peace in our time

supply and demand

An interview worth the read from a Native fund manager with decades of experience that reminds price discovery is the marriage between demand and supply.

Native markets are valued at $3 trillion. Founders hold 44%, international investors 28%, domestic institutions 15%, and individual investors 12%.  International investors trade $2 billion a day against $1 billion for domestic investors. Net buying or selling by international investors determines price direction. And as the subject of the interview observes domestic institutions can not absorb the foreign supply.

Morgan Stanley guides international investors through the MSCI emerging markets index of $7 trillion devoted to 1400 companies in 24 countries. China and Taiwan receive half the investment. The Natives are in for 13%, $1 trillion up from 9%, $700 billion, after the pandemic and political target of China but before the Russian invasion of Ukraine. 

The MSCI EM index invests in 103 Native companies with a market cap of $2.4 trillion or over 40% of the float and more of the free float.  Two of the 50 largest Native companies account for over 20% of the index weight with a volume of $400 million between them each day, 6% of the volume but 20% of index price discovery. 

the cost of money

The incentive for risk is inverse to yield on a Native government bond. A 10% yield on a government bond inverted is ten. Simply one dollar worth of corporate earnings would be worth an earnings multiple of ten. 

The Native Bond yield is 7.5% implying a willingness to pay 13 times for a unit of earnings. The Native index today is valued at 20 times earnings or 60% greater than the willingness to pay. As interest rates rise the willingness to pay decreases. As interest rates decline the willingness to pay increases.

Earnings are expected at 800 a share. A willingness to pay of 13 times implies buyers at 10,500. A premium of 30%, the risk premium, increases willingness to pay to 17 times earnings or an index value of 13,600. The index is at 16,000.

what could go right?

Then British Prime Minister Neville Chamberlain deplaned from Munich in 1938 with the Anglo-German declaration claiming "peace in our time" had been negotiated with Herr Hitler.  Prime Minister Churchill later would always grant Hitler the title of Herr. He reasoned there was no need to be impolite if the intent was to kill the man.

The optimist in Minister Chamberlain was 90 years early to be a Bitcoin enthusiast or a promoter of SPAC's.  

Nevertheless "peace in our time" would return the international investor to its perch in a Native economy that could double in value in ten years with its excess supply of intellect that keeps satellites aloft and the digital economy moving at pace.

In the meantime the international bid is lower.