Financial Times, February 3, 2006
Times were braver a century ago
By Joanna Chung
The flow of money into emerging markets in recent years pales in comparison to the proportion of funds heading there a century ago. "The surprise for emerging markets is not that investment flows are too large," says Richard Cookson, strategist at HSBC. "By historical standards, they are extraordinarily meagre."
He says the average 19th-century investor in Britain was likely to have had 25 per cent of his money in emerging markets. By comparison, US institutional investors in recent years have had barely 10 per cent invested in foreign securities, with a fraction of that devoted to emerging markets.
Capital flows in the late 19th century were also more efficient. "The trend towards globalisation was more effective in terms of capital allocation because money was flowing in the right direction, from developed markets to the emerging markets," says Mike Buchanan of Goldman Sachs. "Now the global financial system has things the wrong way round, with money flowing from places like China to the US."
The value of emerging market debt traded in the late 19th and early 20th centuries was also high, according to research by Goldman. By 1905, the total value of emerging market debt traded in London was about £1bn, equivalent to about 12 per cent of world gross domestic product. This compares with $1,200bn,or 2.7 per cent of world GDP, in 1999. The recent allure of emerging markets has seen debt trading value jump to about $5,500bn last year - back to 12 per cent of global GDP, so restoring the position of 100 years ago.
A century ago the UK accounted for just under half of all cross-border investments of more than a year's duration, says Mr Buchanan. Of those British funds, about 30 per cent was invested in foreign government debt, 40 per cent in railways, 10 per cent in mining and 5 per cent in utilities. The US was a big emerging market. Other countries attracting funds included Australia, Egypt, Hungary, Mexico, Russia and Turkey.
Default was common but the extra yield compensated for the plentiful risks. Investors bought railway bonds from Argentina and Bolivia, some of which were defaulted on; Brazil sold bonds secured by export taxes and railway revenues to pay for trams and electricity lines and even launched an offering to pay for the levelling of a mountain. Most of the world's railway systems were built with British and other European investors' capital.
The heavy flow was halted by war, protectionism and exchange controls. The revival in investor enthusiasm has been a long time coming.
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