Transcript the Presentation file (PowerPoint Slideshow)

Impact of the Internet Age
on the Economics of Business
Patrick A. McNutt
www.Patrickmcnutt.com
Outline of Presentation
Economic
Realism 2010
• Paradigm shift
• FDI and Creative
Industries
Investment Clinic
• Structured Finance,
Innovation &
Technology
• Investment Signals
There is a Paradigm Shift in
Economics: Greater Role for FDI
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Old paradigm GDP = C + I + G + (X – M) still
used in macro-models
Old economy FDI = retained profits
New economy FDI = asset-seeking FDI (low
cost locations) and efficiency-seeking FDI
(information and communications)
New paradigm GDP = X + FDI + (G + C)
Cross-border FDI capital flows
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Since 1990: Cross-border capital flows have been
rising at an annual rate of 10.7%, adjusted for
inflation and exchange rates.
From 1980 – 1990 annual rate of 4.3%
MENA has witnessed YOY average increase of 95%
due to global demand for petrochemical products.
Explain the increase
Information has created connected markets allowing key
suppliers of capital to supply across borders and
across currencies:
Example: DIFX and world portfolio funds or QSTP
100% foreign ownership or China-Egypt
Intra-Regional FDI Flows
Top 5 FDI Recipients 2005-2009
UAE, Turkey, Egypt, Saudi Arabia, Morocco
 FDI Flows to MENA [inc Turkey]
13.4% share of Developing World FDI
 FDI Stocks as % Real GDP (average
adjusted)
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Middle East [inc Turkey]: 11.9%
North Africa: 24.8%
Example of ‘Classic’ FDI Targeted
Industries
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Chemicals and chemical products
(Bahrain)
Telecommunications (Kuwait)
Hotels and restaurants (Saudi Arabia)
Yarn spinning mills (Turkey)
Amusement and recreation (Dubai)
Connected markets
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.
What are the consequences?
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Global growth is increasingly driven by
Emerging Market [EM] economies.
Key EMs are China, Russia and India
Emergent debt is still supported by strong
economic fundamentals.
More Governance: Example: IAIGC
Membership, zero customs duties under
Greater Arab Free Trade Area
Information and Communication Will Define
the Opportunities
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Information is now a commodity with positive costs.
Communication costs are falling.
Information processing = risks + mixed signals
OPPORTUNITIES
Hybrid portfolio of PE and HF focusing on distressed
opportunities.
Strong global growth has come with falling capital costs
and a wider use of quants to reduce credit risk.
FDI = investment in transfer of technology, IPRs and
technology licensing agreements.
Key Drivers of investment opportunities
Pressure on EM currencies and exchange rates:
EM currencies to continue fluctuation
against US$ and Euro.
Global outsourcing and local restructuring:
Focus on exposure to core products – energy,
utilities, materials, equipment suppliers.
Real interest rate policy in Key EMs:
Negative: Impact on confidence of investors to
Central Bank money as store of value.
Positive: Appreciating currency.
.
Real Time Information Flow
Non-traditional FDI:
Not ‘bricks and mortar’
Business
Strategy:
’Trade in
Tasks’
Mobile
Capital:
‘Trade in eFunds’
Resources
&
Materials:
‘Trade in
Scarcity’
FDI & New Economy
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Between 1980-1998, US, EU and Japanese
companies signed 9000 strategic technology
alliances: New economy companies with
costless entry
Churning equilibrium: goes beyond traditional
FDI of bricks & mortar’ to FDI as ‘information
bridge’ in technology and information flows.
Information is a tradable resource for the
distribution of technology and innovation
with FDI potential.
Example of New Paradigm:
Trade co-operation
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Increased Intra-nation trade: only 25% of Asian
exports go outside Asia.
US, EU and Japan share of global economy is
falling [60% in 2009] and expected to
approximate 50% in 2020.
More co-operation and technology transfers: FDI
~ Chinese-Egyptian Business Council 2006 or
Singapore-China Trade Mission 2009
New Paradigm Recommendations for
FDI flows
Strategic exposure to Key EMs
with currency regime linked to US$
with rising inflation
with rising commodity prices
exposure to high yield corporate bonds
prefer credit over equities
prefer equities over government bonds
New Geo-political order
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Emerging markets: young population,
technology transfer, creative industries, and
FOREX reserves:
EMs, GCC, MENA, ASEAN and BRIC
More FOREX
the role of US $.
Non-dollar Assets and
EMs’ Equity markets: High P/E due to high GDP
growth = Flows of FDI as purchase of shares.
Post-Internet Age
since 1988 (arrival of home
PC and www URL)
‘virtual’ investment
FDI and Creative Industries
EU Benchmark
2015:
Innovation &
Technology
Infrastructure
2010:
8% GDP
Greater than
8% GDP
Creative Industries:
EXAMPLES
Virtual surgery or High-Tech Tourism
Smartphone technology or Telcos
Prime Brokerage or Portfolio Fund
Management
New FDI Investment Opportunities
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Understand the ‘information bridge’ in the
Template for FDI Investment
Asset-seeking FDI = Case C
Efficiency-seeking FDI = Case B
Market-seeking FDI = Case A
Template: Case A: Virtual surgery
Telerobotics =
Internet &
Information
Processing
Virtually
assisted
microsurgery
Virtual
Environments
Bio-sential
crops
Next
generation
antibiotics
Template Case B: Smartphone
Technology
Handset
Manufacturers
Networks
Devices
OS
Smartphone
Transformation
Apps
Template Case C: Prime Brokerage
TRADES
Brokerage
accounts
Hedge
Funds
Privileged Information
Investment Clinic
Investment Cycle
Information
Signals
Monetary
policy
does not
work
Moral hazard
embedded in risk
analysis
Information Processing
Data availability in the cloud
Virtualisation of both product and process
Example: (i) IT infrastructure delivered as a service
(ii) Convert data into strategy and insight
(iii) 50% increase on average in Business expenditure on
information processing equipment and software since
1990s
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Mismatch in Risk Signals
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Weightless companies
Mismatch in Risk Signals
New
Technology of
Structured
Finance
Information
Processing
and
Innovation
Weightless virtual companies
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Weightless companies: $x invested in physical
assets, $y invested in sales & capitalisation:
Yahoo, Microsoft, Apple, Google…………….???
$y >> $x
Market Panic
Analyst advice: Strong SELL to SELL
Consensus: HOLD
Panic as Consensus ‘Sell’ and Price Falls
Deviation of Equity values from Fundamentals
Investment Signals
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.
Micro economic trends with
technology transformations. Case
III vertical handset manufacturers
transform to horizontal computer
markets. Case IV global insourcing with mobile workforce.
Case V increased mobile banking
and e-purse payment methods.
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S&P 500: 40% of revenues
from foreign sales.
50% of world’s equity capital
is now outside the US.
Nascent bubble in EMs
depends on sustained
growth in China: 10% of
World GDP.
Case I
Concluding……..
What lies ahead in brokerage:
FDI/Macro Trends?
Today
Tomorrow
What lies ahead in brokerage:
FDI/Micro Trends?
Today
Tomorrow
Private Equity: Prognosis
• Herding and Panic
• Virtualisation and
absence of scarcity
in resources
Information
Processing
Weightless
companies
• Latest technology
• Signals v company
fundamentals
• Geo-politics
• Ease of trade v
ease of entry
Intra-Regional
Virtual Trade
Prognosis for FDI
Markets remain irrational longer than you
remain solvent: short term investors ‘rent’
rather than ‘own’ shares
Long term investment in Asia as they
decouple from US and EU as Asia bouyed
by increasing domestic demand
Low Communication
Costs But High
Governance Regulations
EU Mifid Directive with brokers beholden to
prove best deal for clients in creative
industries
Strategic Trade Alliances like Egypt-China
and China- Singapore with investment
opportunities
Predict an Information Overload!!
THANK YOU
‘’do not wait for the stream to
stop before crossing it’’