A New Port Emerges for Global Investors
"That's what happens when you give an engineer time to dream." Eike Batista's rapid-fire delivery slowed down just enough for him to sum up the daring ambition of his latest project: a mega port to ship Brazilian natural resources to China.
Shortly afterward in our interview, the Brazilian billionaire reeled off the foreign partners backing his vision. One caught my ear: Mubadala Development Co. In March, Abu Dhabi's sovereign-wealth fund invested $2 billion for a stake of around 5% in EBX Group, Mr. Batista's holding company.
Let's recap: A Brazilian entrepreneur builds a gigantic port to meet China's demand for commodities and receives financial backing from a Middle-Eastern sovereign-wealth fund.
Notice anything missing? Not one of these transactions involves the West.
As the U.S. and Europe struggle under the weight of their crises, the center of gravity of the investing world is slowly shifting toward developing markets.
Starved of growth opportunities in their traditional western hunting grounds, sovereign funds, companies and investors based in emerging economies are bypassing developed countries to pour money into fast-growing developing markets.
If this southward and eastward migration of capital continues, the implication for Western economies, their markets and, possibly, the role of the dollar as the global reserve currency will be profound.
Much ink has been spilled on the "south-south" trade flows linking emerging countries such as Brazil and China. Now there are signs that investment flows are also heading in that direction.
Deals between emerging-markets buyers and sellers have accounted for at least 12% of global cross-border mergers and acquisitions volume in each of the past three years, according to Dealogic. In 2000, they were a mere 2%.
Five years ago, M&A deals among the BRICs countries—Brazil, Russia, India and China— totaled around $600 million. In 2011, they topped $11 billion.
It isn't just M&A. A Russian sovereign-wealth fund recently sealed a $2 billion joint venture with China Investment Corp. to invest in companies with interests in both countries. And Gao Xiqing, CIC's president, told the Milken Institute conference last week that the state investment fund has around 15% to 20% of its capital in emerging markets, even though emerging markets account for 5% of the value of global stock markets.
Even Western fund managers are coming under pressure from emerging-markets clients to find investment targets in those areas of the world.
"More and more, we are going to clients saying they should have exposure to global equities, and what we hear back is: What do you have for me in Latin America or emerging Asia?" says Jim McCaughan, chief executive of Principal Global Investors which has more than $258 billion under management.
Some of the reasons for this shift are tactical. Asset managers of all nationalities crave growth, and the sluggish economies of the U.S. and Europe aren't exactly over-endowed with that at present.
Bad experiences, such as the large losses suffered by sovereign-wealth funds on their stakes in U.S. banks during the crisis, have also made emerging countries' investors wary of western markets.
But there are deeper currents at play, such as geopolitics. Mr. Gao was typically forthright when he said: "We meet a lot of resistance from Western governments…so we have to diversify and put a lot of money in emerging markets."
The desire to fill the gap between trade and investment volumes is another powerful driver. Kirill Dmitriev, head of the Russian Direct Investment Fund that is teaming up with CIC, estimates that China and Russia exchange $82 billion of goods and services a year and yet cross-border investments are a tiny fraction of that. "There is potential for them to grow," he says.
To call these episodes a structural trend would probably be premature, but the West would be foolish to ignore them.
Long seen as passive, and grateful, recipients of foreign investments—the emerging economies of Asia and Latin America—are displaying a newfound assertiveness on global capital markets. It is their time to do the buying now, whether the West likes it or not.
The one immediate implication is that investors seeking emerging-markets exposure should put money not just with Western asset managers buying in China and Brazil but also local funds investing in the developing world.
In the long-term, if the intra-emerging markets story has legs—and those countries create a private investment industry to complement sovereign funds—capital markets in developed countries might suffer and the dollar's status as the global currency of choice might come under threat.
That nightmare scenario is years, if not decades, away. Meanwhile, powerful investment forces are stirring in the South and East of the world.
As Mr. Batista told me: "In America, you have the American dream. In Brazil, we are building the Brazilian dream."