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I was anxious when I arrived at Tehran's Mehrabad International Airport recently and handed my passport to a surprisingly young female Customs agent. How would she react to the fact that my father had worked for the former shah's government? And to me, an Americanized emigre returning for the first time in 28 years? After a few hushed whispers with her supervisor, the agent merely stamped my passport and waved me through with a smile and a "Welcome back, sir."
This is a country of many surprises. Consider: in December Iran issued its second eurobond since the 1979 revolution. International investors snapped up the 375 million euro offering. Since then, news from Iran has focused on an earthquake, an ugly election that led to mass parliamentary resignations and new revelations about Iran's nuclear-weapons programs. Yet on the eve of the election, Japan announced a $2 billion agreement to develop Iran's Azadegan oilfields--the largest deal since the revolution. And those bonds? "We still get phone calls from investors looking to snap them up," says a European bond trader. "But no one wants to sell them."
Investors worldwide are not ignoring political risk. But they are becoming more sophisticated in analyzing exactly what it means to their investments, not just in Iran but other political trouble spots like Indonesia and Colombia. While Western politicians and journalists obsess over the war on terror and the clash with Islam, international investors care more about stable economic governance. For them, the biggest shock came with the financial crises of the 1990s--from Mexico to Southeast Asia, Russia, Argentina and Brazil. The years since have seen the rise of the cautious technocrat, who believes in neither the rigid markets of controlled economies nor the unfettered capitalism of the 1990s. Today's markets like what they see.
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China is the most prominent example. In 2002 it sailed through a generational transition as new leaders vowed to continue pragmatic economic policies. Chinese Communist Party chiefs and Politburo members now discuss things like the capitalization of the banking sector and the pace of initial public offerings. Money is now flowing into China fast, creating fears of a bubble. Malaysia has undergone a similar transition, engineered by former prime minister Mahathir Mohamad, whose successors now openly debate lifting the ideologically charged economic controls he imposed five years ago.
In country after country, markets have weathered random acts of terror, and are consistently rewarding boring reform. International investors feared Luis Inacio Lula da Silva as a populist candidate, but love him as the pragmatic president of Brazil: in the last year they've driven up the benchmark Bovespa index 160 percent in dollar terms. In Russia, markets paused in surprise after President Vladimir Putin's latest cabinet reshuffle, then rallied as soon as they saw the magic word technocrat attached to his new prime minister. After a subway blast in Moscow on Feb. 6, the Bourse did recoil, but only for a day.
The numbers are striking. In dollar- adjusted terms, China's domestic shares have risen 45 percent over the last five years, Russia's 740 percent, India's 46 percent and Brazil's 56 percent. Granted, these are from extremely low levels. But, despite recent runs, the Dow is up 9 percent over the same period, and Germany and Japan actually come in negative, at -4 percent and -17 percent, respectively, in dollar-adjusted terms. This is not to say that Russian returns are comparable on a risk-adjusted basis to the Dow, only to highlight the benefits flowing to the new technocrats.
Clearly, the flood of investment money into emerging markets is partly a result of hot money seeking higher returns. But the return of fixed investment capital into risky, illiquid countries means long-term investors are also increasingly impressed by spreading pragmatism. Demonstrations in Iran come and go, but there is never a real questioning of private-property rights and the basic tenets of capitalism. Emigrants are returning home as tourists and investors, drawn by economic stability and the trend toward reform. Ethnic Indian doctors leave the United States to practice in India, in order to reap the rewards of, ironically, a better lifestyle. Ethnic Chinese businessmen, flush with Canadian real-estate profits, are returning to China, Hong Kong and even Indonesia, looking for opportunity.
Of course, geopolitical risk is hardly a thing of the past. Think twice, for example, before counting on Venezuela's Hugo Chavez to protect your property rights. But economic uncertainty is fading. The return of human capital, and the rise in fixed investment, is proof that the boom in emerging markets is not just a function of hot money. It's a credit to a new breed of economic policymakers, and a real decline in economic risk.
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