Mirroring similar moves by other Arab sovereign wealth funds, the $210 billion (Dh770bn) KIA fund is targeting investments in banks and financial services. Badaer Al Sa’ad, head of the KIA, is planning to make the decision-making process more efficient in order to capitalise on any opportunities that may arise in 2008.
Share prices of banks in many markets suffered in 2007 because of actual write-downs and potential write-downs of asset exposures linked to the US sub-prime mortgage market.
At the same time, sovereign wealth investment funds from the Middle East and Asia have invested $4bn recently in global financial companies. Some equity analysts believe the worst has passed for financials and bargain hunters could enter the market soon. Others think that the bear market for bank stocks will not bottom out until the extent of the sub-prime crisis is known.
KIA generally considers the nadir of banking and financial services stock valuations has more or less been reached. During the last quarter of 2007, the investment authority has been casting its investment process over a number of possibilities, including banks in Asia. The KIA already has important holdings in the region, including a stake in Industrial and Commercial Bank of China. However, the KIA has been fairly cautious as many banks in Asia are currently trading at over four times the book value.
On the other hand, banks in western making markets are mainly trading at just above book value, having fallen sharply during the course of 2007. The KIA’s investment philosophy is very much long-term and the protection of accumulated wealth. Although KIA’s focus has been Asia, the authority is cautious about the Chinese stock market due to deemed inflated asset prices. Many other commentators also view Chinese equity prices as a bubble ready to burst.
Irrespective of short-term market events, the financial crisis is likely to persist for most of the year, assuming it does not increase. The sub-prime crisis has turned into a liquidity and credit crisis which, in turn, has led to, if not a banking crisis, then certainly significant problems, most evident in the Northern Rock bank.
Banking problems in the large western markets have persisted for six months now.
This is due to the fact that the banking sector is at the heart of the economic and operating environment, and often exacerbated through the rapid movements of money markets.
Reputations, trust and credit standings of institutions are closely associated to liquidity and funding opportunities, and these factors will continue to be important for most of 2008.
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