Tuesday, July 11, 2006

Validated - flow of investor funds into poor countries

Well, the ink is barely dry (metaphorically) on the recent piece that I wrote titled Political uncertainty - a money machine, where I highlighted that poor countries will very soon find themselves overrun with cash due to investor greed for high returns, as opposed [obviously] to acts of philanthropy.

The Investors Chronicle magazine (owned by the FT) has published an article in its latest issue* titled Emerging markets funds: Undiscovered Africa, in which the author starts:
"If you want to find genuinely emerging markets that are not simply geared plays
on the US, then you need to look to Africa"
The author also rightfully states that Africa is not for the faint hearted, I agree and add that emerging markets in general are not for the faint hearted. Only the risk loving, high yield seeking investors will be found in these markets. Why? Because there are no other alternatives. Yes, really !

For now, the US is offering near comparable returns on its 10 year bonds with far less risk compared to emerging markets. But let's not forget that the US is going to have to stop its contractionary monetary policy because such a policy will soon push the US consumer too far into financial constraints. If this happens, the Fed will then start lowering interest rates dramatically so that it can assist in delivering reasonable economic growth (which is part of its remit, coupled with inflation fighting). So, comparatively high returns on US bonds will be short lived, hardly a proper strategy for a consistent high yielding portfolio. Already, global investors are indifferent between US 3 month currency futures and 10 year bonds (3month money and 10 year money), which leaves them still searching for higher yields (more likely outside the US than in other asset classes within the US).

Money did start to [noticeably] exit the emerging market scene (a bit of capital flight), but that - as always these days - was a market overreaction, where everyone feared another repeat of the Asian Crisis kind. But, risk aversion is a luxury (I am convinced), because if you are risk averse, you may as well keep your money in your mattress because depositing it into a high-street bank is equally unimaginative (though you may not think so). I personally endorse the concept of making my money work hard for me, getting as much leverage and gearing as possible, otherwise, I sacrifice a rather large opportunity cost by just depositing cash into a bank account.

I now expect many market commentaries talking-up emerging markets, and going further to highlight a wider range of poor countries as potential for new money investment. I said it first :-)


*(dated 7th-13th July 2006, page 7 of the feature articles)

1 Comments:

Blogger Rafe said...

For some on-the-ground studies of African enterprise, see the Enterprise Africa program running out of George Mason University.

http://www.enterprise-africa.org/

http://www.mercatus.org/

Tuesday, August 08, 2006 12:39:00 am  

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