They’re the “new it girl” of finance apparently. Everyone wants a piece of them.
And with $3,000bn in assets under their control and projected to invest $5,000bn over the next five years, they are only going to become hotter property.
As they seek to deploy those assets, diversifying into publicly traded stocks, they could lend support to equities, or accelerate corporate restructuring through strategic stakes, says George Hoguet, global investment strategist at State Street, writing in Thursday’s FT.
Possible other financial implications of the rise of SWFs include: a rise in US real yields; sustained interest in emerging market equities and debt; faster development of new asset classes; and continued strong flows into private equity, real estate and alternatives, including hedge funds and commodities.
How will they choose to invest their ever-larger asset pot, he wonders? One hypothesis is that the funds will over time sell US Treasuries and reallocate to global equities and bonds in proportion to world market weights. Investors, says Hoguet, should be cautious in their assessment of the impact on global asset prices - but nor can they afford to ignore the emergence of this new investor-class.
Brad Setser, though, wonders at his blog whether the hubbub over SWFs has missed a crucial point - that a key set of countries doesn’t seem nearly as likely to ramp up their overseas equity investment as they did six months ago: Russia, China, Saudi Arabia and Japan will either have less than was thought to invest, want to move cautiously or tend to have shied away from high-profile investments.
He estimates that in the fourth quarter funds invested only about 10 per cent of the total increase in official assets in the west.
Unless something changes — whether a big fall in private capital flows to the emerging world or a dramatic change in the way China, Russia, India, Brazil and Saudi Arabia manage their state assets — 2008 will probably be roughly similar. Central bank reserves will grow far faster than the funds managed by sovereign wealth funds, and decent chunk of the funds managed by sovereign wealth funds will be invested relatively conservatively.
Frankly, he adds, that seems something of a relief. The US and Europe might not be ready for a world where emerging market governments do $1.2 trillion of ‘deals’ rather than buy $1.2 trillion of bonds. That would be the equivalent of a CNOOC-Unocal effort every week of the year.
