Rapidly developing economies (RDEs) have increasingly become drivers of change -- and sometimes disruption -- in global financial markets. That has important implications for companies in the United States and Europe as new players emerge, including sovereign wealth funds, state-controlled entities and acquisition-minded corporations.
As these groups bolster their foreign exchange reserves, they will increasingly look to buy assets beyond their borders, including controlling stakes in foreign companies, according to experts at Wharton and The Boston Consulting Group (BCG). At the same time, aging populations in the United States and in Europe will be seeking to liquidate some assets to finance their retirements. This combination of trends will present both opportunities and threats for companies in the developed world. Companies that do not run a tight ship could see unsolicited takeover bids from companies in countries with merchandise- or energy-related trade surpluses. Additionally, top executives at Western companies will need to understand sovereign funds' investment criteria and even get to know decision makers personally.
Seeds for this change date in part back to the Asian financial crisis of 1997 and 1998, says Wharton finance professor Franklin Allen. Back then, "The International Monetary Fund got many countries in Asia to do drastic things in exchange for loans," Allen explains. Most decided they never wanted to undergo such economic austerity again and they started building large foreign exchange (forex) reserves as buffers. Even countries relatively unaffected by the crisis -- such as China and India -- took the lessons to heart. Today, forex reserves for those two countries "have just become huge," he says. China now has some $1.5 trillion in reserves, up from a few hundred billion dollars just a few years ago. "India is building too -- nothing like the same scale but it is up to about $200 billion" and rising rapidly, Allen notes.
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