Thursday, December 27, 2007

Reflecting Times – Day Two

The investment landscape has changed. Only a hermit or one stranded on a deserted island would think otherwise. Years of capital flows out of the US via its current account deficit have resulted in a wealth transfer of enormous proportions. Moreover, financial innovation has produced a nearly equal rise in not only new financial instruments, but the players that utilize them.

In a recent report titled “The New Power Brokers”, consultancy McKinsey & Co. describe the rising importance and influence of Petrodollars, Asian central banks, Hedge funds, and Private equity.

As the table above shows*, these new financial actors have large and growing clout that will not go away anytime soon. In fact, according to the McKinsey report, “Under current growth trends, MGI research finds that their assets will reach $20.7 trillion by 2012, 70 percent of the size of global pension funds. But even if oil prices were to fall, China’s current-account declines, and growth in hedge funds and private equity slowed, our analysis shows that the assets of these four players would nearly double over the next five years, increasing to as much as $15.2 trillion by 2012.”

Investment Strategy Implications

There are many implications that result from our new financial world order. For example, understanding the investment styles, risk tolerances, and time horizons of the new power brokers is very important. Moreover, the interplay between these new actors on the financial scene and the existing major players is also a dynamic that requires a deeper understanding.

Whatever the larger implications are (and they are many), one thing is certain - the power and clout of the new power brokers is here to stay.

*click on image to enlarge

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