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   Confidential Annex Research Client Edition

GLOBAL TRENDS

Annual Analysis of U.N. Report on Global Direct Investments  in 2001

Global Investments Plummet

…in Aftermath of 9/11, But There Are Some Bright Spots

PHOENIX, Jan 23 - In its first report on direct foreign investments for a post-9/11 period, the Geneva-based United Nations Conference on Trade and Development (UNCTAD) provided ample evidence of a global plunge in multinationals’ business spending.

In the aftermath of the Sep 11 attacks, global investments plummeted by 51%.  The business spending in the U.S. and the E.U. (European Union) plunged by 59% and 60% respectively in 2001, according to the UNCTAD 2002 “World Investment Report.”  Spending in the developing world also declined, but much more modestly (down 14% in 2001).

The cross-border M&As (mergers and acquisitions), the main drivers of the foreign investment explosion in the post-Cold War era ($6.1 trillion since 1989), dropped by 48% in 2001. 

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Even in their relative demise, however, the M&A’s gained in prominence as drivers of foreign investment activities.  Their share of direct global investments went form 77% in 2000 to 81% in 2001 (also see “Cross-border M&As Rule the World”, Feb 2001).

But not everything was gloom and doom in the latest UNCTAD report.  There were some bright spots on the global investments map.  Just as we suggested in the immediate aftermath of the 9/11 attacks, what had happened was the End of Folly, Not of World (Sep 2001).  Multinational companies willing to engage in worldwide “stalk and sharp-shoot” contests, rather than “herd and shot-gun” fairs, will fare better.  They will still find the post 9/11 world a target-rich area.

Some Bright Spots

As you can see from the chart, while the developed countries led by the U.S. and the E.U. fell like lemmings off the proverbial cliff in 2001, foreign investments in Mexico, for example, surged by 68%.  Investment activities in India and Hungary were up by 47%.  The Red China, the “Real Cold War Winner,” the developing world’s most popular investment destination, attracted 15% more capital in 2001 than the year before.

Nor were these countries isolated examples.  Eastern Europe, for example, was the only relatively developed region of the world in which foreign investments actually rose in 2001 (they were up 2%).  And they grew at a compound annual rate of 27% in the last 10 years.

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So those among our clients who heeded our 1996 advice - to “stalk and sharp-shoot” by investing in Eastern Europe - are now probably reaping the benefits (see Eastern Europe’s “Renaissance II,” our special report, June 1996).

Africa, the perennial orphan of global bankers and multinationals, appears to have experienced a renaissance of its own amid the post-9/11 gloom and doom.  Foreign investments in that part of the world more than doubled in 2001, from $8.7 billion to $17. 2 billion.  But they continue to be minuscule relative to other world regions.  China alone, for example, received nearly three times as much money in 2001 as the entire continent of Africa in its best year ever.

Furthermore, the increases in Africa are due to large projects in only two countries - South Africa and Morocco.  Global players continue to treat the rest of the continent with casual irrelevance.

By the way, Mexico’s 2001 big jump was also mostly due to a single transaction - Citibank’s $12.5 billion acquisition of Banamex, Mexico’s largest bank.

Regional Analysis

Developed countries weren’t the only losers in 2001.  Investments in Argentina, for example, the Latin American country that bankers and multinational companies showered with money only two years earlier ($24 billion in 1999), dropped by 71% in 2001 to only $3.2 billion.  And the foreign money all but dried out in 2002, as the Argentine financial crisis caused street riots and looting in Buenos Aires.

Brazil, Latin America’s largest country and the biggest recipient of foreign investments in the last 10 years ($156.7 billion), also took a hit in 2001.  Foreign capital inflows into Brazil dropped by 31% to $22.5 billion.  This placed Brazil behind Mexico’s $24.7 billion for the first time since 1995, when Mexico suffered a financial crisis (see “Wall Street, Not Mexico Bailout,” Annex Bulletin 95-08, Feb 2, 1995). 

Investments in Latin America as a whole fell by 11% in 2001. 

Elsewhere in the world, Southeast Asia, the largest recipient of foreign capital in the developing world, suffered a 28% drop in direct investments in 2001.  Hong Kong led the decline by a 63% drop (although HK is now a part of mainland China, it is still also shown as a separate entity in the UN report).  

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Foreign investments in the Pacific region (which includes Japan, Australia and New Zealand), also dropped off sharply in 2001.  They were down 48% from the year before to $136 billion.  This part of the world has had one of the most sluggish foreign investment records in the post-Cold War era.  While global investments surged at 17% compounded annually in the last 10 years, the Pacific region’s growth has been a mere 5% per year.

The biggest recipient of foreign capital in the Middle East also hit a bump in 2001.  Direct investments in Israel slumped by 31% to $3 billion (from $4.4 billion in 2000).  More than offsetting that decline, however, Turkey received a real shot in the arm in 2001 with a $3.3 billion foreign capital infusion.  That’s about a four-fold jump relative to prior years. 

Oil and gas pipelines, and Turkey’s strategic role as Washington’s secular Islamic partner in the Middle East quagmire, both played a part in global bankers’ and multinationals’ renewed interest in this NATO country.  For decades, Turkey has been NATO’s (read Washington’s) eyes and ears closest to Russia’s soft southern underbelly.

Speaking of Russia, come rain or shine; feast or famine; Al Qaeda or Chechnya… Washington’s partner in the war on terrorism continues to be virtually shunned by the global bankers and multinationals (also see Two Faces of Globalism; Yin and Yang; Princes and Paupers, Dec 1998) and Russia Is Still the Bogey, Oct 1997).  For the second year in a row, and for the third time in four years, direct foreign investments into Russia in 2001 have ebbed.  They reached a peak of $4.9 billion in 1997. 

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In 2001, direct foreign inflows amounted to a mere $2.5 billion - about half that of the tiny Czech Republic, and about the same as that of the equally small Hungary.

If money talks, and if smart analysts follow the money, Russia is still being treated as a bogey by the sweet-talking West.  On a per capita basis, the world’s richest country in terms of mineral resources has been consistently receiving 20 times less foreign capital than Israel; 14 times less than Hungary; eight times less than Mexico; six times less than Brazil; and half as much as China, even though the latter is the world’s most populous country.  Only India, Russia’s nuclear partner, has received less among major countries. Who says politics and business don’t mix?

Summary

In our first report after the 9/11 attacks, we opined that what happened was the End of Folly, Not of World:

When the New York stockmarket reopened on Sep. 17 (2001)… the Dow dropped 7% and the airline stocks plummeted about 40%.  To some investors, it seemed as if the end of the world had come.  It did not.  The universe was unfolding as it always has been.  What goes up must come down.  The end of folly, not of the world, was merely taking place… A cashflow-driven market, which is what we’ve been saying for years the Wall Street casino has become, simply shifted its assets away from some U.S. equities into other investment opportunities. 

Annex Bulletin 2001-18 (Sep 26, 2001)

The latest UN report on global investments confirmed our initial assessment.  There are still plenty of opportunities left in the world for patient sharp-shooters.  But the era of shot-gunning the world markets seems to be over.  That’s good news for bargain hunters; bad news for sheep among global investors.

Happy bargain hunting!

Bob Djurdjevic

Also, check out some of our other reports on global investments and trends:

China: Real Cold War Winner (Mar 2002), Robber Baron Era Is Back (Feb 2001), End of Folly, Not of World (Sep 2001), A Cleaner, Neater World? Hardly. Deadlier, for Sure (Feb 2000), Death of The Corporation (July 1999), Two Faces of Globalism; Yin and Yang; Princes and Paupers (Dec 1998), The Great Asian Bailout (Oct 1997), Russia Is Still the Bogey (Oct 1997).

Or just click on and use appropriate  keywords.






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume XIX, No. 2003-02
January 23, 2003

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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