The power of SWFs have caused Dominique Strauss Kahn, the new managing director of the IMF, to worry that they could be a source of financial instability. In today’s FT however, Michael Gordon, global head of fixed income at Fidelity International, argues that on the contrary, they are a source of stability in unstable times.
The runaway success of emerging Asian financial markets has prompted talk of a decoupling of the world economy, with western states happy to borrow from thrifty Asian savers, but less happy to allow them to take equity positions in their companies.
Mr Gordon questions whether this can continue. With falling equity prices, and banks in particular increasingly in need of raising fresh capital, he argues that the excess savings of emerging markets could play an important role.
There is no shortage of cash in these markets as the oversubscribed IPO of AliBaba this week illustrates.The need for foreign capital is all the more acute given the lack of domestic capital to support developed markets. In the US, it is estimated that there could be outflows of $290bn into foreign bonds and equities this year.
In this scenario, Mr Gordon suggests that a re-coupling of emerging and developed markets might be called for to recycle the world’s capital.