ReviewUSIS

• Nepalfacespost-earthquakerecovery• PossibleEU'Brexit':Shoulditbefeared?• ThelatestdevelopmentsatAppleInc.• Concernsoverthenew'snoopers'charter'• Techfirms'mergers&acquisitionsboom• Bondsell-offreshapestheyieldcurve• Splunkmaintainspowerfulmomentum

June 2015 UoSInvestment.com

Contents

Contents USISReview June 2015

Editors,Contributors&Sources

Editor'sLetter 3

SpecialReport

Should we fear a 'Brexit'? 4

Economics&GlobalAffairs

Nepal's post-earthquake recovery will slow the economy 6

Technology

Apple Inc: Promotion of Jony Ive and a new music streaming service 8

The return of the 'snoopers' charter' sparks fear over data security 10

Banking&Finance

Tech firms look set for a wave of mergers and acquisitions 11

Investments&Strategy

Bond sell-off drives up the yield curve 12

Splunk shows promise as business continues to surge 14

Spotlight

A history of the USIS Twikker Fund 15

AWordfromtheEditor

Welcome to the June 2015 edition of the USIS Review.

Each edition of the Review brings with it its own challenges. This particular edition was written during the examination period and understandably this meant that many of our usual con-tributors were otherwise engaged with studies. However, we wanted to ensure the magazine remained as a monthly publication and so we are immensely grateful for those who wrote for us this month, as they went above and beyond to maintain the delivery of high quality content. We would especially like to thank Jonathan Leblanc, an alumnus of the society and former writer for the USIS Review, who returned to contribute an article to the Investments & Strategy section.

This issue takes a particular focus on the shock Conservative win in the May 2015 general election. Our writers examine some of the controversial policies that will arise from this victory, including the upcoming EU Referendum and possible 'Brexit', as well as the 'snoopers' charter’, which will give the UK government more powers to monitor digital communication.

The issue also considers the economic recovery following Nepal's April 2015 earthquake, as well as the latest news about Apple Inc. and the rise of mergers and acquisitions amongst tech companies. Finally, we undertake an examination of the bond sell-off in April and produce an analysis of the promising future of Splunk Inc.

Our special thanks go out to the University of Sheffield Enterprise Zone and the Sheffield Man-agement School for their on-going support with this publication.

We hope you enjoy this issue of the USIS Review.

JamesCarne&RachelQuartlyEditors

USISReview June 2015 Editor'sLetter2 3

Editors: James Carne & Rachel Quartly

Contributors: Ryan Bassindale, James Carne, Robbie Haszeldine, Jonathan Leblanc, Brandon Pieters & Rachel Quartly

Layout&Design: Ryan Bassindale

Sources: Bloomberg, Bloomberg Businessweek, Thomson Reuters, Financial Times, Economist, Investors Chronicle, Wall Street Journal, Investopedia, Mergermarket, Yahoo Finance, Company Press Releases & Company Annual Reports

OurPartners

4 USISReview June 2015SpecialReport

Politics

Shouldwefeara'Brexit'?AlookattheupcomingEUReferendumandthepossibleconsequencesofBritainleavingtheEU.

The shock Conservative win at the May 2015 General Election coupled with the inclusion of an EU referendum bill in the Queen's Speech at the state opening of parliament, has for the first time made Britain leav-ing the EU a real possibility; the so called ‘Brexit’. The bill, consisting of an in-out ref-erendum, will be given to the British peo-ple before 2017 and will have widespread economic impacts that could threaten jobs, pensions and investments, should Britain vote to leave.

Both Labour and the Conservatives want Britain to stay in the EU, but the rise of UKIP has drawn considerable momentum around the issue, ultimately forcing the political parties to offer the British people a choice of whether we stay or go.

Last week, after his departure from a whis-tle-stop tour around Europe, David Camer-on began pre-negotiating for a 'better deal' for Britain. With huge opposition to EU re-form in mainland Europe, it is yet to be seen if anything meaningful will be achieved and if any change will actually convince the voters of Britain that the EU is the best outlook for the future. Currently, in an April 2015 poll by YouGov, 45% of the electorate

wish for the UK to stay within the EU, while 35% wish to leave and the remaining 20% are undecided. Should David Cameron fail to bring meaningful reform and the elector-ate vote to leave, what will be the economic consequences?

Trade

A key advantage of the UK being part of the EU is the free trade that exists between member nations, making it cheaper and easier for British companies to export their goods and services to Europe and vice versa. The savings for British business brings jobs to the UK and, according to business lead-ers, this outweighs the billion of pounds of membership fees that could be saved from leaving the EU. The UK, as part of the EU, has access to huge international negotiat-ing power and risks losing this by leaving the trade bloc. The UK would however be able to negotiate free trade agreements with non-EU countries.

UKIP leader Nigel Farage believes Britain could follow the lead of Norway, which has access to the single market but is not bound by EU laws on areas such as agriculture, jus-tice and home affairs. Political opposition

and business leaders alike contest this and say that an 'amicable divorce' is simply not possible and that Britain would still be sub-ject to the economics and policies of the EU, but would no longer have a seat at the table to influence matters in the UK's favour.

A study by Open Europe, a think-tank that wishes for the EU to be radically reformed, found that, in the worst-case ‘Brexit’ scenar-io, the UK economy would lose 2.2% of total GDP by 2030. However, if the UK managed to negotiate a free trade agreement with Europe in conjunction with trade agree-ments elsewhere whilst pursuing 'very am-bitious deregulation', GDP could actually rise by 1.6%.

Jobs

The free movement of people across the EU opens up job opportunities for UK workers willing to travel and makes it easier for UK companies to hire from outside the UK. Considering that the UK has tight border controls for the rest of the world, it seems contradictory that those from Europe do not have to adhere to the same rules. UKIP policy says that this prevents the UK from 'managing its own borders' and that we

SpecialReport

Politics

USISReview June 2015

need to implement a points-based system where only the most highly skilled workers are allowed to enter the country.

This will effectively open up more lower skilled jobs to British workers. By hiring lo-cal people, rather than those from abroad who tend to know less about the rules and laws in place to protect them, employers are unable to partake in exploitative prac-tices, therefore improving the quality of life of these employees. Limiting the freedom of movement could potentially deter the ‘brightest and the best’ from coming to Brit-ain, causing complex immigration controls and ultimately reducing the pool of candi-dates that employers can choose from. A points-based system would still allow for these highly talented people to enter the country, but the barriers would instead be put up against low skilled workers who are getting preferential treatment from UK businesses compared to British workers.

Leader of the Liberal Democrats, Nick Clegg, has in the past claimed that 3 million UK jobs are a result of being in the EU. These jobs could therefore be at risk if global cor-porations decide that a non-EU UK is not the best location for their business. Nestlé, Hyundai, Ford and Goldman Sachs are just some of the companies contemplating scal-ing back their UK operation in the event of a ‘Brexit’. HSBC, which is the world's largest bank in terms of assets and employs 48,000 people in the UK, has threatened to move its headquarters out of London if the UK leaves the EU. HSBC and other companies alike leaving the UK are threats not to be taken lightly. HSBC brings enormous wealth into the UK and to lose that source of income would be detrimental to the economy. It is, however, not the first time that HSBC has threatened to leave. In the wake of the 2008 economic crisis, increased regulation im-posed by successive governments led to the same exit warnings by HSBC, although they never actually materialised.

The Institute of Economic Affairs has re-butted claims that the EU brings in 3 million jobs to the UK, saying that 'jobs created are associated with trade, not membership of a political union, and there is little evidence to suggest that trade would substantially fall between British businesses and Europe-

an consumers in the event the UK was out-side the EU'.

Regulation

The vast majority of small and medium-sized businesses within the UK do not trade with the EU, but are still restricted by a huge regulatory burden imposed by it. A ‘Brexit’ would free up these small and medium-sized businesses and allow for expansion and the creation of more jobs within the UK. UK businesses such as farms would howev-er lose billions in EU subsidies. These loses could be compensated by the savings of the EU membership fee that currently goes towards the EU and, as the UK contributes more than it receives, this is a viable model.

Influence

Britain may lose influence with partners such as America who would consider us a less useful ally if we were detached from Europe. In the event of a 'Brexit', the UK would remain as one of the biggest EU trad-ing partners and would still be able to chan-nel transatlantic influence. It would also manage to claim back its territorial fishing waters, scrap caps on limits on the number of hours that people can work per week, remove itself from the EU's renewable en-ergy drive and create a freer economic mar-ket. According to the Economist, this could turn London into a 'free-wheeling hum for emerging market finance', adding that Lon-don could effectively become like a 'Singa-pore on steroids'.

This, however, would require an ‘admirable divorce’ with the EU, which is seen by many as unlikely and it is therefore equally possi-ble that the UK would become an outsider with limited access to the single market, little global influence and no way to return. The UK is the fifth or sixth (depending on indicators) strongest economy in the world, above Brazil, India and Russia. All three of these nations manage to sustain rapidly growing economies despite not having any free trade agreements, with trade blocs similar to the EU. It is therefore not an un-reasonable expectation for the UK to have the same. The UK is a global superpower in its own right and, although this might be diminished slightly, it is likely for the EU to come to a trade agreement with the UK. After all, it is just as important for EU com-panies to keep free trade with the UK, as it is for us to keep trade with them.

FutureoftheEU

Much like the Scottish Referendum debate of 2014, there is no consensus of the impact a ‘Brexit’ would have on the UK economy. It is important as well to look at the impact it might have on the future of the EU. With Euro-skeptic parties, such as UKIP, rising in many countries around Europe, a ‘Brexit’ might inspire momentum within the elec-torate for other countries to leave as well. Only time will tell, but it is far from impos-sible for the ‘Brexit’ to be the first domino to fall towards a complete collapse of the EU.

JamesCarneBSc Geography

5

Economics&GlobalAffairs USISReview June 2015

Nepal'spost-earthquakerecoveryExpertssayNepal'srecentearthquakeisexpectedtoslowtheeconomyforatleasttwoyears.

6 7

The devastating magnitude 7.8 earthquake that hit Nepal on the 25th April and its sub-sequent aftershocks have not only taken over 8,600 lives, but have left the country in a state of complete devastation. The dis-aster has disrupted all economic activities and it is expected that it will take years be-fore the country is back on track. But what exactly are the economic consequences of this disaster and what sort of recovery plan will help Nepal get back on track?

'The direct financial toll is at least $10 billion'

According to Nepal's finance minister, Ram Sharan Mahat, the direct financial toll of the earthquake is at least $10 billion, with this figure expected to rise as further investiga-tion is carried out. This figure is over half of the country's GDP, which currently stands at $19.2 billion. There is ultimately no doubt that Nepal's economy will go into recession this year.

The extent of the damage to Nepal's econo-my is endless. Farmland, livestock and food stocks have all suffered from landslides, which is causing devastation being so close to the planting season. Power and water dis-tribution has also been disrupted, as have construction and manufacturing activities. Schools, universities and financial services are only partially operational. Confidence in the real estate and housing markets has plummeted. Supply disruptions have exert-ed upward pressure on inflation. Exports have declined and imports have increased, widening the trade deficit and reducing the current account surplus. Slower econom-ic activities means that the government is pulling in less tax revenue than anticipated, which will undermine its budget spending. The tourism industry is also expected to suf-fer and remittances (financial support sent into the country by friends and relatives liv-ing abroad), which make up 30% of Nepal's GDP, are also expected to decline.

The most immediate cause for concern is the coming monsoon. The pre-monsoon rains have already started to fall and the govern-ment and aid agencies are under immense pressure to provide shelter before the full deluge arrives in the second week of June. It is vital that those working on the land are able to stay there in order to continue farm-ing. Johannes Zutt, Nepal's country director for the World Bank says, ‘the winter wheat is still in the fields and it needs to be harvested . . . the rice crop that should come in the sum-mer needs to be planted’. One of the main problems is the issue of storage; many fam-ilies will be unable to harvest their wheat or store it effectively because their storage ca-pacity has been demolished.

The earthquake has hit the poorest and marginalised populations in the remote ar-eas most severely. As a result, many people are expected to be pushed back below the poverty line, calling for urgent action to be taken.

Whatisbeingdonetominimisedamage?

At the moment, Nepal's main priority is to maintain the country's access to foreign currency. Despite tourism only contributing 8.2% of Nepal's GDP, it is the second source of foreign currency after worker remittanc-es. International financial assistance in the coming months will therefore be crucial in allowing Nepal's government and the pri-vate sector to pay foreign creditors and to stabilise the balance of payments. Earlier this week, Ram Sharan Mahat stated that Nepal is in urgent need of short-term fund-ing, while the government works on draw-ing up a long-term plan.

In order to combat the imminent effects on the monsoon, a massive rehabilitation and reconstruction effort is currently in place. There is call for temporary shelters, cash transfers, food supplies and sanitation, as well as the resumption of basic public ser-vices. Once this has been completed, roads, bridges, schools, medical centres, water supplies and power distribution systems can begin to get going.

In the long-term, the recovery process will require two things; the necessary funding and a clear institutional setup. But, as Kun-da Dixit, editor of the Nepali Times reminds us, the government is still very unstable. He says, 'any government would have been overwhelmed, but remember, before the earthquake hit, we were a mismanaged, badly governed, politically unstable, eco-nomically weak state’. Although almost a decade has passed since the end of Nepal's civil conflict, its warring political parties have still to write a constitution and they are regarded by many as self-serving, inept and corrupt. This setup does not provide an ideal basis for recovery and therefore, if the government cannot cope on its own, it is possible that a separate apolitical body may be called in to assist with arrangements and expedite decision-making.

In terms of funding, there are three main sources from which Nepal could draw mon-ey. Firstly, a rationalisation of recurrent expenditure could open up opportunity to increase capital spending, which currently stands at just 3.3 % of GDP. Secondly, the selling of bills and bonds may be used to

raise funds, or the government may intro-duce a special tax targeted for reconstruc-tion. Thirdly, external grants and loans will likely cover the remaining funding. Grants will mostly be on concessional terms from institutions, such as the Asian Develop-ment Bank (ADB) and bilateral donors. As it currently stands, at least $2 billion will be required for rehabilitation and reconstruc-tion of physical infrastructure alone. The government has therefore set up a $2 billion National Reconstruction Fund, to which it has contributed $200 million and is aiming to raise the rest from donors.

In order to combat the effects of increased outmigration, it will be critical for Nepal to continue increasing private sector invest-ment in construction as well as focussing on labour-intensive manufacturing to ensure an adequate supply of jobs.

Adismalfuture

Documents released by the IMF say that the Nepalese economy will decelerate for at least the next two years as the country faces the consequences of loss of revenue from tourism and absorbs higher costs from im-ported goods. According to predictions by the ADB, who recently released its first de-tailed assessment of the damage, the Nep-alese economy is expected to grow 3.8% in the fiscal year ending July 15, which is 0.8% down from its pre-quake forecast. If supply disruptions are more intense than currently predicted, this figure could fall to as low as 3%. The ADB report explains that the ag-riculture, industry and service sectors will all be affected, with the loss of seeds, farm-land and livestock being the main reasons

behind the damage to agricultural output. The complete destruction of the network of infrastructure systems is also one of the main reasons why Nepal's economy will be so severely affected.

In terms of inflation, lower agricultural out-put and supply will exert upwards pressures on food and non-food prices, resulting in inflation of up to 8.2% in the financial year 2015 and 8.5% in 2016. The fiscal deficit and current account balance are also set to worsen in the medium-term, as a result of shortages of construction materials and la-bour for reconstruction. If reconstruction is low, this could lead to an increase in outmi-gration as people look elsewhere for work, causing a rise in wages, a shortage of labour and a further slowdown in reconstruction.

Overall, Nepal looks set to endure many more years of devastation and setback. These mounting pressures also mean that Nepal's goal of moving from a ‘least devel-oped country’ to a ‘developing country’ by 2022 looks unlikely, since for this the econ-omy would have to grow by about 8% an-nually.

If there is any optimism to be found, it is the faint possibility of this devastating event being a catalyst to a more united outlook between Nepal's leaders and residents. It will certainly take time to rebuild, however there is hope that, with a well-designed re-covery plan and efficient relief operations, the economy will soon rebound and the country will be back on track.

RachelQuartlyBSc Geography

Asia

Economics&GlobalAffairsUSISReview June 2015

Asia

TechnologyUSISReview June 2015

AppleInc.

9

Musicstreamingservice

With Apple's Worldwide Developers Con-ference (WWDC) taking place next week, much speculation has turned to the an-nouncement of the much-anticipated new music streaming service. More than a dec-ade ago, Apple revolutionised music owner-ship with digital downloads through iTunes and now, with a renewed push into internet radio, Apple is hoping to change how con-sumers listen to their favourite songs with a new subscription streaming service. This will put Apple in direct competition with the likes of Spotify, Tidal and Pandora.

It is expected to offer the unlimited on-de-mand streaming service for $10 a month in the US, but unlike Spotify, it won't allow a free subscription to its entire catalogue for iTunes users, but rather a curated online ra-dio service with channels programmed by human DJs.

Apple signalled its interest in streaming last year with the $3 billion purchase of Beats Music and its parent company. The deal got Apple the Beats headphones and the up and coming Beats Music Service. It also acquired the music-industry connections of the likes of Jimmy Lovine, the co-founder of Beats Music. Beats remain a small music player with only 303,000 subscribers, all within the US. Apple's own iTunes radio has achieved little traction as well in the US.

It is hoped that the new model will prompt all iTunes users to switch to the new stream-ing service and, in doing so, will revitalise the music steaming industry, much like the iPod did.

The new streaming service will offer Apple two new opportunities. It will help generate more revenue from existing iTunes users and it will expand the amount of people using music subscription services, espe-cially outside the US, where the choice of service is limited. 110 million people used

iTunes last year with the average spend of just $30 a year. Convincing users to switch to the $120 a year streaming service will be a lucrative opportunity for Apple and the re-cord companies alike.

Not everyone in the music industry is happy about the move towards streaming servic-es, with some artists (notably Taylor Swift) and smaller record labels worried about the implications of lower royalty rates. For Apple this move is about retaining leader-ship in the music industry. Music is a legacy that was central to the re-birth of apple with iTunes and the iPod under the leadership of former chief executive and co-founder Ste-ve Jobs.

Is this a good move by Apple? Revenue from download sales fell by 8% last year to $3.6 billion, while the subscription industry saw a rise of 45% to $1.6 billion. As Apple sells around 85% of all music downloads, it is key for the company to keep ahead in the ever-changing market place. In terms of the details of the service, we will have to wait for the WWDC Keynote on Monday 8th June, and the service launch that will likely be in Late September/Early October for concrete information.

JamesCarneBSc Geography

Technology USISReview June 2015

TideschangingatAppleInc.RecentdevelopmentsatAppleseeJonyIvetakeupanewjobrole,alongsidethespeculatedreleaseofanewmusicstreamingservice.

8

NewroleforJonyIve

Jony Ive is seen by many as the revolution-ary figure behind much of the Apple's suc-cess. After the death of Steve Jobs in 2011, Jony was thought to be the man who would take over the helm of Apple, however this was not the case, and instead Tim Cook, who was the former Chief Operating Of-ficer, took over the position.

Since then Jony was promoted from Sen-ior Vice President of Industrial Design, a role in which he designed the iMac, iPod, iPhone and iPad, to Senior Vice President for Design, encompassing human interface design. This lead to the disposal of skeuo-morphism (the design of graphical icons that closely resemble their real-life coun-terparts) within Apple products and the cre-ation of a new flat clean interface as seen in iOS7. Jony is a rising star with investors and therefore his movements within the com-pany are under close scrutiny.

In late May 2015, it was announced that Jony was promoted again to the new role of Chief Design Officer. This was not done through a press report or even a statement to inves-tors, but rather an article by Stephen Fry

in the Telegraph. This is very unusual con-sidering the high profile nature of the pro-motion. It was a sign to many that the an-nouncement was done to limit speculation and damage to the share price. In fact, the unusual circumstances about the promo-tion have only driven speculation. Not only are questions being asked about why such a change in job role was necessary, but fears are mounting over whether this adjust-ment is paving the way for his departure.

The new role for Jony will see him overlook both industrial design and human inter-face, whilst taking on the responsibility of designing other parts of the Apple business, such as the new headquarters, the fixtures and fittings in new stores, as well as office furniture to fill both with. This role keeps him within senior management so that Apple remains single focused on design, but takes the managerial aspect out of his job description. Jony first and foremost is a designer, and he seems apprehensive to do anything but designing, which is perhaps the reason why he did not receive the CEO job after Steve Job's death.

The rhetoric at the Apple camp is all about how Ive's lieutenants Alan Dye and Richard

Howarth are more than capable of running the respective departments of Human In-terface and Industrial Design. This rhetoric is the main spark that is worrying investors that the whole move is to remove Jony Ive from the company. By convincing investors that the new replacements are as good as or even better than Jony, it provides reassure-ment that Apple will still be successful after a possible departure from Jony.

By moving Jony away from the working cogs of Apple into a more advisory role, investors will begin to become comfortable with the idea that it is not a 'one-man show'. This would allow Jony to then leave the company without leaving the future of the company in turmoil, which is what happened after the death of Steve Jobs.

It seems that Jony Ive is taking a break from his high paced life at Apple and would like instead to have complete free reign over what he loves to do best; designing. Spec-ulation is already growing that he may be moving to a new role designing an Apple car or a new innovative product along those lines. Only time will tell what the real plans behind the move are.

AppleInc.

11

Analysts have long been expecting a boom in the mergers and acquisitions (M&As) of technology companies and it seems like it is finally beginning to take place. Until re-cently, the majority of tech M&A has been dominated by five companies – namely Facebook, Google, Microsoft, Oracle and SAP – but new research suggests that it will be increasingly adopted by a wider range of firms in an attempt for them to stay ahead of the competition.

The race for technological growth is on. There is enormous value to be acquired in the technology market and it is becoming almost essential for companies to team up in order to cope with the soaring costs of production. Until recently, three major deals have accounted for 40% of all tech M&A volume – Facebook's $19.5 billion ac-quisition of WhatsApp, Microsoft's $8.5 bil-lion purchase of Skype and SAP's $9.1 billion takeover of Concur. As a result, the majority of tech M&A has so far not been in support of forward-looking growth and therefore seems to be in defence of low-growth tech-nologies from the previous product cycle.

In terms of recent acquisitions, it seems that chip firms are at the forefront of this move-ment. These firms are facing enormous pressure to cut costs and scaling up is one way to do this. Avago Technologies, a chip-maker that has already acquired a number

of its competitors in recent years, has just announced plans to buy Broadcom for a massive $37 billion; the biggest tech deal since the dotcom bubble in the late 1990s. As a result, it hopes to save $750 million a year. Intel is also in acquisition mode, re-cently buying Altera for $16.7 billion.

In other sectors, Verizon, an American tele-coms company, announced on the 12th May that it has agreed to buy AOL for $4.4 bil-lion. In terms of the future, the acquisition of HERE, the digital-map division of Nokia, is set to be the next big deal. HERE's map are considered amongst the most detailed in the industry and will be a crucial asset in a world of self-driving cars. A number of firms are interested in the deal, including one led by Uber, which is said to be willing to pay $3 billion for the company.

A recent report by EY found that many transactions behind M&As are based on cloud software and are thus responsible for many lucrative deals owing to their value to the ‘Internet of Things’ trend. According to 451 Research, mergers and acquisitions relating to the Internet of Things are ‘shat-tering records’, with the largest deal of the period being NXP's $11.8 billion takeover of Freescale Semiconductor, which will make it a key player in the Internet of Things. There is also on-going talk about the takeover of Salesforce; a cloud-computing pioneer

worth nearly $50 billion. Despite repeated denials, Oracle, the world's second-biggest software-seller, is thought to remain the likeliest suitor for this deal.

In the future, we are expecting to see more forward-looking growth plays and the start of many more tech firms choosing to merge and acquire. Companies, such as Twitter, LinkedIn, Servicenow and Workday, which are relatively newly public tech companies, have yet to engage in much M&A but many of these firms have dual-class stock struc-tures, which will provide greater degrees of freedom to acquire as they feel fit, making them much more likely to take advantage of promising venture-backed growth op-portunities in the coming months.

Ultimately, we are witnessing a fight for a technological reinvention of industries, moving toward ‘sense and respond’ rela-tionships, with huge focus on smart mobili-ty, cloud computing and social networking. Consolidation seems to be the best way to progress in this industry and any future deals will likely trigger many more. With more firms realising that they are evolving into technology and data companies, the value of acquisition is almost becoming a necessity to stay ahead of competition.

RachelQuartlyBSc Geography

Banking&FinanceUSISReview June 2015

Mergers&Acquisitions

TechfirmssetforM&AboomAwaveofmergersinthetechnologyindustryispredictedoverthenextfewmonths.

Technology USISReview June 2015

The'snoopers'charter'returnsTheshockgeneralelectionConservativevictoryhassparkedfearovernewenforcementstosecuritylegislation.

10

The election results were barely in and incumbent home secretary Theresa May readily announced her intentions to the country: 'A Conservative government would be giving the security agencies and law en-forcement agencies the powers that they need to ensure they're keeping up to date as people communicate with communications data'.

Sure enough, buried among announce-ments about income tax and the 'Help to Buy' scheme, the Queen's speech signalled plans to expand the surveillance powers of law enforcement agencies.

The new Investigatory Powers Bill, agreed this week by Cameron's government, in-cludes both a ‘turbo charged’ version of the ‘snooper's charter’ and extensions to the powers of bulk interception of communica-tions data currently accessible by security services.

This comes in the wake of NSA plans to wind down their bulk phone metadata collection programme after the US court of appeals ruled it unlawful earlier this month.

The ‘snoopers’ charter’ was introduced by Theresa May as a successor to similar plans made by the previous Labour government. During the coalition, the proposed law faced opposition from all sides, however, with Nick Clegg now out of the picture, the Conservatives are free to vote the bill into law with their newly found majority.

The powers granted by the law are twofold; if enacted, the law will require all commu-nication service providers, including ISPs (Internet Service Providers) and mobile phone companies, to keep records of all us-ers' internet browsing activity, social media use, phone and SMS logs and e-mail corre-spondence for 12 months.

Additionally, proposed new investigatory powers will allow law enforcement agencies to oblige tech companies, such as Facebook and Google, to provide access to the content of all encrypted messages belonging to an

individual under investigation.

For this to be possible, the bill is expected to include a mandatory requirement for a backdoor in any encryption used in the UK, such that security services are able to de-crypt all messages.

These measures, widely interpreted as an attack on encryption, have alarmed both privacy activists and IT professionals alike. Encryption, which is used in online shop-ping, banking, email and messaging, is a cornerstone of modern technology. Weak-ening it with the introduction of backdoors would prevent the ability to make secure online purchases or communications and would leave everyone's communications at risk of being accessed by anyone with a rudimentary knowledge of ‘hacking’, all for the sake of national security. Encryption in-tentionally weakened to be broken by the government can also be broken by outside actors or state sponsored hackers.

Many global technology companies have recently begun championing privacy and security features, such as Apple's iMessage or Facebook's WhatsApp. With the major-ity of these companies based outside the UK, few are likely to want to compromise their product or reputation for the sake of Cameron's government. Indeed, several US companies, Google included, have recent-ly been stepping up to the US government and challenging their attacks on customer privacy, rather than endorsing them.

With no guarantee of cybersecurity, compa-nies protecting trade secrets may be unwill-ing to operate or store data within the UK. Following Edward Snowden's revelations on NSA bulk data collection in the US, many companies moved to offer data hosting physically located outside the US in order to not be subject to government snooping. Some privacy-oriented companies, such as the secure messaging provider Silent Cir-cle, left the country entirely. Charges that the US is using their spying abilities to steal trade secrets from foreign companies only compounds this lack of trust.

Similar trends are already being seen in the UK; ind.ie, a secure messaging platform, and Eris Industries, an industrial cryptog-raphy firm, have announced plans to move their operations out of the UK, arguing that 'cryptography overwhelmingly protects legal businesses and ordinary people, not criminals and terrorists, from harm'. ind.ie has also vowed to never sell out to Google or Facebook, no matter how much they are offered. If this bill passes, it could lead to an exodus of big technology and financial ser-vices companies from the UK, crippling our digital economy.

The charter faces fierce opposition from MPs, business and privacy advocates. Big names such as Tim Berners-Lee, credited with the creation of the world wide web, are urging people to ensure these measures aren't rushed and get the level of debate they need. Privacy advocates also tell us that mass surveillance doesn't work to achieve its aims, and has chilling effects on journal-ism and freedom of speech in general.

It cannot be denied that as people's lives increasingly rely on technology, some level of digital surveillance is inevitable. The gov-ernment insists that the new laws will in-clude 'appropriate oversight and safeguard arrangements'. Whether they are enough remains to be seen once the text of the new bill is released in coming weeks. Either way, some form of legislation over the extent of digital surveillance is needed; as one secu-rity expert put it, 'right now it's a free-for-all out there'.

BrandonPietersMBChB Medicine

Privacy

13

impacted by the move, with investors get-ting rid of long quality debt; the most sen-sitive security to rate increases.

In most cases, the spread of lower quality debt hardly widened more than that of in-vestment grade paper. This quite confusing reaction is the first episode of disturbance in the Eurozone debt space since the 2008 crisis that represents a 'flight from quality' rather than the usual 'flight to quality'.

If we look at the past, the Federal Reserve's quantitative easing (QE) programmes were associated with a modest increase in yields of Treasuries in the months immediately following their announcement (around +40 basis points on average for the 10-years maturity 100 days announcement). The effect of the European Central Bank's QE programme has been very different even at post-adjustment2 level (i.e. after the sell-off at the end of April), with the 10-year Bund only up by 5 basis points since Draghi com-mitted to QE on January 22nd. The paradox is that Eurozone economies are enjoying a cyclical upswing, with GDP growth rising at 0.4% quarter-on-quarter; the strongest

since the second quarter of 2013.

The decline of yields of Investment-Grade debt in all developed markets, that which goes back to 2013, marked the realisation of super low inflation. The plunge in bond price may signal that investors are done betting the collapse of oil prices will lead to deflation. In actual fact, oil has rebounded by 40% since the floor of January and con-sumer price in the currency bloc stagnated in April, ending a 4-month run of decline.

Despite the recent stabilisation of com-modity values, the forces of global deflation remain prevalent in global product mar-kets. What can be said is that the forces of domestic deflation in the developed world are receding, at least in those economies that are in better health.

Just two months back, the gap between 10-year borrowing in Germany and the US was at its widest in a quarter of a century, reflecting the expectations economists had for a sustained economic rebound from the other side of the Atlantic, combined with no growth and a risk of deflation in the

Eurozone. But, as mentioned earlier, the Eurozone economies are clearly enjoying a cyclical upswing. With first quarter GDP growth in the Eurozone twice the pace in the US and deflationary pressures easing up, the reports calling the death of the Euro region economy may have been somewhat exaggerated.

Despite disappointing US figures, Janet Yellen, current chair of the Federal Reserve Board, seems poised to raise interest rates, for the first time in almost a decade, some-time towards the end of the year. This could potentially cause a much bigger upset in the bond markets.

To conclude, say that 10-year German bor-rowing cost at their current level of 0.7% is certainly less worrying than the 0.049% low of April 17th . The best interpretation could be that the price adjustment more reflected a rosier outlook for the Eurozone economy than a dangerous sign of investor panic.

JonathanLeblancAlumnus (BSc Statistics & Financial

Mathematics)

USISReview June 2015 Investments&Strategy

StockMarket

12

Bondsell-offreshapestheyieldcurvesTherecentsell-offinbondsattheendofAprilseesGermany's10-yearBundsurgeuptonearly78basispoints.

The sell-off in bonds that occurred at the end of April drove yields higher, as more than $400 billion was wiped off the value of fixed-income markets in just three weeks. Some say this Eurozone debt shakeout was an accident waiting to happen, but one thing is for sure; the violence of the move caught some investors. Germany's 10-year Bund, the Euro area's benchmark sovereign security, surged up to nearly 78 basis points from a record low of 0.059% on April 17th.

Analysts had predicted that 2014 would be a disastrous year for Treasuries, with the Federal Reserve bringing its long-run-ning bond-buying program to an end. This proved a false prediction, as tumbling infla-tion - driven by commodity prices - pushed yields lower.

Since the beginning of the year, investors were moving up the curve for yield enhance-ment. In just two weeks, all the flattening of the curve has been reversed. The steep-ening is well illustrated by the premium investors' demand to hold longer-maturity bunds instead of short-dated notes. That

spread touched 164 basis points on May 14, from 71 basis points as recently as April 20.

It is apparent that there is no consensus in the industry about the origins or nature of the turmoil in the Eurozone debt market. The practice of non-orthodox monetary policy has made the standard techniques of fixed income valuation almost obsolete. Consequently, there is no longer a consen-sus among analysts about the fair value in the fixed income market, especially within Europe.

The lack of trading liquidity throughout the fixed income space is one of the factors giv-en by financial commentary to explain the recent sell-off. Market liquidity is an amor-phous concept and impossible to measure accurately. Its scarcity is only exposed in times of crisis. Liquidity is needed for trad-ers to close position. When liquidity lacks and market stresses, prices can tumble when investors discover there are no buyers.

The bid/offer spread on the Bund reached 6 basis points in March; the widest in 3 years.

The spread gives an idea of trading liquid-ity; the higher it is, the more illiquid the market. Some blame this on the changes in market regulation that force banks to hold more capital and fewer inventories on their books, curbing their ability to act as mar-ket-makers.

For Christopher Potts, head of Economics and Strategy at Kepler Cheuvreux, there is also a valuation crisis. He wrote on May 11th that 'the divergence between the price of duration (the weighted average of the times until a bond's cash flows are received) and the recovery of nominal growth expec-tations in the Euro area was unsustainable', adding that, 'the over-valuation of long-dat-ed, high quality Eurozone debt had become extreme'.

An interesting point to note is that the adjustment concerns, above all, the real component of higher quality securities. As demonstrated in the chart above, the move in the curve from April 17th was very little impacted by the change in implied infla-tion. Also, long maturities were the most

Investments&Strategy USISReview June 2015

StockMarket

1514

Splunk:Anupandcominggem?Businesscontinuestosurge,aspowerfulmomentumissustainedthrough4Q15.

Investments&Strategy USISReview June 2015

EquityResearch

Splunk (NASDAQ: SPLK) is continuing on its path to carve out diverse and distinct prod-uct offerings for its customers, focusing chiefly upon analytics, security and oper-ations. Moreover, their refined cross-func-tional sales structure for both new and ex-isting customers is anticipated to be a key driver of growth over the coming year. Their security division has done particularly well during 4Q15, with fears of corporate cyber-attacks at all-time highs. The next market to be targeted by SPLK will be business an-alytics, where customer experience analyt-ics in particular offers new opportunities. With over 9,000 customers (+29% YoY), the company has an enormous head start over its competitors, with the total addressable market only set to soar in the coming years.SPLK have increased their revenue guid-ance to $600m for FY16, following $451 for FY15. 4Q15 saw positive growth across all key metrics, with revenues of $147m (+48% YoY) and EPS of $0.09 (versus the street's consensus of $0.05).

I believe that SPLK is the best pure-play for the Internet of Things: a unique, high- growth story with robust fundamentals and expansive opportunity. Their technol-ogy unlocks value from machine-generat-ed data, addressing a plethora of business needs in security, management and analyt-ics. SPLK's customers are deeply engaged with the technology; their competition is highly fragmented and the management team and board are seasoned with exten-sive software and business experience.

Valuations&Forecast

CLSA upgraded their price target for the stock to $87, following the FY15 earnings report. This is derived by applying a 13x EV/Sales multiple to their revenue forecast of $773m in FY17, adding back $7.89 per share in cash. Their valuation is based on an aver-age of comparable high- growth software M&A valuations, which reflect the strate-gic value of unique technology. The thirty analysts offering 12 month price targets for SPLK have a median target price of $82, which represents a 35.6% increase from the last closing price of $60.49.

Risks&ConcludingRemarks

SPLK is a highly valued stock, and as such investors will be sensitive to any perceived deceleration in revenue growth. As a new-ly traded security, the stock lacks trading history, with a limited float and shares that could be subject to sudden volatility. Fun-damental risks for SPLK include technical failures of the product, inability to respond in a timely manner to software and security flaws and competition from larger, better capitalised firms. Business risks include the potential failure to meet sales targets, man-age costs and retain key personnel.

There is undoubtedly strong organic growth potential for SPLK over the coming twelve months, though it is undoubtedly the long-term opportunity surrounding the Internet of Things that reinforces my conviction in the company and its share price.

Recommendation BUYPrice ($) 60.4952 Week Range ($) 90.49 - 39.35Performance (YTD) 5.17%Market Cap ($m) 7,403Primary Exchange NASDAQ

Splunk Inc. provides the leading software platform for real-time Operational Intelli-gence. Splunk software and cloud services enable organisations to search, monitor, analyse and visualise machine-generated big data coming from websites, applica-tions, servers, networks, sensors and mobile devices. More than 9,000 enterprises, gov-ernment agencies, universities and service providers in more than 100 countries use Splunk software to deepen business and customer understanding, mitigate cyber- security risk, prevent fraud, improve service performance and reduce cost.

Revenue ($m) 451Gross Profit ($m) 403Operating Income ($m) 12.3Net Income ($m) 11Earnings Per Share ($) 0.09 Price / Earnings 804.2EV / Sales 18.4

Chairman Godfrey SullivanSenior VP & CFO David ConteSenior VP & CMO Steven SommerInvestor Relations Ken Tinsley

RyanBassindaleBA Economics & Philosophy

Overview

Profile

Financials(Fiscal year to 31/01/2015)

Executives

USISReview June 2015

InvestmentSociety

Spotlight

AHistoryoftheUSISTwikkerFundWetakealookathowtheUniversityofSheffieldhasdevelopedoneofthemostsuccessfulstudent-runfundsintheUK.

The USIS Twikker Fund is the student-run investment fund that forms part of the Uni-versity of Sheffield Investment Society and has just closed its forth year of trading with its best results yet.

Formed in 2011, the fund started out with a kind donation from Steve Kiln, helping to form one of only four student-run invest-ment funds in the UK and four years on it is now one of the biggest of its kind.

The Twikker Fund forms part of the Uni-versity of Sheffield Investment Society, alongside this publication, the USIS Re-view. The fund is a unique offering for stu-dents at the University of Sheffield, giving real world experience to those who wish to pursue a career in finance and other relat-ed fields, with many alumni from the fund now working in a range of positions, from investment banking and stockbroking to pursuing further specialist study. Both past and present students who have been part of the Twikker Fund have shown tremen-dous initiative over the years, seizing the opportunities given to them, and helping to teach themselves and each other more about investing, finance and the global economy. The end result is a tightly knit team who aim to make successful invest-ments and broaden both their own and each other's knowledge.

Reaching this point has been the culmina-tion of an eighteen-year journey. When Ste-ve's father Robert died in 1997, the trustees of the Robert Kiln Trust decided to start up a small bursary in his name with the Archae-ology Department at The University of Shef-

field. They hoped that the interest gained from the bursary would help to sponsor an Archaeologist to complete the Landscape Archaeology Masters course. Through his charitable trust, Robert had been a long supporter of the university, which in turn made him a Doctor of Letters a few years prior to his death, an honour that he was particularly proud of as he never went to university himself.

In 2004 it became apparent that the in-come produced by the bursary was too lit-tle to produce a meaningful income for the students. At the same time, the Archaeol-ogy Department applied for more money to fund the purchase of better equipment for their courses. Steve decided to visit the university and talk to the department him-self in order to find out why the income was so small, and what he could do to im-prove the situation.

In early 2011, following a successful invest-ment, Steve decided to give a large dona-tion of shares to the university under the condition that he could continue to have a role managing them, thus creating the Twikker Fund.

Following the successful formation of the fund, he was invited to lunch with the university's Vice-Chancellor and spoke at length about how to make students' time at university more memorable. Steve pro-posed the idea of allowing students to manage the portfolio of shares he had do-nated. However, this would only be done on the condition that the university would match the donation given. The Vice-Chan-

cellor agreed there and then. As a result, the university's Investment Society was able to move from managing a fund with virtual money to managing one with real money, a change that allowed its students to gain a deeper appreciation of the risks involved with investment and to better understand how the practice worked within industry.

Soon after its creation, The University of Sheffield Enterprise merged the two funds managed by Steve and the Investment Soci-ety together, thus creating the USIS Twikker Fund, with the name Twikker coming from the old rag magazine the ‘Twikker', which was in turn named after “The Wicker'; a fa-mous road in Sheffield.

Four years on from the creation of the fund, an interesting journey has followed, with many students taking part within the fund and gaining valuable knowledge in the field of investing before beginning their ca-reers. As a result of the investments within the fund, the profits generated are used to support the Archaeology bursary as well as funding the publication of the USIS Review.

The society and the university as a whole are lucky to have been given this opportu-nity by Steve to help further their academ-ic achievement and they collectively look forward to the knowledge, experiences and enjoyment that it will produce for the next generations of students within the Twikker Fund.

RobbieHaszeldineMEng Aerospace Engineering

ReviewUSIS

EditorsJames Carne & Rachel Quartly

Copyright © 2015 The University of Sheffield Investment Society

Any unauthorised reprint or use of this material is prohibited. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording,

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University of Sheffield Investment Society, the USIS Review or our Partners.