Today’s Top Stories
- London Attacker, Born in U.K., Had Criminal Convictions, Was Probed for Extremism (WSJ.com: World News)
- Pro-settlement hardliner Friedman confirmed as US envoy to Israel (BBC News - Home)
- Investing In Soccer (Forbes - Business)
- Eurovision: Russia rejects offer for Julia Samoilova to perform 'via satellite' (BBC News - Home)
- Mexico may 'step away from NAFTA' if deal isn't good (Business and financial news - CNNMoney.com)
- London Attacks Highlight Balancing Act for Big Cities (WSJ.com: World News)
- New GOP bill costs more, but doesn't cover more (Business and financial news - CNNMoney.com)
- MarketWatch First Take: Micron profits from memory price spike, expects party to continue (MarketWatch.com - Top Stories)
- Rolling Back EPA's Clean Car Standards Is Bad For America. Here's Why. (Forbes - Business)
- Republicans delay health vote as rebels defy Trump (Europe homepage)
- Republicans delay health vote as rebels defy Trump (UK Homepage)
Other Blog Headlines
- 5 Filters of the Mass Media Machine (The Big Picture)
- The Natural Rate of Interest: Estimates for the Euro Area (Economist's View)
- A few Comments on February New Home Sales (Calculated Risk)
Category Archives: International Business
A recent blog-post in the Council on Foreign Relations highlighted how Western (and, in particular, European) countries are drastically reducing their credit exposure to Russia given recent Ukraine-Russia tensions (see French Banks Play Russian Roulette):
This trend in and of itself is not very surprising, nor is the speed at which domestic European banks are cutting their exposures. What is more striking to me is the size of the U.S. exposure to Russia–it’s higher than everyone else’s save for France. In addition, I was surprised that France’s exposure to Russia is so high relative to Germany and certainly relative to the UK. The CFR blog-post goes on to mention that much of France’s exposure to Russia is illiquid, putting it in a pretty sticky situation should things go further south.
A recent article in the Economist highlighted the struggles of developed-country multinationals in emerging markets (see Emerge, Splurge, Purge). Multinationals struggling in emerging markets is nothing new. The surprising part to me is that we still haven’t learned our lesson from years of mistakes. Every wave of emerging market investment seems to be justified by some variant of the “this time will be different” meme—i.e., the opportunities are limitless and the risks are diminished. We’ve witnessed this type of behavior in the investment run up before the 1997-98 Asian financial crisis; the irrational exuberance leading up to the 2007-08 global financial crisis; and now, in the period of central bank easy money and yield chasing in the wake of the global financial crisis. But now, every time the Fed utters the word “taper”, markets in the emerging world wobble and multinationals suddenly discover that profitability in emerging markets has failed to live up to expectations. According to the Economist:
The decline has been broad-based. Current laggards include some of the world’s largest, and best known, companies. For example, Proctor & Gamble’s global margins are half of its U.S. margins, and its performance in emerging markets is especially weak. Not only that, but Western multinationals have struggled in the previously high-flying BRIC economies—China, India, and Brazil, in particular. The root of the problem:
One comment here: Growth is not the same thing as profitability. And managers often conflate the two. But beyond the obvious pursuit of growth, expressions of managerial hubris, and increased market volatility, multinational managers often make poor decisions about the underlying risks they will take on in emerging markets. Globalizing companies tend to systematically overestimate the benefits of entering emerging markets while underestimating the costs. This is because developed country multinationals bear heightened political, economic, regulatory, and cultural risk in emerging economies. And those risks are not adequately priced. As I’ve written before (see So You Want to Do Business In a Developing Country? or U.S. Banks Pin Hopes on Emerging Markets):
The takeaway here is that ventures into emerging markets should be considered with appropriate risk pricing tools. Judging by the recurring bouts of poor multinational performance in emerging markets, we haven’t quite reached that goal. But maybe, just maybe, next time will be different.
More on this topic (What's this?)
SunEdison goes on a wind energy acquisition overdrive as it looks to set up an emerging market yi... (Green World Investor, 7/13/15)
FTTx goldmine in emerging markets hindered by regulators, incumbents (Telecom Ramblings, 6/10/15)
Emerging Market Bonds (The DIV-Net, 5/27/15)
Benn Steil and Dinah Walker of The Council of Foreign Relations ask: Will Portugal Bring Down the Spanish Banking Sector (as if it weren’t doing a good enough job of bringing itself down)?
The authors provide a really interesting graphic depicting the Spanish banking sector’s nominal exposure to Portugal, …and it exceeds $70 Billion. Wow!
Although Spain’s exposure to Portugal is certainly alarming, the tidbit I found most interesting is that Spain’s exposure to Portugal is larger than France’s exposure to Greece, and Spain’s banking sector is less than half the size of France’s. That’s a mighty burden to bear for Spain, and its banking sector.
So how does Spain dig itself out from under its Portuguese burden? The authors argue that as with Greece, at some point the EU and/or the ECB will need to intervene.
Whatever the endgame, I encourage you to read the full CFR post here.