His argument was that currencies - and countries - we now regard with suspicion or worse could, within a generation, be transformed into the new emblems of stability. He pointed out that the deutschmark did not look too wonderful in 1947.
However, there is an even more important consideration. It is not just currencies we are talking about; it is economies. The economies that now look like basket cases may well be the winners of the future. The financial institutions have, over the past 10 years, discovered the importance of what they call the "emerging markets". Every investment bank and many economic consultancies have rushed to appoint specialists in such markets, with the effect that investment in, say, Indonesia, becomes the flavour of the month. But this is pretty much a scatter-gun approach, with investors driven as much by herd instinct as by careful research.
In any case, over the past two or three years the fashion for investing in emerging markets has begun to wane. Everyone can spot the opportunities, indeed probably over-estimate them, so there is no added value for the investor. You can see the effect of these attitudes in the graphs.
Emerging markets as a whole shot up until the end of 1993 but since then have really gone nowhere (see left-hand graph). Individual countries have soared or sagged, as the graphs for Venezuela and Pakistan show. The former was a brilliant buy in 1990, but a catastrophic one thereafter; the latter was great in 1993, but again dismal since then. And some potentially promising countries have simply bumbled along: witness the graph for Jordan.
All these graphs show stock-market returns, but these may reflect the narrow opportunities for investment as much as the underlying performance of the economy. They are a warped mirror. So ways of getting funds into investments in these places without necessarily plunging into the stock markets are needed also.
Meanwhile money in Western pension funds continues to pile up. Where might it go?
What about the fringe? Even now there is a host of countries which as yet have remained "undiscovered" by the investment community. They have been neglected largely because there has, at least from the narrow perspective of the financial community, been something wrong with them: a hard-line communist or military government; very high levels of corruption or crime; physical danger for non-nationals (and frequently for nationals too); capital restrictions which prevent investors repatriating funds; and a simple lack of economic activity.
But things change. Look at the new fashion for investment in Vietnam. If anyone in the United States had said 25 years ago that Vietnam would become a hot investment proposition, they would have been laughed at. So the rewards for any investor, or firm of investment advisers, who can develop appropriate research into the underlying strengths of these deeply unfashionable economies, and then find ways of investing in them, are very large indeed.
Which countries are they? Here are some "fringe" ideas. There is Cuba, of course. At some stage within the next 15 years Cuba will return to the market system. It will again become an offshore service centre for the Florida economy, helped by the diaspora of Cuban talent that has migrated to the US over the last generation. If Cuba is able to establish a functioning democracy post-Castro, the attractions will be enormous.
Within Europe the astonishing growth of countries like Poland and Hungary is now widely appreciated. A few brave souls (including myself and my lunch companion) happen to think Russia will be the next great winner - perhaps Europe's fastest-growing economy through the first decade of the next century. But you can go further, and ponder at what stage Ukraine or Bulgaria will achieve take-off. Ukraine is particularly fascinating, for it was the bread-basket of Europe for generations; it has deep cultural resources, a well-educated population and a large expatriate community in the West to draw on.
Next, how about Iran? It has great natural wealth and a substantial established middle class. The past 15 years have been difficult for obvious reasons, but there is no reason why a Muslim society should not be a prosperous one. The trend of the oil price over the next five to 10 years may well be upwards, as demand builds from East Asia. If it were possible to bring in a greater element of market allocation of resources, without submitting to the hated Western cultural influences, you could sketch a scenario where Iran became a tiger of the region.
Come to think of it, at some stage maybe Algeria will again become an attractive investment proposition. It was not colonised by the French solely because of its climate - it was a powerful economic resource. That resource remains, to be unlocked at an unknown point in the future.
Burma? Yes, of course. At some stage in the next 10 years it will join the democratic fold. This is crucial to the timing of Western investment because even if there were attractive economic opportunities there, politics rule out involvement for the moment. But politics change. The basis for democracy in the shape of an honourable leader of the opposition already exists; and note that the British went into the country because they felt they could exploit the underlying wealth.
Within sub-Saharan Africa, a region not normally recognised as an economic power zone, there are enormous underlying opportunities. Indeed, given the resources there, the potential for catching up by countries like the Ivory Coast, Nigeria and Ghana is perhaps as great as anywhere in the world. At some stage in the admittedly misty future the riches of Africa will again be unlocked, hopefully this time for the prime benefit of the people who live there.
One can go on, but you see the point. When looking at the global economy is it important to recognise that relative success shifts from one region to another. It is very hard from the perspective of today to envisage a country like Ukraine being an economic powerhouse. But then, from the perspective of the mid-1970s it would have been very hard to imagine China achieving compound growth of about 8 per cent through the 1980s.
From a Western investor's view-point a problem does remain. To identify the country is one thing, but to find the appropriate investment vehicle is another. Just plonking money into the stock market is not enough, or at least may miss the best opportunities. Indeed there may not even be a stock market yet. So there is a whole second stage to come. But at least there is a model. The development of the present fashionable emerging markets has generated investment skills, not so much in stock-picking but more in the creation of appropriate forms of fund to invest in these countries.
The countries must feel happy with the process. Within Africa in particular you sometimes hear people saying they have to make a pact with the devil: if they want private sector investment they have to satisfy international bodies such as the IMF and World Bank. But as the private sector does more of its own research, the less it will have to depend on the seal of approval of the IMF. So gradually even this objection will wane.
And the prizes for both sides are enormous. If the rouble were eventually to become a hard currency, the countries of Western Europe would benefit as well as those to the east.
- More about:
- C And #244;te D'ivoire (ivory Coast)
- International Monetary Fund
- West Africa