Hot point?

Reader question:

Please explain “hot point” in this sentence: The paradox of Africa at the moment is that, at last, it is where the hot money is going.

My comments:

I have no idea what that “paradox” is about, without being given more context. Fortunately, “hot money” is a straightforward enough term to explain. Here it points out the fact that Africa is attracting foreign investment because Africa is now a place where investors think a quick buck can be made there.

“Hot money”, you see, is a business term referring to discretional money people invest in this and that in order to take advantage of emerging money making opportunities. Money making opportunities can sometimes be fleeting, and so, therefore, this money is moved very quickly from place to place, from one form investment to another. One day, it’s going to buying gold. Next month, as was once the case in China, everybody rushes in to stockpile garlic.

Garlic, of all things, but why not? A profit is a profit - To hot money, all profit making opportunities are created equal.

In short, hot money is the hot investor money. You may understand the “hot” in “hot money” as you understand “hot” in “hot spot” and “hot favorite”. “Hot spot”, of course, is where the activities are. “Hot favorite” refers to someone who is very hot, i.e. favored to win, say, a competition.

Hot money, in other words, goes to people’s favourite areas where a quick buck is to be made.

Or where they think a quick buck is to be made. They may be wrong, hence all the fuss we see all the time in the media about where the hot money is and where it is going next.

And, via such media, let’s see for ourselves where all the hot money of the world is, or moving:

1. 3. A DAP MP wants Putrajaya to impose capital controls like that which former prime minister Tun Dr Mahathir Mohamad enacted in 1997 to prevent what he called an impending surge of hot money into the local market would put Malaysia into a tailspin similar to the Asian Financial Crisis.

Klang MP Charles Santiago explained that this time the hot money would come from the US Federal Reserve’s move to spend a whopping US$600 million (RM1.8 trillion) to purchase US Treasuries over the next eight months under its quantitative easing programme.

“You will see a surge in the property, currency and stock markets, including even in food and oil. Therefore, Malaysia has to do something in order to control such movements.

“When the money comes in, it may look all nice but when it leaves, it will leave a whole lot of destruction along the way. Thousands will lose their jobs, our SMEs will shut down,” he warned.

- DAP MP wants Malaysia to impose capital controls, TheMalaysianInsider.com, November 23, 2010.

2. Around the world, around the clock, billions of dollars move in and out of one of the most abstract financial tools ever designed: the S&P 500 futures contract.

Buying or selling the contract -- the most actively traded among stock index futures -- is like making a bet.

In this case, it’s a bet on the direction of the S&P 500 index, a broad measure of stock-market changes based on the performance of 500 large companies’ shares.

The contract’s purchase or sale is a legally binding agreement to buy or sell a derivative of the S&P 500 index at a preset price on a preset date.

But if S&P 500 futures are complex, their use as a stock-market forecasting tool remains clear.

Like the S&P 500 index itself, the underlying value of an S&P 500 contract -- whose underlying index represents 80 percent of the value of all stocks on the New York Stock Exchange -- rises and falls based on what traders will pay for it moment to moment.

And because the contract’s terms are settled at a future date, an S&P 500 contract’s price generally leads the S&P 500 index it’s derived from -- on both the upside and the downside.

“The futures give an indication where stocks are likely to go,” said Hans Stoll, a Vanderbilt University finance professor who has studied the contract. “The futures lead the cash.”

As such, an S&P futures quote is to short-term market forecasts what the satellite photo is to weather predictions.

In a study, Stoll found that during the trading day, the futures index leads the regular index by an average of five minutes. Before the opening bell, a similar but less predictable relationship exists.

“It’s a useful early indicator of where the hot money is going to go that day,” said Jeff Davis division chief investment officer of State Street Global Advisors.

- S&P futures lead the way, CNN.com, May 1, 1999.

3. China made headlines around the world this week when it revealed that its foreign reserves had eclipsed the $2 trillion market for the first time, rising by a record $178 billion in the second quarter – thanks to a flood of “hot money” that flowed into the world’s most promising economy.

But the “hottest” investment money may soon be flowing from China back into the United States – thanks to an accompanying development that didn’t even make the news (let alone headlines) here in this country. This will translate into windfall profits for U.S. investors with holdings in the “right” kinds of companies, and in the long run should bolster the U.S. dollar.

This other, below-the-radar development was China’s decision to relax the rules that guide its company’s overseas investments. In a clear attempt to boost investments beyond its borders, China has changed some of its rules to make it easier for its companies to make foreign investments, and to use foreign financing for those deals.

The new rules – which take effect Aug. 1 – will make it lots simpler for China-based firms to make major investments here in the United States – no small deal at a time when credit and other forms of capital remain scarce. This development is especially bullish for U.S. investors holding stocks in U.S. companies involved in such industries as oil, gold, natural resources and high technology, as well as companies that possess strong global brands, since these are precisely the kinds of companies China-based firms will be on the prowl for.

Once the rules take effect, Chinese companies will no longer have to report foreign currency transactions, or go through China’s central bank. Instead, these firms will be able to buy foreign currencies in whatever market they happen to be operating in, and will even be able to borrow from the banks in those markets as a way of fueling direct overseas expansion. Lastly, China-based firms doing business abroad will no longer have to repatriate assets, meaning they will be able to take their foreign profits and directly reinvest them overseas.

- How to Profit From China’s “Hot Money” Strategy, MoneyMorning.com, July 17, 2009.

About the author:

Zhang Xin is Trainer at chinadaily.com.cn. He has been with China Daily since 1988, when he graduated from Beijing Foreign Studies University. Write him at: zhangxin@chinadaily.com.cn, or raise a question for potential use in a future column.