Cairo Brokerage Conference- Global MBA Brazil

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This presentation was made by Professor Patrick McNutt and is part of the Global MBA offered by FGV in partnership with Manchester Business School (MBS)

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Cairo Brokerage Conference- Global MBA Brazil

  1. 1. Impact of the Internet Ageon the Economics of Business<br />Patrick A. McNutt<br />w ww . P a t r i c k m c n u t t . c o m <br />
  2. 2. Outline of Presentation<br />
  3. 3. There is a Paradigm Shift in Economics: Greater Role for FDI<br />Old paradigm GDP = C + I + G + (X – M) still used in macro-models<br />Old economy FDI = retained profits<br />New economy FDI = asset-seeking FDI (low cost locations) and efficiency-seeking FDI (information and communications)<br />New paradigm GDP = X + FDI + (G + C)<br />
  4. 4. Cross-border FDI capital flows<br />Since 1990: Cross-border capital flows have been rising at an annual rate of 10.7%, adjusted for inflation and exchange rates.<br />From 1980 – 1990 annual rate of 4.3%<br />MENA has witnessed YOY average increase of 95% due to global demand for petrochemical products.<br />Explain the increase<br />Information has created connected markets allowing key suppliers of capital to supply across borders and across currencies:<br />Example: DIFX and world portfolio funds or QSTP 100% foreign ownership or China-Egypt<br />
  5. 5. Intra-Regional FDI Flows<br />Top 5 FDI Recipients 2005-2009<br />UAE, Turkey, Egypt, Saudi Arabia, Morocco<br />FDI Flows to MENA [inc Turkey]<br />13.4% share of Developing World FDI<br />FDI Stocks as % Real GDP (average adjusted)<br />Middle East [inc Turkey]: 11.9% <br />North Africa: 24.8%<br />
  6. 6. Example of ‘Classic’ FDI Targeted Industries<br />Chemicals and chemical products (Bahrain)<br />Telecommunications (Kuwait)<br />Hotels and restaurants (Saudi Arabia)<br />Yarn spinning mills (Turkey)<br />Amusement and recreation (Dubai)<br />
  7. 7. Connected markets<br />Connected markets exist because of the Internet: global markets are now locally controlled…..data warehouses, IT processing, international brokerage, supply chain management, technology transfer, information-sharing.<br />
  8. 8. What are the consequences?<br />Global growth is increasingly driven by Emerging Market [EM] economies.<br />Key EMs are China, Russia and India<br />Emergent debt is still supported by strong economic fundamentals.<br />More Governance: Example: IAIGC Membership, zero customs duties under Greater Arab Free Trade Area<br />
  9. 9. Information and Communication Will Define the Opportunities<br />Information is now a commodity with positive costs.<br />Communication costs are falling.<br />Information processing = risks + mixed signals <br />OPPORTUNITIES<br />Hybrid portfolio of PE and HF focusing on distressed opportunities.<br />Strong global growth has come with falling capital costs and a wider use of quants to reduce credit risk.<br />FDI = investment in transfer of technology, IPRs and technology licensing agreements.<br />
  10. 10. Key Drivers of investment opportunities<br />Pressure on EM currencies and exchange rates:<br />EM currencies to continue fluctuation <br />against US$ and Euro.<br />Global outsourcing and local restructuring:<br />Focus on exposure to core products – energy, <br />utilities, materials, equipment suppliers.<br />Real interest rate policy in Key EMs:<br />Negative: Impact on confidence of investors to <br />Central Bank money as store of value.<br />Positive: Appreciating currency.<br />.<br />
  11. 11. Real Time Information Flow<br />
  12. 12. FDI & New Economy<br />Between 1980-1998, US, EU and Japanese companies signed 9000 strategic technology alliances: New economy companies with costless entry<br />Churning equilibrium: goes beyond traditional FDI of bricks & mortar’ to FDI as ‘information bridge’ in technology and information flows.<br />Information is a tradable resource for the distribution of technology and innovation with FDI potential.<br />
  13. 13. Example of New Paradigm: Trade co-operation<br />Increased Intra-nation trade: only 25% of Asian exports go outside Asia.<br />US, EU and Japan share of global economy is falling [60% in 2009] and expected to approximate 50% in 2020. <br />More co-operation and technology transfers: FDI ~ Chinese-Egyptian Business Council 2006 or Singapore-China Trade Mission 2009<br />
  14. 14. New Paradigm Recommendations for FDI flows <br />Strategic exposure to Key EMs <br />with currency regime linked to US$<br />with rising inflation<br />with rising commodity prices <br />exposure to high yield corporate bonds<br />prefer credit over equities<br />prefer equities over government bonds<br />
  15. 15. New Geo-political order<br />Emerging markets: young population, technology transfer, creative industries, and FOREX reserves:<br />EMs, GCC, MENA, ASEAN and BRIC<br />More FOREX Non-dollar Assets and the role of US $.<br />EMs’ Equity markets: High P/E due to high GDP growth = Flows of FDI as purchase of shares.<br />
  16. 16. Post-Internet Agesince 1988 (arrival of home PC and www URL)‘virtual’ investment<br />
  17. 17. FDI and Creative IndustriesEU Benchmark<br />
  18. 18. Creative Industries:<br />EXAMPLES<br />Virtual surgery or High-Tech Tourism<br />Smartphone technology or Telcos<br />Prime Brokerage or Portfolio Fund Management<br />
  19. 19. New FDI Investment Opportunities<br />Understand the ‘information bridge’ in the Template for FDI Investment<br />Asset-seeking FDI = Case C<br />Efficiency-seeking FDI = Case B<br />Market-seeking FDI = Case A<br />
  20. 20. Template: Case A: Virtual surgery<br />
  21. 21. Template Case B: Smartphone Technology<br />
  22. 22. Template Case C: Prime Brokerage<br />
  23. 23. Investment Clinic<br />
  24. 24. Investment Cycle<br />
  25. 25. Information Processing<br />Data availability in the cloud <br />Virtualisation of both product and process <br />Example: (i) IT infrastructure delivered as a service<br />(ii) Convert data into strategy and insight <br />(iii) 50% increase on average in Business expenditure on information processing equipment and software since 1990s<br />Mismatch in Risk Signals<br />Weightless companies<br />
  26. 26. Mismatch in Risk Signals<br />
  27. 27. Weightless virtual companies<br />Weightless companies: $x invested in physical assets, $y invested in sales & capitalisation: Yahoo, Microsoft, Apple, Google…………….???<br />$y >> $x<br />Market Panic<br />Analyst advice: Strong SELL to SELL<br />Consensus: HOLD<br />Panic as Consensus ‘Sell’ and Price Falls<br />Deviation of Equity values from Fundamentals<br />
  28. 28. Investment Signals<br />S&P 500: 40% of revenues from foreign sales.<br />50% of world’s equity capital is now outside the US.<br />Nascent bubble in EMs depends on sustained growth in China: 10% of World GDP.<br />Case I<br />Macro economic trends moving towards intra-nation trade and exchange rates as policy tool. Case I EMs and ASLEEP economies to account for 50% of world trade and 30% of world exports by 2015. Case II production drives demand in oil and core scarce resources.<br />Micro economic trends with technology transformations. Case III vertical handset manufacturers transform to horizontal computer markets. Case IV global in-sourcing with mobile workforce. Case V increased mobile banking and e-purse payment methods.<br />
  29. 29. Concluding……..<br />
  30. 30. What lies ahead in brokerage: FDI/Macro Trends?<br />
  31. 31. What lies ahead in brokerage: FDI/Micro Trends?<br />
  32. 32. Private Equity: Prognosis<br />
  33. 33. Prognosis for FDI<br />
  34. 34. Predict an Information Overload!!<br />
  35. 35. THANK YOU<br />‘’do not wait for the stream to stop before crossing it’’<br />

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