In Foreign Investing, Money Comes With A Price

Saudi Arabian Monetary Authority

Political regimes come and go.  Structural reforms take root or don’t.  Currencies wax and wane.  When money chases growth (and returns) across borders, investors must gird for turbulence, as recent events in Saudi Arabia and China show.

When it comes to global investing, money comes with a price.

Simple statement – maybe a little glib, even.

But given a few signal and seismic events on the geopolitical stage these past several days, it’s a statement that has some, well, currency – and it’s current, see? (We’ll stop with the wordplay now.)

Events in countries as far-flung as Saudi Arabia and China are showing that when it comes to capital flows – specifically, when investors park money across borders – all sorts of ancillary costs are attached, intangible ones that suddenly have an impact when investors may least expect it.

The repercussions are felt, in turn, by the companies and institutions that are the initial beneficiaries of the foreign investments, and suddenly … might not be. Or at least the perception in markets, and among market makers, may be that investments (and financial support) have been easy come, and may be easy go. Confidence is shaken, which means that investors vote with their feet and move toward safer havens.

Consider, first, the case of Saudi Arabia. The internal purge earlier this month led by Mohammad bin Salman, recently ascendant as Crown Prince, and ostensibly tied to anti-corruption probes, led to the detention of hundreds of people – 208 per an initial official tally – which included Saudi billionaire investor/businessman Prince Alwaleed Bin Talal.

Dozens of members of the country’s royal family and top businesspeople were arrested. Many of them were taken to Riyadh or to the Ritz Carlton, and placed under house arrest.

News reports, including those from The New York Times, state that the Crown Price took these actions in hopes of spurring a country-wide change that will help to prevent economic trouble. The move, he has said, is tied to “exploitation by some of the weak souls who have put their own interests above the public interest in order to, illicitly, accrue money.”

Pakistani media reported Sunday (Nov. 12) that Alwaleed has been released, along with six other individuals. Amid those reports, we might assume this is a short-lived drama, with a week of tension suddenly untensed – at least when it comes to Alwaleed.

Through the Kingdom Holding Company – which has $12.5 billion in holdings across a dozen sectors, at last tally – Alwaleed invested $300 million in Twitter beginning in 2011 and more than $105 million in Lyft. In the past, he has been a prominent and even among the largest shareholders in Citigroup and JD.com, the online Chinese retailing firm. His investments have included Apple, too, dating back to 1997.

Clearly this is a man who looks for the intersection of technology and commerce, and has been a strong early backer of new business models.

When an individual is the face of an investment company (Warren Buffett, George Soros or Jack Ma spring to mind), reverberations are swiftly felt as holders fret that he/she who has been calling the shots may no longer be shot-calling – and Alwaleed owns about 95 percent of Kingdom Holding.

Shares in the investment firm skidded almost 10 percent the first trading day after the arrests, later recovering intraday to finish the day off at 7.7 percent. The knock-on effect was felt on Wall Street last week – albeit briefly – where, for example, Twitter slipped 5.9 percent from recent peaks seen at the beginning of the month before rebounding. Citigroup has traded down a bit more than 3 percent from peak to trough.

These are not disastrous price swings by any means. Part of the salve comes from the fact that there doesn’t seem to be a coup to nationalize holdings where the government has displaced the controlling force of the firm, to be replaced with a new individual whose strategic intent may be hard to read. Nor is it apparent that holdings are going to be liquidated. In this latter case, liquidation would hit shares hard, hurting the holdings of other investors.

Incidentally, a visit to the Kingdom Holding site brings an immediate popup that, paraphrased, says “the kingdom of Saudi Arabia has full confidence” in the firm.

Status quo for now, it seems – and even the U.S. Secretary of State Rex Tillerson has said that the arrests raise “a few concerns until we see more clearly how these particular individuals are dealt with.”

Beyond the Alwaleed news lies a corruption probe spanning government and business arenas in Saudi Arabia, with estimates that as much as $100 billion was embezzled by individuals who are still being detained.

Might future investments inside and outside the country be shelved? Is impermanence permanent?

One more Alwaleed tidbit: News sites such as CNBC reported that in October, Alwaleed had a meeting with Lloyd Blankfein, who helms Goldman Sachs, to discuss investments in the region, which would in part entail the financial giant boosting its presence in the country. Tough sledding going forward, perhaps, with uncertainty in the air.

As an aside, the country is seeking to list Saudi Aramco, the state-owned oil company, on public exchanges next year – and even President Donald Trump has said that the listing should be here in the States.

The Trump tweet reads thus: “Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the United States!”

The tweet itself – and a direct solicitation from the leader of the free world to bring business to the NYSE – is emblematic of what foreign investment and cross-border activity means.

For companies such as Lyft, Careem and others that got capital from Alwaleed’s Kingdom, money meant rocket fuel, enabling those new business models to take shape and gain share. The eagerness of companies, funds and countries to park their dollars, euros or riyals away from home base speaks to excitement over demographics, technology and sometimes even mere concepts that, made flesh, can change the world.

Growing pains must give pause, however. As Saudi Arabia moves through a power shift, uncertainty reigns, and investors must be willing to consider an element of risk that goes beyond what might be considered in other regions – say, the vagaries of interest rates or GDP. Here, there’s the distinct possibility that business as usual gets upended – several times, because government has such an outsized hand in how business is usually conducted.

Taking a look at the other seismic shift, China said it is lifting limits that have been in place for foreign ownership of banks, securities firms and other entities, with phase-outs coming over extended periods. In one example, for banks, the aggregate 25 percent limit on holdings from non-China investments will be eliminated.

The liberalization of these and other financial sub-sectors means that global banks will be able to manage money in China, and can trade in different assets in the country.

Might the moves be a gesture from China, levelling the cross-border playing field, so to speak, as it has been buying up foreign companies? By opening the banking system, China becomes a bit more entrenched in the global financial system.

Interesting to note, then, that just days before the historic announcement that the markets would become more accessible to foreign investments, China’s central bank governor, Zhou Xiaochuan, warned about the risks tied to debt levels.

The risks are to the downside, it seems, and they are “hidden, complex, sudden, contagious and hazardous” amid a backdrop where the current financial system remains healthy. The total debt level stands at about 260 percent of the economy. The governor stated that financial institutions have been weak in pricing risk effectively, and a greater number of companies have been defaulting on debt.

So, when it comes to foreign investment, regardless of the fund flows from country to country, from sector to sector, two words reign where geopolitics hold sway and where structural reforms are dominant:

Caveat emptor.