"Follow the Money" is a catchphrase made popular in the 1976 docudrama All the President's Men. By following the paper trail, political corruption is uncovered. Here at Wanderer, our beat is investing rather than politics, but following the money is still potent advice for anyone looking for trading opportunities.
For decades, the US was the top source for international investment flows. In other words, money flowed FROM other countries TO the United States. As capital flowed into the US, the steady source of funds helped to provide a floor under the price of investments. Ample capital formation is also a fertile ground for new product development and infrastructure investment. The whole process feeds on itself as the existing capital creates the conditions to attract even more capital. It is a safe bet that the story is improving in the nations where capital is flowing towards, and problems are developing in the nations where capital is fleeing.
2020 brought change that was inevitable, but was quickened by the coronavirus. Direct investment to the US collapsed 49% last year! The sudden collapse allowed China to take the mantle for receiving the most foreign investment.
Of course, that means capital flowed FROM other countries TO China. The rising tide of investment helped China post a positive GDP for 2020, despite being the first to discover the pandemic. According to the People’s Bank of China, foreigners increased their holdings of Chinese financial assets by $204bn for the first nine months of last year.
To break it down further, $94bn flowed into Chinese equities, while $110bn found its way into debt securities. The flow of capital to China is part destiny, and partly unique to today’s circumstances. The circumstances we refer to, of course, is the coronavirus, but destiny? Why is China destined to be the recipient of capital flows? Well, that part is just history.
When it comes to trading, capital knows no borders. Oh sure, there are often restrictions that need to be overcome, but in general, capital tends to flow where it is treated best, and where it stands the best chance of earning a return. Among the many things that attract capital is business growth. These trends of inflows and outflows tend to last for decades.
In fact, every century tends to belong to a different nation when it comes to being the world's financial center. Before the US took the mantle, London was the financial capital of the world. Now, that title is looking eastward, as China enjoys a growing capital inflow. Although it is possible that last year will be an anomaly, the trend towards capital migration is well underway. For the big money that is able to navigate the sea of regulation that often accompanies investing on different exchanges, it means more and more deals will be found in the East.
For example, way back in 2008, the legendary investor Warren Buffet bought 225 million shares of BYD at HK$8. For an investment that size, filling out the forms and hiring the right people to navigate the bureaucracy is worth the effort. But what if you only can afford a hundred shares? Most likely, you will pass on the opportunity, regardless of its merits. This week, BYD soared to HK$275. In twelve years. Buffet managed to increase his investment by 34 times. As good as that is, other major players have also enjoyed massive returns by buying into the China growth story.
Sometimes, politics and economics collude, and sometimes they collide. For the past four years, President Trump fought the inevitable capital shift eastward. But, despite imposing billions of dollars in new tariffs and outright banning certain corporations from being listed on US exchanges, capital continued to find its way East. In the end, there is no stopping destiny. The big money will flow to where the action is. Local regulation has very little impact on institutions that are able to navigate scores of rules and regulations. Instead, it is the little guy that is confined to playing in his own sandbox. Unfortunately for Americans, the action is increasingly happening elsewhere.