With the recent drop in the price of oil, new doubts have been cast over the future of hybrid and electric vehicles. Many manufacturers and designers of electric vehicles have faced technical and financial challenges in the past few months. Such challenges combined with large capital investments in research and development necessary for these cars, have prompted some analysts to predict a reversal of the trend towards green vehicles.
Climate change and environmental concerns, however, play a major role in policies and trends that shape the future of the automotive industry. Green tech vehicle programs are not only critical in shaping the future of our transportation but also vital for the long term survival of big global auto companies such as Detroit's big 3. Electrification is on its way and at the forefront of innovation in the auto industry.
Atmospheric and environmental scientists have shown us the effects of carbon emissions on the increase of average global temperatures. There is more to the cost of operating internal combustion engines than the price paid at the pump. It will be irresponsible if we do not spend resources on development and optimization of battery technologies, which can lead to less expensive and ultimately economically feasible generations of electric vehicles, vehicles that have zero carbon footprints and no harm to our mother nature and that will replace current gasoline engines responsible for significant part of the green house gasses released in the atmosphere.
For now, governments have realized that value of research on this topic. In many places policies have been implemented that encourage consumers to purchase electric vehicles. The next US administration has already indicated its will and desire to support electric vehicles and it is anticipated that subsidies and/or tax credits will make the price of electric vehicles competitive for a number of years. Our belief is that the revolution has already begun and that the signs are already visible on the road. Our prediction is that more community and government cooperation shall take place on a global scale to bring the best minds together and to create future cars that run on efficient electric motors fueled by durable and economically feasible batteries.
Saturday, December 13, 2008
Monday, November 3, 2008
US Welcomes Foreign Direct Investments
Following the recent global financial turmoil and the collapse of several US financial institutions, the United States Government is encouraging foreign investments in US companies and institutions. Specifically, funds in the Gulf Cooperation Council countries are aggressively being encouraged to invest in the United States.
According to the Gulf News Agency, Robert Kimmitt, deputy secretary of the US Department of the Treasury, praised sovereign wealth funds (SWFs) such as the Abu Dhabi Investment Authority (ADIA) in sharp contrast to a debate in the West early this year that sought to put protectionist barriers against investments made by these organizations. Kimmitt said the US favors "the free flow of capital, both from sovereign wealth funds and all other overseas investors." He is meeting officials and business leaders in Saudi Arabia, Kuwait, Qatar, Iraq and the UAE, trying to encourage Arab funds to invest in the US.
The economic downturn and the ensuing panic has already created unprecedented investment opportunities in the US both in real estate and in science and technology. Lack of liquidity has caused some assets to be sold at significant discounts to the fundamental values of such assets. In this environment, prudent investors from around the world have started to take a closer look at the US market. As an example, Mohammad Ali Al-Hashimi, the Executive Chairman of Zabeel Investments, recently announced that his company is keen to invest in the US, but not willing to "overpay" for deals.
The question in the mind of many institutions is where the bottom of the market may be. However, for fundamental investors catching the bottom of the market must not be the sole objective. Acquisition of assets that are trading at discounts to intrinsic valuations shall translate into economic gains in the long term. Waiting for the market to bottom out might lead to realization of higher gains on investments but carries the risk of missing the bottom and ending up trying to make investments in a rising market, where quality assets will be harder to come by.
For sovereign wealth funds and other GCC pools of capital, it is prudent to continually evaluate opportunities and to make investments as the markets gradually stabilize. Investments in fundamentally sound and strong companies with proven cash flows and a clear growth path is a great diversification tool for GCC funds and right now the time is great for accessing unprecedented opportunities.
According to the Gulf News Agency, Robert Kimmitt, deputy secretary of the US Department of the Treasury, praised sovereign wealth funds (SWFs) such as the Abu Dhabi Investment Authority (ADIA) in sharp contrast to a debate in the West early this year that sought to put protectionist barriers against investments made by these organizations. Kimmitt said the US favors "the free flow of capital, both from sovereign wealth funds and all other overseas investors." He is meeting officials and business leaders in Saudi Arabia, Kuwait, Qatar, Iraq and the UAE, trying to encourage Arab funds to invest in the US.
The economic downturn and the ensuing panic has already created unprecedented investment opportunities in the US both in real estate and in science and technology. Lack of liquidity has caused some assets to be sold at significant discounts to the fundamental values of such assets. In this environment, prudent investors from around the world have started to take a closer look at the US market. As an example, Mohammad Ali Al-Hashimi, the Executive Chairman of Zabeel Investments, recently announced that his company is keen to invest in the US, but not willing to "overpay" for deals.
The question in the mind of many institutions is where the bottom of the market may be. However, for fundamental investors catching the bottom of the market must not be the sole objective. Acquisition of assets that are trading at discounts to intrinsic valuations shall translate into economic gains in the long term. Waiting for the market to bottom out might lead to realization of higher gains on investments but carries the risk of missing the bottom and ending up trying to make investments in a rising market, where quality assets will be harder to come by.
For sovereign wealth funds and other GCC pools of capital, it is prudent to continually evaluate opportunities and to make investments as the markets gradually stabilize. Investments in fundamentally sound and strong companies with proven cash flows and a clear growth path is a great diversification tool for GCC funds and right now the time is great for accessing unprecedented opportunities.
Wednesday, October 15, 2008
The Future of US Economy
A few months ago sudden cracks started appearing in the US economy hinting of an end to years of economic expansion. It only took a short while before the whole US, and subsequently the global financial systems started crumbling, sending shockwaves around the world.
The media is full of analyses and commentaries about possible reasons and for the collapse of the banking system and the economic downturn. There is not a day that goes by without debate on whether we are paying for our excesses or that we are unfortunate victims of the greed of a select few. Such debates are necessary. In fact, it’s incredible to analyze and find out why an institution like Bear Sterns went from having $18 billion on the books to a deficit of $30 billion in one week. Such a dramatic freefall warrants investigation.
What’s more interesting, however, is the simplicity of the problem. The fact that most people start pointing fingers during hard times is only normal but to get a real understanding of the events, one needs to sit back and determine the role that each and every one of us including our government has played in creating this mess. The fact is, that the heart of the capitalist society beats by spending and that every aspect of our government and our economy has been designed to encourage spending. For years all of us developed the habit of spending more than our means. Every time we desired something and could not afford it, we took on debt to pay for our consumption. The government, on the other hand, would reduce interest rates at the first sign of any distress, artificially boosting valuations for years. As such, we were able to afford to make bad financial decisions. The value of our homes would jump 20% per year, fueled by speculation and low borrowing costs. Eventually all this needed to stop and stop it did.
As Fareed Zakaria mentioned in the 10/20/2008 issue of the Newsweek magazine: “Under Alain Greenspan the Federal Reserve obstinately refused to inflict any pain. Russian default? Cut interest rates. Worried about Y2K? Cut interest rates. NASDAQ crash? Cut rates. The economy slows after 9/11? Cut rates.” The final blow to the hole system was the prolonged boost that was given to the housing market spinning the problem so far that it was almost impossible to tackle.
Like any responsible society, we now need to look at where we stand and where we want to be tomorrow. It’s not constructive anymore to find someone to blame for the problem. What’s constructive is to envision a future for us where we can live respectfully within the international community: Less arrogant and more productive. Mistakes of previous administrations have been made and the damage is already done but the US is still a large, efficient, modern, and vibrant economy. It is still the wealthiest economy in the world. As Zakaria mentioned: “It’s a different world out there. If Iraq cast a shadow on US political and military credibility, this financial crisis has eroded America’s economic and financial power. In the short run, there has been a flight to safety but in the long run, countries are likely to gain greater independence from an unstable superpower. The United States will now have to work to attract capital to its shores, and manage its fiscal house better. We will have to persuade countries to join in our foreign endeavors. We will have to make strategic choices. We cannot deploy missile interceptors along Russia’s borders, draw Georgia and Ukraine into NATO, and still expect Russian cooperation. We cannot noisily denounce Chinese and Arab foreign investments in America one day and then hope that they will keep buying $4 billion worth of T-bills another day. We cannot keep preaching to the world about democracy and capitalism while our own house is wildly out of order.”
The media is full of analyses and commentaries about possible reasons and for the collapse of the banking system and the economic downturn. There is not a day that goes by without debate on whether we are paying for our excesses or that we are unfortunate victims of the greed of a select few. Such debates are necessary. In fact, it’s incredible to analyze and find out why an institution like Bear Sterns went from having $18 billion on the books to a deficit of $30 billion in one week. Such a dramatic freefall warrants investigation.
What’s more interesting, however, is the simplicity of the problem. The fact that most people start pointing fingers during hard times is only normal but to get a real understanding of the events, one needs to sit back and determine the role that each and every one of us including our government has played in creating this mess. The fact is, that the heart of the capitalist society beats by spending and that every aspect of our government and our economy has been designed to encourage spending. For years all of us developed the habit of spending more than our means. Every time we desired something and could not afford it, we took on debt to pay for our consumption. The government, on the other hand, would reduce interest rates at the first sign of any distress, artificially boosting valuations for years. As such, we were able to afford to make bad financial decisions. The value of our homes would jump 20% per year, fueled by speculation and low borrowing costs. Eventually all this needed to stop and stop it did.
As Fareed Zakaria mentioned in the 10/20/2008 issue of the Newsweek magazine: “Under Alain Greenspan the Federal Reserve obstinately refused to inflict any pain. Russian default? Cut interest rates. Worried about Y2K? Cut interest rates. NASDAQ crash? Cut rates. The economy slows after 9/11? Cut rates.” The final blow to the hole system was the prolonged boost that was given to the housing market spinning the problem so far that it was almost impossible to tackle.
Like any responsible society, we now need to look at where we stand and where we want to be tomorrow. It’s not constructive anymore to find someone to blame for the problem. What’s constructive is to envision a future for us where we can live respectfully within the international community: Less arrogant and more productive. Mistakes of previous administrations have been made and the damage is already done but the US is still a large, efficient, modern, and vibrant economy. It is still the wealthiest economy in the world. As Zakaria mentioned: “It’s a different world out there. If Iraq cast a shadow on US political and military credibility, this financial crisis has eroded America’s economic and financial power. In the short run, there has been a flight to safety but in the long run, countries are likely to gain greater independence from an unstable superpower. The United States will now have to work to attract capital to its shores, and manage its fiscal house better. We will have to persuade countries to join in our foreign endeavors. We will have to make strategic choices. We cannot deploy missile interceptors along Russia’s borders, draw Georgia and Ukraine into NATO, and still expect Russian cooperation. We cannot noisily denounce Chinese and Arab foreign investments in America one day and then hope that they will keep buying $4 billion worth of T-bills another day. We cannot keep preaching to the world about democracy and capitalism while our own house is wildly out of order.”
Wednesday, October 8, 2008
Hunger for Power in the GCC
With the unprecedented economic growth and the construction boom of the Gulf countries comes an unprecedented appetite for energy. According to a recent estimate by Moody’s, the GCC will need an investment of $35 billion for the 10 years to keep up with the energy demand.
The states have been very smart about how to make such investments. Considerable attention is paid to ensuring that capital often flows into projects and companies that both contribute to local infrastructure and transfer intellectual property and know-how to the region.
Our projection is that solar power shall prove to be a dominant long term source of energy for the region. It is both abundant and with the right technology its economically feasible to produce.
Tuesday, September 16, 2008
Is the US Dollar Reversing Course?
There are pros and cons for a weak Dollar. Its effects on exports and consequently the US GDP during these hard economic times are clearly a plus. On the flip side, it can be cause for inflation both within and outside the United States. Internationally speaking, countries with currencies pegged to the US Dollar have the most to lose.
As the USD deteriorates in value such countries lose relative purchasing power of their currencies and their economies can feel inflationary pressures. In recent weeks, however, the Dollar has been showing some signs of recovery, which has brought some relief to Gulf countries. "The strengthening dollar is good for the Gulf region because it will reduce the imported inflation in the region and it also increases the purchasing power of the regional currencies." said Monica Malik, Director of Economic Research, EFG Hermes, a regional investment bank.
The slowdown in Euro economies has been more than anticipated by policy makers and if continued such trends can strengthen the US Dollar even further. Good news for those Americans who were postponing trips to Europe for fear of big dents in their checking accounts.
"Both the dollar weakness and the interest rate cuts have been painful for the GCC countries, but now the worst is over. However, it is in the interest of the regional economies to have greater flexibility in monetary and exchange rate policies to meet the needs of the regional economies," said Malik.
As the USD deteriorates in value such countries lose relative purchasing power of their currencies and their economies can feel inflationary pressures. In recent weeks, however, the Dollar has been showing some signs of recovery, which has brought some relief to Gulf countries. "The strengthening dollar is good for the Gulf region because it will reduce the imported inflation in the region and it also increases the purchasing power of the regional currencies." said Monica Malik, Director of Economic Research, EFG Hermes, a regional investment bank.
The slowdown in Euro economies has been more than anticipated by policy makers and if continued such trends can strengthen the US Dollar even further. Good news for those Americans who were postponing trips to Europe for fear of big dents in their checking accounts.
"Both the dollar weakness and the interest rate cuts have been painful for the GCC countries, but now the worst is over. However, it is in the interest of the regional economies to have greater flexibility in monetary and exchange rate policies to meet the needs of the regional economies," said Malik.
Thursday, September 11, 2008
GCC Investment Opportunities must not Be Overlooked
While there is considerable enthusiasm surrounding every move made by rich Middle Eastern sovereign funds, capital movements in the opposite direction must not be overlooked. The Gulf Cooperation Council (GCC) Countries represent one of the fastest growing regions in the world.
While the US economy has stalled, the global economy has expanded at 4% to 5% annually for the past 5 years, according to the National Real Estate Investor. Worldwide, the number of high-net-worth individuals grew 6% in 2007 to more than 10 million. In the same period the number of people with more than $30 million in assets grew more than 8% to over 100,000. According to the World Wealth Report, published by Merrill Lynch and Capgemini, the assets of the wealthy are expected to grow by 7.7% annually to $59 trillion in 2012. Most of this growth is expected to be in rapidly expanding economies like those in the GCC.
As discussed in my previous posts, the regional governments have been very smart in how they spend the wealth generated from increased petroleum revenues. Considerable capital has been invested in critical infrastructure and industry, slowly but surely, transforming the region into a hub for trade, business, tourism, and finance.
The Goldman Sachs Group is one among many of the Western institutions that has been aware of such opportunities. In a recent move, the group launched a new proprietary fund to invest in select assets in the Middle East.
While the US economy has stalled, the global economy has expanded at 4% to 5% annually for the past 5 years, according to the National Real Estate Investor. Worldwide, the number of high-net-worth individuals grew 6% in 2007 to more than 10 million. In the same period the number of people with more than $30 million in assets grew more than 8% to over 100,000. According to the World Wealth Report, published by Merrill Lynch and Capgemini, the assets of the wealthy are expected to grow by 7.7% annually to $59 trillion in 2012. Most of this growth is expected to be in rapidly expanding economies like those in the GCC.
As discussed in my previous posts, the regional governments have been very smart in how they spend the wealth generated from increased petroleum revenues. Considerable capital has been invested in critical infrastructure and industry, slowly but surely, transforming the region into a hub for trade, business, tourism, and finance.
The Goldman Sachs Group is one among many of the Western institutions that has been aware of such opportunities. In a recent move, the group launched a new proprietary fund to invest in select assets in the Middle East.
Thursday, September 4, 2008
Recent Move by a Middle Eastern Sovereign Fund
In early August the Oman Investment Fund, the investment arm of the sultanate of Oman, acquired 50% partnership in Jurys Inns.
Jurrys Inns had been acquired by Quinlan Private, the international private real estate group back in 2007 and since the acquisition, Quinlan Private has expanded the group significantly opening new locations. The recent acquisition by Oman Investment Fund, gives it an equal representation on the Board of Jurrys Inns as Quinlan Private.
State investment funds such as the Oman Investment Fund, are actively seeking international investment opportunities and seek financially attractive deals where the investment can yield superior long-term returns.
Jurrys Inns had been acquired by Quinlan Private, the international private real estate group back in 2007 and since the acquisition, Quinlan Private has expanded the group significantly opening new locations. The recent acquisition by Oman Investment Fund, gives it an equal representation on the Board of Jurrys Inns as Quinlan Private.
State investment funds such as the Oman Investment Fund, are actively seeking international investment opportunities and seek financially attractive deals where the investment can yield superior long-term returns.
Sunday, August 24, 2008
Booming Economies and Increased Expenditure on Luxury Goods
When levels of expenditure on luxury goods rise, it is usually an indication of booming economies. Money has to be abundant before citizens can afford the luxury of private jets or residential palaces. Such is currently the case in most Gulf Cooperation Council (GCC) countries.
US financial institutions are well aware of this wealth effect. Citigroup, for example, was recently said to be discussing eight to ten private aircraft financing deals worth more than $400M. Private jet purchases in the GCC have doubled in the last 24 months from 43 in 2006 to 86 in 2008.
Purchases that might have seemed too extravagant a few years ago are now becoming common place in the Middle East. This all is good news to sound and strong US businesses. The cash rich GCC states have been a major source of capital for Western conglomerates in today’s hard economic times.
US financial institutions are well aware of this wealth effect. Citigroup, for example, was recently said to be discussing eight to ten private aircraft financing deals worth more than $400M. Private jet purchases in the GCC have doubled in the last 24 months from 43 in 2006 to 86 in 2008.
Purchases that might have seemed too extravagant a few years ago are now becoming common place in the Middle East. This all is good news to sound and strong US businesses. The cash rich GCC states have been a major source of capital for Western conglomerates in today’s hard economic times.
Tuesday, July 22, 2008
Middle Eastern Investments in the US Decreasing but Still Strong
According to the National Real Estate Investor magazine, “Global real estate investment by Arab investors will nearly double this year, to $22 billion, say analysts Jones Lang LaSalle. Arab investments in the U.S., however, may lag. Through May of this year, Middle East investment in the U.S. totaled $1.8 billion, far less than the $4.8 billion spent in the first five months of 2007 and $8.2 billion spent for the year, according to New York-based research firm Real Capital Analytics.”
One of the major factors responsible for the dwindling investments by Middle Eastern investors, mostly sovereign wealth funds, in the US is the fear of persistent economic downturn. The depreciating US Dollar is another factor contributing to reduced interest in US assets and real estate. Arab investors are finding more compelling opportunities in the emerging markets such as India and Eastern Europe. Arcapita, an investment firm managing capital of wealthy families in Bahrain, is an example of institutions active is such regions.
As for their US investments Arabs have had a policy shift, preferring to participate indirectly through private equity firms and other alternative vehicles. Despite the pessimism, however, capital has not stopped to flow into the US. GE, for example, recently announced that Mubadala Development Company is likely to become one of GE’s largest 10 institutional investors through the partnerships that the two are forming. Among other projects, the companies are working on initiatives in clean energy, finance, and aviation. The recent $800M purchase of a 75% interest in the Chrysler Building in New York by the Abu Dhabi Investment Council is another case in point.
These investments are taking place in an environment where most of the world’s largest sovereign wealth funds are scaling back their exposure to US Dollar. Middle Eastern sovereign funds have invested in several troubled US companies recently and have witnessed the value of their investments diminish. Moreover, they are not the only ones that are seeking alternative investment targets in the emerging markets and in Europe. The Chinese government fund is also in talks with European private equity firms in an effort to diversify and to reduce its exposure to the US Dollar. Furthermore, some private equity funds are instructed to increase their exposure to natural resources as a means of reducing their vulnerability to the US Dollar decline.
Some believe that the US Dollar is not very likely to decline much further against the Euro. That can be a part of why the Abu Dhabi Investment Authority has not yet taken any major steps away from the US Dollar. To others, however, it is only prudent to diversify away from US denominated assets to reduce the potential damage from “catching a falling knife.” While the US economy might be suffering from a credit crunch, falling real estate prices, weak currency, and inflation, it is still the largest economy in the world and that is not expected to change anytime soon. When the dust settles and the real estate and credit markets correct themselves, the US economy shall turn around to a healthy growth.
One of the major factors responsible for the dwindling investments by Middle Eastern investors, mostly sovereign wealth funds, in the US is the fear of persistent economic downturn. The depreciating US Dollar is another factor contributing to reduced interest in US assets and real estate. Arab investors are finding more compelling opportunities in the emerging markets such as India and Eastern Europe. Arcapita, an investment firm managing capital of wealthy families in Bahrain, is an example of institutions active is such regions.
As for their US investments Arabs have had a policy shift, preferring to participate indirectly through private equity firms and other alternative vehicles. Despite the pessimism, however, capital has not stopped to flow into the US. GE, for example, recently announced that Mubadala Development Company is likely to become one of GE’s largest 10 institutional investors through the partnerships that the two are forming. Among other projects, the companies are working on initiatives in clean energy, finance, and aviation. The recent $800M purchase of a 75% interest in the Chrysler Building in New York by the Abu Dhabi Investment Council is another case in point.
These investments are taking place in an environment where most of the world’s largest sovereign wealth funds are scaling back their exposure to US Dollar. Middle Eastern sovereign funds have invested in several troubled US companies recently and have witnessed the value of their investments diminish. Moreover, they are not the only ones that are seeking alternative investment targets in the emerging markets and in Europe. The Chinese government fund is also in talks with European private equity firms in an effort to diversify and to reduce its exposure to the US Dollar. Furthermore, some private equity funds are instructed to increase their exposure to natural resources as a means of reducing their vulnerability to the US Dollar decline.
Some believe that the US Dollar is not very likely to decline much further against the Euro. That can be a part of why the Abu Dhabi Investment Authority has not yet taken any major steps away from the US Dollar. To others, however, it is only prudent to diversify away from US denominated assets to reduce the potential damage from “catching a falling knife.” While the US economy might be suffering from a credit crunch, falling real estate prices, weak currency, and inflation, it is still the largest economy in the world and that is not expected to change anytime soon. When the dust settles and the real estate and credit markets correct themselves, the US economy shall turn around to a healthy growth.
Saturday, July 12, 2008
Global Financial Turmoil and Glimmer of Hope in the Middle East
In recent months global banks have increasingly shifted their resources and management to the Middle East in the face of financial turmoil elsewhere. Deutsche Bank was the latest to announce the move of senior banker, Christophe Laing, to the Dubai International Financial Center. Laing is head of Deutsche Bank’s equity capital markets for the Middle East and Africa as well as Eastern Europe.
Financial institutions around the world have written down around $400 billion as a result of the credit crunch and have raised $300 billion to repair their balance sheets. Shifting to the Middle East and committing to the oil-rich region is an obvious move to become closer to the riches of funds and governments in the area.
Others who have recently appointed senior management to the Middle East are Lehman Brothers, Citi, and Merrill Lynch. The major incentive is being close to sovereign wealth funds and their seemingly endless pool of capital. Estimates show that these funds shall grow to $15 trillion by 2016.
Financial institutions around the world have written down around $400 billion as a result of the credit crunch and have raised $300 billion to repair their balance sheets. Shifting to the Middle East and committing to the oil-rich region is an obvious move to become closer to the riches of funds and governments in the area.
Others who have recently appointed senior management to the Middle East are Lehman Brothers, Citi, and Merrill Lynch. The major incentive is being close to sovereign wealth funds and their seemingly endless pool of capital. Estimates show that these funds shall grow to $15 trillion by 2016.
Monday, June 30, 2008
Emerging Markets and Global Inflation
Despite the rising “decoupling” discussion of the U.S. economy and the emerging markets, it is irrefutable that the sub-prime mortgage crisis and rising global inflation are due partly to large capital flows from Asian economies and oil-rich Middle Eastern sates to US assets. Such capital flows are designed to prevent the currencies of such Asian and Middle Eastern countries from rising and create demand for US bonds, regarded by those economies as a safe asset, increasing prices of those bonds and depressing the yields. Lower rates translate into cheap money and, with the Federal Reserve more concerned about recession than it is about inflation, the result is a loose monetary policy that is responsible for the melt down of the US credit markets. Cheap imports from China and other Asian countries have granted the central banks in rich countries the luxury to worry less about inflation while keeping rates low.
Now that the US economy has entered a downturn, the direction of these capital flows has reversed and those countries that have linked their currencies to the US Dollar are being subject to the loose monetary policy of the Federal Reserve, despite their overheating economies. This in-turn causes price rises in those economies due to low interest rates that might be suitable for the US economy at its current state but not for the overheating Asian and Middle Eastern economies. Add the high prices of oil and other commodities to the equation and the result is an inevitable global inflation that is poised to threaten growth globally.
The overvaluation of currencies has sparked talks in many Middle Eastern circles of re-valuation of local currencies. An alternative scenario would be changing their currency pegs from the US Dollar to Euro. While the latter is less likely, it cannot be ruled out entirely. Only time will tell how ultimately the capital flow to and from the emerging economies will affect global inflation. What’s known is that so far it has been partially, if not significantly, responsible for it.
Saturday, June 21, 2008
Diversification, Diversification, and then again Diversification
In the previous post, I mentioned how GCC States have fueled their exponential growth with an immigrant labor force that is now demanding more compensation and is creating an imbalance in the labor markets where the private sector is less inclined to hire nationals.
One possible solution to the problem, is already being investigated and, in some cases, implemented in the region. The basic assumption is that by investing their huge oil wealth in other industries and by simultaneous investment in educating and training their younger generation, the GCC countries can create industries that can be competitive on a global scale and can be run by the skilled force of their nationals.
A bold initiative along these lines is the Masdar Institute of Science and Technology by the Government of Abu Dhabi. It involves substantial investments aimed at fostering clean technology ideas from research to commercialization. Projects like this are channels to divert the oil wealth to alternative industries in which the regional countries can emerge as global pioneers and leaders. If such high risk, high reward projects come to fruition we might see a future Gulf that is way more diversified than the one we know today. It can be more than just one of wealthiest areas in the world in terms of its petroleum income and act as a power center for development and deployment of intellectual capital and breakthrough technologies. Only time can show us what the outcome will be.
One possible solution to the problem, is already being investigated and, in some cases, implemented in the region. The basic assumption is that by investing their huge oil wealth in other industries and by simultaneous investment in educating and training their younger generation, the GCC countries can create industries that can be competitive on a global scale and can be run by the skilled force of their nationals.
A bold initiative along these lines is the Masdar Institute of Science and Technology by the Government of Abu Dhabi. It involves substantial investments aimed at fostering clean technology ideas from research to commercialization. Projects like this are channels to divert the oil wealth to alternative industries in which the regional countries can emerge as global pioneers and leaders. If such high risk, high reward projects come to fruition we might see a future Gulf that is way more diversified than the one we know today. It can be more than just one of wealthiest areas in the world in terms of its petroleum income and act as a power center for development and deployment of intellectual capital and breakthrough technologies. Only time can show us what the outcome will be.
Thursday, May 29, 2008
Cheap Immigrant Work Force and Imbalanced Labor Markets
Countries in the Gulf Cooperation Council (GCC) face a tricky situation. For years cheap imported labor from India, Bangladesh, Pakistan, and other countries has been providing a seemingly unlimited factor of production. That source, however, has recently realized its contribution to regional growth and has dared to ask for more compensation. Such claims have been supported by the government of the countries supplying labor to GCC countries as well.
Interestingly, some GCC countries have voluntarily engaged in practices to make immigrant labor more expensive in a bid to make the labor markets more competitive. Bahrain, for example, will be charging a visa fee and a per-head levy on foreign labor. GCC nationals like the lifestyle that they enjoy, which is mostly made possible by the work of migrant workers. What they don’t like is the competition it creates in the labor markets. Nationals are predominantly hired in artificial government positions and benefit from distribution of Petrodollars. This is while the private sector does not compete with the government to match salaries and instead hires immigrants for a fraction of the cost. The trick is to find the benefits that foreign labor brings and match them against the costs of unemployment (or employment in quazi positions) of local labor force.
Interestingly, some GCC countries have voluntarily engaged in practices to make immigrant labor more expensive in a bid to make the labor markets more competitive. Bahrain, for example, will be charging a visa fee and a per-head levy on foreign labor. GCC nationals like the lifestyle that they enjoy, which is mostly made possible by the work of migrant workers. What they don’t like is the competition it creates in the labor markets. Nationals are predominantly hired in artificial government positions and benefit from distribution of Petrodollars. This is while the private sector does not compete with the government to match salaries and instead hires immigrants for a fraction of the cost. The trick is to find the benefits that foreign labor brings and match them against the costs of unemployment (or employment in quazi positions) of local labor force.
Tuesday, May 6, 2008
The Wealth Effect: The Gulf’s Difficulty in Spending its Vast Revenues
The geographic span to the south of the Persian Gulf and to the west of the Indian Ocean is flushed with economic activity. The region is home to several landmarks including man-made islands and record breaking sky scrapers. The rapid social and economic growth that has affected the Gulf has transformed a vast region from small tribal economies to global financial and business players. Abu Dhabi, the capitol of the United Arab Emirates, for example, lacked even a paved road before 1961. Now, it is a wealthy community, with control over major petroleum reserves and multi-national firms are present in every corner.
Despite the rapid growth, regional economies are facing a major hurdle: Absorbing the petro-dollars the accumulation of which is beginning to clog their arteries. The six nations of the Gulf Cooperation Council (GCC) earned $381 billion in 2007 from exports of oil and $26 billion from gas according to Institute of International Finance. If oil remains at $100 a barrel they will reap a windfall of $9 trillion by 2020 according to McKinsey Global Institute. This is when in 2007 the combined GDP of the GCC was $800 billion in 2007. To avoid overheating a large part of this windfall is stored in foreign assets. Some goes to central banks and sovereign wealth funds while some end up with wealthy families. It all added up to $1.8 trillion by the end of 2007, by Institute of International Finance’s estimates.
In the 1990s low oil prices left petroleum producing countries with small revenues and the level of spending was subsequently adjusted to match such low revenues. As the oil prices rose higher revenues outpaced their ability to spend. Recently, however, the GCC states’ ambitions have grown to catch up with their greater means. According to the Middle Eastern Economic Digest, members of GCC have begun projects worth $1.9 trillion in 2007, 43% more than a year ago. It is remarkable how these countries are beginning to spend on themselves.
Dubai has the tiniest oil reserves of all the UAE emirates but has been very aggressive and effective in spending its wealth widely and building an infrastructure that has transformed the small emirate into the most luxurious place in the region. Dubai has made a point of exhibiting its wealth and in the process, attracting businesses and capital from around the world. This is in part due to its long term reliance on its guests. It is now more than just a municipality with oil revenues. It’s both a destination and a business hub simultaneously.
Despite the rapid growth, regional economies are facing a major hurdle: Absorbing the petro-dollars the accumulation of which is beginning to clog their arteries. The six nations of the Gulf Cooperation Council (GCC) earned $381 billion in 2007 from exports of oil and $26 billion from gas according to Institute of International Finance. If oil remains at $100 a barrel they will reap a windfall of $9 trillion by 2020 according to McKinsey Global Institute. This is when in 2007 the combined GDP of the GCC was $800 billion in 2007. To avoid overheating a large part of this windfall is stored in foreign assets. Some goes to central banks and sovereign wealth funds while some end up with wealthy families. It all added up to $1.8 trillion by the end of 2007, by Institute of International Finance’s estimates.
In the 1990s low oil prices left petroleum producing countries with small revenues and the level of spending was subsequently adjusted to match such low revenues. As the oil prices rose higher revenues outpaced their ability to spend. Recently, however, the GCC states’ ambitions have grown to catch up with their greater means. According to the Middle Eastern Economic Digest, members of GCC have begun projects worth $1.9 trillion in 2007, 43% more than a year ago. It is remarkable how these countries are beginning to spend on themselves.
Dubai has the tiniest oil reserves of all the UAE emirates but has been very aggressive and effective in spending its wealth widely and building an infrastructure that has transformed the small emirate into the most luxurious place in the region. Dubai has made a point of exhibiting its wealth and in the process, attracting businesses and capital from around the world. This is in part due to its long term reliance on its guests. It is now more than just a municipality with oil revenues. It’s both a destination and a business hub simultaneously.
Saturday, April 26, 2008
Rumble in the Gulf
The Rich Economies in the Gulf are Experiencing their Fastest Growth in Decades
The rich economies of the Persian Gulf are experiencing their fastest growth in decades. Thanks to high oil prices and the growing demand in non-oil sectors, these economies have experienced growth rates of 5.5% to 6% in their gross domestic products since 2004 and 2008 in not expected to be any slower. Such high growth is by no means confined to Dubai or the UAE. It is vividly felt across all Gulf Cooperation Council (GCC) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
In a symbol of the region’s upward reach, the Burj Dubai officially became the world’s tallest tower on February 5, 2008. “We have only seen the tip of the iceberg,” said Mr. Omar Bin Sulaiman, Governor of the Dubai International Financial Center. “There will be a bigger boom in the next 5 to 10 years, as people keep coming to the region from around the world,” he added.
In Dubai, the Dubai International Financial Center (DIFC) is home to 550 companies and is arguably the current center of financial activity in the region. During the current cycle of rising oil prices, the substantial windfall has not only been invested outside the region but also in the GCC countries. This is the main distinguishing factor between the current boon in the Persian Gulf region and previous ones. As a result the GCC countries have become a hub for regional business activity and a powerhouse for global financial and business deals. In Dubai, for example, the country’s tremendous success has had a spillover effect for the whole region. Due to the fundamental strength of the current boom in the Gulf region the current growth pattern is expected to continue well into 2009 and beyond.
The GCC represents more than half of all petroleum reserves of the Organization of Petroleum Exporting Countries (OPEC). Saudi Arabia, whose oil revenues are approaching $1 billion per day, is building refineries and petrochemical plants to get the most value our of every barrel of oil that is sold and to develop an infrastructure that can help expand oil production.
As for the future of the oil market, it is anticipated to remain tight partly due to the rising demand from rapidly growing economies of India and China. With today’s global economy and with the emergence of solid, strong, and rapidly growing economies in Asia, the strength of the GCC economies is poised for sustained and rapid growth in the coming years. The Middle Eastern economies are less susceptible to a slow down in the US, making their growth less vulnerable to the crisis in the US markets.
“Dubai is certainly a vibrant place that is growing exponentially and is already the base for many international institutions and support services. Bahrain is obviously marketing its new Marina Financial Center hard and has some interesting benefits as a center of excellence in the field of Shariah based investment,” said Ms. Imogen Dillon Hatcher, Managing Director of FTSE Europe, Middle East, and Africa.
“It is no secret that businesses are thriving to expand to the GCC countries. The obvious advantages of having a presence in the region bring a strong motivation for companies to establish an active presence there,” said Mr. Nima Montazeri, Managing Director at Floyd Associates. “Benefits of having activities in the GCC include access to a growing and healthy consumer market, proximity to the fastest growing and most prestigious financial market in the Middle East, and potential access to investment capital for both growth companies and investment houses around the world,” he added.
About Floyd Associates
Floyd Associates is a privately held consulting firm with expertise in corporate finance, business strategy, and mergers and acquisitions. Our expert team advises companies of various sizes on capital raising instruments, optimal capital structures, and formation of strategic alliances. Capitalizing on years of experience, the Company offers complete solutions customized to meet the specific needs of each of its clients. The Company intends to form long lasting relationships with its clients and to maximize shareholder value through optimization of capital structure and business planning. Solutions include equity financing, business expansion plans, global corporate finance solutions, and international trade strategies. To read more about Floyd Associates please visit http://www.floyd-associates.com/. If you have questions or comments, please contact us by email at info@floyd-associates.com or call us at: +1 (310) 300-0890.
The rich economies of the Persian Gulf are experiencing their fastest growth in decades. Thanks to high oil prices and the growing demand in non-oil sectors, these economies have experienced growth rates of 5.5% to 6% in their gross domestic products since 2004 and 2008 in not expected to be any slower. Such high growth is by no means confined to Dubai or the UAE. It is vividly felt across all Gulf Cooperation Council (GCC) countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
In a symbol of the region’s upward reach, the Burj Dubai officially became the world’s tallest tower on February 5, 2008. “We have only seen the tip of the iceberg,” said Mr. Omar Bin Sulaiman, Governor of the Dubai International Financial Center. “There will be a bigger boom in the next 5 to 10 years, as people keep coming to the region from around the world,” he added.
In Dubai, the Dubai International Financial Center (DIFC) is home to 550 companies and is arguably the current center of financial activity in the region. During the current cycle of rising oil prices, the substantial windfall has not only been invested outside the region but also in the GCC countries. This is the main distinguishing factor between the current boon in the Persian Gulf region and previous ones. As a result the GCC countries have become a hub for regional business activity and a powerhouse for global financial and business deals. In Dubai, for example, the country’s tremendous success has had a spillover effect for the whole region. Due to the fundamental strength of the current boom in the Gulf region the current growth pattern is expected to continue well into 2009 and beyond.
The GCC represents more than half of all petroleum reserves of the Organization of Petroleum Exporting Countries (OPEC). Saudi Arabia, whose oil revenues are approaching $1 billion per day, is building refineries and petrochemical plants to get the most value our of every barrel of oil that is sold and to develop an infrastructure that can help expand oil production.
As for the future of the oil market, it is anticipated to remain tight partly due to the rising demand from rapidly growing economies of India and China. With today’s global economy and with the emergence of solid, strong, and rapidly growing economies in Asia, the strength of the GCC economies is poised for sustained and rapid growth in the coming years. The Middle Eastern economies are less susceptible to a slow down in the US, making their growth less vulnerable to the crisis in the US markets.
“Dubai is certainly a vibrant place that is growing exponentially and is already the base for many international institutions and support services. Bahrain is obviously marketing its new Marina Financial Center hard and has some interesting benefits as a center of excellence in the field of Shariah based investment,” said Ms. Imogen Dillon Hatcher, Managing Director of FTSE Europe, Middle East, and Africa.
“It is no secret that businesses are thriving to expand to the GCC countries. The obvious advantages of having a presence in the region bring a strong motivation for companies to establish an active presence there,” said Mr. Nima Montazeri, Managing Director at Floyd Associates. “Benefits of having activities in the GCC include access to a growing and healthy consumer market, proximity to the fastest growing and most prestigious financial market in the Middle East, and potential access to investment capital for both growth companies and investment houses around the world,” he added.
About Floyd Associates
Floyd Associates is a privately held consulting firm with expertise in corporate finance, business strategy, and mergers and acquisitions. Our expert team advises companies of various sizes on capital raising instruments, optimal capital structures, and formation of strategic alliances. Capitalizing on years of experience, the Company offers complete solutions customized to meet the specific needs of each of its clients. The Company intends to form long lasting relationships with its clients and to maximize shareholder value through optimization of capital structure and business planning. Solutions include equity financing, business expansion plans, global corporate finance solutions, and international trade strategies. To read more about Floyd Associates please visit http://www.floyd-associates.com/. If you have questions or comments, please contact us by email at info@floyd-associates.com or call us at: +1 (310) 300-0890.
Saturday, March 29, 2008
Another Consequence of High Priced Oil: Large Sums of US Assets Purchased by Arab Gulf States Flush with Petroleum Dollars
In September 2007 in a complex set of transactions, Dubai proposed to acquire 19.9 percent of the NASDAQ, placing the Arab nation in an ownership position of a key US stock exchange. Earlier in the year through the state owned holding company for Dubai Financial Market (DFM) and Dubai International Financial Exchange (DIFX), Borse Dubai, the country announced a public all-cash offer to the shareholders of OMX AB, the Nordic Stock Exchange, headquartered in Stockholm Sweden.
This recent acquisitions of ownership in US and European entities by private and state-owned Middle Eastern entities are just part of the flood of oil wealth spilling from the region. Middle Eastern investments in the United States have been on the rise since mid 2006 and have been showing constant gains since the tense period following September 11, 2001. While some of these takeovers are triggering alarm, most famously the purchase by Dubai Ports World of a seaports management firm, others are evoking warm welcomes.
One of the most prominent figures behind the recent wave of expansions and acquisitions is the ruler of Dubai and the Prime Minister and Vice President of the United Arab Emirates, Sheikh Mohammed bin Rashid Al-Maktoum. A visionary and an entrepreneur, he has spent decades carefully shaping Dubai as a hub for trade and investments in the Middle East. Dubai has been transformed from a small city-state to one of the world's premier business center and tourist destination. Incentives like establishment of free trade zones have resulted in exponential growth of business activity in the Emirate.
It is noteworthy, however, that Dubai is only one of the states in the region with a success story. While Dubai owes most of its growth to Sheikh Mohammed's vision and not to a great extent to its oil wealth, other states in the region have great amounts of accumulated petroleum wealth. The rush of these petro dollars is creating enormous private and public wealth and reshaping regional businesses and society. A small portion of this wealth is being invested regionally but a great majority of it is being funneled back to the US in form of investments and joint ventures with Western entities.
Some notable acquisitions in 2006 include a $1 billion portfolio of 21,000 apartments in the US Sun Belt cities; a 2.2 percent stake in the automotive giant DaimlerChrysler AG; and a Manhattan landmark building. In March of 2006, we witnessed news of another Dubai acquisition of plants in Georgia and Connecticut that make precision components used in engines for military aircraft and tanks that drew scrutiny from the Bush administration because of national security risks.
As recently as July of 2007, Dubai International Capital, the private equity firm of Sheikh Mohammed announced plans to open an office in the United States as it seeks to add American companies to its European-focused portfolio. Speaking to the New York Times, Dubai International's CEO, Sameer al-Ansari, said, “it is very important for us to find and execute deals in the US, as we're trying to create a diversified portfolio.” Dubai International has acquired minority stakes this year in European Aeronautic Defense and Space, the parent company of Airbus; HSBC Holdings; and the Icici Bank of India. Five Fortune 500 companies are on a short list for possible investments and about 15 are on a close watch list, Mr. Ansari added.
Not all of such acquisition proposals are dealt with skepticism. The disclosure, several months ago, that Dubai Investment Group had acquired the Essex House hotel in Manhattan and promised to spend $50 million into renovating it, prompted New York City Mayor, Michael Bloomberg to exult: “Another iconic hotel overlooking Central Park will be preserved and its unionized workforce protected. This is excellent news for New York's tourism and hospitality.”
So what does all this mean for US businesses? Besides the obvious opportunities in raising capital through Middle Eastern funds, it is important to understand the forces behind the emerging interest in US businesses. Behind such transactions are two powerful forces. One, of course, is the high price of energy, which has left several oil-producing Arab countries swimming in cash. The other is the burgeoning U.S. trade deficit, $726 billion last year, which means that the United States needs foreign capital; a country that imports more than it exports must cover the gap with money from abroad.
Until now, investments in the United States from Europe and other parts of Asia have dwarfed those from the Middle East. But an increasing share of the foreign money required to fuel the U.S. economy is likely to come from places that, like Dubai, trigger visceral reactions among Americans seared by memories of the Sept. 11 attacks.
"The price of oil is going only one way, up, for the next five years, because it is going to take at least that long for alternatives to kick in," said Youssef M. Ibrahim, managing director of the Strategic Energy Investment Group, a consulting firm based in Dubai. "So there is no question in my mind that billions of dollars will continue flowing this way, and people cannot handle all of that kind of money here. You've got to circulate the money, and the United States is still the biggest market."
Already, the list of U.S. businesses owned by Arab investors, not just from Dubai, includes some well-known names. Among them are Caribou Coffee Co., the fast-growing rival to Starbucks Corp.; Church's Chicken, a fast-food concern; Loehmann's, a specialty retailer; TLC Health Care Services Inc., a provider of home nursing and hospice care; and even several financial publications, including the American Banker.
Such "direct" investment in hard assets (companies, factories and real estate) is generally preferable for the U.S. economy, in the view of most economists, to foreign investment in bonds, stocks and other financial assets. One advantage of direct investments is that they cannot be dumped in a panic the way that a Treasury bond can. Moreover, they often involve high-wage jobs. Average annual compensation per worker at U.S. subsidiaries of foreign companies is about $60,500, 34 percent higher than the rate at all U.S. companies, according to the Organization for International Investment.
Author: Nima Montazeri
Managing Director
Floyd Associates
This recent acquisitions of ownership in US and European entities by private and state-owned Middle Eastern entities are just part of the flood of oil wealth spilling from the region. Middle Eastern investments in the United States have been on the rise since mid 2006 and have been showing constant gains since the tense period following September 11, 2001. While some of these takeovers are triggering alarm, most famously the purchase by Dubai Ports World of a seaports management firm, others are evoking warm welcomes.
One of the most prominent figures behind the recent wave of expansions and acquisitions is the ruler of Dubai and the Prime Minister and Vice President of the United Arab Emirates, Sheikh Mohammed bin Rashid Al-Maktoum. A visionary and an entrepreneur, he has spent decades carefully shaping Dubai as a hub for trade and investments in the Middle East. Dubai has been transformed from a small city-state to one of the world's premier business center and tourist destination. Incentives like establishment of free trade zones have resulted in exponential growth of business activity in the Emirate.
It is noteworthy, however, that Dubai is only one of the states in the region with a success story. While Dubai owes most of its growth to Sheikh Mohammed's vision and not to a great extent to its oil wealth, other states in the region have great amounts of accumulated petroleum wealth. The rush of these petro dollars is creating enormous private and public wealth and reshaping regional businesses and society. A small portion of this wealth is being invested regionally but a great majority of it is being funneled back to the US in form of investments and joint ventures with Western entities.
Some notable acquisitions in 2006 include a $1 billion portfolio of 21,000 apartments in the US Sun Belt cities; a 2.2 percent stake in the automotive giant DaimlerChrysler AG; and a Manhattan landmark building. In March of 2006, we witnessed news of another Dubai acquisition of plants in Georgia and Connecticut that make precision components used in engines for military aircraft and tanks that drew scrutiny from the Bush administration because of national security risks.
As recently as July of 2007, Dubai International Capital, the private equity firm of Sheikh Mohammed announced plans to open an office in the United States as it seeks to add American companies to its European-focused portfolio. Speaking to the New York Times, Dubai International's CEO, Sameer al-Ansari, said, “it is very important for us to find and execute deals in the US, as we're trying to create a diversified portfolio.” Dubai International has acquired minority stakes this year in European Aeronautic Defense and Space, the parent company of Airbus; HSBC Holdings; and the Icici Bank of India. Five Fortune 500 companies are on a short list for possible investments and about 15 are on a close watch list, Mr. Ansari added.
Not all of such acquisition proposals are dealt with skepticism. The disclosure, several months ago, that Dubai Investment Group had acquired the Essex House hotel in Manhattan and promised to spend $50 million into renovating it, prompted New York City Mayor, Michael Bloomberg to exult: “Another iconic hotel overlooking Central Park will be preserved and its unionized workforce protected. This is excellent news for New York's tourism and hospitality.”
So what does all this mean for US businesses? Besides the obvious opportunities in raising capital through Middle Eastern funds, it is important to understand the forces behind the emerging interest in US businesses. Behind such transactions are two powerful forces. One, of course, is the high price of energy, which has left several oil-producing Arab countries swimming in cash. The other is the burgeoning U.S. trade deficit, $726 billion last year, which means that the United States needs foreign capital; a country that imports more than it exports must cover the gap with money from abroad.
Until now, investments in the United States from Europe and other parts of Asia have dwarfed those from the Middle East. But an increasing share of the foreign money required to fuel the U.S. economy is likely to come from places that, like Dubai, trigger visceral reactions among Americans seared by memories of the Sept. 11 attacks.
"The price of oil is going only one way, up, for the next five years, because it is going to take at least that long for alternatives to kick in," said Youssef M. Ibrahim, managing director of the Strategic Energy Investment Group, a consulting firm based in Dubai. "So there is no question in my mind that billions of dollars will continue flowing this way, and people cannot handle all of that kind of money here. You've got to circulate the money, and the United States is still the biggest market."
Already, the list of U.S. businesses owned by Arab investors, not just from Dubai, includes some well-known names. Among them are Caribou Coffee Co., the fast-growing rival to Starbucks Corp.; Church's Chicken, a fast-food concern; Loehmann's, a specialty retailer; TLC Health Care Services Inc., a provider of home nursing and hospice care; and even several financial publications, including the American Banker.
Such "direct" investment in hard assets (companies, factories and real estate) is generally preferable for the U.S. economy, in the view of most economists, to foreign investment in bonds, stocks and other financial assets. One advantage of direct investments is that they cannot be dumped in a panic the way that a Treasury bond can. Moreover, they often involve high-wage jobs. Average annual compensation per worker at U.S. subsidiaries of foreign companies is about $60,500, 34 percent higher than the rate at all U.S. companies, according to the Organization for International Investment.
Author: Nima Montazeri
Managing Director
Floyd Associates
Subscribe to:
Posts (Atom)
