The Worldview Guide to Global Investing


THE GREAT MISMATCH PART II: The Barriers to Efficient Capital Flows

Efficient cross-border capital flows—allowing investors to search for reliable returns, and in the process, meet legitimate capital needs wherever they are—would be a more effective way to finance the global economy than today’s system. In theory, few dispute this. In practice, many barriers have been erected that hamper efficient flows. The deliberate or inadvertent barriers to efficient global capital flows have been erected by a unique combination of regulators, governments, historical conventions and path-dependencies, investor mindsets and capital-seekers themselves (see below exhibit).


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Not game over for China

If popularity has its price, then major investors in China are now paying those consequences. Chinese stock markets have taken a plunge and continue to face a roller-coaster path of sorts. There’s no telling how long the ride is or what turns lie ahead, which means investors have been increasingly concerned over the uncertainty.

But it’s not the time to panic. It never really is. The foundation of investing isn’t and never was based on making flash gains. It’s always been about making strategic decisions for a potential haul in the long term.

We still believe in China’s potential because many companies still have attractive long-term growth prospects, in our opinion. The challenge for us as stock pickers, of course, is what to buy.

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The Great Mismatch: Addressing Barriers to Global Capital Flows

Executive Summary

Cross-border capital flows are at an inflection point. While in aggregate they
have not returned to pre-crisis high watermarks—primarily driven by a significant decline in bank lending—they are increasingly varied in their scope and direction. More countries around the world are seeking and providing capital across borders than ever before. And asset managers and asset owners—not just governments, corporations and banks—are becoming increasingly influential in determining the scale and stability of global capital flows.

Yet capital around the world is being deployed inefficiently—large pools are not getting the returns they should, even as many needs for investment, both public and private, go unmet. This “great mismatch” is driven by a confluence of governments focused on near-term electoral cycles and rent-seeking, emerging-market financial institutions lacking investment management expertise and depth, and investors prioritizing short-term gains over sustainable long-term investment priorities.

Correcting this mismatch represents one of the most significant opportunities for global growth over the next decade. Success will require both long-term institutional investors and policymakers re-thinking long-standing assumptions and re-shaping their role in global markets. This report provides the backdrop and lays the case for six key recommendations over both the nearer and longer term:

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China: Ecological Civilization Rising?

Returning to China for the first time in a quarter century this month was equally awe inspiring and terrifying. The observation deck of the truly gorgeous Shanghai World Financial Center is breathtaking, a fitting testament to China’s rise. But it was the unexpected sense that we might be experiencing history at DeTao Group’s summit in Shanghai, “Future New Economy: Sustainable Model Toward an Ecological Economy,” that left an indelible mark on me.

I had the honor to address the DeTao Group summit on the topic of regenerative investing in natural capital. Inspired by the vision and leadership of DeTao Chairman George Lee, it was an extraordinary experience. The warm hospitality and genuine appreciation and respect extended to all the visiting “experts” was quite exceptional. As George told me, “in Chinese culture, we honor our teachers.”

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Mongolia Investment Outlook

Mongolia is one of the world's fastest growing economies, with a year-on-year real growth rate of 7% in 2014. Recent growth has been primarily driven by development of new mining projects, growth in the real estate and agriculture sector, and an expansionary fiscal and monetary policy.

Mongolia's economy is highly dependent on trade with China. Economic growth has been negatively affected by a slowdown in the Chinese economy, which accounted for 94.1% of Mongolia's exports in 2013. In addition, Mongolia is dependent on Russia for all of its fuel and some of its energy needs, which makes Mongolia vulnerable to price pressure from Russia.

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Book Review: The End of Copycat China

CopyCat-ChinaIn 2005, Shaun Rein founded China Market Research Group, a strategic market intelligence firm based in Shanghai. Their clients included private equity firms, hedge funds, as well as Chinese businesses and multinationals. In the course of his market research, he comments, "As I traveled, I realized the changes and reforms were happening so fast that they were hard for people outside the country to follow." In his previous book, The End of Cheap China, and now, with The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia Shaun Rein shares with the readers his knowledge of the rapidly changing Chinese economy, and how businesses and investors are adapting, and must adapt.

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Emerging markets offer investors the possibility of outsized returns—but at the expense of outsized risks. Understanding the potential pitfalls of investing abroad requires not only an analysis of foreign markets but also an examination of the historical context and contemporary political climate. These articles provide an overview of and insight into the most relevant factors for investors to consider.

Check back frequently, as we will continue to expand our coverage of global markets. To suggest new countries that you'd like to see covered, contact us.



BustIn his new book, Bust: Greece, the Euro, and the Sovereign Debt Crisis, Matthew Lynn provides a thorough and fast-paced account of Greece’s role in the decline of the euro and the impact felt by the rest of Europe. Lynn, a financial commentator and writer for Bloomberg Television, Bloomberg News, MoneyWeek, and Spectator, is well equipped for the task.

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Brazil on the RiseBrazil is a country that has become an industrial and agricultural superpower in the world market. However, it is a country still not well known to many and “hardly on the radar screen" to most Americans. Larry Rohter’s new book, Brazil on the Rise: The Story of a Country Transformed, is an excellent introduction to Brazil. He was in Rio de Janeiro for 14 years as a correspondent for Newsweek and the New York Times.

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The China StrategyEdward Tse, the author of The China Strategy: Harnessing the Power of the World's Fastest-Growing Economy, is Booz & Company’s senior partner and chairman for greater China. He has been involved in China as a management consultant since the early 1990s. While his book is primarily for business executives, it contains much that is essential reading for investors and analysts. China is a unique country in intense and constant change; what you see today may not be what you see in a few years. However, some aspects of China will be familiar to Wall Steeters.

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Poorly Made in ChinaThere’s trouble in wonderland. China is increasingly the go-to spot for world global production, promising cheap fabrication, short lead times, large profit potential, and an enormous domestic target market. It’s virtually impossible not to make use of a product manufactured in China in the course of any given day. But major quality problems, such as the 2007 recall of toys containing lead paint, occur with alarming frequency. Poorly Made in China not only lifts the curtain to reveal the games behind Chinese production, it provides an acute analysis of the factors behind China’s manufacturing woes—cultural, ethical, political.

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Start-Up NationAs the U.S. economy attempts to recover, leaders in government, business, and academia search for ways to modernize the economy and reduce unemployment by creating high-tech jobs. In Start-Up Nation: The Story of Israel’s Economic Miracle, authors Dan Senor and Saul Singer analyze a question that might help American policymakers: How does a small country that is only 60 years old, with only 7.1 million people, surrounded by hostile neighbors, radically restructure its economy to become one of the world’s most technologically oriented and entrepreneurial nations?

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Uprising: Will Emerging Markets Shape or Shake the World EconomyCurrently money is flowing to the emerging markets. Many see China and India as the future, America and Europe as the past. A thoughtful and sophisticated look at these popular conclusions is presented by George Magnus in his new book, Uprising: Will Emerging Markets Shape or Shake the World Economy. He is well positioned for this analysis as a senior economic adviser at UBS Investment Bank London, having previously served as chief economist at UBS.

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