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10 December 2023

Sovereign funds may be saviour of US finance

By Agencies

INVESTMENT FUND RECIPIENTS Western firms such as Citibank have been benefitting from sovereign funds run by Gulf states and China (GETTY)

(November 29) Investment funds run by China and the Gulf states have made Western politicians uneasy as they flex their $2 trillion of investment muscle, but they may be a lifesaver for battered United States banks.
The developing world has been pouring its new-found wealth from booming global trade and commodity prices into the housing-wracked US financial sector in recent months.
On Monday, tiny oil exporter Abu Dhabi invested $7.5 billion in Citigroup, the most visible of a growing trend among sovereign wealth funds, which have been buying stakes in banks, money management firms and brokers.
Since April these funds have invested $37.3 billion in global financial assets, striking a deal a week during the past two months, according to Morgan Stanley.
The investment surge could bolster asset prices and provide additional sources of capital to banks squeezed by the subprime crisis, the investment bank said.
While the buying binge has prompted the Group of Seven nations to call for guidelines for the funds, it is too early to tell if the investment is enough to turn the tide of gloom hanging over the US financial sector.
"A few things have to happen to really lift the cloud," said Don Straszheim, vice chairman at Roth Capital Partners LLC in Los Angeles. "We'll have to see a few more of these deals. People are not going to buy just on a theory. It's not going to sell until there's evidence there are more deals."
The funds are not interested in shoring up U.S. financials, said Straszheim, a former chief economist at Merrill Lynch Co. who now focuses on China. The funds are interested in a bargain and in gaining much-needed expertise in banking, especially the Chinese, he said.
Sovereign wealth funds prefer financial institutions, said Morgan Stanley, citing the case of Singapore-owned Temasek Holdings, which holds 38 per cent of its portfolio in financial assets and is a role model for some of the funds.
The funds are a major investment theme at a time when some banks may face pressure on the capital they are required to maintain and funding has been more difficult, Morgan Stanley said.
"There obviously is a lot of potential," said Brad Setser, a fellow at the Council on Foreign Relations who is studying central bank reserves, sovereign wealth funds and emerging market financing of the US.
He expects about $200 billion to be added this year to what sovereign wealth funds manage. While the big funds are cautious and invest heavily in bonds, "some of it is going into equities -- and no doubt more is going into equities now than before," Setser said.
Sovereign wealth funds, which have more than $2 trillion under management, are expected to double in size before 2010 and reach the $10 trillion mark before 2014, the Korean Investment Corp said in May.
The size of the sovereign wealth funds should act as a powerful shock absorber and help the US economy avert a recession, said Ed Yardeni, a former Prudential strategist who now runs his own firm, Yardeni Research Inc.
"Sovereign wealth funds may be coming to the rescue of distressed US financial firms," Yardeni said this week in his daily commentary to investors.
The Citi deal suggests US financial institutions can offset their large write-offs from losses in mortgage-backed securities with backing from these funds, Yardeni said.
While deals might bolster individual assets, the funds' impact at the global level will be limited as financials account for a little more than 20 per cent of the world stock market, which is valued at about $45 trillion, said Ken Fisher, author and founder of Fisher Investments
"At that level, it takes one hell of a lot of buying to drive (financials) up," Fisher said.
Gulf states may focus on financials for their relationship to oil prices.
In the past, when oil prices declined, so did inflation and interest rates and financial stocks did well, said Jeff Kleintop, chief market strategist at LPL Financial Services in Boston. The opposite occurred when oil rose, suggesting the buying of financial assets is a diversification strategy, he said.
"The future growth in sovereign wealth funds is largely dependent upon the direction of crude oil prices, but there can be no doubt that they have become a powerful investing force," Kleintop said. (REUTERS)