Market Shocks, Financial Literacy, and Net Worth

Abstract

Global shocks typically inflict large persistent contractions on commodity prices compared to small transitory contractions on equity prices. The resulting output headwinds and asset tailwinds set the global income statement and balance sheet on divergent paths. The cognitive capability to trace the exposures of income statement transactions and balance sheet portfolios to global shocks and the adaptive capacity to take steps to cover exposures become essential for modulating the pass-through from global shocks to global wealth or net worth. While output-centric literacy remains a crucial determinant of net worth, the realities of smaller and uneven margins along value chains compared to larger capital gains across asset types mean that asset-centric literacy is the most critical determinant of net worth. Each country’s performance across three criteria- GDP growth, FDI stock, and servitization- should identify her as an adjuster who possesses the cognitive and adaptive capabilities to modulate the pass-through from global shocks to national liquidity, sectoral resilience, and growth, or as a non-adjuster who needs these capabilities. We highlight measures of global shocks that global watchdogs must now emphasize, and we offer strategic insights on how country managers can modulate pass-through from global shocks to wealth.

1. Introduction

This paper observes that the global shocks since 2008 typically weaken commodity prices and lift equity prices, the market responses are that global experts are stagnating while global FDI stocks are surging. While global exports and FDI stocks were about US$20 trillion in 2010, exports remained less than US$25 trillion by 2020 while FDI stocks climbed above US$41 trillion in 2020.

Section 2 illustrates how the path of wealth creation opportunities from transactions on the income statement is diverging dramatically from the path of wealth creation opportunities on the balance sheet. In Sections 3 and 4, we discuss what this evolving reality portends for the financial literacy required to shield wealth or net worth from unfavorable transaction shocks while seizing vast opportunities from favorable portfolio shocks.

To gauge exposures, in Section 5, we show that each country’s performance across three criteria- GDP growth, FDI stock, and services growth-should identify her as an adjuster who possesses the cognitive and adaptive capabilities to modulate the pass-through from global shocks to national liquidity, sectoral resilience, and growth, or as a non-adjuster who needs these capabilities.

We then highlight measures of global shocks that global watchdogs must now emphasize, and we offer strategic insights on how country managers can modulate pass-through from global shocks to wealth Section 6. We conclude in Section 7.

2. Global market shocks

2.1 Episodes and triggers

We focus on four episodes of market shocks: the first was the well-documented 2008/2009 Global Financial Crisis (GFC), the second was the quiet technological disruptions from 2011 onwards that preceded the third and fourth well-documented shocks, the Pandemic of 2020/2021, and the geopolitical tensions that were triggered by the Russian invasion of Ukraine in March 2022.

1. Financial Crisis 2008/2009

   • Financial Meltdown: Fall in house prices, the crisis in financial institutions/markets.

   • Economic Meltdown: Low investor/consumer confidence depressed demand.

2. Techno-Economic Disruptions of 2011–2016

   Disruptive adoption of breakthroughs in biotechnology, ecological technology, physical technology, and digital technology created global commodity gluts (across crude oil, crops, livestock, and metals) that precipitated a weakening of commodity prices that started from around 2011 and culminated in steep declines in prices from July 2014.

   • Biotechnology (genetic modification of crops and livestock, and shale)

   • Ecological technology (renewable energy, energy storage, carbon capture)

   • Physical technology (nanotechnology, 3D printing, drones, high-speed rail)

   • Digital technology (hardware, software, internet, cloud, e-platforms, IoT, robotics, AI)

3. Pandemic 2020/2021

   • The outbreak of the COVID-19 pandemic and the resort to non-pharmaceutical measures like social distancing and isolation in the absence of pharmaceutical remedies triggered several rounds of global lockdowns until pharmaceutical therapies were eventually developed.

4. Geopolitics 2022/2023

   • The outbreak of the Russian-Ukraine war and the imposition of economic and financial sanctions on Russia disrupted global food and energy supplies, shocking food and energy prices, inflation, stock prices, and interest rates.

2.2 Price shocks

The cumulative effects of the four episodes of market shocks since 2008 have been to break the strongly upward trend that commodity global prices enjoyed since the turn of the millennium while lifting equity prices into a sustained upward and resilient trend.

A comparison of the evolution of commodity price and equity price from January 1990 to July 2023 in Figure 1 reveals that commodity price suffered more severe shocks from each of the four episodes than equity price.

Figure 1.

Global commodity vs. equity index.

The cyclical swings in commodity price recorded in 2008/2009 gave way to trend breaks from 2011, while the impact of shocks on equity price remained transitory across the four shocks, to make equity price trend steadily upwards since the early 1990s.

Massive surge in the proliferation of innovations in biotechnology, digitization, and renewable energy has increased supply or reduced demand for commodities- including oil, crops, and livestock- enough to depress their prices and weaken the global income statement. In contrast, the rise in the asset values of the various innovations lifts their equity prices and strengthens the global balance sheet.

Widespread resort to government bailouts from 2006/2009, fiscal stimulus, and eventual massive liquidity injections in the form of quantitative easing to cushion advert effects of incomes lost in the various shocks could also explain the resilience of global equity price and the concomitant pass-through to the global balance sheet.

In summary, the opportunities offered in global markets have thus been punctuated by a series of financial, technological, ecological, biological, and geopolitical shocks on four occasions in the last decade and a half. The typical pattern across global shocks is that they inflict larger and longer contractions on commodity prices and more minor and shorter contractions on equity prices.

2.3 Consequences

Since 2008, global production, and export of industrial, manufactured, agricultural goods, and related commercial services have decelerated, stagnated, or declined in response to adverse global commodity price developments, while global asset values, cross-border equity stocks or foreign direct investment (FDI) stocks, and non-commercial services flowing from place-based, space-based, knowledge-based, or skill-based assets have surged steadily in response to favorable global equity price developments.

These developments have been variously labeled as deindustrialization, servitization, assetization, and/or financialization. Knowledge, talent, and investment flows are increasingly displacing flows of goods and services as the focal points of global connectedness. There has been a surge in inward stocks of cross-border equity (a.k.a. foreign direct investment) in search of four asset clusters- ideas, skills, physical places, and digital spaces- that could be financialized.

Figure 2 reveals that exports of goods and services that had been the primary focus of global connectedness for centuries have stagnated since 2015 while inward FDI stocks have continued to surge. Consequently, surging global FDI stocks have displaced stagnant global export flows as the of global connectedness and the dominant source of external liquidity.

Figure 2.

Global exports vs. FDI stocks.

Figure 3 documents the surge in innovations, Figure 4 shows the surge in urge in skill migration, Figure 5 shows the diverging growth paths of services and non-service value-added, and Figure 6 shows the steady surge in global GDP despite industrial and export stagnation.

Figure 3.

Global innovations.

Figure 4.

Global migration trends.

Figure 5.

Global sectoral trends.

Figure 6.

Global GDP trends.

We assess the extent to which selected countries align or misalign with the striking global realities captured in Figures 2, 5, and 6 in Section 5 where we assess the exposures of G7, BRICS, and Next-11 countries to liquidity, growth, and sectoral risks.

Income statement exposures to each of the four episodes of global shocks, using global exports of goods and services as the proxy, have often been larger and protracted than balance sheet exposures, using global FDI Stocks as the proxy, which have often been smaller and fleeting.

Exports have only grown five-fold from US$4.4 trillion to US$22.4 in 1990 by 2020, while foreign direct investment (FDI) stocks that have emerged as the focal point of global connectedness surged nineteen-fold from US$2.2 trillion to US$41.4 trillion over the same period. Global Inward FDI stocks have grown from half the size of annual global exports in 1990 to nearly twice the size of global exports by 2020. Prosperity in today’s global markets is fueled more by cross-border equity stocks than cross-border trade flows.

Global shocks typically inflict large persistent contractions on commodity prices compared to small transitory contractions on equity prices. The resulting output headwinds and asset tailwinds set the global income statement and balance sheet on divergent paths.

3. Financial literacy

Global watchdogs like the IMF, World Bank, and UNCTAD should have the cognitive capability to correctly measure and track all the important dimensions of shocks to global commodity and equity prices, and what they might portend for the outlook of global transactions and global portfolios.

Global, national, sub-national, and corporate decision-makers should be aware of the roles of the two global prices as leading indicators of income statement and balance sheet developments. They should be able to trace the impact points of global price shocks on their income statement and balance sheet. They should have the cognitive capability to assess exposures of income statement transactions and balance sheet portfolios to shocks.

Managers should have the adaptive capability to take steps to reconfigure their participation in relevant value chains to cover their exposures to declining and uneven margins along value chains and have the skills for readjusting their portfolios of assets, equity, and debts to seize opportunities presented by increasing capital gains.

The cognitive capability to trace the exposures of income statement transactions and balance sheet portfolios to global shocks and the adaptive capacity to take steps to cover exposures become essential for modulating the pass-through from global shocks to global net worth.

4. Net worth

Shocks to commodity and equity prices have reduced the roles of income-statements-related flows of goods and commercial services in cross-border transactions and increased the roles of balance-sheet-related ideas, skills, and investment as the current focal points of global connectivity.

Consequently, balance-sheet-based portfolio optimization contributes more to global, national, subnational, and corporate wealth or net worth than income-statement-based transaction optimization. Asset-centrism now contributes more to net worth than output-centrism.

The reality is that activities that enable production, such as innovative placemaking, platform building, knowledge building, and skill building have become more reliable ways for countries, cities, and companies to create economic value and enhance global wealth than the production activities themselves.

Leading countries, cities, and companies increasingly loosen their grip on low-margin segments of their value chains, typically midstream production transactions, by offshoring or outsourcing them, while strengthening their grip on the high-margin segments of the value chains, typically upstream and downstream asset portfolios.

While output-centric literacy remains a crucial determinant of net worth, the realities of smaller and uneven margins along value chains compared to larger capital gains across asset types mean that asset-centric literacy is the most critical determinant of net worth.

5. Country exposures: G7, BRICS, and Next-11

In this section, we assess the extent to which selected countries align or misalign with the striking global realities captured in Figures 2, 5, and Chart to gauge the exposures of G7, BRICS, and Next-11 countries to liquidity risks (Figures 7–9), sectoral risks (Figures 10–12), and growth risks (Figures 13–15).

Figure 7.

G7 external financing mix.

Figure 8.

BRICS financing mix.

Figure 9.

Next-11 financing mix.

Figure 10.

G7 sectoral dynamics.

Figure 11.

BRICS sectoral dynamics.

Figure 12.

Next-11 sectoral dynamics.

Figure 13.

G7 growth trajectories.

Figure 14.

BRICS growth trajectories.

Figure 15.

Next 11 growth trajectories.

Each country’s performance across three criteria-GDP growth, FDI stock, and servitization- should identify her as an adjuster who possesses the cognitive and adaptive capabilities to modulate the pass-through from global shocks to national liquidity, sectoral resilience, and growth, or as a non-adjuster who needs these capabilities.

5.1 External financing mix

Only countries that align with the evolving global reality of growing inward FDI stocks in the face of sluggish exports as portrayed in Figure 2 will remain liquid enough to sustain exchange rate stability and diversified GDP growth. Countries with stagnant inward FDI stocks and slow export flows will likely require additional funding to stay liquid enough to support diversified GDP growth.

• Increasingly Liquid Group: The United States from the G7, China, and India from BRICS, Egypt, and the Philippines from N-11 belong to this group of increasingly liquid countries.

• Increasingly Illiquid Group: Japan and Germany from G7, Brazil, Russia, and South Africa from BRICS, and Nigeria from N-11 belong to this group of increasingly illiquid countries.

It is the responsibility of each country, its cities, and its companies to urgently take steps to move from the club of increasingly illiquid nations into the league of increasingly liquid countries.

5.2 Internal sectoral dynamics

Countries must either align with the global reality of stellar growth in services in the face of growth deceleration in other sectors or stagnate. Countries can be classified as servitizers and industrializers.

5.3 GDP trajectories

The trajectories of gross domestic product (GDP) levels continue to differ across and within country groupings. This could be due to differences in the external financing mix or internal sectoral dynamics.

Countries across standard groupings can be classified as steady growers and unsteady growers.

• Steady Growers share two attributes in common: inward FDI stocks accelerate, even as exports decelerate, and services accelerate even as other sectors decelerate. Again, the US from the G7, China, India from BRICS, Egypt, Bangladesh, Egypt, Indonesia, Mexico, Pakistan, Philippines, South Korea, and Vietnam from N-11 all fall into the group of steady growers.

• Unsteady growers also share two attributes in common: FDI stocks stagnate, regardless of export performance, although most also face the global reality of stagnant exports and services stagnate along with other sectors. Canada, France, Italy, Japan, Germany, and the United Kingdom from G7, Brazil, Russia, South Africa from BRICS, Iran, Nigeria, and Turkey from N-11 all fall into the group of unsteady growers.

6. Strategic insights

We highlight measures of global shocks that global watchdogs must now emphasize, and we offer strategic insights on how managers can modulate pass-through from global shocks to wealth.

6.1 Global wealth

Global economic watchdogs provide one-sided narratives of global markets.

IMF, World Bank, and UNCTAD only provide comprehensive data and analytical reports on the history and outlook of commodity prices, production, and trade as if only transaction values on the income statement matter. They provide no comprehensive data or analytical reports on the history and outlook of equity prices, assets, and dealmaking as if portfolio values on the balance sheet do not matter.

According to Howells 2020, ‘Barely one-fifth of Wall Street’s huge gains over recent decades have come from earnings: rising liquidity and investors’ appetite for riskier financial assets have propelled stock prices. Similar experiences are shared worldwide, and even in emerging markets, such as India, flat earnings have not deterred waves of foreign money and domestic mutual funds from driving up stock prices [1].’

McKinsey Global Institute (2021) phrased the issue thus,

‘Net worth has tripled since 2000, but the increase mainly reflects valuation gains in real assets, especially real estate, rather than investment in productive assets that drive our economies. We have borrowed a page from the corporate world- namely, the balance sheet- to take stock of the underlying health and resilience of the global economy … This view from the balance sheet complements more typical approaches based on GDP, capital investment levels, and other economic flow measures that reflect economic value changes [2].’

International watchdogs must provide data and analytical reports on both sides of the global markets as the world evolves from transaction dominance to portfolio dominance. UNCTAD’s World Investment Report provides comprehensive annual data and analytical narratives on all the important dimensions of inward and outward FDI flows but offers no analytical narratives on FDI stocks, providing basic annual data on inward and outward FDI stocks in annex Tables 3 and 4.

The World Bank’s World Development Indicators only provide data on FDI flows and offer no data on FDI stocks. The World Bank’s Wealth Accounts provides data on the constant US% of human, natural, and produced, and total capital for 146 countries, none for the world, but these were last updated to 2018 on 27 October 2021. None of the global watchdogs provide any data on the prices corresponding to these assets. We used the Morgan Stanley World Equity Index for this study.

6.2 The wealth of nations

The importance of the public sector balance sheet for fiscal liquidity is well articulated in a flurry of recent research at the IMF [3, 4, 5, 6, 7]. The IMF’s October 2018 Fiscal Monitor, ‘It’s not just what governments owe, it’s what they own.’ Gaspar et al. (2018), ‘Knowing what a government owns and how they can put their assets to better use matters because they can earn … as much revenue as governments make from corporate income tax receipts’ [4]. Harris et al. (2019), ‘When governments know what they own, they can better use the assets for the well-being of all their citizens [5].’

Given glaring evidence of large stocks of under-exploited corporate, real estate, and infrastructure assets owned by the Government [8], Nigeria is sitting on a goldmine of assets [9]. The total value of Nigeria’s assets, reported to be US$5.6 trillion in 2018 in the World Bank’s online Wealth Accounts, is eleven times bigger than her GDP, reported to be US$480 billion in 2022 in the World Bank’s World Development Indicators, and 56 times bigger than her total public debt stock of US$100 billion in 2022 [6].

Yet the country languishes in external, fiscal, and systemic illiquidity as the government keeps trying to rejuvenate export revenue instead of unlocking liquidity from its vast wealth of human, natural, and produced capital by connecting them to the global FDI glut, the way countries like India and Saudi Arabia have been doing in the past decade. The two are among the growing list of countries that now list fundable projects on online platforms to connect them to investable funds around the world.

Saudi Arabia’s list of 200 projects in 16 sectors included ARAMCO and football clubs when the list was made public in 2017 as the country sought FDI inflows to the tune of US$200 billion. India Investment Grid currently seeks US$2.28 trillion to fund 15,182 projects in 22 sectors and 78 subsectors that have been originated by 8865 promoters, and 12,265 investors are registered on the platform.

Fiscal conversations in Nigeria should be focused on net worth, not just revenue and debt. We must situate income and debt in the broader context of assets owned by Nigeria and the enormous equity issuance headroom the assets bequeath the country in a post-boom environment in which we are guaranteed to be asset-rich, even when income/revenue shortfalls give little or no debt issuance headroom [10].

Finding new streams of non-tax revenue will be helpful. Nigeria’s debt liabilities are well-known, but her assets are not. Not knowing what we own adversely affects the assessment of our net worth, as most of our assets do not come into the reckoning in discussions of our solvency. Nigeria should list all assets owned by the government in a National Asset Register, value them, and rationalize them to ensure that use values are aligned with market values Teriba shows ways of unlocking liquidity from four types of assets [11].

7. Conclusion

The cognitive capability to trace the exposures of income statement transactions and balance sheet portfolios to global shocks and the adaptive capacity to take steps to cover exposures are essential for modulating the pass-through from global shocks to net worth.

Global watchdogs must provide data and analytical reports on both sides of the global markets as the world evolves from transaction dominance to portfolio dominance. And country managers must take steps to unlock more liquidity from national assets to fuel growth and diversification.

8. Data sources

Commodity Price Index data is from the IMF’s Monthly Global Commodity Price Excel database.

Equity Price Index data is from the online database of Morgan Stanley’s End of the Day Chart.

Exports, GDP. Agriculture, Industry, Manufacturing, and Services from World Bank’s World Development Indicators (WDI).

Inward FDI Stock data from Annex Table 3 of UNCTAD’s World Investment Report.

Patents and Trademark data from the World Intellectual Property Organization (WIPO) database.

Migrants Stock and Migrant Ratio data from the International Migration Office (IMO).

Acknowledgments

I acknowledge helpful insights from class conversations with the 2021, 2022, and 2023 cohorts of scholars who participated in the Economics of Globalization (EOG) course at the National Scholars Program (NSP) of the Nigerian University of Technology and Management (NUTM).