Impact of the Internet Age

on the Economics of Business

Patrick A. McNuttw w w . P a t r i c k m c n u t t . c o m

Outline of Presentation

Economic Realism 2010

• Paradigm shift

• FDI and Creative Industries

Investment Clinic

• Structured Finance, Innovation & Technology

• Investment Signals

There is a Paradigm Shift in

Economics: Greater Role for FDI

Old paradigm GDP = C + I + G + (X – M) still used in macro-models

Old economy FDI = retained profits

New economy FDI = asset-seeking FDI (low cost locations) and efficiency-seeking FDI (information and communications)

New paradigm GDP = X + FDI + (G + C)

Cross-border FDI capital flows

Since 1990: Cross-border capital flows have been rising at an annual rate of 10.7%, adjusted for inflation and exchange rates.

From 1980 – 1990 annual rate of 4.3% MENA has witnessed YOY average increase of 95%

due to global demand for petrochemical products.

Explain the increaseInformation has created connected markets allowing key

suppliers of capital to supply across borders and across currencies:

Example: DIFX and world portfolio funds or QSTP100% foreign ownership or China-Egypt

Intra-Regional FDI Flows

Top 5 FDI Recipients 2005-2009

UAE, Turkey, Egypt, Saudi Arabia, Morocco

FDI Flows to MENA [inc Turkey]

13.4% share of Developing World FDI

FDI Stocks as % Real GDP (average adjusted)

Middle East [inc Turkey]: 11.9%

North Africa: 24.8%

Example of ‘Classic’ FDI Targeted

Industries

Chemicals and chemical products (Bahrain)

Telecommunications (Kuwait)

Hotels and restaurants (Saudi Arabia)

Yarn spinning mills (Turkey)

Amusement and recreation (Dubai)

Connected markets

Connected markets exist because of the Internet: global markets are now locally

controlled…..data warehouses, IT processing, international brokerage, supply chain

management, technology transfer, information-sharing.

What are the consequences?

Global growth is increasingly driven by Emerging Market [EM] economies.

Key EMs are China, Russia and India

Emergent debt is still supported by strong economic fundamentals.

More Governance: Example: IAIGC Membership, zero customs duties under Greater Arab Free Trade Area

Information and Communication Will Define

the Opportunities

Information is now a commodity with positive costs. Communication costs are falling. Information processing = risks + mixed signals

OPPORTUNITIESHybrid portfolio of PE and HF focusing on distressed

opportunities.Strong global growth has come with falling capital costs

and a wider use of quants to reduce credit risk.FDI = investment in transfer of technology, IPRs and

technology licensing agreements.

Key Drivers of investment opportunities

Pressure on EM currencies and exchange rates:EM currencies to continue fluctuation

against US$ and Euro.Global outsourcing and local restructuring:

Focus on exposure to core products – energy, utilities, materials, equipment suppliers.

Real interest rate policy in Key EMs:Negative: Impact on confidence of investors to

Central Bank money as store of value.Positive: Appreciating currency.

.

Real Time Information Flow

Non-traditional FDI:

Not ‘bricks and mortar’

Business Strategy: ’Trade in Tasks’

Mobile Capital:

‘Trade in e-Funds’

Resources &

Materials: ‘Trade in Scarcity’

FDI & New Economy

Between 1980-1998, US, EU and Japanese companies signed 9000 strategic technology alliances: New economy companies with costless entry

Churning equilibrium: goes beyond traditional FDI of bricks & mortar’ to FDI as ‘information bridge’ in technology and information flows.

Information is a tradable resource for the distribution of technology and innovation with FDI potential.

Example of New Paradigm:

Trade co-operation

Increased Intra-nation trade: only 25% of Asian exports go outside Asia.

US, EU and Japan share of global economy is falling [60% in 2009] and expected to approximate 50% in 2020.

More co-operation and technology transfers: FDI ~ Chinese-Egyptian Business Council 2006 or

Singapore-China Trade Mission 2009

New Paradigm Recommendations for

FDI flows

Strategic exposure to Key EMs

with currency regime linked to US$

with rising inflation

with rising commodity prices

exposure to high yield corporate bonds

prefer credit over equities

prefer equities over government bonds

New Geo-political order

Emerging markets: young population, technology transfer, creative industries, and FOREX reserves:

EMs, GCC, MENA, ASEAN and BRIC

More FOREX Non-dollar Assets and the role of US $.

EMs’ Equity markets: High P/E due to high GDP growth = Flows of FDI as purchase of shares.

Post-Internet Agesince 1988 (arrival of home

PC and www URL)‘virtual’ investment

FDI and Creative Industries

EU Benchmark

2010:

8% GDP

Innovation & Technology Infrastructure

2015:

Greater than 8% GDP

Creative Industries:

EXAMPLES

Virtual surgery or High-Tech Tourism

Smartphone technology or Telcos

Prime Brokerage or Portfolio Fund Management

New FDI Investment Opportunities

Understand the ‘information bridge’ in the Template for FDI Investment

Asset-seeking FDI = Case C

Efficiency-seeking FDI = Case B

Market-seeking FDI = Case A

Template: Case A: Virtual surgery

Telerobotics = Internet & Information Processing

Virtually assisted

microsurgery

Virtual Environments

Bio-sentialcrops

Next generation antibiotics

Template Case B: Smartphone

Technology

Handset Manufacturers

Smartphone

Transformation

Networks

Devices

OS

Apps

Template Case C: Prime Brokerage

Privileged Information

Hedge Funds

TRADES

Brokerage accounts

Investment Clinic

Investment Cycle

Moral hazard embedded in risk

analysis

Monetary policy

does not work

Information Signals

Information Processing

Data availability in the cloud Virtualisation of both product and process

Example: (i) IT infrastructure delivered as a service(ii) Convert data into strategy and insight

(iii) 50% increase on average in Business expenditure on information processing equipment and software since

1990s

Mismatch in Risk Signals

Weightless companies

Mismatch in Risk Signals

New Technology of

Structured Finance

Information Processing

and Innovation

Weightless virtual companies

Weightless companies: $x invested in physical assets, $y invested in sales & capitalisation: Yahoo, Microsoft, Apple, Google…………….???

$y >> $x Market Panic

Analyst advice: Strong SELL to SELLConsensus: HOLD

Panic as Consensus ‘Sell’ and Price FallsDeviation of Equity values from Fundamentals

Investment Signals S&P 500: 40% of revenues from foreign sales.

50% of world’s equity capital is now outside the US.

Nascent bubble in EMs depends on sustained growth in China: 10% of World GDP.

Case I

Macro economic trends moving towards intra-nation trade and exchange rates as policy tool. Case I EMs and ASLEEP economies to account for 50% of world trade and 30% of world exports by 2015. Case II production drives demand in oil and core scarce resources.

Micro economic trends with technology transformations. Case III vertical handset manufacturers transform to horizontal computer markets. Case IV global in-sourcing with mobile workforce. Case V increased mobile banking and e-purse payment methods.

Concluding……..

What lies ahead in brokerage:

FDI/Macro Trends?

Today Tomorrow

What lies ahead in brokerage:

FDI/Micro Trends?

Today Tomorrow

Private Equity: Prognosis

• Herding and Panic

• Virtualisation and absence of scarcity in resources

Information Processing

• Latest technology

• Signals v company fundamentals

Weightless companies • Geo-politics

• Ease of trade v ease of entry

Intra-Regional Virtual Trade

Prognosis for FDI

Markets remain irrational longer than you remain solvent: short term investors ‘rent’

rather than ‘own’ shares

Long term investment in Asia as they decouple from US and EU as Asia bouyed

by increasing domestic demand

EU Mifid Directive with brokers beholden to prove best deal for clients in creative

industries

Strategic Trade Alliances like Egypt-China and China- Singapore with investment

opportunities

Low Communication Costs But High

Governance Regulations

Predict an Information Overload!!

THANK YOU

‘’do not wait for the stream to stop before crossing it’’