A Global Quest for Growth: Asia, the Middle East, and Africa Rising
By Jim Altenbach, CFA
In May, over 3,700 attendees and 620 thought-provoking panelists from around the world gathered in Los Angeles, California, for the 16th annual Milken Institute Global Conference. Speakers included Nobel Prize winners, top industry leaders, scientists and heads of state, including Bill Gates, Tony Blair, Gary Becker, and Carlos Slim. The focus of the 165 panel sessions included the global economy's strength and longevity, the Middle East, energy security, inflation, banking, and Africa. The conference offered a complete global overview of the most pressing questions facing investors and decision-makers. We present topics of interest to those with an eye toward growth, progress, and innovation.
Panel: U.S. Overview: First Recovery, Then Takeoff?
Fundamentals of the U.S. economy seem to be improving. U.S. bank and corporate balance sheets are robust, and housing prices have stopped falling.
However, a slow job creation rate, and weak consumer discretionary spending are threats (see figures 1 and 2).
Companies remain reluctant to invest more money in equipment or expand their workforce. "The challenge for companies is finding ways to grow their companies through market expansion rather than cost-cutting," explained Jim Moffatt, Chairman of Deloitte Consulting LLP.
"Because of the way the U.S. taxes multinational companies - globally as opposed to territorial - it provides an incentive for them to keep their cash out of the U.S." explained Goldman Sachs Senior Strategist Abby Joseph Cohen.
Panel: Global Overview
Panelists agreed the outlook is better than it was a year ago, when Greece was threatening to leave the EU and Iran was talking war against Israel, but they didn't agree on much else.
The U.S. is still struggling to maintain its role as global leader since the financial collapse. Risks posed by geo-politics, terror, and U.S. and Euro-zone financial debts remain. For similar reasons as the U.S., Europe is suffering, but more severely.
Growth rates are mixed in many emerging markets, including the BRICS countries (Brazil, Russia, India, China and South Africa), which are slowing down. MIPS countries (Malaysia, Indonesia, the Philippines and Singapore) are the new emerging markets performers.
Nouriel Roubini, New York University economics professor, noting BRICS are "overhyped," stressed digging even deeper into the periphery of the developing world to places like Chile, Colombia, Peru, Turkey, Czech Republic, Botswana, Gabon and Nigeria (see figures 1, 2 & 3).
Roubini predicts the stock and bond markets can rise for another two years, as the Federal Reserve maintains its massive easing program.
However, Roubini continues, "the Fed's accommodative policy is sparking the same problems that led to the financial crisis in 2008 by keeping rates low. The Fed is 'creating massive fraud.' The problem is the Fed's liquidity injections are not creating credit for the real economy, but rather boosting speculation."
With slowing global growth, it's impossible to keep stocks and bonds at these valuations. "The global growth scare implies that equity and commodity prices should be lower."
"When things do come back down to earth, the economy will suffer a depression, rather than a recession. When the Fed starts to raise interest rates (some time in 2015), it will proceed slowly, taking two years," he says. "Meanwhile, Eurozone's crisis threatens stocks."
Panel: Asia Rising: A New Competitive Landscape
"It's not all about China," panelists agreed.
Timothy Dattels, Senior Partner, TPG Capital, noted that Association of Southeast Asia Nations (ASEAN) countries have the world's highest-performing stock markets. For example, Indonesia, Southeast Asia's largest economy, has gone from the most - to the least - leveraged country in the world. It has a massive consumer class, a young population and an economy that's emerging rapidly. The Philippines has a well-educated workforce and a major service economy. He sees production moving from China to ASEAN countries that are most stable, despite China having "higher reliability…this is a very powerful trend."
There are three trading blocks for Asian countries, depending on stages of development. India and Vietnam focus on unskilled labor and natural resources, China focuses on efficiency and quality, while Japan, Hong Kong, and other developed countries are innovation driven (see figure 3).
However, a rising middle class, increasing urbanization, and pollution would put incredible stress on the resources of Asian countries. China is still the economic powerhouse in Asia.
Panel: Global Markets in Uncertain Times
William Buiter, Chief Economist of Citigroup, says, "China has injected massive liquidity, credit up 50% in half a year, but growth has slowed to below 7%. There is a credit bubble that has gone into bad real estate loans, which will lead to massive realized bank losses, equal to 20% of GDP." Panelists agreed China's ballooning debt crisis could derail one of the world's critical engines of growth.
Energy costs influence international commodities (see "The end of Energy Scarcity" below). Views regarding other commodities were mixed this year. Most panelists attribute declines to economic weakness.
In mid-April the gold price crashed to below $1400 an ounce. However, Marcus Grubb, World Gold Council Managing Director, stated, "The bull market is very intact. Gold's decline was driven by very large short sales in the New York futures market. Prices are recovering as physical demand (which is growing worldwide) rebounds…e.g., consumers in India and China currently pay a premium for physical gold. Investors should hold gold in their portfolios as an inflation hedge and store of value."
Gold's decline is likely due to jawboning by the Fed, and not a true decline in inflationary pressures; thus global interest rates and inflation should rise.
Panel: Bioscience Discoveries That Will Blow Your Mind
Aydogan Ozcan, UCLA Professor of Electrical Engineering and Bioengineering, demonstrated how dramatic increases in the megapixels of camera phones "open up the use of the cell phone itself as a microscope." This can be a boon to the developing world, especially for telemedicine, because it's so inexpensive. Smartphones can easily be modified to detect bacteria such as E. coli and allergens such as peanuts.
Jack Andraka, a 16-year-old scientist and cancer researcher, created a simple way to detect pancreatic, lung and ovarian cancer at the earliest stage with 100 percent accuracy - for about 3 cents. Current diagnostic tools cost $800 and miss 30 percent of cases. His method is not only more accurate, it's 168 times faster and 26,000 times cheaper, he said. Using information found through Google and Wikipedia, he learned about a protein marker for the cancer found in the bloodstream. He then developed a paper dip stick test to detect it.
The concept is simple, but getting people to take him seriously was not easy. He needed a lab, so he contacted 200 university professors. 199 of them quickly rejected him. One professor did listen to him, and after grilling him on his knowledge, decided to help him. Andraka went on to win the 2012 Intel Science Fair Grand Prize.
Nobel laureate David Baltimore of the California Institute of Technology discussed his research on gene therapy aimed at stopping diseases such as cancer and HIV.
Other speakers and panels
On Monday, Carlos Slim, Chairman of Telmex, observed, "There are always good places to invest even in this depression. Many countries in Latin America have over $10,000 per capita income. Increasing 5%-10% per year for 10 to 15 more years breaks the $15,000 milestone, where a middle class can grow a larger economy."
On Tuesday, former U.S. Treasury Secretary Robert Rubin shot down the idea that we could have just the amount of inflation we want. "Once inflation begins, it tends to build on itself," he said. Professor Gary Becker, Nobel Laureate of Economics, agreed that "it's hard to keep it in bounds" and inflation would likely create "real problems." Neither would predict when the Fed might raise rates. Both Rubin and Becker see bright spots in the U.S. economy. Rubin likes the prospects for 3D printing, robotics and new sources of energy. Becker praised U.S. startup culture and advances in biotech and manufacturing. "We're the major innovators in the world," he said.
Harry Reid, U.S. Senator and Majority Leader, and Eric Cantor, U.S. Congressman and House Majority Leader, squared off. They agreed on the benefits of more medical research, but not on how to fund it.
Jim Barth, Senior Finance Fellow, Milken Institute, cautioned, in an interview, that fracturing the big banks into several smaller ones would not reduce systemic risk, but only diffuses it over thousands of small banks because their balance sheets, mostly of real estate, would be the same. Problems include leverage and inadequate regulation, says Barth, who advocates the establishment of a "Sentinel" to provide independent expert assessment of financial regulation.
On Tuesday, Tony Blair, former Prime Minister of Great Britain, observed, "The only solution for Palestine is two states side by side. The economic challenge is in getting quality investment into a Palestinian state. We need to give the Palestinian people some hope."Global Risks, Energy, the Middle East, and Africa:
Panel: Global Risk
Nations like China have formal cyber-warfare strategies. Difficult-to-identify small groups also wage cyber-warfare. Matthew Burrows, Counselor, National Intelligence Council, said lone actors boast the disruptive power once wielded only by nations. The U.S. must create barriers against these threats. Wesley Clark, Army General (Ret.), former Supreme Allied Commander of NATO, agreed, blaming Congress for not acting.
Strongly supporting Ghadbian (See "Syria" below), Clark says, "The question isn't whether a "red line" has been crossed, but rather what is the sensible policy? If we can bring a Western Democratic government to Syria, there will be incredible benefits to the region."
Panel: Syria's Choices
Najib Ghadbian is the Syrian Opposition Coalition's (SOC) top U.S. representative. SOC's objectives are to remove the Assad regime from power, to create united regions and a Free Syrian Army (NYSEARCA:FSA) under the power of democracy.
In 2005, a peaceful revolution for democracy regrettably turned violent "when civilians took up weapons in self-defense from regime snipers." Then Syrian army members defected. These splintered groups make up the FSA.
"We ask the International Community for support, but not a foreign invasion," he says. U.S. humanitarian relief is generous. However, FSA's main problem is lack of munitions and strategic weapons (anti-aircraft/tank).
"The U.S. is fearful that such arms will get into the wrong hands," a reason given to not arm the rebels. Ghadbian acknowledges extremist groups exist within the FSA. However, "the U.S. can arm only the main moderate forces. Of which, only selected moderate rebel officers will have these arms."
Documented use of chemical weapons by Assad already exists. "Assad tested the International Community's will to see what he can get away with," he says.
"The role of Iran has been very destructive. Assad has been serving Iran's interests," he says. They've been spoiling U.S.-backed Israeli/Arab peace efforts. A democratic Syria would bring in a new era of Middle East geo-political relations, enormously beneficial to the U.S. "The pillars of democracy support us. We will be successful," he says.
Panel: The End of Energy Scarcity?
The U.S. has the highest domestic proven reserves in the world (see figure 4).
However, James Woolsey, former Director of Central Intelligence, says, "The chart is misleading, as it is 'oil equivalents,' which are not fungible, as they include oil, natural gas, and coal. We cannot switch between fuels. The U.S. must change its infrastructure and delivery strategy."
T. Boone Pickens, Founder of BP Capital, commented: "The plan is to start with fleet vehicles and work down-line. Trucks can save US$2 per gallon using liquefied natural gas (NYSEMKT:LNG), but must know where fueling is. The private sector must take the initiative, as we cannot count on government." The U.S. can be energy independent and net exporting by 2020, progress worth trillions of dollars and national security.
Energy prices are down from their 2008 highs. Crude price estimates forecast decline into 2020 (see figure 5). However, Pickens says crude is supported by Middle East tensions.
Panel: Arab Spring: Hope, Then Upheaval, Then What?
Americans understand the desire of the Middle East masses to overthrow despots and expand freedom, but are naive about "cultural differences," says Ayaan Hirsi Ali, a Fellow at Harvard Kennedy School.
"We think everyone is like us." But according to a recent Pew survey, the vast majority of Muslims in the region want to be ruled by fundamentalist Sharia law, which "could not be more different," she says.
Ali fears the despots being overthrown might simply be replaced by "new despots we do not understand." To prevent terrorism, she said the U.S. should put more effort into spreading its ideas and inspiring people, a cheaper and more effective approach than using bombs.
Panel: Two, Three, Many Middle Easts: A Region's Economic Prospects
A Monday panel opened with "the standard narrative of the Middle East: 'it's a grouping of Petro-States within a miasma of slow growth and explosive politics.'" In fact, disparate nations co-exist, some of them wealthy with natural resources (e.g. Saudi Arabia), others economically poor but human capital rich (e.g. Egypt), but not both. Wealthy Israel is human capital rich, but has no natural resources.
Heidi Crebo-Rediker, Chief Economist, U.S. Department of State, observed, "The International Community plans to create stability" by fostering entrepreneurs. Young people tell U.S. government representatives, "Teach us how to do what you do." Highly educated groups in the region need specific skills. Small-medium size businesses provide majority of employment, but need capital." Obviously, this is less costly than military deployment," she says.
Panel: Investing in African Prosperity
Africa is increasingly viewed as the final large-scale global frontier. Africa's share of world population is projected to be 25% by 2050, and boasts 7 of the 10 fastest-growing economies, driven largely by surging foreign direct investment (NYSE:FDI). FDI is expected to reach $150 billion in 2015 (see Figures 6 and 7).
Fertility rates are dropping, but still high (Figure 8). But challenges remain, as Africa is also home to the world's largest concentration of impoverished people, and the considerable gap between rich and poor continues to widen.
Prosperity is the answer to many of the world's challenges. To address challenges, a collaborative partnership approach between governments, multi-lateral organizations, private business and philanthropic organizations is needed to enhance growth in Africa for its people.
Bill Gates, Co-Chair and Trustee of the Bill & Melinda Gates Foundation, highlighted that philanthropy, growth, and investment go hand-in-hand. Gates says, "Increasing health, agricultural productivity, education, infrastructure, and governance, are the 'magic mixes' to make a nation economically self-sufficient. Ironically, surprising, population growth has slowed with increased health." The speed with which things are changing pertaining to investments, particularly on the social side, is "mindblowing."
Tony Blair, Former Prime Minister of Great Britain, says, "Government transparency and efficiency are foundations for improving prosperity," as "when there's stability and there's order, you can get things done." Advances in health and wellness prime nations for growth.
Gates says, "Ghana, even with its low income levels, has an excellent medical system, with higher vaccine coverage rates than the U.S." He was surprised "how many high-impact opportunities were available" when he first got involved. "Poor children not given vaccines had 100 times the chance of dying from an infection as vaccinated rich kids."
Political stability has spread across the continent as well. Over 50 nations are democracies, versus only five in 1990. Africa has a socio-economic landscape as varied as that of any other region. Rhonda Zygocki, Chevron Executive Vice President, says, "the key to successful investment in Africa is partnering with local governments and businesses. Chevron employs an almost entirely African workforce there."
Strive Masiyiwa, Chairman of telecom company Econet Wireless, said outside investors need to "empower people so they are not resentful" and so that they "feel a part of what you are doing."
Masiyiwa says with growing cell-phone penetration rates of 65% (some countries 100%), Econet uses that network to improve access to health-care, education, and information.
H.E. Paul Kagame, President of the Republic of Rwanda, observed, "For any investment made in Africa, there are good investment returns with high impact made on the people." He explained that countries like Rwanda, once divided by war, have put aside their differences in the name of progress.
Because of the "trust relationship" and "religious connection" with several African nations, Middle East countries have huge impact on economic support and investment, Gates says.Economic Insights:
Conclusions: The World Economy, Middle East, and Africa
The influential Gulf Cooperation Council (NYSEARCA:GCC) countries have been reallocating more of their capital to their immediate region, Middle East North Africa (MENA), and Africa, a growing trend.
Multi-lateral organizations such as the Association of Southeast Asia Nations (ASEAN) and the Islamic Development Bank (IDB) target their member countries. As Africa contains 26 of the 56 IDB member countries, expect more investment from IDB and other multi-lateral organizations targeting Africa. ASEAN targets its members in Southeast Asia.
What is significant to understand is investment decisions by multi-lateral organizations such as IDB often carry with them positive implications for investor sentiment.
This is especially true for Africa. First expect lower-risk fixed-income instruments, then more equity market investing (many African countries have a very low market capitalization), and later on the currently developing venture market with liquid micro-cap exit strategies. The least difficult way to seek investment exposure to many developing markets is indirectly via the public equities of U.S. or European listed multinational, mid-size or small-size companies, with significant business in the target country.
About the Author
James Altenbach, CFA is principal of Florentez Investment Management (Shari'ahShares). Since the firm's inception, he serves as an advisor to the President on strategic matters including research and proprietary analysis and product development on ETFs and Sukuk. He writes published articles and reports on Islamic Finance and the Middle East. He possesses over 18 years of research, sales, financial advisory, institutional relationship, and general management experience, working with firms such as H.C. Wainwright & Co. Economics, Altimus Capital, First Allied Securities, Evergreen Realty Securities, and RedChip Companies. He did his undergraduate work in business administration (Finance) at California State University, Los Angeles, with distinction, and holds the designation of Chartered Financial Analyst (NASDAQ:CFA).