One of the most significant transformations in global capital market history has begun, as trillions of dollars in capital begin to move into global stock markets the latter half of this decade.
As my colleague Mike Burnick has pointed out (see "The Silver Lining Behind all the "Gloom and Doom" in Financial Markets" ), international growth continues to exceed U.S. and other mature market economies over the last decade. Asian and OPEC member nations are earning record amounts of dollar and even euro-based reserves in their foreign-exchange coffers.
Foreign governments are looking to deploy this mountain of global market capital as they seek to earn a higher return on investment. That secular shift inevitably implies higher U.S. and G-6 lending rates as more governments sell fixed-income securities and shift a part of those assets to stocks.
According to the United States Treasury Department, an estimated US$7.6 trillion is controlled by global governments. This astronomical amount is mostly in foreign exchange reserves and government-sponsored pension funds.
The policymakers who control this large chunk of pension funds are now seeking better returns. They want higher inflation-adjusted returns outside of stale Treasury bonds and other international fixed-income markets.
Indeed, over the last five years, U.S. Treasury bonds have gained a pitifully low 4.5% per annum based on the Lehman Brothers Aggregate Bond Index. Adjusted for rising inflation over the same period, returns have been a disappointing 1.5% annually.
That's hardly the sort of return to augment government-sponsored pension fund returns, which need to earn a higher rate on capital to finance future healthcare and other entitlement programs.
U.S. Dollar Bear Market Makes U.S. Assets Cheap
Inevitably, global investors will benefit from the huge rush of capital heading into common stocks as the entire world rediscovers the equity culture.
Provided inflation and interest rates remain stable, capital flows should continue to find their way to the boom underway in emerging markets and even the industrialized stock markets, including the United States.
The cheap U.S. dollar makes U.S. assets a big bargain for euro and other foreign currency-based pools of capital.
Since peaking in early 2001, the dollar has shed more than 65% of its value against the euro. The majority of other currencies have also soared versus the sagging buck over the last six years, including currencies in Latin America, Asia and the emerging markets of Russia and Eastern Europe.
China's Powerful Reserves Ranked #1
China is undoubtedly the largest source of government-sponsored investment capital this decade with over US$1.3 trillion in foreign-exchange reserves.
In July, China invested US$3 billion dollars in private equity firm, Blackstone Group, on the eve of its initial public offering (IPO).
Other countries, including Singapore, Japan, South Korea, Saudi Arabia and the United Arab Emirates (UAE) have bulging foreign-exchange coffers and are already deploying capital to stocks.
In September, UAE-based Dubai International, which has US$6 billion under management, plans to announce a major investment in a U.S. blue-chip company.
The group has already invested a major stake in Airbus's subsidiary, EADS in Paris, and India's highly profitable ICICI Bank Limited.
Protectionist Sentiment Growing
The big risk to this secular move in asset flows isn't just interest rates and inflation. Possibly a greater threat is the growing protectionist sentiment developing in the U.S. Congress and in the European Union (EU).
U.S. and EU governments are reluctant to include some countries as minority shareholders. China, for example, was blocked from purchasing U.S.-based Conoco-Phillips just a few years ago. Russia plays a similar game at home, redefining the rules on foreign ownership, particularly throughout its incredibly lucrative energy sector. Venezuela and Bolivia have also copied Russia's strategy on nationalizing oil interests.
Although the surge in cross-border trade is definitely a bullish development for investors, it does pose certain risks. Among those are trade barriers where Congress and the EU feel compelled to thwart non-democratic foreign investors.
Trade tariffs are destructive to global trade. Hopefully, all sides can make money and allow capital to flow freely as the world enjoys its greatest economic boom in more than 30 years.
As my colleague Mike Burnick has pointed out (see "The Silver Lining Behind all the "Gloom and Doom" in Financial Markets" ), international growth continues to exceed U.S. and other mature market economies over the last decade. Asian and OPEC member nations are earning record amounts of dollar and even euro-based reserves in their foreign-exchange coffers.
Foreign governments are looking to deploy this mountain of global market capital as they seek to earn a higher return on investment. That secular shift inevitably implies higher U.S. and G-6 lending rates as more governments sell fixed-income securities and shift a part of those assets to stocks.
According to the United States Treasury Department, an estimated US$7.6 trillion is controlled by global governments. This astronomical amount is mostly in foreign exchange reserves and government-sponsored pension funds.
The policymakers who control this large chunk of pension funds are now seeking better returns. They want higher inflation-adjusted returns outside of stale Treasury bonds and other international fixed-income markets.
Indeed, over the last five years, U.S. Treasury bonds have gained a pitifully low 4.5% per annum based on the Lehman Brothers Aggregate Bond Index. Adjusted for rising inflation over the same period, returns have been a disappointing 1.5% annually.
That's hardly the sort of return to augment government-sponsored pension fund returns, which need to earn a higher rate on capital to finance future healthcare and other entitlement programs.
U.S. Dollar Bear Market Makes U.S. Assets Cheap
Inevitably, global investors will benefit from the huge rush of capital heading into common stocks as the entire world rediscovers the equity culture.
Provided inflation and interest rates remain stable, capital flows should continue to find their way to the boom underway in emerging markets and even the industrialized stock markets, including the United States.
The cheap U.S. dollar makes U.S. assets a big bargain for euro and other foreign currency-based pools of capital.
Since peaking in early 2001, the dollar has shed more than 65% of its value against the euro. The majority of other currencies have also soared versus the sagging buck over the last six years, including currencies in Latin America, Asia and the emerging markets of Russia and Eastern Europe.
China's Powerful Reserves Ranked #1
China is undoubtedly the largest source of government-sponsored investment capital this decade with over US$1.3 trillion in foreign-exchange reserves.
In July, China invested US$3 billion dollars in private equity firm, Blackstone Group, on the eve of its initial public offering (IPO).
Other countries, including Singapore, Japan, South Korea, Saudi Arabia and the United Arab Emirates (UAE) have bulging foreign-exchange coffers and are already deploying capital to stocks.
In September, UAE-based Dubai International, which has US$6 billion under management, plans to announce a major investment in a U.S. blue-chip company.
The group has already invested a major stake in Airbus's subsidiary, EADS in Paris, and India's highly profitable ICICI Bank Limited.
Protectionist Sentiment Growing
The big risk to this secular move in asset flows isn't just interest rates and inflation. Possibly a greater threat is the growing protectionist sentiment developing in the U.S. Congress and in the European Union (EU).
U.S. and EU governments are reluctant to include some countries as minority shareholders. China, for example, was blocked from purchasing U.S.-based Conoco-Phillips just a few years ago. Russia plays a similar game at home, redefining the rules on foreign ownership, particularly throughout its incredibly lucrative energy sector. Venezuela and Bolivia have also copied Russia's strategy on nationalizing oil interests.
Although the surge in cross-border trade is definitely a bullish development for investors, it does pose certain risks. Among those are trade barriers where Congress and the EU feel compelled to thwart non-democratic foreign investors.
Trade tariffs are destructive to global trade. Hopefully, all sides can make money and allow capital to flow freely as the world enjoys its greatest economic boom in more than 30 years.
No comments:
Post a Comment