Monday, October 1, 2007
The world of finance is undergoing a fundamental shift.
If you've been reading the headlines over the last year or so, you've probably seen it... though it may not have registered. I'm talking about the emergence of several new players in international finance...
Here's a hint: They're almost all Middle Eastern.
Altogether, Gulf Cooperation Council (GCC) states have made $1.5 trillion in export earnings in the last five years. This money has to go somewhere, and $542 billion of it has gone into global capital markets.
You've seen it in the headlines.
In the last two weeks alone, Dubai made a bid for 20% of the Nasdaq (the Nasdaq's 28% stake of the London Stock Exchange would be part of the deal); Qatar bought 10% of the Swedish stock exchange as well as 20% of the LSE; and Abu Dhabi bought 7.5% of Carlyle Group, a private-equity firm that has $76 billion under management.
So now Dubai and Qatar now own nearly 50% of the LSE. And as of 2006, oil-exporting nations – Bahrain, Iran, Iraq, Kuwait, the UAE, etc. – owned $132 billion worth of U.S. debt (nearly double what they owned the year before).
Even so, a 2005 report by the Bank of International Settlements (BIS) indicates that this number is misleadingly small. The BIS was unable to account for almost 70% of an estimated $700 billion of investable funds generated by OPEC as oil prices increased from 1999 to 2005.
The Department of the Treasury believes that oil-exporting nations are using accounts in Luxembourg, the Cayman Islands, and Belgium to buy U.S. Treasuries without detection.
Aside from debt, the Middle East is taking massive stakes in banks and finance assets. Earlier this week, Financial Times wrote that state-owned "sovereign wealth funds" have purchased an estimated $35 billion worth of banks, securities houses, and asset managers since January 2006. Roughly $14 billion of this came from the UAE and Qatar.
Here are a few of the UAE's largest finance holdings...
Currently, most of the growth opportunities for large-cap financial companies lie outside of the U.S. And the companies that are aligned with foreign governments – particularly in the untapped markets in Asia and the Middle East – will find their profits in those markets growing much faster than their competitors'.
Take Deutsche Bank, for example. The German heavyweight has been in Dubai since 2001, but only just opened an office at the Dubai International Finance Center last year. A few months later, Deutsche began providing buy and sell prices for the two largest companies on the Dubai exchange. Recently, Dubai's government took a 2.2% stake in the bank, making it one of the bank's largest foreign investors.
Over the coming years, we're going to be seeing more of this: state-owned funds taking large stakes in blue-chip assets. The newest, biggest players at the moment are the Middle East, Asia, and Russia.
Look for more on Asia and Russia in upcoming essays. Until then...
Gold breaks $750... Lihir Gold, Rangold Resources, Compania de Minas Buenaventura, and two gold ETFs at new highs.
Grain prices continue record run... All-time highs for Monsanto, Bunge, Agrium, and Mosaic.