It has been a tough few years for global markets, but the Gulf's sovereign wealth funds are still doing well, largely thanks to continued inflows of cash from oil and gas exports
Something rare happened in the Gulf this February: the head of one of the region's secretive sovereign wealth funds (SWFs) quit unexpectedly, allowing a brief, if opaque, view into the world of the region's state asset managers.
Admittedly, Talal al Zain ran one of the smallest funds in the region, Bahrain's Mumtalakat Holding Company, with about $9 billion of assets under management. But the resignation of the fund's founding chief executive led to widespread scrutiny: had he quit because the reform agenda of his closest ally, crown prince Shaikh Salman bin Hamad al Khalifa, was under fire? Were there problems at the fund? Who would replace him?
Mumtalakat is a little different from the rest of the region's SWFs. Bahrain has little oil wealth and rarely runs big trade or budget surpluses so when the fund was established, it took over most of Manama's non oil and gas-related assets, from Aluminium Bahrain (Alba) to loss-making state carrier Gulf Air. What it has in common with its neighbours, though, is that it was set up to ensure the country's long-term future, post-oil, through the creation of a widely diversified portfolio.
The way that the region's other SWFs choose to invest varies widely, from the experienced, considered approach of Abu Dhabi Investment Authority (ADIA) and Kuwait Investment Authority to the more aggressive direct investment of Abu Dhabi's younger funds Mubadala Development Company and International Petroleum Investment Company (Ipic), or another newcomer, Qatar Investment Authority (QIA).
The funds also vary hugely in size. ADIA has some $627 billion of assets under management, according to the US Sovereign Wealth Fund Institute, compared to Mumtalakat's $9.1 billion or Oman's State General Reserve Fund's $8.1 billion - with ADIA and Saudi Arabia Monetary Fund (SAMA) Foreign Holdings among the biggest SWFs in the world. QIA, which was only set up in 2005, has already accrued about $85 billion-worth of assets. However, because they do not release annual reports or full lists of their assets, it is hard to gauge how well or badly most funds are faring.
Yet in general, says Florence Eid of London-based analysts Arabia Monitor, the way the SWFs are funded and the kind of investments they make means that it is possible to gauge how most funds are doing if only in generalities. They are likely to have done well in 2011, she says. Demand and prices for oil rose, pushing most countries into budget surplus and making more cash available for the SWFs.
"What happened last year is that we saw a gradual recovery on global markets and especially in emerging markets, a rise in commodity and equity prices, and particularly in the price of oil," Eid says. "So the trend for 2011 was one of growth; I would be very surprised if anyone would have posted a decline in the size of assets under management."
European Brent crude oil contracts traded at an average price of $110 per barrel in 2011, a record high which eclipsed even the pre-crisis 2008 peak of $97 per barrel. The Gulf states' income from oil and gas was probably more than $600 billion last year, also a record. The boom in income also had a knock-on effect on neighbouring countries which don't have much oil - Dubai municipality announced in February of this year that it had managed a budget surplus of $571 million in 2011, not long after the emirate which bears the same name almost buckled under the strain of its massive debts which ran to almost $90 billion.
It looks like 2012 could be much the same. There are signs of an incipient recovery in the US, with analysts forecasting overall growth of two to 2.5 per cent there for the coming year, while the restructuring of Greek debt in Europe in mid-March has allowed EU policymakers to avoid a widely anticipated collapse in the Eurozone. Doubts still linger over China's economy - Beijing said last month that the country had recorded its largest trade deficit in over a decade, $31.5 billion, in February this year - but its profile as the world's second biggest energy importer is unlikely to change; indeed, it is likely to overtake the US in the coming year.
With many of the older and more cautious SWFs like ADIA and SAMA heavily invested in government treasuries and with western fund managers, the return to a growth path, or at least the avoidance of financial meltdown, in Europe and the US is likely to be good news.
It is even better news for the more interesting of the SWFs like QIA, and Ipic, which placed big bets on real estate and energy in the run-up to, and after, the global financial crisis. QIA now holds stakes in everything from the US' Miramax films to the former Credit Suisse headquarters in London's Canary Wharf. Ipic took over Canadian petrochemicals firm Nova in 2009 while in February last year it became the sole owner of Spanish energy firm Cepsa.
"Assuming they have made the right calls in their investment choices, [the SWFs] should make good returns this year," Eid says.
With money flowing in, the SWFs are likely to be back on the prowl for new assets, says a Dubai-based banker. "And there are still plenty of distressed assets out there which could look good to them," he adds. Last month, Mubadala took a $2 billion chunk out of the Brazilian business empire of Eike Batists, while Abu Dhabi's royal family is also thought to be in talks to buy a big share in the UK's Royal Bank of Scotland, in which London is the majority shareholder.
"If oil prices stay high, and we see growth returning at a fair clip, then I don't see any reason why a few of the funds wouldn't start drawing up shopping lists again," the banker says.
"The only accurate thing we can comment on is inflows," Eid adds. "What we can say with certainty is that they will receive strong inflows through their state allocations on the back of high oil prices."
© The Gulf 2012
