Sovereign wealth funds – beyond the hype
In the early years of the 21st Century, the rise of hedge funds and private equity has been nothing short of spectacular.
And in the decade to come, a new class of hyper-rich investor - Sovereign Wealth Funds - will easily surpass them. With assets already estimated at $2.5trn, these state-owned investment funds are emerging as the new and potentially much greater force in global capitalism. Fuelled by record petrodollars and other export receipts, a forecast earlier this year by Morgan Stanley estimated that they would reach a staggering $12trn by 2015 – almost the same size as the US Economy today. So what kind of world can financiers look forward to?
Actually it won’t be that different. Unlike Hedge Funds or Private Equity, SWFs are risk-averse and above all, discreet. They have no yen to be drivers of volatility or being blames as the guilty party in any industrial dispute. And not everyone believes they will continue to grow at their current rate. A recent report by London-based Lombard Street Research claimed that for China, the massive current account surpluses could not last because the Renminbi was bound to rise in value against the dollar, raising manufacturing goods prices or failing that, there would be a protectionist backlash by the West.
The critical change though will be the way in which nations and their regulators start to look at this emerging breed of foreign investor. Hard questions will increasingly be asked about whether SWFs make investments purely to make a return, or whether they are making national strategic investment decisions to further their geopolitical interests?
Nowhere will this be more sensitive than in the fields of dwindling energy resources and its related infrastructure, sensitive defence technology and US government securities.
The last point is perhaps the most worrying. The world is going through a seismic financial rebalancing (or so Dan Lewis thinks, see the Final Bell on page 208). As the developing world continues to catch up, they are desperately trying to diversify out of their devaluing US Dollar holdings. Arguably, OPEC and Asia have funded the US current account deficit and kept the debt-ridden American economy afloat. Provided these greenbacks are unwound slowly, the world economy will still prosper.
The nightmare is that quitting the dollar becomes a stampede.
