Hungry wealth funds lose their appetite |
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Sovereign wealth funds that control $3 trillion (Dh11trn) were today due to meet in Washington DC to lift the lid on their historically secretive activities.
A group representing 21 of the world's largest state-owned pots of cash will tell the annual meeting of the International Monetary Fund (IMF) and the World BankWorld Bank
how they intend to operate in future.Major funds, including the $875 billion Abu Dhabi Investment Authority (Adia)Abu Dhabi Investment Authority (Adia)
, have come up with a code of practice to allay fears about a perceived lack of transparency. The meeting comes at an awkward time for the funds, which have watched their overseas banking and property investments suffer in the crisis engulfing the world's financial sector.
Washington DC - the political heart of the crisis - is seen by many as a fitting place to discuss their future investments.
Funds in Gulf countries - particularly the UAE, Qatar and Kuwait - that once invested in Citigroup, Morgan StanleyMorgan Stanley
and Merrill LynchMerrill Lynch have temporarily lost their appetite, according to local banking experts."Until a couple of months ago sovereign wealth funds were quite active as there was a feeling that we'd reached the bottom of this financial crisis," said Gundi Royle, Managing Director for Investment Banking at The National Investor. "But people are shocked by the intensity of the crisis playing out.
"We need to find a bottom and I think this will come between now and quarter one in 2009. Why buy something today when it will be cheaper tomorrow?"
Royle said Gulf-based investors had started to question the valuations of US and European financials as earnings forecasts and yields were out of date.
"These have yet to be repriced to account for the fact that these markets are entering a recession," she said. "And this is a reason to hold off investing."
AdiaAdia
and Kuwait Investment AuthorityKuwait Investment Authority each own stakes in Citigroup while the latter also has a 4.8 per cent holding in Merrill LynchMerrill Lynch, the troubled bank being bought by Bank of America. Qatar Investment AuthorityQatar Investment Authority has built up an undisclosed stake in Credit Suisse and a 6.4 per cent holding in the UK's BarclaysBarclays.Estimates put the total global sovereign fund investment in the banking sector in the past year at more than $60bn. Estimates of the value of the funds' assets range from $2trn to more than $3trn - and the IMF says the total could reach $12trn within 10 years.
Fadi Al Said, Head of Equities for the Middle East at ING Investment Management, said further high-value deals had been put on hold for the time being.
"We're not seeing many high-profile deals from sovereign wealth funds currently, but maybe when things settle down we might have more activity," he said. "This is likely to be triggered by stability in the money and financial markets, and this isn't happening at the moment.
"In the beginning of the crisis investors didn't foresee how deep a problem it would become or expect the repercussions we're seeing. It's now very hard to correctly value a firm's assets given the volatility and lack of stability at the moment. Therefore we are definitely seeing passive investors, like sovereign wealth funds, taking more of a wait-and-see approach."
Gulf sovereign funds will be waiting for the dust to settle following the recent upheavals in the global economy, including the US government's $700bn bailout and the continuing crisis talks between EU finance ministers on how to tackle the credit crisis. The British Chamber of Commerce said this week it believed the UK was already in recession.
UAE-based firms Prime EmiratesPrime Emirates
and Algebra CapitalAlgebra Capital each said Middle East institutional investors would remain on the sidelines until there was clarity in global markets. Ahmed Ali, Managing Director of securities broker Prime EmiratesPrime Emirates, said: "Large Gulf investors haven't had the venture mentality of late when it comes to US stocks. Sovereign wealth funds are currently assessing their options and taking very much a wait-and-see stance until the dust settles on the bailout plan."Most investors here are waiting to see some visibility in the US system before they make their move."
At a time when US and European markets are crying out for fresh capital, the appetite among sovereign wealth funds for new ventures could not be weaker.
Royle said: "The financial model we've come to appreciate no longer exists. Last year, the global financial services industry represented 30 per cent of the global gross domestic product. In 1974 it was 15 per cent, and that's what it should be. The financial services sector is a service industry, servicing the real economy, and we've forgotten that.
"Once people get more comfortable that governments in the US and Europe are putting in place proper measures that work and the real economies are secure, then we'll see sentiment shift."
She said once the crisis subsided there would be investment opportunities in Asia and bargains in US and European property.
"Sovereign wealth funds will want to leverage down because of a lot of their banking stocks have been hit hard recently. I can't see a rush into these markets until the model of banks is secure," said Royle.
"You can buy property at good yields provided you have confidence in the occupancy rates. At the moment property is more attractive than financial stocks.
"There are opportunities in Asia, which is currently bombed out because they are the supplier to the developed markets. There are good solid companies in the region and bargains to be had. Large Gulf investors are increasingly looking at the East," she said.
Al Said added that only brave investors would consider more sophisticated investment vehicles, such as asset-backed securities that use real estate as collateral, at the moment.
"You have to look carefully at the actual value of the property assets as it's an indirect way of investing in properties and it's quite a risky investment currently," he said.
"Asia is in better shape currently but is still correlated to the US and Europe. The survivors of this financial crisis will be the ones to look out for because the markets will be highly consolidated.
"I will not be surprised if sovereign funds increase their allocations to the likes of Citigroup, HSBCHSBC
, JP MorganJP Morgan and Goldman Sachs, who could be among the survivors. These banks will have gained the trust of investors and depositors."One senior executive at an international investment bank, who asked not to be named, said: "Sovereign funds are like any other institutional investors in that they will be risk-averse at the moment as they wait until the outcome of the crisis.
"They are always looking for markets with liquidity. Banks that survive the crisis will be by definition the only ones left for wealth funds to invest in. But the question facing them now is which to choose. There are some banks that won't go under. BarclaysBarclays
and Deutsche BankDeutsche Bank have a deposit base strong enough to cope with the current financial climate."Sovereign wealth funds contacted by Emirates Business declined to comment.
Big investments
The UAE caused a stir in July when it bought the iconic Chrysler building in New York City. Abu Dhabi Investment CouncilAbu Dhabi Investment Council
bought 90 per cent of the Manhattan landmark for $800 million (Dh2.94bn), as part of its drive to diversify into overseas property.Commentators at the time said Abu Dhabi got a bargain given the slumping US real estate sector.
By Ryan Harrison
© Emirates Business 24/7 2008
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