Saturday, December 22, 2007

The new Financial Power Brokers in the World

The Dec 2007 article by McKinsey outlines the world's new financial power brokers. In summary

a) The new financial power brokers are oil-rich countries, Asian Central banks, hedge funds and Private Equity firms. Their assets have tripled since 2000. Even though it constitutes only 5% of the total global assets, their rise over the last 5 years has been astounding.

b) The 4 entities (oil-rich countries, Asian Central banks, hedge funds and Private Equity firms – in that order) have helped lower the cost of capital for borrowers around the world. In the United States, it is estimated that long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone.

c) At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets. Second in size to petrodollars are the reserves of Asia's central banks. In 2006, Asia's central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. China alone had amassed around $1.4 trillion in reserves by mid-2007.

d) Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.

Net/net - Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. In particular pay close attention to the Middle East. The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Recently, an Abu Dhabi based fund bought 5% stake in Citigroup. Dubai has reinvented itself as a financial powerhouse not just dependent on oil. Since the Gulf is situated between Asia and Europe, it is becoming a hub for travel and logistics.

Taking this to the next level, I predict that the Gulf would be a major source of opportunity for software vendors - since development in economic areas would necessitate software automation and streamlining of processes. The other 2 areas for software vendors are India and China - due to the sustained high rate of growth.

See some interesting videos about Dubai
CBS 60 minutes - Part 1 (the cheapest room at the Burj-al-Arab hotel is $2000 a night)

CBS 60 minutes - Part 2

A nice report by Richard Edelman - CEO of Edelman PR firm

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