To begin with, Sovereign Wealth Funds have a reputation for secrecy and it is difficult to pinpoint exactly what their investment intentions are.
This hot topic of debate is still playing out in the corridors of power of, amongst others, the US, the European Union and may yet involve the International Monetary Fund and the World Bank. Each are currently discussing whether there should be an introduction of a code of principles, which (in the words of the EU), will cover “transparency, predictability and accountability”. And here is the rub.
Many of the current concerns are political. Again, turning to the EU – “We cannot allow non-European funds to be run in an opaque manner or used as an implement of geopolitical strategy.” The US treasury have said that SWFs “are typically not regulated by their domestic regulators, and the extent of indirect regulation may also be limited.”
For their part, the UK has been low-profile on this issue. It has been reiterated on a number of occasions that the free economy and free markets under which we operate necessarily allow for quoted companies to be acquired by foreign parties, as we have seen over the last couple of years in BAA, Abbey, O2, ICI and so on, traditionally classic British brands.
The SWFs themselves have not all reacted positively to what they consider to be protectionist noises. A Singaporean government minister and Chairman of the central bank recently noted that “Underlying the debate are irrational fears and a nationalistic backlash fuelled by domestic politics and economic problems that cloud reason”. He added that “The West and Asia should cooperate to work out transparency rules governing sovereign wealth funds, while at the same time ensuring open investment regimes on all sides.”
This political hot potato has furthermore been brought to the fore by the fact that the drop in markets generally has presented investment opportunities which the SWFs may not have been expecting for a while – and typically the investment decisions rest in the hands of a few individuals as opposed to a full-blown democracy, meaning that they can move quickly.
The reaction of the former US Treasury Secretary in Davos recently, that these investments were in danger of ceasing to be pension funds and becoming tools of international diplomacy was a moot call given the recent SWF investments in US banks. The Norwegian minister of finance had his own reaction to this latest concern, namely that “It seems you don’t like us, but you need our money.”
Proponents of these investments might argue that having a large stake in a blue-chip company with a long-term investment horizon could actually bring some stability to markets – after all, there is nothing to suggest so far that SWFs will be “trading” these stocks, so much as taking the long-term view.
It is also likely that SWFs will favour equities over bonds for the most part (due to their historically higher returns) and that equally they will head towards quality blue-chip companies, where liquidity is greater and the ability to pick up a larger stake is much more manageable.
Another fascinating twist to these events, as recently reported in the FT, is that increasingly private equity groups are bypassing the traditional Wall Street investment banks for funding, and approaching instead the SWFs. Whether the claim that the Abu Dhabi Investment Authority will effectively replace Wall Street will ever be substantiated seems some way off, but it does nonetheless underline just how the investment landscape could change in the relatively near-term future.
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown Stockbrokers