The year of the ‘everything bubble’ comes to an end leaving behind much hype and little certainty. As I write this column, a new coronavirus variant has hit the headlines and turned upside down the agenda of cabinet meetings across the globe.
As much as we try to turn the page on the pandemic, it’s not business as usual, and certainly it’s not economic recovery as usual. In the midst of the biggest crisis in recent history, asset prices have been relentlessly rallying behind monetary and fiscal stimuli. Stocks are charting higher day by day, and so are property prices, commodities, even cryptocurrencies.
Foreign direct investment (FDI) is the exception and, frankly, an anchor to reality. FDI remains way below pre-Covid levels. In the current environment, it is one thing pulling the trigger on a trade via a Bloomberg terminal in New York or London; quite another taking a long-term risk on a physical asset in a foreign country with uncertain prospects.
China is a case point for this dichotomy. Global financial holdings of Chinese stocks and bonds have touched new highs, while our fDi Markets data suggest that FDI into the country remains 50% below pre-Covid levels. Why is FDI not bouncing back, in China as well as elsewhere? There are several reasons. Global value chains are being disrupted – somewhat by Covid, largely by politics; in the age of populism and tech sovereignty, companies looking for new markets face an uneven playing field skewed in favour of domestic companies; and those mining or oil and gas companies looking for natural resources have fallen out of grace because of their dubious environmental and social track record.
Capital is plentiful – multinational enterprises (MNEs) also have had access to credit at incredibly low rates. The business case for its allocation is also rock solid across many fast-growing industries, from all things digital to biotechnologies and new mobility, where capital expenditure (capex) intentions are very bullish.
The distribution of this capex is the real issue. Doing business in faraway markets is hazardous by nature, but it used to be worth it. That is less straightforward today, and investors are adjusting accordingly. Take a look at US investors. Traditionally the biggest source of FDI globally, they have announced domestic, inter-state investment worth a record $175bn in the first 10 months of 2021, against the $93.4bn they announced overseas, according to fDi Markets. In other words, they are investing almost twice as much at home than they do overseas – before the pandemic, it used to be the other way round.
Similar patterns of investment emerge in most OECD countries. Capex is allocated locally, or at least within familiar economic blocs. While monetary and fiscal stimuli are blurring our sight, these FDI figures are telling us that foreign investors are entrenching. It’s a natural reaction. Whenever we feel vulnerable, we go back to our comfort zones.
MNEs are no exception. The global market used to be their playground. I’m afraid that is no more, and it won’t change in 2022.
This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine. Read the online edition here.