It seems barely a day goes by now without news of one sovereign wealth fund or another buying yet another chunk of western financial or corporate heritage. In the last 24 hours alone, we’ve heard about Abu Dhabi’s rather lucrative Citigroup deal and Dubai’s swoop on a stake thought to represent nearly 5 per cent of Sony. There’s also been the move by Singapore’s Temasek to sell off a small part of its 4.6 per cent stake in Bank of China.
If anyone remains in doubt about the power — actual and potential – of these vast pools of capital, consider the headline on Bloomberg on Tuesday about the Citigroup deal: “Yen Falls as Citigroup Sells Stake, Reviving Carry Trade Demand”
The agreement by the Abu Dhabi Investment Authority to buy about $7.5bn of Citi securities convertible into shares apparently gave investors confidence to buy higher-yielding assets with loans from Japan, helping drive the biggest fall in the yen in two weeks against the dollar, to Y108.18 early Tuesday in London from Y107.41 in New York on Monday, reports Bloomberg.
Analysts in Tokyo were big on the Citi angle on the yen’s marked weakening on Tuesday.
In a note to investors, John Richards, strategist at RBS in Japan, attributes a fall Tuesday in Japanese government bond futures to the Citi deal. “All eyes will be on [Tuesday] tonight’s US equity opening. S&P futures bounced about 1 per cent in Asia trading. Some investors may take comfort that there is a buyer for distressed or should we say ‘duress-ed’ assets if the price is right. But others may see it as a sign of weakness, especially once the terms of this deal are fully known.”
According to Richards:
We have long said that the bond market needs continuous injections of news to sustain the current levels. If today’s move by Abu Dhabi is taken as evidence that the worst is over, there will be a meaningful back up in yields. Our problem is that we are more inclined to see this as a sign of just how serious the banking situation has become and we think it is too early to get bearish on JGBs.
So over to China, where further evidence of SWF forces comes from the slide of more than 9 per cent in Bank of China shares on Tuesday after news of Temasek’s sale of part of its holding for $567m, at a discount of 3.5 per cent to the stock’s closing price. Shares in Bank of China, which has the biggest subprime exposure among China’s large lenders, pared losses to close 5.2 per cent lower amid a broad Hong Kong market sell-off.
Temasek is BoC’s second-largest foreign shareholder, and the sale will only reduce its stake from 4.6 per cent to 4.1 per cent. But the psychological impact of the sale was immediate in terms of the slide in BoC’s share price.
Temasek’s decision to sell was reportedly based on market worries about the bank’s exposure to the US subprime mortgage crisis, according to Reuters. Late last month, BoC reported subprime-related exposure of about $8bn as of the end of September and booked $643m in provisions and reserves for the third quarter. Its overseas flagship, Bank of China (Hong Kong), reported subprime-related exposure of $1.23bn.
But Bloomberg quotes Ronald Chan, who manages $3bn of Asian equities at Fortis Investment Management in Hong Kong, saying Temasek is trying to “reduce the exposure in financial holdings and not to be a substantial shareholder of any big company”.
That is hardly reassuring for the numerous other companies in Temasek’s vast portfolio - not just banks, which include some big western names. Bloomberg notes that financial services companies made up 38 per cent of Temasek’s portfolio of more than $100bn at the end of March, compared with 35 per cent a year earlier, according to its annual report. And with Temasek’s penchant for taking sizeable stakes, there is undoubtedly a lot of pain it can inflict with rapid decisions to sell off.
All the while, the SWFs continue their long and large shopping spree. Just like Temasek, the Middle Eastern SWFs have the cash, and the drive, to acquire vast holdings and are moving aggressively to acquire chunky stakes in a diverse range of companies. They are also focusing increasingly on Asia, and that, despite Abu Dhabi’s Citi deal, is taking place amid a broader move by cash-rich Arab investment vehicles to increase overseas assets away from the US, given the weakening dollar and rising trade flows between the Middle East and fast-growing Asia.
Dubai International Capital, which bought the Sony stake on Tuesday, has been eyeing investments in Asia as it seeks to diversify holdings away from Europe, the US and the Middle East, the FT noted. DIC, owned by Dubai ruler Sheikh Mohammed bin Rashid Al Maktoum, wants to double its $12bn of assets under management to $25bn over the next few years, with Asia currently forming about 20 per cent of the firm’s global portfolio.
DIC did not reveal the value of its new Sony stake, made through its $2bn Strategic Equities Fund that bought into HSBC and EADS this year, but it is likely to be less than 5 per cent, as any greater holding would have to be reported to Japanese authorities.