1. Impact of the Internet Age on the Economics of Business Patrick A. McNutt w w w. P a t r i c k m c n u t t. c o m

2. Outline of Presentation Economic Realism 2010 Paradigm shift FDI and Creative Industries Investment Clinic Structured Finance, Innovation & Technology Investment Signals

3. There is a Paradigm Shift in Economics: Greater Role for FDI Old paradigm GDP = C + I + G + (X – M) still used in macro-models Old paradigm GDP = C + I + G + (X – M) still used in macro-models Old economy FDI = retained profits Old economy FDI = retained profits New economy FDI = asset-seeking FDI (low cost locations) and efficiency-seeking FDI (information and communications) New economy FDI = asset-seeking FDI (low cost locations) and efficiency-seeking FDI (information and communications) New paradigm GDP = X + FDI + (G + C) New paradigm GDP = X + FDI + (G + C)

4. Cross-border FDI capital flows Since 1990: Cross-border capital flows have been rising at an annual rate of 10.7%, adjusted for inflation and exchange rates. Since 1990: Cross-border capital flows have been rising at an annual rate of 10.7%, adjusted for inflation and exchange rates. From 1980 – 1990 annual rate of 4.3% From 1980 – 1990 annual rate of 4.3% MENA has witnessed YOY average increase of 95% due to global demand for petrochemical products. MENA has witnessed YOY average increase of 95% due to global demand for petrochemical products. Explain the increase Information has created connected markets allowing key suppliers of capital to supply across borders and across currencies: Example: DIFX and world portfolio funds or QSTP 100% foreign ownership or China-Egypt

5. Intra-Regional FDI Flows Top 5 FDI Recipients 2005-2009 Top 5 FDI Recipients 2005-2009 UAE, Turkey, Egypt, Saudi Arabia, Morocco FDI Flows to MENA [inc Turkey] FDI Flows to MENA [inc Turkey] 13.4% share of Developing World FDI FDI Stocks as % Real GDP (average adjusted) FDI Stocks as % Real GDP (average adjusted) Middle East [inc Turkey]: 11.9% North Africa: 24.8%

6. Example of Classic FDI Targeted Industries Chemicals and chemical products (Bahrain) Chemicals and chemical products (Bahrain) Telecommunications (Kuwait) Telecommunications (Kuwait) Hotels and restaurants (Saudi Arabia) Hotels and restaurants (Saudi Arabia) Yarn spinning mills (Turkey) Yarn spinning mills (Turkey) Amusement and recreation (Dubai) Amusement and recreation (Dubai)

7. Connected markets Connected markets exist because of the Internet: global markets are now locally controlled…..data warehouses, IT processing, international brokerage, supply chain management, technology transfer, information-sharing.

8. What are the consequences? Global growth is increasingly driven by Emerging Market [EM] economies. Global growth is increasingly driven by Emerging Market [EM] economies. Key EMs are China, Russia and India Key EMs are China, Russia and India Emergent debt is still supported by strong economic fundamentals. Emergent debt is still supported by strong economic fundamentals. More Governance: Example: IAIGC Membership, zero customs duties under Greater Arab Free Trade Area More Governance: Example: IAIGC Membership, zero customs duties under Greater Arab Free Trade Area

9. Information and Communication Will Define the Opportunities Information is now a commodity with positive costs. Information is now a commodity with positive costs. Communication costs are falling. Communication costs are falling. Information processing = risks + mixed signals Information processing = risks + mixed signalsOPPORTUNITIES Hybrid portfolio of PE and HF focusing on distressed opportunities. Strong global growth has come with falling capital costs and a wider use of quants to reduce credit risk. FDI = investment in transfer of technology, IPRs and technology licensing agreements.

10. Key Drivers of investment opportunities Pressure on EM currencies and exchange rates: EM currencies to continue fluctuation against US$ and Euro. Global outsourcing and local restructuring: Focus on exposure to core products – energy, utilities, materials, equipment suppliers. Real interest rate policy in Key EMs: Negative: Impact on confidence of investors to Central Bank money as store of value. Positive: Appreciating currency..

11. Real Time Information Flow Non-traditional FDI: Not bricks and mortar Business Strategy: Trade in Tasks Mobile Capital: Trade in e- Funds Resources & Materials: Trade in Scarcity

12. FDI & New Economy Between 1980-1998, US, EU and Japanese companies signed 9000 strategic technology alliances: New economy companies with costless entry Between 1980-1998, US, EU and Japanese companies signed 9000 strategic technology alliances: New economy companies with costless entry Churning equilibrium: goes beyond traditional FDI of bricks & mortar to FDI as information bridge in technology and information flows. Churning equilibrium: goes beyond traditional FDI of bricks & mortar to FDI as information bridge in technology and information flows. Information is a tradable resource for the distribution of technology and innovation with FDI potential. Information is a tradable resource for the distribution of technology and innovation with FDI potential.

13. Example of New Paradigm: Trade co-operation Increased Intra-nation trade: only 25% of Asian exports go outside Asia. Increased Intra-nation trade: only 25% of Asian exports go outside Asia. US, EU and Japan share of global economy is falling [60% in 2009] and expected to approximate 50% in 2020. US, EU and Japan share of global economy is falling [60% in 2009] and expected to approximate 50% in 2020. More co-operation and technology transfers: FDI ~ Chinese-Egyptian Business Council 2006 or Singapore-China Trade Mission 2009 More co-operation and technology transfers: FDI ~ Chinese-Egyptian Business Council 2006 or Singapore-China Trade Mission 2009

14. New Paradigm Recommendations for FDI flows Strategic exposure to Key EMs with currency regime linked to US$ with rising inflation with rising commodity prices exposure to high yield corporate bonds prefer credit over equities prefer equities over government bonds

15. New Geo-political order Emerging markets: young population, technology transfer, creative industries, and FOREX reserves: Emerging markets: young population, technology transfer, creative industries, and FOREX reserves: EMs, GCC, MENA, ASEAN and BRIC More FOREX Non-dollar Assets and the role of US $. More FOREX Non-dollar Assets and the role of US $. EMs Equity markets: High P/E due to high GDP growth = Flows of FDI as purchase of shares. EMs Equity markets: High P/E due to high GDP growth = Flows of FDI as purchase of shares.

16. Post-Internet Age since 1988 (arrival of home PC and www URL) virtual investment

17. FDI and Creative Industries EU Benchmark 2010: 8% GDP Innovation & Technology Infrastructure 2015: Greater than 8% GDP

18. Creative Industries: EXAMPLES Virtual surgery or High-Tech Tourism Smartphone technology or Telcos Prime Brokerage or Portfolio Fund Management

19. New FDI Investment Opportunities Understand the information bridge in the Template for FDI Investment Understand the information bridge in the Template for FDI Investment Asset-seeking FDI = Case C Efficiency-seeking FDI = Case B Market-seeking FDI = Case A

20. Template: Case A: Virtual surgery Telerobotics = Internet & Information Processing Virtually assisted microsurgery Virtual Environments Bio-sential crops Next generation antibiotics

21. Template Case B: Smartphone Technology Handset Manufacturers Smartphone Transformation Networks Devices OS Apps

22. Template Case C: Prime Brokerage Privileged Information Hedge Funds TRADES Brokerage accounts

23. Investment Clinic

24. Investment Cycle Moral hazard embedded in risk analysis Monetary policy does not work Information Signals

25. Information Processing Data availability in the cloud Virtualisation of both product and process Example: (i) IT infrastructure delivered as a service (ii) Convert data into strategy and insight (iii) 50% increase on average in Business expenditure on information processing equipment and software since 1990s Mismatch in Risk Signals Mismatch in Risk Signals Weightless companies Weightless companies

26. Mismatch in Risk Signals New Technology of Structured Finance Information Processing and Innovation

27. Weightless virtual companies Weightless companies: $x invested in physical assets, $y invested in sales & capitalisation: Yahoo, Microsoft, Apple, Google…………….??? Weightless companies: $x invested in physical assets, $y invested in sales & capitalisation: Yahoo, Microsoft, Apple, Google…………….??? $y >> $x Market Panic Market Panic Analyst advice: Strong SELL to SELL Consensus: HOLD Panic as Consensus Sell and Price Falls Deviation of Equity values from Fundamentals

28. Investment Signals S&P 500: 40% of revenues from foreign sales. S&P 500: 40% of revenues from foreign sales. 50% of worlds equity capital is now outside the US. 50% of worlds equity capital is now outside the US. Nascent bubble in EMs depends on sustained growth in China: 10% of World GDP. Nascent bubble in EMs depends on sustained growth in China: 10% of World GDP. Case I Case I Macro economic trends moving towards intra-nation trade and exchange rates as policy tool. Case I EMs and ASLEEP economies to account for 50% of world trade and 30% of world exports by 2015. Case II production drives demand in oil and core scarce resources. Micro economic trends with technology transformations. Case III vertical handset manufacturers transform to horizontal computer markets. Case IV global in- sourcing with mobile workforce. Case V increased mobile banking and e-purse payment methods.

29. Concluding……..

30. What lies ahead in brokerage: FDI/Macro Trends? TodayTomorrow New Geo-political order Emerging Markets with 30% World exports China to explain 15% of World GDP Resource ScarcityRole of US $

31. What lies ahead in brokerage: FDI/Micro Trends? TodayTomorrow Standardisation and IPRs Global vision for financial transactions Governance of sophisticated sourcing arrangements Cross-border data management National prudential regulation on technology and on information flows.

32. Private Equity: Prognosis Herding and Panic Virtualisation and absence of scarcity in resources Information Processing Latest technology Signals v company fundamentals Weightless companies Geo-politics Ease of trade v ease of entry Intra-Regional Virtual Trade

33. Prognosis for FDI Markets remain irrational longer than you remain solvent: short term investors rent rather than own shares Long term investment in Asia as they decouple from US and EU as Asia bouyed by increasing domestic demand EU Mifid Directive with brokers beholden to prove best deal for clients in creative industries Strategic Trade Alliances like Egypt-China and China- Singapore with investment opportunities Low Communication Costs But High Governance Regulations

34. Predict an Information Overload!!

35. THANK YOU do not wait for the stream to stop before crossing it