The Hindu Business Line : Economic growth does not guarantee good returns

The developed world – comprising the US, Canada, Western Europe, Japan, Australia and New Zealand, Singapore, South Korea and Taiwan, and Hong Kong – contains less than 15 per cent of the world’s population, yet it produces over half of the world’s goods and headquarters over 93 per cent of the world’s equity capital. But this very unequal distribution of output and capital will not last, writes Jeremy J. Siegel in ‘Stocks for the Long Run,’ fourth edition ( www.tatamcgrawhill.com ). The emerging nations’ share of output and equity capital has been rising rapidly and will continue to do so, he adds.

“Forces unleashed by the communications revolution and market capitalism will push countries such as China and India to the forefront of the world economy,” predicts Siegel. He expects the share of the developed world in the total stock market value to shrink to slightly more than one-third. “Western capital will be sold to the emerging nations in exchange for the goods that ageing economies will need.”

The author, however, warns investors that the increase in a country’s share of world capital does not necessarily represent capital appreciation of existing shares, because most of the increases come from the flotation of new capital as well as the acquisition of old capital.

Reasoned arguments that seasoned investors will relish.

Tax perspective

With the liberalisation of foreign investment norms, investing in foreign companies is comparatively easier than before; but before venturing into such an exercise, you must carefully consider the pros and cons thereof, cautions Samir S. Mogul in ‘Tax & Financial Planning Guide for Investors and Traders in Securities & Commodities’ ( www.taxmann.com ). He speaks of the different modes of investing in listed companies outside India, as follows: domestic companies with large foreign business/service exposure, direct foreign investment, domestic mutual funds, and international mutual funds. From a taxation perspective, Mogul advises that while acquiring assets abroad, investors should consider the tax rates in the foreign country on the gains depending upon the period of holding, provisions relating to set-off of losses, and the double taxation avoidance agreements (DTAAs).

Useful guide.

Facilitative governments

Foreign direct investment (FDI) is much sought after by both developed and developing nations, writes C. Gopinath in ‘Globalization: A Multidimensional System’ ( www.sagepublications.com ). He cites examples from the developed world, such as of the Japan External Trade Organization, a government agency, advertising in the US newspapers that Japan is a good market to invest because Japanese consumers appreciate quality and new products. InvestItaly, an Italian government organisation, similarly advertises in the US that Italy is ‘a great place for biotechnology research with a skilled workforce, government support, and strong interaction with academia.’

Since the question of national interest is important enough for the government to intervene and direct the nature of investment, any scenario of a hands-off government has more credibility as an ideal than as a representation of reality, the author avers. As nations have moved toward freer markets, they have seen their role change from being directive to facilitative, and their role in providing the right institutions and regulations that support the functioning of markets has been heightened, he reasons.

“Countries like greenfield investments rather than M&A, for the former adds to productive capacity while the latter merely transfers ownership and control,” Gopinath finds.

In-depth analysis.

Downward risks
The relative resilience of emerging markets to the global financial turmoil has been due to three main factors, observe the authors of ‘World Economic Situation and Prospects 2008’ ( www.academicfoundation.com). “First, the response of central banks in the major developed economies – and especially the interest rate cuts by the US Federal Reserve Bank – has served to lift equity markets, including in emerging markets.” The second factor is that the global financial turbulence has been concentrated in innovative credit instruments that are mostly prevalent in mature financial markets; and the third, the macroeconomic indicators of a number of key emerging economies have seen a visible improvement.
Disturbingly, however, the report states that there can be downward risks to the current situation of emerging markets being a temporary haven for portfolio funds. “The most vulnerable developing and transition economies are likely to be those running sizeable external imbalances and/or those in which credit growth has risen to unsustainable levels and is characterised by risky borrowing.”
For the all-too-essential big picture.

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