomenon where stock prices continue to drift in the direction of the earnings surprise for days or even weeks after the report. This can give you time to act on new information while others are still processing the news.

Entry and exit decisions: before or after earnings?

Many investors debate whether to buy a stock ahead of earnings or wait. Buying before earnings can capture upside if the company beats expectations, but comes with the risk of a sharp selloff if they miss.

Buying before earnings: If confident in long-term fundamentals and believing the market underprices the stock, entering before earnings can make sense. For instance, if tech stocks are overly punished, buying companies like Alphabet (GOOGL) or Microsoft (MSFT) before their results could be a good move.

Buying after earnings: For risk-averse investors, waiting until after earnings may be safer. You may sacrifice some upside but gain clarity on the company’s performance.

Also, keep an ear out for the earnings whisper—the unofficial number that circulates among investors and traders. It’s often based on rumors or insider sentiment, and stocks can sometimes move sharply if they hit or miss this whispered expectation, even when they meet the official consensus.

Sector-specific risks and opportunities in a rate-cutting environment

If we’re entering a rate-cutting cycle, dynamics shift across sectors, especially for financials. While rising rates often benefit banks by boosting net interest margins, rate cuts tend to compress margins, potentially pressuring large institutions like JPMorgan (JPM), Wells Fargo (WFC), and BlackRock (BLK).

Key sectors to watch:

Financials: Banks may see pressure on profitability due to lower net interest margins, but improved loan demand and reduced credit risks could help.

Technology and growth stocks: Lower rates favor growth stocks, as the discount rate for future earnings falls. This could benefit companies like Apple (AAPL) and Microsoft (MSFT).

Real estate: Lower rates generally benefit real estate companies and REITs as borrowing costs decrease and property values rise.

Consumer discretionary: Lower borrowing costs may boost consumer discretionary sectors. Companies relying on consumer spending, such as automotive and retail, could benefit from increased activity.

And beware of the Thursday surge—most companies avoid reporting earnings on Mondays, leaving Thursdays as one of the busiest days for earnings releases. This allows time for results to be digested over the weekend, making Thursday afternoons and Friday mornings a critical time for investors.

Expect volatility, but stay focused on the long-term

Earnings season often brings volatility as markets react to reports and guidance. For long-term investors, short-term price swings are less important. If your investment thesis is based on long-term growth, a single earnings miss is unlikely to change that.

Actionable tip: Stick to your strategy. If confident in the fundamentals, avoid knee-jerk reactions based on short-term results. Volatility can present buying opportunities for high-quality stocks.

Be cautious if a company delays its earnings report, though. While not always a cause for concern, a delayed earnings release could signal internal challenges or financial disclosure problems.

Opportunistic adjustments: trim or add?

Earnings season can be a time to reassess whether to trim overvalued positions or add to those with strong fundamentals but overly pessimistic market sentiment.

Actionable tip: Evaluate whether to take some profit from high-flyers or add to undervalued positions. Reassess your sector allocation based on earnings and macro conditions.

Also, keep in mind that some companies strategically time their earnings releases. Bad news might be reported when another company is making headlines, while good news may be saved for quieter days to maximize attention. This timing tactic can affect how the market absorbs earnings news.

Analyst expectations vs. actual performance

One critical factor during earnings season is how a company’s performance aligns with analyst expectations. Even when a company posts strong results, failing to meet market expectations can trigger volatility. For long-term investors, understanding whether a miss is due to one-off factors or a structural issue is crucial.

Conclusion: stay disciplined and focused on fundamentals

As earnings season unfolds, it’s easy to get caught up in market reactions. However, long-term investors should focus on the bigger picture: Is the company still delivering on its growth story? Are management’s initiatives on track? If yes, short-term fluctuations matter far less than the company’s ability to create long-term value.

By preparing ahead of earnings season—reviewing your holdings, making strategic decisions, and focusing on long-term fundamentals—you’ll be well-positioned to navigate volatility and capitalize on opportunities.

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

Despite a general decline in venture capital funding, artificial intelligence startups saw another quarter of strong cash injections.

According to data compiled by analytics company Stocklytics, AI startups raised $11.8 billion during the past 90 days, accounting for 30% of total venture capital funding in the third quarter of 2024.

The surge occurred despite the United States increased export restrictions on AI chips, valuation uncertainties, and earlier disappointing earnings from startups, creating a mixed landscape for investors.

According to the analysis, although investors are being more selective about which AI startups to back, their overall interest remains strong.

“The $11.8 billion of fresh capital is close to quarterly figures seen throughout 2023 and 2024, excluding the absolute record of $29.6 billion raised in Q2 2024,” noted Stocklytics analyst Neil Roarty.

The deal count declined, with the total number of transactions dropping by 28% year-over-year to 79 in the third quarter, down from 110 in the same period of 2023.

“The larger deals have kept sentiment in the sector positive,” said Roarty. The overall VC funding activity also slowed down, falling by 13% year-over-year.

Data from Crunchbase shows that investors have pumped close to $53 billion into the AI sector so far this year, or 35% more than in the first three quarters of 2023. Notable deals include OpenAI’s recent $6.6 billion round at a $157 billion valuation.

With this quarter’s figures, the cumulative funding amount in the AI sector now tops $241 billion, with US companies raising almost 65% of that, or $155 billion. In total, Asian AI startups have raised $53 billion, while European AI firms have secured $30.2 billion.

One of the key betting strategies of venture capitalists is the convergence of AI and blockchain technology.

“I am particularly excited about opportunities at the convergence of AI and Crypto, although even that distinction will sound dated in a few years,” Pantera Capital’s portfolio manager Cosmo Jiang told Cointelegraph in a previous interview.

Investment manager VanEck announced a new venture fund on Oct. 9 targeting AI and crypto startups, with $30 million available for pre-seed and seed-stage companies.

Source: COINTELEGRAPH

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Brookings Institution

Economic

During the last two decades, it has become commonplace for presidential candidates on both sides of the aisle to pledge to not raise taxes on at least some income groups. For example, in 2008 John McCain promised to not raise taxes on any income group, whereas Barack Obama pledged to not raise taxes on individuals earning less than $200,000 and on families earning less than $250,000. Likewise, in 2016 Donald Trump pledged to reduce taxes for the middle class, and Hillary Clinton pledged to not raise taxes on individuals earning less than $250,000. Most recently, in 2020 Joe Biden pledged to not raise taxes on anyone making less than $400,000, and in 2024 Kamala Harris re-affirmed this commitment.

These pledges are clearly made to insulate “middle-class” households (and middle-class voters!) from increases in their taxes. Therefore, they are also a statement about who should bear the burden of financing federal spending and how progressive the tax system should be.

But these pledges also complicate the development and implementation of good tax policy. By design, they place a large share of the tax base “off the table,” making it harder to raise revenue. Less obviously, these pledges also make it harder to raise revenue from higher-income households because they effectively exempt a portion of higher-income households’ income from taxation. This makes it harder to increase the progressivity of the income tax. Finally, these pledges can make it politically or practically difficult to enact and implement new tax or spending programs. This has caused some awkward episodes in the past and could make it difficult to negotiate a future deficit reduction deal by taking certain policies off the table before the discussion even starts.

To illustrate the revenue and distributional effects of these types of pledges, we estimate the effect of increasing statutory income tax rates by 10% under different income exemption thresholds using the Urban-Brookings Tax Policy Center microsimulation model. We consider the effect of five salient thresholds: $0; $100,000; $250,000; $400,000; and $1,000,000. In this exercise, the function of the pledge is to exempt taxpayers under the threshold from the tax increase. Specifically, we assume the threshold applies to married couples filing jointly based on adjusted gross income. The threshold for non-married filers is set to be half as large as that of married filers.

We apply the 10% tax increase to all individual income tax rates, including those that apply to capital gains and under the Alternative Minimum Tax (but not other taxes, like payroll taxes or the net investment income tax). In each simulation that we estimate, the change in tax rate for any group over the threshold is exactly the same—a 10% increase in all rates over the threshold. In other words, the only differences in revenues and tax rates across simulations arise from the change in thresholds. (To focus on the main points of this paper, we are assuming there is no change in behavior under alternative tax regimes.)

We assume these tax rate increases affect the 2025 tax year. We choose this base to ensure that the lower individual tax rates provisioned by the Tax Cuts and Jobs Act are still in effect. The TPC microsimulation model predicts that total tax receipts will be $4.8 trillion in 2025 and that the average federal tax rate paid by Americans will be 19.8%.

Note that our policy example, even without a threshold, would increase tax rates more in absolute terms for higher-income taxpayers because it is a proportional increase in tax rates within a system already characterized by steeply progressive tax rates. For example, under this policy the lowest bracket tax rate rises by just one percentage point (from 10 to 11%), whereas the rate facing those in the top bracket increases by 3.7 percentage points (from 37 to 40.7%).

Figure 1 illustrates the change in revenue from this policy example based on different thresholds. If there were no threshold—i.e., there were no pledge to exempt certain groups from income tax increases—and taxes increased by 10% across the board, this policy would raise $221 billion in additional tax revenue in 2025 (illustrated by the orange bar) and would increase the average federal tax rate paid by Americans by 1.1 percentage points (the blue line).

The Implications of Pledging to Exempt Certain Households from Tax Hikes_1

Were the threshold no-tax-increase pledge set to be $100,000, this policy would instead raise $166 billion, a 25% reduction in new revenue relative to the no threshold scenario. At $400,000, this policy would raise $71 billion, and at $1 million, this policy would raise just $39.4 billion, or an 82% reduction in new revenue. In short, exempting large portions of the tax base constrains the ability of this policy to raise revenue.

The steep decline in revenue reflects the fact that each increase in the threshold eliminates a larger share of taxpayers, and therefore income, from the tax base. For example, the $400,000 threshold excludes more than 95% of tax units.

Figure 2 shows how average tax rates change for each group as the threshold for the no-tax-increase pledge increases. With no threshold, the progressivity of 10% tax increase is clear: The average tax rate increases by just 0.3 percentage points for households earning less than $100,000, by 0.9 percentage points for households earning between $100,000 and $200,000, by 1.3 percentage points for households earning between $250,000 and $400,000, by 1.7 percentage points for households with earnings between $400,000 and $1 million, and by 2.4 percentage points for households earning more than $1 million. In other words, the increase in the average tax rate for the wealthiest households is eight times larger than for those earning the least.

The Implications of Pledging to Exempt Certain Households from Tax Hikes_2

As the threshold for the no-tax-increase pledge rises, the effect on the average tax rate for affected households falls. For example, if the threshold were set to be $100,000, the increase in the average tax rate for households earning between $100,000 and $250,000 would fall from 0.9 to 0.5 percentage points, a 44% reduction compared to a no-threshold policy. Likewise, if the threshold were set to be $400,000, the increase in the average tax rate for households earning between $400,000 and $1 million would fall from 1.7 to 0.7 percentage points, a 59% reduction.

Note, however, that the groups who benefit the most from increasing the threshold aren’t necessarily the taxpayers who appear to be directly affected. Figure 3 illustrates the average revenue loss per taxpayer from successive increases in the pledged tax threshold. Increasing the threshold from $250,000 to $400,000, for example, doesn’t reduce the taxes of anyone earning less than $250,000. Among taxpayers earning between $250,000 and $400,000, the average savings is about $640. But the savings are even larger for wealthier households under this threshold: Taxpayers earning between $400,000 and $1 million save about $2,500, and taxpayers earning over $1 million save almost $2,700.

The Implications of Pledging to Exempt Certain Households from Tax Hikes_3

Beyond limiting revenue and muting progressivity, these pledges make it harder to develop, reform, and implement tax policy. Without a doubt, the biggest tax policy choice facing the next Congress and Administration will be whether and how to extend the provisions of the Tax Cuts and Jobs Act (TCJA) that expire after December 31, 2025. Many of these provisions reduce various individual income taxes. The Congressional Budget Office estimates that a full extension of the TCJA would cost nearly $5 trillion over the relevant ten-year window. Some have proposed a more nuanced extension of the TCJA that maintains the individual income tax cuts but only for households under $400,000. Strictly adhering to this pledge, however, will introduce design complexities and behavioral distortions that are counter to central tenants of optimal tax policy.

For example, the TCJA not only lowered tax rates for most taxpayers but also changed a wide variety of provisions to simplify taxes and change the tax base, like nearly doubling the standard deduction, eliminating personal exemptions, increasing the child tax credit, limiting certain tax deductions, and reducing the impact of the Alternative Minimum Tax (AMT). Nearly three-quarters of the cost of extending the TCJA comes from extending the individual income tax provisions. Applying a no-tax-increase threshold into the negotiations over these expiring provisions will lock in not only the tax cuts below the threshold but also most of the tax cuts above the threshold because it will be difficult or unwieldy to apply one set of tax parameters (like the standard deduction or AMT relief) to taxpayers under the threshold but not to taxpayers over the threshold.

Likewise, the TCJA introduced a tax cut for individuals who earn pass-through income through the new Section 199A deduction. While the desirability of this tax policy has been questioned by economists, there is no doubt that this deduction provided a large tax cut for households that earn pass-through income, and a full extension of this tax cut would cost $700 billion over ten years. Limiting this tax cut to households earning less than $400,000 would introduce additional complexity to the tax code, especially for those taxpayers earning both wage and pass-through income, who will face trade-offs as their total income crosses the $400,000 threshold.

Beyond limiting revenue and distributional features, threshold pledges can introduce complexity in unexpected ways. For example, the latest estimate of unpaid taxes, or the net tax gap, totaled $625 billion in TY2020 and 2021. Fortunately, the Inflation Reduction Act provisioned $80 billion to the IRS to enhance its operations, and more than half of these funds were allocated to enforcement activities. However, some raised concerns that increased enforcement activity might yield tax revenue from households earning less than $400,000 per year. Consequently, the Biden administration pledged that there would be no change in audit rates among taxpayers earning less than $400,000. Why should tax cheats escape enhanced enforcement based on how much they report in adjusted-gross income (AGI) to the IRS?

These pledges can also make it hard to use the tax system to solve other social problems. President Obama was criticized for the Affordable Care Act (ACA), which expanded health insurance to millions of Americans, in part based on the argument that the ACA’s individual mandate violated his $250,000 pledge. The Social Security Trust Fund, which pays critical retirement benefits to millions of Americans, is funded by the Old-Age, Survivors, and Disability Insurance (OASDI) payroll taxes that apply to the first $168,600 in wages. The Trustees of the Social Security and Medicare trust funds recently estimated that the trust fund reserves will become depleted in 2035, after which there will only be sufficient income to pay roughly 80% of scheduled benefits. Many agree that an expansion of the OASDI payroll taxes may be necessary as part of the solution to shore up this critical U.S. safety net, but expanded payroll taxes would likely be viewed as a violation of a tax pledge. This restricts the ability of policymakers to rely on tax policy to address this looming crisis.

Finally, some progressive policymakers often point out that the U.S. is the only OCED country that does not mandate access to paid maternity leave all Americans, and they advocate for polices to offer paid family and medical leave. For example, the Family and Medical Insurance Leave (FAMILY) Act, recently re-introduced into the 118th Congress by Sen. Gillibrand (D-NY) and Rep. Rosa DeLauro (D-CT), would introduce a federal mandate for such benefits, funded by a payroll tax. This funding design is similar to the state-mandates that are currently in place in 13 states and the District of Columbia. Would implementing the FAMILY Act be a violation of the $400,000 pledge?

Ultimately, the trajectory of the U.S. federal debt cannot be ignored. The Congressional Budget Office projects that the deficit will total $2 trillion for the current fiscal year, and that the Federal debt held by the public will total 122% of GDP in 2034. And these projections were made under the assumption that the provisions of the TCJA will expire, as scheduled, after December 31, 2025. It is clear that new revenue will be needed to address this looming fiscal imbalance. It is also clear that while middle-class tax pledges may be good politics, they impose significant economic and practical disadvantages.

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The 2024 BRICS summit, to be held in Kazan, Russia, from October 22-24, will take place amid an increasingly tense geopolitical atmosphere. The crises in the Middle East and Ukraine are likely to dominate the agenda, as member states explore the future of the alliance and their nations’ roles within it. During the 2023 BRICS summit, the original members from which the axis takes its name (Brazil, Russia, India, China and South Africa) welcomed new members into the fold: Egypt, Ethiopia, Iran, the United Arab Emirates (UAE) and Saudi Arabia.

South Africa’s controversial bedfellows

Some in the international community have expressed mixed reactions to South Africa’s position within BRICS. Concerns are rife about the bilateral relations South Africa has built with authoritarian BRICS members such as Russia, China and now Iran.

Since Pretoria failed to condemn Moscow following its full-scale invasion of Ukraine in February 2022, South Africa’s relationship with Russia has come under scrutiny. Mr. Ramaphosa’s administration has been criticized by American diplomats as well as South African civil society for its close ties with Russia, but has still maintained its “non-aligned” posture. In defiance of the ANC’s position toward the Kremlin, and before becoming its coalition partner, the leader of the main opposition party in South Africa, the Democratic Alliance (DA), undertook a fact-finding trip to Kiev, demonstrating solidarity with the people of Ukraine.

In the leadup to the 2023 summit, the African National Congress (ANC)-led administration under President Cyril Ramaphosa reiterated its loyalty to the BRICS alliance by again refusing to condemn Russia. He went so far as to question the basis of the International Criminal Court (ICC)’s order to arrest Russian leader Vladimir Putin on South African soil if he attended the summit. South Africa’s diplomats controversially claimed that the ICC’s order interfered with South Africa’s sovereignty, and arresting him would be a “declaration of war.” Under pressure from civil society organizations, the press and opposition parties, President Ramaphosa eventually withdrew Mr. Putin’s invitation to attend the summit.

South Africa showcases its clout with BRICS expansion

During the 2023 summit, South Africa emerged not as a junior partner surrounded by global giants in the expanding BRICS club, but as a major player. Pretoria used its role as host of the summit to make it clear that the country is willing to defy Western powers, and will openly maintain close ties with Russia even amid Western sanctions against the country.

The 2023 summit was also significant because gates were opened for additional members. Iran’s presence raised questions about the direction of alliance, as it implied its goal may have moved beyond building an alternative and representative global trade system – toward challenging United States foreign policy. The new member states are not known for their open competitive democratic systems, but this seems not to have concerned the ANC-led government. President Ramaphosa lauded the inclusion of Iran, Saudi Arabia, Egypt, the UAE and Ethiopia in the bloc as “a new chapter” in building a fairer world.

Recent global tensions have further distanced South Africa from Western powers. Pretoria brought Israel to the International Court of Justice (ICJ) on charges that the country might be involved in acts of genocide in Gaza. This move was in direct defiance of the U.S., who saw the court route as unfavorable toward attaining lasting peace in the region. South Africa’s official opposition party, the Democratic Alliance, also opposed the government’s stance on Israel, which they saw as hostile and condoning the militant Hamas.

Domestic pressure creates uncertainty about BRICS summit

The ANC entered South Africa’s recent election, held on May 29, carrying this baggage. Yet, instead of openly engaging with different stakeholders on geopolitical issues, the ruling party was resolute and uncompromising in defying what it saw as bullying by Western powers and the unfounded sewing of discord by local civil society organizations and opposition parties. The election resulted in the ANC losing its majority and being forced to join with the opposition Democratic Alliance as a coalition partner, as well as other small opposition parties.

The 2024 BRICS+ summit will be the first since the ANC lost full control. As a senior partner holding the coalition government together, the Democratic Alliance will demand more accountability from the ANC on contentious issues such as BRICS’s expansion to include Iran. While the ANC retains key and influential portfolios like foreign relations and defense, the DA’s West-leaning policy outlook will be difficult to reconcile with the direction the ANC seems to want to lead BRICS.

Pretoria’s decisions will now bear the signature of more than one political party. This signals a new era in foreign policy. The upcoming BRICS summit in Kazan will witness a different South Africa.

Source: GIS

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Source: GIS

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