 Hey guys, it's MJ and in this video we're going to be continuing our discussion around finance for the fellowship exam and We're going to be looking at Foreign investors. So before we've been looking at the main investing classes being private individuals financial intermediaries Businesses and now we're going to be looking at foreign investors Okay, and like always this is an unscripted video, this is me just you know studying out loud I've got quite a skeptical approach. So this video is going to be very much opinion based Feel free to join the discussion in the comment section below if I do forget to say something I will add it in the comment section But job, this is all going to be opinion based Well, I mean I'm going through the notes, but I'm going to be flavoring it a lot with my opinion So these videos are just to help me help me study and thank you so much for joining in so what we're going to be talking about is foreign investors and Foreign investors, I mean depending on what country you're in Foreign investors are going to play a different role so I am from South Africa as many of you already know that the greatest country in the world and So the way South Africans will look at foreign investors will be very different to say how America looks at foreign investors the role of foreign investors in South Africa will play a much bigger role or a different role To say foreign investors in the United Kingdom or say a European country so Let's look at South Africa South Africa is considered as an emerging market So yeah, we come considered emerging Market although if you come to Cape Town you will be surprised because I mean it's a world-class city and it puts all the European cities to shame But because we're very diverse and we do have a lot of poverty Throughout our country. We are known as an emerging market Now why do foreign investors Want to invest in South Africa? So foreign investors like to come to South Africa because of the fact that we're an emerging market and They might see that we might have higher returns But the main reason for foreign investment is a thing known as diversification Okay diversification. I'm assuming you guys are very comfortable with finance. I don't have to explain diversification Essentially, you want to have assets that are uncorrelated to reduce the overall volatility of your portfolio So yeah, foreign investors are attracted to to our country because of that diversification benefits and It was up to them. I mean they would try and put quite a bit of money into our country To reap the benefits and they'll put some in South Africa. They'll put some in Kenya. They'll put some in Korea They'll put some in Brazil, you know, they will they will spread it around in order to get diversification Now the big thing surrounding South Africa is our credit rating Okay, our credit rating is very important because We must think about the foreign investors and a lot of the foreign investors are massive financial intermediaries whether they be pension funds or all these massive Organizations that basically are playing with billions and billions of of dollars coming in monthly and They need to put it in somewhere Now they have rules Specifying what they can do with that money Rules could be something like 60% needs to go in the local government bonds 30% might go into say stocks 5% into property and say 5% into A rated emerging markets Okay, it could be something like that I don't know that the way we'll talk a lot more about portfolio construction and various strategies in other videos For now, let's look at this fact that foreign investors have got rules and regulations That say to them that they should be investing outside of the country for diversification benefits But they can't just go and invest in any country. The country needs to have a good credit rating and The reason why I should have a good credit rating is so that it's not taking on too much risk I mean you don't want to be investing in say a country like Syria where with the current war conditions It's very very risky and all the money you put in you might never get out And credit ratings I mean we can do an entire video around them and why I feel they hold too much power and why they're actually In my opinion bad But in this video, let's talk more about foreign investors specifically coming to to South Africa Okay, what what are foreign investors? Looking for when they come to an emerging country Well, the one thing is they they're very worried about the impact of the currency movement Okay, so What what happens specifically here in South Africa is you might get a foreign investor they come and they buy a beautiful apartment in say the Cape Town waterfront and you know, they could maybe spend by for say 10 million Rand and Then two years later and the value is now at 12 million Rand And we might say wow, that's been a great great annual return or capital appreciation of two million Rand But to the investor, I mean back here. It was maybe Why is my thing not working? having a bit of a technical Wait, I think we're back. There we go bit of a technical difficulty there So sorry, so you bought the apartment for 10,000 10 million Rand and it's now worth 12 million Rand But you can still be unhappy because at this time you might have found that 10 Rand was equivalent to one dollar Whereas now 20 Rand is equivalent to one dollar. I'm just I'm making making these stats up To illustrate the point as in before This was worth say one million dollars Why is my thing freaking out one million dollars? Whereas now at 20 Rand, it's only worth I'm getting this maths correct 600,000 dollars So though your your asset has increased in Rand terms, it's decreased in dollar terms And that might be kind of awkward because you might have to pay Capital game tax on the Rand increase even though your dollar value is going down Although there might be some double-tax agreement and you might be able to if you have a smart accountant on your team You might be able to get around that, but it would be really awkward to pay tax and taking a loss So currency movement is is important for foreign investors Specifically in South Africa. I mean our currency has been depreciating for quite a while I mean it is it is something that scares away foreign investors That's it. I mean another thing that that investors don't like or rules and regulations Okay, specifically rules and regulations that give an advantage to the local people and Disadvantage foreigners because then they thinking well why compete in the country where we have an unfair bias against us and Finally enough South Africa is one of those countries I don't know all of the rules and regulations around foreign investment in South Africa But just based on what I've been seeing in the in the news and stuff I mean we've got we want to implement a whole bunch of regulations around foreign investors buying property You know, we want to make it very difficult for them or we want to say foreign investors can't do this can't do that Once you put the capital in you can't take the capital out I mean even at one stage South Africa to bizarre this is quite a few years ago like a maybe 20 years ago We had two currencies where foreign investors would buy the one currency then exchange the one currency for another currency And it was all rather complicated but Foreign investors don't like rules and regulations that limit the amounts that you can invest in or limit the asset classes You can come into or do all these other things and South Africa Does have rules and regulations another thing foreign investors are not a fan of is something known as political risk Okay, and I mean South Africa's neighbor Zimbabwe is the key example beautiful country. Everything's going great great economic prosperity Government wakes up one morning and it's like we're gonna implement a bunch of rules and regulations Which we think is gonna benefit the country and they had maybe some good intentions, but it had some disastrous financial consequences and wiped out the entire economy the currency you hit hyperinflation and It was I mean your people who invested in Zimbabwe bought certain financial assets specifically in the Zimbabwe dollar God, yeah, it was was worse than a nightmare So they don't like political risk because political risk. It's very difficult to to hedge out It's very difficult to predict It takes a lot of learning and knowledge of politics and remember investors know Finance now in order to go into this merging market. They need to understand politics as well They don't like the idea that politicians can change rules and regulations So quickly put them at a disadvantage because remember you're foreign investor I mean, he's not just going to South Africa. He's maybe got South Africa. Maybe he's got Bhutan Maybe he's got Kenya. Maybe he's got New Zealand and so if one of them is being politically unstable I mean, I know Thailand's got some weird politics going on then they'd rather be like, you know what? let's just leave that country alone and Go to one of these other ones So some countries are more more encouraging of foreign investment I think like Indonesia they like have advertising like come invest in our country, you know, they want foreign investment in But I mean despite all these things South Africa does get a lot of foreign investment. I mean one weird thing is that I mean our GDP grows very very Very very small amounts. I mean it was yeah, very small yet our stock market I mean that grew I don't want to quote numbers because I don't want to quote numbers on this video but basically the GDP grew by a small amount and the stock market grew by a large amount and That could be because of foreign investment. I mean a lot of our stocks are owned by Have got foreign money in and this causes a bit of a problem. You don't I mean, this is my opinion I mean foreign investors. I love I love free markets. I'm very much a free market guy But I understand that There is a danger to to foreign investors the case being foreign investors coming to a country Start, you know investing do all these type of things and then on a dime notice They can withdraw everything and cause total chaos. I mean, I was reading something about Puerto Rico, I don't even know how to spell Puerto Rico, I shouldn't even be trying to spell but basically Puerto Rico. It's a little island state. I Mean it's good. I don't know if it's American if it's an American state or I don't know it's got some weird political thing But the idea was there was a rule in regulation something about good tax benefits for I think it was pharmaceuticals a lot of pharmaceuticals Went into the country set up pharmaceutical businesses. Then there was a tax law changed in some country which removed their benefit and all their capital was sucked out of Puerto Rico and They left in quite a thing. They required such a massive bailout. So foreign investors I mean, like I said, I like free markets, but in a weird way, I Understand why South Africa has got these rules and regulations Making it difficult for foreign investors We what we do we want to make it easy for foreign investors to put money in but we're going to make it difficult for them to pull The money out foreign investors if it's difficult for them to pull the money out They're gonna think twice before putting the money in so it's it's a very weird Relationship because foreign investors can help your economy grow. I mean, we see here with the stock market As the stocks increase These companies can now employ more people they can expand they can do all these wonderful things You know foreign investment is good, but when foreign investment is withdrawn. It's very bad So you want to kind of keep your enemy And this is the thing is sometimes if the credit rating agency Downgrades us and this is why it was such a disaster or such everyone was very nervous in South Africa Is because we were thinking, you know, is this credit rating agency gonna downgrade us? And if they downgrade us then it's no longer just foreign investors preference for investing in us or not It becomes against their rules to invest in us and that means billions and billions of dollars that was flowing in Every month suddenly stops and that can cause a lot of chaos To our economy so foreign investors play a large role in the economic environment of emerging markets such as South Africa and We have a very heavy reliance on a credit agents credit rating agency Which I feel is unfortunate because it's like this little office far away from South Africa Making decisions that have a very large impact on our nation So it's understandable that a country will want to protect itself with rules and regulations But we need to be careful that we don't create political risk and then scare foreign investors all together and stunts our economic growth and This makes the job of say a financial minister a very big headache You want to encourage foreign investors, but you want to limit the power that they have on it So it is kind of like a double-edged sword. It is very Difficult to try and balance. I mean, do you want free market or do you want protection? I mean both of them can cause disastrous effects. So it is a fascinating topic So, yeah, feel free to to let me know your opinion in the comment section below but For the syllabus objective, we just need to know that foreign investors are a big investment class. They are worried about currency movements rules and regulations and political risk and They do have quite a big sway in a country such as South Africa if you in America Foreign investors will play a different role. I think they'll be a much smaller role And you might just have to worry about say one or two Countries such as maybe, you know, what is China's involvement? You know that whole China America But it does get very interesting. It does get very political. I mean finance and politics, especially at this globalization level Are very much intertwined So, yeah, I mean you can go and read books and books and books about foreign investors But for the financial exam, you do want to be aware of them and maybe think about it and When answering questions think what role will foreign investors play and always bring it back to the country that you are writing in Otherwise, thanks so much for watching and check out next time when I'm going to be talking a little bit more on politics In the sense that we're going to be looking at Government policies and how that influences the economic environment. Thanks guys for watching. Cheers