The Big One: Saudi Arabia Sells Stocks to Foreigners

It's Riyadh or bust, baby.

The never-ending chase for better investment returns brings us to the doorstep of Saudi Arabia. The country remains an enigmatic mix of integration and isolation with the world economy. For instance, the same government that now funds one of the premier research institutions in the region, the King Abdullah University of Science and Technology (KAUST), has long paid what is in effect hush money to fundamentalist educational groups which have helped radicalize impressionable youths the world over. Or, the same country that is a G-20 member does not allow women to drive cars.

One of the restraints Saudi Arabia has kept is barring foreigners from buying stocks listed in the country directly. Sure you could acquire exposure to this market through mutual funds and ETFs, but not by purchasing stocks outright. However, market forces could not be curtailed forever as Saudi authorities are now finalizing plans to allow stock sales to foreigners. In terms of market capitalization, there really is no contest as far as the Middle East is concerned:

Saudi Arabia’s Capital Market Authority (CMA) said in July that it will open its $560 billion stock market to foreign financial institutions in the first half of next year. The announcement (which can be found here, but you may want to use Google Translate if your Arabic is as rusty as mine) spurred investors’ enthusiasm.

“This move by Saudi Arabia could be one of the most important catalysts for attracting significant flows of global institutional capital into this region,” said Zak Hydari, CEO of European Islamic Investment Bank-Rasmala, which manages more than $1.1 billion of assets in the Middle East. “The size and liquidity of the Saudi market, coupled with the strong regulatory framework of the CMA, will be extremely appealing to global investors, who have been waiting a long time for such a development to take place. It could be a real game changer for the region's investment and capital markets,” noted Hydari.

The stock market of Saudi Arabia, the world’s largest oil producer, stands out for its size and breadth. In comparison, Dubai and Qatar—which have been attracting attention in the past couple of years and have been promoted to emerging (from frontier) markets status on the MSCI index by Morgan Stanley—are much smaller. Dubai has a market cap of $101 billion; Qatar, $191 billion.

Make no mistake: the Tadaqul is probably the world's largest stock exchange that remains unopened to foreign investment. Consider it alongside those of other emerging markets...

“To put that in context, [the Saudi market is] just under 10% [of] the size of the Nasdaq, half the size of South Africa's stock exchange and more than twice the size of Israel's market,” said Shane Leonard at Stockflare (www.stockflare.com), an investment blog. “Saudi stocks have the potential to become a major part of the MSCI Frontier Indexes, which could drive significant foreign interest in the Tadawul,” said Leonard. “Though the devil will be in the details, and retail investors shouldn't expect to be able to buy Saudi shares directly, as there may be a requirement to be a large long-term investor.”

The Tadawul All Share Index has appreciated a healthy 20% since the beginning of the year, compared with a nearly 6% rise in the MSCI Emerging Markets Index and 7% in the MSCI GCC Countries Index.

The logic of capital marches on--what David Harvey would call a "spatial fix."

What To Make of Corporate Tax Inversions

Click here to read my column in Sunday's NY Times.

Another Papal Accolade: Top Car Salesman

This Kia Soul pitchman beats dancing hamsters hands down.

You'd think that being "vicar of Christ" would be a heavy enough burden. To the list of many accolades accorded to the current leader of the Catholic church, however, add this one: "savior of Korean manufacturing." You see, Pope Francis recently visited South Korea after receiving an invitation to go there. Unlike the nominally godless North Korea, over a tenth of South Korea's population is composed of Catholics. It is just as well since Korea has been in need of divine intervention as of late given the economic headwind of a fast-appreciating currency. One of those negatively affected was Kia Motors, the country's second-largest automaker:

Major companies announced financial results for the second quarter yesterday, most of which declined due to the strengthening of the Korean won in the first half. Following Hyundai Motor’s slack quarterly earnings report Thursday, Kia Motors announced a decline in operating profit that it blamed on the won.

Kia Motors said its second quarter profit fell 31.7 percent from a year earlier to 769.7 billion won. Its operating profit for the first half of 2014 was 1.5 trillion won, down 17.8 percent from the same period last year. Its revenue was 23.98 trillion won, a 0.9 percent fall from last year. “As 75 percent of our business comes from exports, a currency rate that fell 58 won on average in the first half caused a deterioration in profitability,” said the automaker in a release.

Given such a scenario, Pope Francis requesting a modest compact car as his wheels of choice in South Korea was, ah, godsend for Kia. Practicing what he preaches, one of the world's most influential and powerful persons chooses to go around not in ostentatious bulletproof luxury cars but hatchbacks. Asking for a modest vehicle to carry him around, he chose the Kia Soul which is soulled [sic] around the world. Talk about free publicity:

The pope slipped into the back of the [Kia Soul] and rolled down a window to wave at the welcoming party...[t]he pontiff’s choice is a victory for Kia at a time when the won, last quarter’s fastest-appreciating major currency, is eroding South Korean exporters’ earnings. The selection also underscores the pope’s preference for small cars, a departure from past “Popemobiles,” such as the custom-built, bulletproof Mercedes-Benz Pope John Paul II used to ride on.

“This will help Kia by bringing far-reaching exposure through the mass media,” Kim Jin Kook, chief executive officer of auto researcher Marketing Insight, said by phone. “That exposure will be related to the pope, who has a very positive image among the general public, which in return will trigger a halo effect for Kia.”

No power windows in 2014? Pope Francis is clearly downsizing. At any rate, the upshot of the recent papal visit to South Korea has been increased sales of the Kia Soul. Mind you, it's a good model anyway that provides exceptional space for a compact vehicle:

The so-called "Pope Francis" effect may have extended to the "popemobile" as well. Sales of Kia Motors' Soul model shot up last week, after Pope Francis used the compact car to get around during his trip to Korea.

The company says an average of 32 cars were sold per day in the country right before the pope arrived until shortly after he left. That's up 63 percent compared to the same period last month. Kia forecasts global sales of the Soul model to spike as well in the months to come.

Catholicism in Korea is an interesting growth story that I will discuss another day. Lest you doubt its growing influence, I leave you with the 800,000-strong mass that Pope Francis held in downtown Seoul. Whatever views you may have of Catholicism, he is a huge draw in South Korea--a decidedly non-traditional market for the church in saving souls.

Futbol Geopolitics: Crimean Clubs Join Russian Leagues

"We're all Russians now," Sepp tells Vlad.

With the end of the World Cup, I haven't had a single football (soccer)-related post. Let's fix that right here, right now. There's an interesting feature from BBC News on the consequences for incorporation of the Crimean peninsula into Russia through a "referendum." Say what you will about the legitimacy of that vote, but there is no doubting that a vast majority of people there would have wished to join Russia anyway.

A rather visible manifestation of this ongoing (re-)integration of Crimea into Russia is that a number of clubs that formerly belonged to the Ukrainian league have, ah, broken away to join the Russian equivalents, albeit in the third division:

The recent conflict between Russia and Ukraine has impacted directly on football in the region, with three clubs from the annexed Crimea region - including two formerly from Ukraine's top tier - starting the new season in the Russian lower leagues. The clubs - TSK Simferopol, SKChF Sevastopol and Zhemchuzhina Yalta - made their debuts in the Russian Cup this week and have been placed in the third tier of Russian league football.  They will play their first matches in the division next week. 

Talk about a demotion not through football but through political action. Then again, they're playing in a bigger country--at least for now. Already the Ukranian league is complaining to the Union of European Football Associations (UEFA) that this breakaway was neither approved nor sanctioned, therefore not permitted:

The Ukraine Football Federation's (FFU) president, Anatoly Konkov, sent a letter of complaint to world governing body Fifa and European football authorities Uefa, asking them to punish the Russian Football Union (RFU) for the move. "As the president of the Ukrainian national association, I am asking you to take all necessary actions to deal with the situation, including applying sanctions," Mr Konkov wrote. "This is a matter for the whole of Ukrainian football."

The Russian football authorities did not officially inform Uefa or Fifa about their decision to incorporate the teams. Uefa say they are "monitoring the situation" and are in contact with both national associations to discuss the matter, while Fifa say they are aware of it but that the matter should be dealt with by the European football governing body. 

Oh boy, even in a game where twenty-two grown men chase a ball around for ninety minutes there are sanctions. The newly Russianized clubs, however, have been playing under new names and new players to erase the previous Ukranian identity. Does that qualify them as "new"? That will be a bone of contention. Additionally, there are restrictions there on players having to be Russian:

The Crimean clubs have also been renamed and been given Russian addresses. TSK was previously known as SC Tavriya, while SKChF from the city of Sevastopol - where Russia's Black Sea naval fleet is based - had been playing in the Ukrainian Premier League as FC Sevastopol. "We had certain reasons to do that [change the club's name]," a spokesperson for SKChF told the BBC. "It had to be [now known as] another club, not the one that is registered at the Ukrainian Football Federation.

"We got a Russian address and changed the squad, with players who have Russian passports, because we can't use the Crimean players yet." According to Russian third division rules, only players with Russian citizenship can take part in the league.

Therein lies the rub: under international and not Russian, er, "law," Crimea remains part of Ukraine, hence the legal maneuverings by Ukraine's football league and the breakaway clubs to change their names in preparation for Russian makeover/takeover:

Russian sports minister Vitaly Mutko - who is also a member of Fifa's executive committee - told reporters that he considers the inclusion of the Crimean clubs an internal Russian affair. One legal expert, Russian sports lawyer Michael Prokopets, questioned the RFU's decision to incorporate the Crimean clubs into the Russian league.

"Crimea at the moment is not recognised as a Russian territory by the international community," Mr Prokopets told BBC Russian. "[As far as] Fifa and Uefa [are concerned], it is the territory of Ukraine and therefore they need the permission of Fifa and the FFU."

As with more things than I can to mention, the only clear-cut victors here will be the lawyers.

Money Laundering or Investment? Chinese Buy Oz Property

What is capitalism? What is state-driven capitalism? The blurred distinction between the two gives rise to now-frequent crackdowns on Chinese businesspersons during Xi Jinping's current drive to supposedly reduce corruption in the PRC. Unless you're a die-hard Marxist--property is theft, more so in a "Communist" state--the distinction isn't so clear. In an earlier post, I described how many Chinese are hedging their bets by seeking residences abroad should the purge in China reach Cultural Revolution proportions. While that's a remote possibility, you never know.

Apparently, one of the choice destinations for the Chinese is Australia. Closer than Europe or North America, it is still relatively affordable. Throw in a large and growing Chinese communities in several destinations and you have an attractive deal:

More wealthy Chinese are moving their money out of China to invest in Australia's property market as a corruption crackdown in the world's second biggest economy gathers momentum, property consultants and lawyers said. They said their clients had told them they had legitimate funds to invest but were concerned about being caught up in an investigation, which in China often delves into the affairs of dozens of associates of the main target, and losing that wealth.

"What we see at the moment is that there are more Chinese who would likely send more money out of the country so they don't get caught up in this crackdown," David Green-Morgan, global capital markets research director at real estate servicesfirm Jones Lang LaSalle (JLL), told Reuters.

We're not talking about trifling sums here, either:

Australian property has long been a popular choice for Chinese money - both legitimate and illegitimate - but the flow of investment appears to have accelerated of late.

According to Australia's foreign investment review board, China was the No.1 source of foreign capital investment into Australia's real estate in 2013. It received approvals to invest nearly A$6 billion ($5.58 billion) into the sector, up 41 percent from a year ago. "They are worried so they are looking for a safe place," said a Sydney-based immigration lawyer, who is advising on setting up a new fund exclusively for Chinese investors and regularly travels to Beijing and Shanghai. "They don't want returns, not necessarily. They want a safe place," he added.

China is expected to see an annual growth of 20 percent in outbound real estate investment in the next decade, up from $11.5 billion last year, property agent Savills has forecast.
That will help push Chinese demand in Australian property by 15 percent over the next 12 months, said Andrew Taylor, co-CEO of Juwai.com, the largest real estate portal that targets Chinese buyers looking abroad.

Meanwhile, the commercial bonanza is on:

Chinese property developers have been aggressively investing abroad to cater to domestic demand and to diversify their assets in response to a cooling property market at home.

Hong Kong-listed Wanda Commercial Properties has set up a $1.6 billion fund to invest in Australian real estate, while China's Greenland Holding sold every apartment in a Sydney project last year within the first three hours for a total of 2 billion yuan ($325 million).

Century21 and Fairfax Media's Domain.com, Australian real estate portals, have launched Chinese language websites, and REA Group recently announced that SouFun, a major real estate online marketplace in China, would carry Australian listings.

Murdoch's The Australian has another angle on this story focusing on the attractiveness of suburban homes near top universities. Nevertheless, there's no doubting the new force in offshore real estate investment regardless of the "legitimacy" of the source.

Teaching Conference

I will be speaking at the annual conference of the National Economics Teaching Association, which this year is being held on Thursday, November 6th and Friday, November 7th, 2014 in San Diego, CA.  If you want to consider attending, click here for more information.

 

You can potentially win a free trip to the conference, as well as some cash, by entering this contest.

If Hell Comes: Preparing for UK's EU Departure

Some are intent on killing the goose that lays the golden egg.

Never underestimate the human potential for acting stupidly: The UK's ruling Conservative Party has long been playing fire with its Eurosceptic stylings. By bashing the EU and its alleged overregulation at every turn, their intent is to use possible UK departure from the EU as a leverage point to gain more exceptions for its financial services industry. The Tories now plan to hold a referendum on the matter of EU membership if reelected out of electoral self-interest. Now, imagine if UK voters are sufficiently peeved at Europe to vote for leaving it. There's no saying it couldn't happen, but the effects of the UK being branded a "foreign" financial system would mean curtains for its status as a gateway to the EU.

Already, American banks are preparing their doomsday scenarios by moving more activities to Ireland--a classic low tax destination within the EU that is unlikely to leave the union:

[US banks] said their plans were in most cases still at very early stages. But they said the US banks had started preparing for the eurozone’s impending banking union that threatens to isolate Britain and, ultimately, for a possible UK exit from the EU. “I’m frankly looking at moving some activities to Ireland,” said one senior UK-based manager at a Wall Street bank. “I think the Irish central bank and government would welcome this. It is not so much Brexit, more about legal entity optimisation.”

Most US and Asian banks have chosen to base their main European operations in the UK, giving them an automatic passport to carry out their services across all 28 countries in the EU. But senior US banking executives said the UK was unlikely to be granted the same “passporting” rights if it left the EU – the so-called “Brexit” scenario.

Prime Minister David Cameron has promised to hold a referendum on a renegotiated EU membership if his Conservative party wins next May’s election. Executives at American banks in Europe are reluctant to speak publicly about the issue for fear of upsetting the UK regulators. One said: “I don’t think people are making enough of it – a lot of passported activities that cannot take place in London will not exist here any more.”

London, or more specifically the City of London, is the world's financial capital. New York isn't; not by a long shot. These yahoos are running the risk of turning it into another offshore economy like, say, the Cayman Islands. It may be a particularly big offshore economy, but it will become smaller as the transaction costs of doing business in a non-EU country increase. To its credit, Ireland is seeing the potential of siphoning away at least some support activities like backroom operations even if the UK ultimately stays as the baseline scenario still suggests:

The UK hosts more than 250 foreign banks and last year it generated a financial services trade surplus of $71bn, about a third of which came from trade with the EU, according to TheCityUK, a financial lobby group.

Most observers assume that if the UK did leave the EU then Frankfurt or Paris would be the most likely alternative for US banks looking to shift parts of their European activities out of the UK. But Ireland’s attractions for US banks include its low corporate tax rate, English speaking population, English-style legal system and eurozone membership. “Dublin is selling itself very hard at the moment,” said one banker.

Leaving the EU would be an unthinkably stupid thing for the UK to do, but hey, WWI looked pretty unlikely until about a hundred years ago, didn't it?