Indeed, this particular theme could yet play out to be one of the most radical changes in the investment landscape over the next few years.
To begin with, let us remind ourselves of exactly what we are dealing with and, for Sovereign Wealth Funds, think foreign governments.
A quite vast war chest of investment funds is being built up by certain countries, swelled by their ever-growing foreign currency reserves and national savings. Morgan Stanley recently estimated that the total of funds being held in SWFs could be as high as $2.5 trillion. It has also been estimated that in five years’ time, this figure could rise to $10 trillion. To put this into perspective, global equities in total are currently valued at around $28 trillion.
Furthermore, recent research from the City of London think tank, International Financial Services London, concluded that SWFs grew by 18% in 2007 and the trend was set to continue.
It has been reported that due to conditions not seen since the beginning of the 20th century, trade surpluses as a percentage of the global economy are at astronomical highs, with the result that official reserves are extremely healthy. With this accumulation of capital comes the inevitable pressure to earn higher returns, which of course would usually equate to traditionally higher yielding asset classes such as shares. This is in contrast to the places where these funds have been parked to date, namely in more “secure” and passive investments such as US treasury bonds. The more recent weakness of the US Dollar has also meant that dollar denominated assets have seen switches in investment behaviour to other asset classes also, in the hope of chasing higher returns – it is certainly no coincidence that the recent highs in the oil and gold prices, not to mention the Euro/$ exchange rate, are all interconnected with this.
For example, China has set up a SWF (the China Investment Corporation) with the intention of a more aggressive approach to investment. It is estimated that this fund alone could have funds available to it of some $300 billion. Already there have been instances of equity investment (both the Chinese and Singaporean governments recently took noticeable stakes in Barclays) and indeed China also invested some $3 billion in the recent US initial public offering of Blackstone, the private equity group.
There has also been more recent speculation surrounding the possibility of a Qatari stake in the Royal Bank of Scotland.
Certain other countries have had SWFs for some time now. The long-established Government Pension Fund of Norway, which recently announced that it would be increasing its exposure to global equities from 40% to 60%, is also rumoured to have funds available to it of nearly $400 billion. Also, the Abu Dhabi Investment Authority, which has actually been in existence since 1976, is said to have assets of £875 billion.
Russia also is understood to be looking at setting up funds to invest some of its oil monies, another potential $50 billion, and it is understood that similar schemes are also being considered by the likes of Japan, Kazakhstan, Azerbaijan, Bolivia, Nigeria and Venezuela. In addition, expect more noise from the likes of the United Arab Emirates, Saudi Arabia and Kuwait.
The continuing fallout from the US sub-prime crisis has also presented opportunities. Some of the larger investment banks who have had exposure to sub-prime have found themselves with depleted balance sheets and have subsequently benefited from the capital injection of a SWF to shore their finances up – for example, funds from the likes of Singapore and Abu Dhabi totalling some £6.5 billion have found their way into stakes in US houses such as Merrill Lynch and Citigroup.
Other purchases over recent times have included P&O and, outside the shares asset class, large blocks of high-end commercial real estate in both London and New York. This is apart from the purchase of the QE2, the near-purchase of Sainsbury’s and ongoing speculation surrounding the future of Liverpool Football Club.
This step up in activity – which could yet prove to be the thin end of the wedge – has made politicians in certain countries sit up and take notice.
And next week we will examine some of the reasons why this form of investment has become something of a political hot potato.
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown Stockbrokers