Hamish McRae: We have welcomed the new rich for centuries, now isn't the time to bar them
Sunday 22 January 2012
What will the world's new rich want to buy? And, since the UK is perhaps the most open market in the world, should we remain relaxed about their investment choices?
We have just heard that a Chinese sovereign wealth fund is setting out to buy a just-under-9-per-cent interest in Thames Water, which would have seemed almost bizarre 20 years ago. We have had Tata of India taking control of Jaguar Land Rover and turning the whole business into a success story. Much of London's office property is foreign owned and the Shard, what will be – when finished – the tallest building in the European Union, is owned by a consortium of Qatari investors.
We have become used to the idea that new money – particularly from China, India and the Middle East – should be reshaping our cities, and indeed our lives. So in one sense this Chinese investment, and it is only a portfolio investment at this stage, merely takes a bit further a policy of welcoming investment that we have followed for, gosh, the best part of 200 years. (Remember it was European bankers, not British ones, that helped make London the centre of world finance in the 19th century.)
But there is a difference between the current wave of investment and previous waves in that it is coming from the emerging world rather than the developed world. In the past, developed countries invested in the developing world, but there was not a significant flow the other way round. This is the first time that poorer countries are investing in the rich ones. In the case of Middle Eastern investors there is an obvious driver, in that there is surplus oil wealth that cannot be invested at home. But in the case of China and India there are huge investment needs and opportunities. For those two countries the lure of the UK must be in the diversification it offers. I suppose in the case of China you could also say that given the scale of the flow of savings, the odd investment in a UK utility is marginal to the funds available.
That leads to another question: to what extent will the emerging world's tastes and choices shape our own? Come back to investment in a moment and start with consumer choice. The graph shows how the balance of growth is shifting from West to East. It comes from an excellent study by HSBC on the world economy in 2050 and, as you can see, the decade we are now in will be the first when more growth will be generated by the emerging world than the developed one. That is the first time for a couple of centuries. HSBC thinks that global growth will trend upwards too.
As far as consumption is concerned, we are already seeing the effect. The new rich want to buy top end. So there has been a boom in sales of luxury cars (Rolls-Royce sold a record number last year), in fine wines (great for Bordeaux), in fashion labels (great for Italy) and so on.
These trends in global consumption have attracted a lot of attention, not least because exports to these countries are one of the main supports to our own economy. Much less attention has been paid to the trends in investment. True, we have some experience of this, particularly investments from the Middle East, for that has been coming since the oil shocks of the 1970s. But the flow from India and China is more recent. We are still in the early stages of something that will become huge. So what can we say about it?
It is important to make a distinction between the two countries, indeed several distinctions. For a start, the scale is different: the flow from China is, and will be, vastly larger than that from India. But the purpose is different too. At the risk of over-simplifying, investment from India is driven by the quest for commercial success, whereas China's is driven by national strategy. So all the investment from India has come from private companies, making commercial decisions. They may have a desire to rebalance their operations by making them more international, but they are in no way agents for the state.
China's purpose is pretty explicit in Africa where the aim is to secure access to raw materials. It is less explicit in the case of, say, the purchase of Volvo by Geely, the Chinese privately owned car-marker. (Geely also has a stake in Manganese Bronze, which makes London cabs.) And it is not particularly explicit in the investment by China Investment Corporation, one of the country's sovereign wealth funds, in part of the holding company that owns Canary Wharf. Nevertheless, you can see a pattern, where China is buying up top-quality European assets and not bothering with second-rate stuff. That is a strategy: buy the best.
We are, I think, still in the very early stages of this diversification of assets, particularly in the case of China. Stage one was buying US Treasury securities. Such investments have not done as badly as they might have, for the loss on the exchange rate has been partially offset by the rise in the assets' price. The "safe haven" status of US government paper remains solid, notwithstanding the downgrade by the ratings agency Standard & Poor's. But on a long view it must make sense for China both to diversify away from dollar assets and to try and get a better rate of return.
UK public utilities have a considerable lure for foreign investors. They offer a reasonably stable flow of revenues in a reasonably predictable regulatory environment. The OFT says that one-third of our public utilities are now foreign-owned. Prime property also has similar attractions, though timing is crucial. But I suspect the flow of investment funds will be placed much more widely in the years to come. There is a lot of money around.
So should we remain relaxed about some of that money being used to take control of our enterprises? My view is that investment from the emerging world is in some ways more welcome than that from the old developed world. Contrast the great job that Tata has done with Jaguar Land Rover with the performance of the Spanish construction company Ferrovial at Heathrow. Point made?
This is unlikely to be a bond-market turning point, but the bears are gathering
Trying to pick a turning point in the markets is a mug's game, and I don't think this is it. Still, it is worth noting that this year has so far been the worst for US Treasury securities since 2003. There are a number of reasons for this.
On one side of the equation, the US economy does seem to be leading the developed world out of the downturn, with signs that much of the deleveraging that the country has had to do has been taking place. The housing market has picked up and job creation has been rather better than expected.
On the other side, the eurozone shenanigans have calmed down a little, thanks to the European Central Bank's huge injection of liquidity into the banking system and (less obviously) some strong-arm tactics by eurozone governments to get their financial institutions to bid at public-debt auctions.
So while dollar assets have not lost their "safe haven" status, investors are not quite as frightened as they were in December. That improvement in sentiment is evident in share markets, too.
But let's accept that even if this is not a turning point for long bond yields, they will turn some day and when they do the bear market in bonds will be vicious. Take the UK. We have some undated gilts, such as War Loan, but the longest dated one, which matures in 2060, went below 3 per cent last week.
Leave aside that fact that it is hard to worry too much about what will happen in 2060, ask what is likely to be the average rate of inflation in Britain over the next 48 years and then ask what sort of real return you are likely to get on that investment. The price must be wrong.
And when people come to realise that present long-term yields offer utterly inadequate protection against debasement of the currency, the bear market in bonds begins.
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