Ad Hoc Commentary – Massive FDI into Asia in 2013
Mr Market didn’t disappoint us again. Risk sold off as we maintained our bearishness into year end:
Yours truly believe that the Democrats will drive off the fiscal cliff. Intentions matters. If the Democrats drove off the cliff to ensure the national debt is sustainable (unlikely), then all is good. However, if they are driving off the cliff to gain political leverage against the Republicans (likely), then that would spook capital. Since the intention is likely political leverage, the solution proposed after the cliff would be flavored in the ideals of Democrats-living, i.e. redistributive social welfare and big government. CEOs of corporations that were hoarding trillions of cash would likely decide that they cannot afford ‘four more years’.
What do you do when you have trillions in the kitty which might get debased by populist leaders? You rotate them out of cash into private assets. How do you do this? There are three ways of bringing private capital into developing countries – foreign direct investment (FDI), portfolio equity, and private debt. Everyone is fighting the last battle: America stuck in the deflationary Great Depression (thus her easy money policies today); Germany stuck in the hyperinflationary Weimar Republic (thus her obsession with austerity); and developing countries stuck in the crises of the late 1990s (thus their fetish with capital controls). If Asia learnt anything from the Asian Financial Crisis of 1997, it was this: dependence on external private debt and portfolio equity can lead to sudden reversals. Since FDI is viewed to be long-term and had not gotten a bad name (yet), FDI would be the only conduit large enough to bring in trillions of private capital into developing countries from 2013 onwards.
Of course, capital, like entropy, always concentrate. Several key ingredients are required for FDI concentration: positive market sentiment, existence of suitable infrastructure, sound institutions and policies, perceived high potential for future growth, etc. But the most important of all is the RULE OF LAW. You can do FDI to create an export base; or to cater to domestic consumption. Given that traditional export destinations are dying, FDI for domestic consumption will be in vogue. Thus, countries with large middle-income populations like India and Indonesia will benefit most in 2013 onwards. The other Asian tigers who lost their mojo in 1997 will likely benefit too, but perhaps to a lesser degree.
For those who are still hanging on to their Indian rupees after yesterday’s bad IP numbers, don’t worry too much. Medium term, you are fine – it will come back in 2013.
Good luck in the markets.