RSS FeedBy M. Isi Eromosele
Emerging countries across Africa, Asia and Latin America are experiencing a new burst in capital investment as they embark on meeting demands for factories and plants, transportation infrastructures, water systems, medical facilities, energy systems and new homes. Propelled by this rise in capital investments in these regions of the world, the global investment rate has increased from a low of 21.2 percent of GDP in 2003 to 24.1 percent in 2008. However, there was a slight dip in 2009, as the world went through a global recession.
Utilizing economic models, Oseme Finance predicts that global investment could experience further boost, exceeding 28 percent of GDP by 2025. If expected economic growth is achieved, global investment will amount to $22 trillion by 2025, compared with $12 trillion today. If world growth does not meet projected forecasts, we still expect an increase in global investment from current levels, but at a lower rate of GDP.
The global investment mix will experience a change as emerging market economies in the developing world continue to be the engine of global economic growth. Meanwhile, developed economies will largely invest in improving their capital stock, with factories replacing their machinery equipment, for example.
Even today, there is twice as much investment in emerging economies as there is in the developed ones. This is particularly true is such economic sectors such as transportation, power and water systems. As such, we forecast that capital investment needs of $5 trillion in infrastructure, $7 trillion in residential real estate and $16 trillion in other economic assets by 2025.
Our analysis has valuable inferences for global businesses, investors and government policy makers. They will need to become accustomed to a new scenario where capital costs will be higher and emerging markets will propel the world’s savings and investments.
There needs to be a realization that companies which attain high capital productivity - output per dollar invested - would achieve sustained competitive advantage in their respective markets. This would reduce their need for the more expensive capital for growth, giving them more flexibility in their strategic planning.
Companies that already have straight capital finance sources would also accomplish competitive advantage. These financial sources include sovereign wealth funds and pension funds, among others.
For financial institutions, capital market activities will grow more rapidly as larger corporations raise more and more funds in debt markets, because they would be less expensive than bank loans. It is expected that mid-sized companies will seek more access to the capital credit markets, since the new capital standards will raise the cost of bank lending.
Investors would have to rethink some of their strategies as long-term interest rates start to rise. Bond holders could experience short-term losses as global interest rates spike upwards. However, in the long-term, investors will earn improved returns from fixed income investments due to higher interest rates. This would result in a move from traditional fixed income instruments and deposits to equities and alternative investments.
Governments would need to support the movement of capital from countries with high savings rates to economies where it can be astutely invested. Developed economy governments must find ways of promoting higher rates of savings and investments in their respective countries in order to attain a more balanced economy.
M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance
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