Emerging Markets: Changing Global Finance

By M. Isi Eromosele

Rapidly developing economies (RDEs) have become drivers of change in the global financial markets. Other new players have surfaced from the emerging economies, including sovereign wealth funds, government controlled entities and acquisition minded corporations. A major implication is that as these entities strengthen their foreign exchange coffers, they will look beyond their borders to make acquisitions and perhaps take controlling interests in foreign companies.

The build-up of foreign reserves by these rapidly developing economies was achieved through the establishment of export-led economic policies, particularly in Asia. Many of them made a transition from onerous based economic systems to more deregulated, market-oriented economies. Their success helped create enormous trade surpluses, often coupled with high savings and investment rates. These trade surpluses are expected to keep growing strongly in the foreseeable future. Another contributing factor to the wealth of these emerging nations has been the tremendous rise in price for commodity items they sell, mainly to the developed world. They have reaped a great financial windfall due to this massive increase in commodity prices.

The wealth of the emerging nations has resulted in a huge increase in global liquidity and has helped moderate world interest rates as well as finance a very large U.S. trade deficit. This is the converse side of what is called a global financial imbalance, with the world richest country borrowing from poorer nations.

Realigning Capital Inflows

In order to finance the twin deficits (trade and budget), the U.S. has had to issue relatively low yielding Treasury securities. The Chinese and others are not pleased with the interest rates on the Treasury bonds and are seeking higher returns. New money from emerging nations is seeking outward investments through mergers and acquisitions, among other strategic stakes. The most visible of this realignment of capital flow came in 2008, when major Wall Street companies sought offshore money, largely sovereign funds for bailouts from the severe credit crunch resulting from the U.S. subprime mortgage crisis. Investors from China, Singapore and oil producing countries from the Middle East injected about $70 billion into Merrill Lynch, Citicorp, UBS, Morgan Stanley, Credit Suisse and other major institutions.

Investment From Sovereign Funds

In 2008, sovereign funds totaled $2.5 trillion. Today, that amount is almost doubled, surpassing the forex reserves of many developed nations’ Central Banks. Sovereign funds investments in the United States enjoy an advantage in that as government held investors, they are exempt from paying taxes. With such a tremendous amount of funds under their management, sovereign funds are becoming a colossus in the global investment market.

While sovereign funds insist they are simply passive investors who are only seeking the best returns from their investments, there are still some concerns from many quarters, including the European Commission, the IMF and other financial organizations as well as developed nations’ governments about the influence being exerted by these funds on the global financial markets. Others view sovereign funds as important sources for much needed capital that offer corporations new opportunities in financing sources. As such, it is expected that there will be more partnerships between major Western companies and sovereign funds. The funds are great partners for financing of large global projects.

Looking ahead, companies in the developed nations need to recognize that their shares will be primarily owned by foreign investors. There is nothing they can or should do about that. Instead, they should consider these investments as great opportunities. The momentum in global finance is shifting quickly in favor of emerging nations and will continue to do so in the foreseeable future. Meanwhile, expect sovereign funds and cash flushed companies from emerging markets to continue exerting much influence in the global financial markets.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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