| 17 Sep 2008 |
|
Wall Street: Where have all the Sovereign Wealth Funds Gone?
- Text size
Turbocharged with extra oil cash in the first half of 2008 before the sharp 1/3 rd correction from $147 per barrel since, SWFs would have been flush again to respond to ever weakening bank equity prices. But SWFs haven't been biting. Like nearly everyone else, the credit crunch drama has turned out to be both more prolonged and severe than had previously expected, with no guarantee the worst is over, going by recent LIBOR spread widening. A banking system that now looks far too big and needs to shrink balance sheets, raising questions over solvency not just liquidity, doesn't warrant fresh capital infusions from SWF in the hope of a quick turnaround in market prices. The falling oil price has prompted further caution, though most sovereigns are still building reserves while the price remains above $50 per barrel.
SWFs haven't disappeared, they've remained on the sidelines, or gone elsewhere. New Investment strategies have been developed:
(1) "Reciprocal Investment" is one theme. The $8 billion GE (General Electric)GE (General Electric)
tie-up with with Abu Dhabi's SWF Mubadala for a joint venture aims to access GEGE's broad expertise in Medicare and engineering, while exploiting growth and opportunities in the Middle East and Africa. The strategy also more clearly delivers much need diversification of oil dependent economies. SiemensSiemens, GEGE's arch European rival, is in similar talks with SWFs.
(2) " Food Security Investments". Food price rises have been particularly troublesome for the water-poor Middle East, as well as testing the social fabric. SWFs from this region have been investigating strategic agricultural investments. Saudi Arabia is setting up a $566 million company to invest in agriculture and is looking at Sudan, Pakistan and Kazakhstan. The Qatar Investment AuthorityQatar Investment Authority is doing likewise with joint ventures in Vietnam and possibly elsewhere in Indo-China
(3) "Alternative Equity Markets" - Asia still features prominently for Middle Eastern SWFs. A new double-taxation treaty between Japan and Kuwait has furnished more broad based equity index exposure to a country with relatively little direct exposure to the property-backed securities. The new Russian SWF is also looking at Japan. India already has 3-4 SWFs operating in its financial markets and has nine more awaiting investor licensing approval.
The appetite for "Trophy Assets" remains: Dubai's Zabeel InvestmentsZabeel Investments reportedly offered $1.4 billion for Morgans Hotel Group, while SWF investors from Abu Dhabi bought British soccer club Manchester City earlier this month.
The initial wave of SWF investments in banks were concentrated in the 4th quarter of 2007 and 1st quarter of 2008, but has noticeably dried-up since. Of course, market share prices in banks have been driven lower since then implying mark-to-market or paper losses, but we have to be careful about jumping to conclusions here because
1. The terms of conditons, particularly the price of equity negotiated at the time need not reflect the market price at the time and in many cases was bargained lower in anticpation of lower prices ahead.
2. These bank equity investments have long term horizons over several years and are not marked-to-market in conventional quarterly terms. So while many may have paper losses today, the shares are will be held for many years, in anticpation of an eventual credit cycle and economic recovery. The timing of SWF investment also involves more than just the price of equity, but the potential for political and regulatory backlash at the time, because of the reputational risks some SWFs have because of their government owners.
3. Having said all this, SWFs have largely steered clear of the US and European banking sector since the beginning of 2008 for reasons given in the first bullet point above regarding the need to shrink the banking system that has got to large and appropriatness of fresh capital infusion this and in circumstance of insolvency.
- Ends -
For more information, please contact:
Catarina Walsh
Media Relations Manager
InternationalCorporate Communications
Global Insight, Inc.
Tel:+44 20 7452 5183
Fax+44 20 7452 5035
© Press Release 2008
Zawya is a distributor (and not a publisher) of content supplied by third parties and subscribers. Any opinions, advice, statements, services, offers, or other information or content expressed or made available by those third parties, including information providers, subscribers or other users of the Service, are those of the respective author(s) or distributor(s) and not of the Company. The Company neither endorses nor is responsible for the accuracy or reliability of any opinion, advice or statement made on the Service by anyone other than authorized Service employee spokespersons while acting in their official capacities. The Company is not responsible for any infringement of intellectual property rights or breach of any applicable law or regulation, including regulation in relation to financial services or the distribution of financial products, defamation, data protection, telecommunications (including regulations relating to excessive use, spamming or other abusive activities) or obscene, offensive or illegal content). Under no circumstances will the Company be liable for any loss or damage caused by a member's reliance on information obtained through the Service. It is the responsibility of member to evaluate the accuracy, completeness or usefulness of any information, opinion, advice or other content available through the Service. Please seek the advice of professionals, as appropriate, regarding the evaluation of any specific information, opinion, advice or other content.
Read the full Member Agreement
http://www.zawya.com/legal/NewsLetter.cfm?name=disclaimer
Post a Comment
Community Comments (1)
The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by our firm, Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm – www.farmlandinvestmentpartnership.com) shows investors must be prepared to rotate into asset classes with different characteristics. During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland.
- Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms);
- Cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return); and the
- S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)
We believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:
- Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,
- Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974
- Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981
Another interesting metric is the long-term average ratio of the Commodities Research Bureau Index versus the S&P 500 which is currently around 1.5 times. Simplistically, this ratio indicates how much S&P 500 stock you can buy with a fixed basket of commodities. Some important points:
• During the commodity bull market of the 1970s, the ratio was consistently higher than 2 times for over 10 years – it peaked at almost 4 times.
• The ratio is currently at around 0.5 times - significantly below the 1.5 times long-term average, just slightly above the 0.15 all time low reached in 1999/2000 and still very far below the almost 4 times multiple reached in the last commodity bull market. We still appear to be at an all time low relative valuation between “hard assets" versus "stocks.”
• If history is a guide, the ratio of hard assets to stocks will have moved much higher before this commodity bull market is over.
• How? Stocks will continue to fall and/or commodities will continue to climb – most likely a serious combination of both as investors, fearing inflation, rotate out of stocks into commodities – the cycle of “inflation, rotation, hard assets”.
Agcapita is a Calgary based, agriculture private equity firm that allows investors to cost effectively allocate a portion of their portfolios to hard assets in the form of Canadian farmland via its professionally managed, sharia compliant, Agcapita Farmland Investment Partnership. Agcapita Farmland Investment Partnership is the third in a family of private equity funds which has grown to almost $100 million in assets under management. Agcapita’s investment team has over 40 years private equity and fund management experience and over $1 billion in total career transactions and previously managed a group of emerging market funds with almost C$500 million in assets for one of the largest banks in Europe.
1.1 Contain any material which is libelous or defamatory of any person, is obscene, offensive, hateful or inflammatory or causes damage to the reputation of any person or organisation.
1.2 Promote sexually explicit material, violence, discrimination based on race, sex, religion, nationality, disability, sexual orientation or age or any illegal activity.
1.3 Be made in breach of any legal duty owed to a third party, such as a contractual duty or a duty of confidence.
1.4 Be threatening, abuse or invade another's privacy, or cause annoyance, inconvenience or needless anxiety.
1.5 Be used to impersonate any person, to misrepresent your identity or affiliation with any person, or be likely to deceive any person.
1.6 Give the impression that they represent Zawya.
1.7 Advocate, promote or assist any unlawful act such as (by way of example only) copyright infringement or computer misuse.