International Capital is Country Blind and Seeks Returns instead of Sentiments

The Electronic Herd and the Quest for Returns

The flow of global capital can be likened to a herd that is always in search of a prey. The combination of globalization and the adoption of electronic means of allocating assets has meant that the electronic herd or the agglomeration of international investors are always in the search for the highest returns and best possible outcomes when they invest in emerging markets and the next break out nations.

This electronic herd of investors does not favor countries because of sentiments or feelings and emotions and the only criterion that they have is that the destination must provide the best possible returns for their investment.

This is the underlying economic philosophy behind the movement of the electronic herd and as we shall discuss subsequently, stock markets in emerging markets are getting used to the fickle nature of the electronic herd that flows into countries where returns are more and flows out of countries where returns are diminishing. This is the reason why many emerging markets that were hitherto the darlings of the electronic herd now find themselves abandoned by the very investors who were signing praises earlier.

Capital Inflows and Capital Flight

The best example of how the electronic herd enters and inflates the values in emerging markets when the times are good and stampedes and heads for the exists at times of crisis is provided by the experiences of countries like Indonesia, Malaysia, Thailand, and India. These countries were in the limelight in the previous decade when it seemed that they could do nothing wrong and the global capital flocked to these countries.

Of course, Malaysia, Thailand, and Indonesia found the hard truth in 1997 when the speculators shorted their currencies. Sadly, they have not learnt the lessons from that experience and are now witnessing a repeat of the same crisis that struck them in the 1990s.

Further, India that was the darling of the international investors now finds itself a pariah where no global investor seems to want to invest in that country. The clear implication of this is that global capital or what we termed the electronic herd is country blind, color blind, is not swayed by sentiments or emotions, and instead, seeks the best possible returns for their investments. This is the cold fact that future generations of business leaders must learn from the experiences of the electronic herd that is always on the lookout for prey.

Lessons for Emerging Markets

Continuing the same argument, it is clear that emerging markets and the policymakers in these markets must be wary of the machinations of the electronic herd that loves them when the times are good and dumps them when the times are bad. Indeed, this simple logic is intuitive and commonplace and the reason why most business leaders do not get the message is that like in personal lives when we are infatuated and in love which makes us overlook logic.

The financial world is similarly gripped by manias and when the inevitable crash happens, the blame game starts which is not in the interest of anybody. Therefore, the lessons for emerging markets is that they must not overlook the fact that in the ultimate analysis, it is the fundamentals of the economy that are important and not the short term speculation that is always in search of instant gratification and always gives way to hard realities.

Further, the emerging markets have also to realize that they must build walls around their economies and build the foundations of their economies that are resilient and strong and which do not crumble at the slightest hints of crises.

Concluding Remarks

Finally, in these times when everything is measured in the here and now, it is difficult to take a longer-term perspective. However, this is precisely the need of the hour, which means that the future business leaders must understand that they must be prepared for the long haul, and not gives in to instantaneous temptations that are always short lived.

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