Global Investing vs. Financing

By M. Isi Eromosele

The term ‘investing” can be associated with different activities, but the common target in these activities is to use the money (funds) during a time period to seek the enhancement of an investor’s wealth.

Funds to be invested come from assets already owned, borrowed money and savings. By foregoing consumption today and investing their savings, investors expect to enhance their future consumption possibilities by increasing their wealth.

It is useful to make a distinction between real and financial investments. Real investments generally involve some kind of tangible asset, such as land, machinery, factories, etc. Financial investments involve contracts in paper or electronic form such as stocks, bonds, etc.

Financing

Corporate finance typically covers such issues as capital structure, short-term and long-term financing, project analysis, current asset management. Capital structure addresses the question of what type of long-term financing is the best for the company under current and forecasted market conditions; project analysis is concerned with the determining whether a project should be undertaken.

Current assets and current liabilities management addresses how to manage the day-by-day cash flows of the firm. Corporate finance is also concerned with how to allocate the profit of the firm among shareholders (through the dividend payments), the government (through tax payments) and the firm itself (through retained earnings).

But one of the most important questions for the company is financing. Modern firms raise money by issuing stocks and bonds. These securities are traded in the financial markets and the investors have possibility to buy or to sell securities issued by the companies.

Thus, investors and companies searching for financing realize their interest in the same place, in financial markets. Corporate finance area of practice involves the interaction between firms and financial markets and investments area practice involves the interaction between investors and financial markets.

The investment field also differs from the corporate finance in using the relevant methods for research and decision making. Investment problems in many cases allow for a quantitative analysis and modeling approach and the qualitative methods together with quantitative methods are more often used to analyze corporate finance problems.

The other very important difference is that investment analysis for decision making can be based on the large data sets available from the financial markets, such as stock returns, thus, the mathematical statistics methods can be used.

Corporate Finance and Investments are built upon a common set of financial principles, such as present value, the future value and the cost of capital. And very often, investment and financing analysis for decision making use the same tools but the interpretation of the results from this analysis for the investor and for the financier are different.

For example, when issuing securities and selling them in the market, a company performs valuation looking for the higher price and for the lower cost of capital, but the investor using valuation search for attractive securities with the lower price and the higher possible required rate of return on his/ her investments.

There are two types of investors:

• Individual investors
• Institutional investors

Individual investors are individuals who are investing on their own. Sometimes, individual investors are called retail investors. Institutional investors are entities such as investment companies, commercial banks, insurance companies, pension funds and other financial institutions.

In recent years the process of institutionalization of investors has accelerated.  The main reasons for this trend are that institutional investors can achieve economies of scale,

demographic pressure on social security and the changing role of banks.

Direct vs. Indirect Investing

Investors can use direct or indirect type of investing.  Direct investing is realized using financial markets and indirect investing involves financial intermediaries.

The primary difference between these two types of investing is that in applying direct investing, investors buy and sell financial assets and manage individual investment portfolio themselves.

Consequently, by investing directly through financial markets, investors take all the risk and their successful investing depends on their understanding of financial markets, its fluctuations and on their abilities to analyze and evaluate the investments as well as manage their investment portfolio.

Conversely, by using indirect type of investing, investors are buying or selling financial instruments of financial intermediaries (financial institutions) which invest large pools of funds in the financial markets and hold portfolios.

Indirect investing relieves investors from making decisions about their portfolio.

As shareholders with ownership interest in the portfolios managed by financial institutions, the investors are entitled to their share of dividends, interest and capital gains generated and pay their share of the institution’s expenses and portfolio management fee.

The risk for investors using indirect investing is related more with the credibility of chosen institution and the professionalism of their portfolio managers. In general, indirect investing is more related with the financial institutions which are primarily in the business of investing in and managing a portfolio of securities.

Investors can invest their funds by performing direct transactions, bypassing both financial institutions and financial markets. But such transactions are very risky, if a large amount of money is transferred only to one’s hands.

Companies can obtain necessary funds directly from the general public (those who have excess money to invest) by the use of the financial market, issuing and selling their securities.

Alternatively, they can obtain funds indirectly from the general public by using financial intermediaries. And the intermediaries acquire funds by allowing the general public to maintain such investments as savings accounts, Certificates of Deposit accounts and other similar vehicles.

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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Long Term Shifts In Global Investment

By M. Isi Eromosele

The recent and still ongoing global financial crisis followed two decades in which capital became increasingly cheaper and easily available. For several reasons, global interest rates have remained low up to today. There are many reasons for this, including continued economic weaknesses in developed economies, weak demand for credit by households that are heavily in debt and monetary policies by global Central Banks aimed at inspiring growth. As such, a number of analysts are concluding that low interest rates will be prevalent for the long-term.

The Oseme Finance analysis reveals that the low interest rate scenario will certainly end in the next few years. Our findings show that the long-term trends in global investments and savings, which had contributed to low interest rates in previous years will invert in coming years. This is because the emerging economies have started a building boom that is expected to last for the next two decades, at the very least.

These emerging countries are experiencing fast-track urbanization, which has raised the demand for new road transportation networks, ports, educational institutions, water systems, energy systems, medical facilities and other infrastructure facilities. New factories are being built, new machinery is being bought and new housing is being built for a growing workforce.

However, several factors, including an aging population in these countries will limit the growth in global savings. Therefore, it is apparent that the world is entering an era where the desire to invest surpasses the readiness to save, which would inevitably result in higher interest rates.

It is expected that increased capital costs will be beneficial to savers, which could result in muted borrowing. This would limit capital investment, in the end slowing global growth.

Our analysis also indicates:

• Investment rate within advanced economies has been declining since the 1980s, which saw investments (gross capital investment) from 1985 to 2007 drop by $25 trillion, compared to previous investment levels. This considerable drop in capital demand certainly contributed to the fall in global interest rates that lasted for two decades, fueling a sense of false security in the global capital credit markets.
• The world is about to experience a new wave of huge capital investment that will be primarily propelled by emerging economies. We forecast that by 2018, demand for global investment will have reached astronomical levels
• This projected investment thrust will put pressure on global interest rates unless people around the world increase their savings rates considerably. Looking forward, our analysis indicates that this increase will result in a serious break between ability to save and readiness to invest
• The above chasm between the need for capital to invest and sustained savings level will unavoidably result in long-term interest rates. This will result in reduced realized investment, which may conceivably prompt more savings. We expect that long-term interest rates may start moving up again within the next three years as investors start to price the long-term structural shift.

The above findings have crucial inferences for global businesses, financial institutions, investors, consumers and governments. They will need to adapt themselves to a world where investment capital is more costly and less available, with most of the global investment occurring in emerging economies.

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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New Growth In Global Investment

By 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

Copyright Control © 2011 Oseme Group

The New Paradigm in Global Investment

By M. Isi Eromosele

The last decade has ushered in a fundamental shift in the global economy. Globalization has resulted in the integration of fast-growing emerging nations, i.e. China and Brazil into the world trading economy and capital market structures. As such, these emerging economies has captured an increasing market share of consolidated exports as well as capital inflows, precipitating a continuing gradual transfer of real economic wealth from the developed to emerging economies of the world.

Earlier in the past decade, cheap credit created a bubble debt. There was a sharp increase in consumer spending, caution was thrown to the wind in mortgage lending and leveraged buyouts boomed, especially in the United States. The structural dynamics of the global economy was further undermined by a failure of regulations to keep in stride with the pace of changes going on within world financial system.

Given the continued frailty of the global financial system (the growing debt crisis in Europe) and its spreading impact on the real economy in the United States as well as other parts of the world, there are enduring structural risks for many major world assets. Additionally, there is still great risk for further bank credit losses, tightening credit conditions and uncertain deleveraging of the balance sheets of global financial institutions.

Global financial markets have experienced severe stress and eminent levels of instability. This instability will continue, albeit at a lower level due to the ongoing global economic uncertainty and continued problems in the global financial system. Additionally, the formal rules of the global capital markets system have been upended, with government intervention and political involvement in economic management prevalent in many developed nations of the world. This has had undue influence on outcomes of various global investments, making for unfavorable risk/reward tradeoffs.

However, market participants have continued to reduce leverage to conserve capital and reduce balance sheet usage. This is creating different market prices for cash and artificial economic exposure as for example, cash investment grade bonds versus credit default swaps. This means that in the bond markets, there is a high yield premium for buying physical exposures, whether corporate bonds or government debt. This liquidity premium is typically elevated in uncertain times, but is especially high at the present time, given global economic uncertainties.

The New Financial Environment

The structure of global finance has been irreversibly altered since 2008, especially where investment banks are concerned. The process of credit deleveraging has had profound implications for the global economy; capital markets operations, global financial regulations as well as global investment.

The United States continue to suffer from a severe case of balance of payments problem as well as excessive consumer debt. The disruption in the financial markets is brutal and insecurity is high over how well the world economy will continue to manage its recovery. Recent market events are the result of global structural debt problems and cannot be swiftly repaired.

There is a high premium to be paid in uncertain times and this is especially true at the present time, as market participants are forced to deal with assets that are difficult to price and difficult to sell. Recent events in the world economies and financial markets are direct results in the unwinding of structural imbalances. Government actions have been significant, but the end results of these actions are uncertain.

Investors need to consider how they will deal with the possibility of unplanned outcomes at a time of elevated uncertainty. However, it should be said that the current dislocation in the global markets provide some attractive opportunities for investors with capital and long-term horizons.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2011 Oseme Group

Global Investment Outlook - 2011 Part I

By M. Isi Eromosele

The continuing European debt crisis has demonstrated that a loss of confidence in the global bond market can be difficult. As the global economic recovery continues to gather speed, it is sure to relieve cyclical budget stress, which would in turn lessen investor concerns, giving developed economies a period of time to solve their structural budget deficits. All indications point to a better global economic expansion in 2011, suitable for expansive investments.

In 2011, it will be prudent to practice a tactical asset allocation policy that prefers stocks over bonds and cash. This is recommended because we at Oseme Finance believe that a mixture of natural global growth, conservative monetary policy and a better global political environment will encourage a certain level of risk taking in global investing. Within the context of this risk taking, there needs to be a focus on the management of downside risks while partaking in the global markets’ positive potential.

Growth Outlook

The global economy slid into 2011 with passable forward impetus, as Europe struggles with sovereign debt problems and the United States faces continued high rate of unemployment. The Federal Reserve decision to purchase billions of dollars in bonds from primary dealers has had the effect of reducing the supply of bonds while conversely increasing bank reserves.

Even though excess bank reserves are currently high, this has not resulted in increased level in lending, as would be expected to happen, even as equity prices has risen. A combination of the wealth engendered by the rise in the global stock markets and the expected inevitable rise in bank lending will be factors in a continued global economic expansion.

Global corporations are returning to high profit margins and have commenced reinvesting in their companies. As confidence has risen among them, the U.S. consumers have returned to spending in the wake of the rise in the stock market and reduction in corporate layoffs.

With the strong German economy as the propelling engine, European growth is rising again, with strong exports to emerging economies. With the U.S. economic growth, which had been tepid, finally gaining speed and as the economies of emerging markets continue to propel forward, we expect global growth to surge during 2011.

Global Inflation

The developed economies in the United States and Europe are saddled with surplus production capacity and not much pricing power while the emerging markets, whose economies are rising fast, are experiencing reduced spare capability and shortage of specialized labor. With an inflation rate of about 1.2 percent in November 2010, the United States inflation rate is at historically low level. Conversely, emerging economies in China and Brazil face an inflation rate of about 5 percent and India’s is at 10 percent. The Central Banks in China and India have been forced to tighten monetary policy to counter inflation concerns in their respective economies.

Inflation in the United States is heavily weighted toward the housing markets at 40 percent of CPI. While the U.S. is saddled with excess housing inventory, this should not put pressure on its consumer prices. The labor markets in the U.S. will remain stabilized as the moderate growth rate of the economy gradually reduces the high unemployment rate through the year. With tight labor markets and little surplus production capacity, the emerging markets face a more demanding inflation picture. These emerging markets could experience high inflation pressures from food prices with China experiencing food price inflation of as much as 10 percent. See Part II of Article.

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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Copyright Control © 2011 Oseme Group

Global Investment Outlook - 2011 Part II

By M. Isi Eromosele

In 2011, it will be prudent to practice a tactical asset allocation policy that prefers stocks over bonds and cash. This is recommended because we at Oseme Finance believe that a mixture of natural global growth, conservative monetary policy and a better global political environment will encourage a certain level of risk taking in global investing. Within the context of this risk taking, there needs to be a focus on the management of downside risks while partaking in the global markets’ positive potential.

Global Central Banks

Central Banks in the United States and the European Union have played vital roles in stabilizing global finance during the recent world financial crisis as well as in its aftermath. The U.S. Federal Reserve Bank made a crucial decision to strongly mitigate the deflation risk by helping the banks raise their reserves through the advancement of billions of dollars to them.

The European Central Bank (ECB), with a singular focus on maintaining price stability, was initially more conservative in its financial bailout programs. However, as the sovereign debt crisis in the European Union escalated, it has changed its stance by advancing billions of dollars to European banks and states suffering from excessive budget deficits.

China’s central bank, the Peoples Bank of China, has achieved more success in maintaining sufficient liquidity in its huge economy. It attained this feat by effectively working with its banks to affect a rise in the money supply to help accelerate growth in its economy.

The U.S. Federal Reserve and the ECB will take no major actions to remove liquidity assistance and raise interest rates in 2011. The Federal Reserve is still very much focused on countering deflationary risks in the United States. Central banks in emerging countries are expected to be more preventive in their policies, moving forward because of apparent inflationary pressures in their economies.

China has taken the route of raising the required rate of its banks’ reserve obligations. In other emerging economies, fiscal controls that limit the inward flow of capital have been implemented. This indicates that during 2011, emerging countries will practice more restrictive fiscal policies that those in the advanced economies, with uncertain effects on global currencies.

Sector Investment Strategies

As the global economy has maintained its upward trajectory, we have amended our recommendations for investment strategies in several global sectors. Our stance is being influenced by articulated views of the global economy and financial markets as well as a micro analysis of the fundamentals present within the various global sectors. These dynamic success factors, coupled with the fast resurgence of emerging market economies lead us to believe that the global environment is conducive to astute investment opportunities.

The top line investment sectors we’ve chosen are energy, technology and industrials. As the world recovery accelerates, the demand for needed energy supplies will grow exponentially. All indications point to a positive return in investments in the energy sector. The same dynamics apply to the technology sector, with demand by corporations rising as the global economies continue to expand, engendering strong corporate profits, which in turn results in robust capital expenditures on required technology. Industrials will benefit from continued strong emerging markets growth as well as increased domestic demands on the heels of corporate reinvestments in their manufacturing plants.

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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