There has been a lot of press this week about foreign ownership of assets. The US House of Representatives passed a bill on Wednesday that could see TikTok being banned in the United States unless its Chinese owner ByteDance sells their stake in the video-sharing platform. On the same day, British Prime Minister Rishi Sunak laid out plans to change the law to prevent foreign states from buying British news organizations in order to block an Abu Dhabi led deal to buy The Spectator and Telegraph newspapers.
On Thursday Joe Biden announced his opposition to Nippon Steel’s proposed purchase of US Steel, saying it was “vital” for the American steel company to remain “domestically owned and operated. ” While US law does allow the President to block foreign acquisitions on national security grounds, there don’t appear to be any national security arguments being made about this acquisition – with Japan being one of the United States largest trade partners and allies. Politicians aren’t just voicing concern about foreign investment; they are also trying to encourage their citizens to invest locally.
A good example being the news of how UK Chancellor Jeremy Hunt is considering adjusting the way Tax Free savings accounts (known as ISA’s) work - to boost investment in UK-listed companies. Additionally, under his plans -defined contribution pension funds would have to publicly disclose their level of investment in the UK, which he claims is being done in an effort to boost British business and increase returns for savers. In Canada last week a group of business leaders signed a letter to push Canadian pension funds to invest in domestic businesses.
The Canadian pension funds in question hold roughly one third of Canadas institutional capital. While the letter is not requesting that the government compel Canadian pension funds to invest domestically, it does push for “a new set of rules” that would “factor in” whether an investment is Canadian or foreign. Each of these news stories are quite different to each other and to lump them together as examples of xenophobia or even extreme nationalism would (in my opinion) be unfair.
They relate to quite different concerns (some of which are more valid than others) over things like foreign government spying, concerns about propaganda, concerns about deindustrialization, and an urge to boost local stock markets. Despite what you might feel about the merits of each individual case, as a group of stories that all came out in the last week, they do highlight a move away from the ideas of free trade and internationalism that people believed in a decade ago. I think this is a growing trend, and it’s something we have been discussing for quite some time on this channel, with videos like “The Death of Globalization.
” The examples above just happen to be western examples that made it into my news feed this week, but you can find similar stories from all around the world. The Malaysian Prime Minister - for example - called for Malaysia’s national pension fund to increase its domestic investment to 70% last year to the objection of local fund managers and academics who argued for a more diversified portfolio. Let’s discuss to what extent we should be concerned about foreign ownership of domestic businesses and what are the drivers behind this more protectionist trend that we are seeing around the world.
Before I get to that let me tell you about today’s video sponsor. Brilliant dot org is the best way to learn math data science and computer science interactively through their user-friendly app. Brilliant has thousands of lessons from foundational and advanced math to AI, data science, neural networks and more with new lessons added monthly.
They have a new section called how LLM’s work which I have been exploring. Brilliant is built for busy people - You tell them how much time you want to spend on the app every day, the app then works out your skill level and customizes content to fit your needs. I’m told it’s six times more effective learning with an interactive app than just watching a lecture.
With Brilliant you learn by trying things out for yourself, which is what makes learning with Brilliant so powerful. To try everything brilliant has to offer free for a full 30 days visit brilliant. org/Patrick or click on the link in the video description.
You’ll also get 20% off an annual premium subscription. The biggest news story of the group is the US House of Representatives vote to ban TikTok unless it is sold by its Chinese-based parent ByteDance. Now, this bill may not go through as it can still be blocked by the Senate or the courts.
While it does specifically cite TikTok, the bill which is called the “Protecting Americans from Foreign Adversary Controlled Applications Act” would apply to apps owned in many other countries designated as foreign adversaries under U. S. law — such as Iran, Russia, North Korea and China.
It wasn’t a one-sided vote either, while Trump appears to have changed his opinion on the app, the bill passed in a bipartisan vote, supported by more than three-quarters of the chamber in a 352-65 vote. A Chinese foreign ministry spokesman told the press on Thursday that the US vote on Tik Tok "runs contrary to the principles of fair competition and justice", but it’s worth noting that Beijing currently blocks most US social media platforms — including Google, YouTube, Twitter, Instagram, WhatsApp and Facebook. While TikTok is usually described as being “Chinese owned,” it is in fact 60% owned by non-Chinese investors, the majority of which are American.
The concerns about the app in the United States are not entirely about ownership but are down to U. S. officials not believing the assurances from the company that TikTok's data is kept from the Chinese government.
This is because under Chinese law, its parent company ByteDance, must take orders from the central government, and would be required to provide data to the Chinese government if it was requested. In a wrongful termination lawsuit last year, an ex-ByteDance employee claimed that the Chinese government had a special office in the company which monitored everything and had supreme access to all of the company data, even data stored in the United States. The lawsuit also claimed that the ex-employee had observed Bytedance being “responsive to the CCP’s requests” to share, elevate or even remove content from the platform.
It is difficult to know how true this is and Bytedance denied all of these allegations. It doesn’t help Tik Tok’s case however that last year, the company admitted that it had used the app to spy on reporters as part of an attempt to track down the journalists’ sources. Obviously, the blocking of Tic Tok would materially affect my longer-term goal of becoming a Finance TikTok Rapper, which I had planned on doing to diversify my online audience.
I’m now worried that if Tic Tok disappears before I get to execute that plan, – I’ll be forced to become a LinkedIn influencer – the worst kind of influencer… Anyhow, Joe Biden’s Opposition to Nippon Steel’s proposed purchase of US Steel would also appear to have bipartisan support. Donald Trump last month told reporters after meeting with the International Brotherhood of Teamsters that he would “absolutely” block the Nippon Steel deal if elected. He told the press “We saved the steel industry, now US Steel is being bought by Japan, It’s so terrible.
” Nippon Steel told the press that it is determined to complete the acquisition reiterating their promise of no layoffs or plant closures until at least September 2026. Bidens intervention in an acquisition like this is extremely unusual in the United States, and it is possibly unlikely that it would have happened if this wasn’t an election year. This potential deal reminds me of the 2006 deal when Mittal bought the French Steel company Arcelor in a hostile takeover.
The French government extracted concessions from Mittal that no French production facilities would be closed and that no French job losses would occur. Three years after the deal, Mittal announced that they would shut down two blast furnaces and lay off some of the famously productive French workers – who are known to work up to 32 hours a week with as little as nine weeks a year of paid holidays. The French government reminded Mittal of their deal and threatened to nationalize the entire business.
After some back and forth, ArcelorMittal cancelled the job cuts and agreed to invest 180 million euros in the plant over the next five years. Rishi Sunak’s blocking of the Abu Dhabi Sovereign Wealth Fund backed takeover of Telegraph Media Group is possibly electioneering too, much like the US Steel objections in the United States – It might only be an issue because it is an election year. Especially in a day and age when people mostly get their news online and can source it from a variety of international sources.
If a foreign government wanted to spread propaganda, it would likely be easier to do this on social media rather than by buying a newspaper that people would be aware is foreign owned. According to the FT, British government officials suggested that they would aim to reduce the threshold for material influence over a British media entity to below 10 per cent ownership. So, what should we think about arguments from around the world – which often come from politicians about how incentives or even requirements should be put in place for citizens or pension funds to invest in domestic securities?
The argument in the UK for greater incentives to invest domestic companies likely comes from the recent history of key British firms choosing to list themselves on US stock exchanges in order to attain higher valuations. The politicians might feel that if they could push more demand for UK company shares, that high profile companies would want to list on British exchanges rather than American ones. Last year, the British chip designer Arm – in a blow to the UK equities market - opted for a US listing, despite three British prime ministers lobbying for it to list in London.
The drugmaker Indivior – a component of the FTSE 250 index recently announced plans to move its primary listing from London to New York with the idea that a US listing would attract more US investors and might eventually lead to inclusion in a US stock index. A number of tech stocks like Deliveroo and Wise listed on the LSE in 2021, only to see their share prices slump. The argument was made by VC firms that the institutional investors that dominate the London market don’t understand tech and that they were looking for cashflows rather than growth.
Jeremy Hunts idea of encouraging British people to invest their long-term savings tax-efficiently in the stock market may be a good one, as British people tend to invest too much of their savings in real estate rather than in the stock market, but I would argue that the goal should be for the investors to maximize their returns by diversifying internationally rather than being tied to domestic investments. The benefits of international diversification are supported by both financial theory and common sense. International diversification allows investors to reduce risk for a given level of expected return.
It is known as home country bias when investors concentrate their investments in stocks and bonds from their home country, rather than investing internationally. People often do this because it can be easier to buy domestic securities and because they often feel they know more about local firms. One of the problems with this is that in many countries if you only invest in domestic securities, you might be over concentrated in certain sectors.
If Canadian pension funds were compelled to invest only in Canadian securities, they would have almost one third of their portfolios in financial stocks and four times as much money in the energy sector as a globally diversified investor would. A British investor would find themselves very heavily weighted in Financials, Consumer staples and energy too. According to Statista, British stocks make up around 4% of the global stock market and Canadian stocks make up less than 3%.
Requiring citizens to invest locally gives them a very small selection of stocks to pick from. In Ireland, in the run up to the Global Financial Crisis, a lot of individual investors concentrated their holdings in domestic stocks, a lot of which were banks and construction related businesses which were devestated When we look at a chart of international stock returns, you can see that in different years, different countries have good and bad performance. An internationally diversified investor is not tied to the performance of just one countries returns.
The British government’s top infrastructure adviser John Armitt came out earlier today, saying there is no reason British pension funds should have a home bias. While he said that tens of billions of pounds of private investment were needed in the UK to meet infrastructure needs, including energy upgrades, new hospitals and roads. He went on to say that it would not be right for pension funds to simply invest in home markets due to ministerial pressure.
I would agree with that statement. There is also something foolish about the idea of restricting individuals’ investment opportunities, hoping that if you force them to invest in domestic stocks, that something good would come from a pumped up stock market, where prices only rose because of restricted choice rather than because of the quality of the businesses. There has been a long trend towards increased international trade starting with the Silk Road in the first century BC when silk, spices, tea and porcelain from Asia were transported to Europe, and horses, honey, wine and gold were shipped to Asia.
That trade came to a sudden halt with the rise of the Ottoman empire which abruptly blocked trade between the East and The West. International trade started back up again shortly afterwards – by sea this time rather than by road. Another great wave of international trade came with the Industrial Revolution when new technologies like the steam engine meant that goods could be transported over thousands of miles, both within countries and across borders.
Britain, being the source of so much of the capital and technology of the day, benefited the most from international trade at this time. John Maynard Keynes wrote in his book “The Economic Consequences of the Peace” about how lifestyles in Britain improved at this time when, conveniences, comforts and amenities became available to the middle classes that had been beyond the reach of the richest and most powerful monarchs of other ages. He wrote “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.
A description which sounds surprisingly modern today. He went on to discuss international investment, saying, “He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share — without exertion or even trouble — in their prospective fruits and advantages”. The two world wars brought this era of international trade to an end.
The next wave of globalization came in the post war period when The United States began encouraging free trade around the world. Today interest in international trade and international investment appears to be in retreat due to geopolitical tensions and the concern that the benefits of free trade are not being equally shared within or between countries. Looking at history you can see international trade has waxed and waned over the centuries, but generally grown over time.
China’s “dual circulation” policy involves a focus on increasing self-reliance. The “Make in India” initiative similarly aims to boost Indian industry by protecting domestic firms from foreign competition. Biden’s Inflation Reduction Act aims to boost domestic green technologies through subsidies and tax breaks and the CHIPS and Science Act provides similar incentives to semiconductor firms to redomicile Semiconductor manufacturing in the United States for strategic and defensive reasons.
A decade ago, trade and financial flows around the world were driven mostly – but – by no means - entirely - by economic considerations. The pandemic disrupted supply chains and Russia’s invasion of Ukraine showed that relying on a single supplier for energy could leave an entire continent at risk. Countries and businesses took notice and trade and financial flows began to be redirected to both align with new government incentives, and to increase the resilience of supply chains.
Apple’s moving of some production and assembly to countries other than China is a good example of these changes. While doing this might increase their resilience in an era of greater geopolitical complexity, it is also expensive to do and adds complexity to their business. Apple is still extremely reliant on manufacturing in China, and will likely remain so for quite some time While international trade does ebb and flow over time, it has been an important factor in raising living standards around the world, providing employment and enabling consumers to enjoy a greater variety of goods.
While there may be strategic and economic reasons for some of the changes we have been seeing in recent years, the types of protectionism that aims to prevent investment in friendly countries and tries to boost local stock markets by requiring citizens to invest locally makes no sense. If you enjoyed today’s video, you should watch this one next. Don’t forget to check out our sponsor Brilliant using the link in the video description.
Have a great day and see you in the next video.
