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SWFs: The Bull's Best Friend? |
rffrydr
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 Posted: Sat Aug 04, 2007 10:06 pm Post subject: SWFs: The Bull's Best Friend? |
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Lawence Summers succinctly captures some of the contradictions in Sovereign Funds evolution and practice. And now, more than ever, it about following the money--notwithstanding they, "shake the logic of capitalism."
| Quote: | HEADLINE: Sovereign funds shake the logic of capitalism
BYLINE: By LAWRENCE SUMMERS
BODY:
For some time now, the large flow of capital from the developing to the industrialised world has been the principal irony of the international financial system. In 2007 this flow will total well over half a trillion dollars, a figure that will be comfortably exceeded by the build-up in reserves and sovereign wealth funds (SWFs) in developing countries.
Indeed, Morgan Stanley has estimated on reasonable assumptions that there is now close to Dollars 2,500bn (Pounds 1,200bn) in SWFs and that this figure will increase to Dollars 5,000bn by 2010 and Dollars 12,000bn by 2015.
Inevitably, and appropriately, countries possessed of publicly held foreign assets far in excess of anything needed to respond to financial contingencies feel pressure to deploy them strategically or at least to earn higher returns than those available in US Treasury bills or their foreign equivalents. Even without this pressure, SWFs are now growing at a faster pace than the global rate of new issuance of traditional reserve assets.
There is plenty of room for debate over how large these funds should become. (Does China really need a saving rate in excess of 50 per cent that all but forces hundreds of billions of dollars in reserve growth?) But on any plausible path over the next few years, a crucial question for the global financial system and indeed for the global economy is how these funds will be invested.
The question is profound and goes to the nature of global capitalism. A signal event of the past quarter-century has been the sharp decline in the extent of direct state ownership ofbusiness as the private sector has taken ownership of what were once government-owned companies. Yet governments are now accumulating various kinds of stakes in what were once purely private companies through their cross-border investment activities.
In the last month we have seengovernment-controlled Chinese entities take the largest external stake (albeit non-voting) in Blackstone, a big private equity group that, indirectly through its holdings, is one of the largest employers in the US. The government of Qatar is seeking to gain control of J. Sainsbury, one of Britain's largest supermarket chains. Gazprom, a Russian conglomerate in effect controlled by the Kremlin, has strategic interests in the energy sectors of a number of countries and even a stake in Airbus. Entities controlled by the governments of China and Singapore are offering to take a substantialstake in Barclays, giving it more heft in its effort to pull off the world'slargest banking merger, with ABN Amro.
To date most of the official commentary on the issue of SWFs has been framed in terms of traditional arguments about cross-border capitalflows. US and UK officials have raised -concerns that focus only on the desirability of reciprocity and transparency and on how to treat sectors that trigger national security questions. Others, particularly in -continental Europe, have been less positive and have emphasised nationalist considerations about the benefits of local ownership and control.
What has received less attentionare the particular risks associatedwith ownership by government-controlled entities, particularly where the ownership stake is taken through direct investments. The logic of the capitalist system depends on shareholders causing companies to act so as to maximise the value of their shares. It is far from obvious that this will over time be the only motivation of governments as shareholders. They may want to see their national companies compete effectively, or to extract technology or to achieve influence.
We have seen the degree of concern over News Corp's attempt to buy The Wall Street Journal. How differently should one feel about a direct investment stake of a foreign government in a media or publishing company?
Apart from the question of what foreign stakes would mean for companies, there is the additional question of what they might mean for host governments. What about the day when a country joins some "coalition of the willing" and asks the US president to support a tax break for a company in which it has invested? Or when a decision has to be made about whether to bail out a company, much of whose debt is held by an ally's central bank?
All of these risks would be greatly mitigated if SWFs invested through intermediary asset managers, as is the case with most institutional pools of capital such as endowments and pension funds. The experience of many endowments and pension funds suggests that this approach is in most cases likely to produce the best risk-adjusted returns.
To the extent that SWFs pursue different approaches from other large pools of capital, the reasons have to be examined. The most plausible reasons - the pursuit of objectives other than maximising risk-adjusted returns and the ability to use government status to increase returns - are also most suspect from the viewpoint of the global system.
None of this is to propose policy. That can come only after the investment policies of SWFs have been much more extensively debated and many details have been clarified. But it is to register a cautionary note about the debates over SWFs so far.
Governments are very different from other economic actors. Their investments should be governed by rules designed with that reality very clearly in mind.
The writer is the Charles W. Eliot -professor at Harvard University
LOAD-DATE: July 30, 2007 |
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rffrydr
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| Posted: Mon Dec 10, 2007 6:37 pm Post subject: |
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Sovereign funds and private equity have capital to invest, but they are acting at vulture prices. They are also buying newly issued shares. Thus, no equity is actually being taken off the market. Prior to the credit dislocation, private equity and sovereign funds were actually reducing share counts.
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rffrydr
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rffrydr
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rffrydr
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| Posted: Sat Aug 04, 2007 10:09 pm Post subject: a |
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Add it up:
| Quote: |
HEADLINE: Markets eye the rich new kids on the block
BYLINE: By JOANNA CHUNG
DATELINE: LONDON
BODY:
How powerful sovereign wealth funds decide to invest their vast armoury of cash will play a pivotal role in reshaping financial markets in the next decade.
With total holdings estimated to be worth up to Dollars 2,500bn (Pounds 1,200bn, Euros 1,800bn), the funds are already equivalent in size to about half the gross official reserves of all countries. Aside from their sheer bulk and their rapid rate of growth, they are developing a greater appetite for risk.
Prices of equities, and other riskier assets - such as corporate bonds, hedge funds, private equity, real estate, and commodities - should rise as a result. Safer investments, such as government bonds and the US dollar, should fall. That is the conventional wisdom. But exactly what impact these funds - some of which are very secretively managed - will have on markets remains largely conjecture.
"The full impact on financial markets will manifest itself over multiple years," says Ramin Toloui, emerging markets portfolio manager at Pimco, one of the world's largest fixed-income managers.
What is clear is that markets are increasingly sensitive to the activities of the funds, closely watching decisions such as those last week by China Development Bank and Singapore's Temasek to take stakes in Barclays, the UK bank. What is also clear is they want to increase their returns.
While countries with large foreign exchange reserves invested in bonds are unlikely to want to risk hurting the value of their holdings through heavy sales, a greater proportion of new reserve accumulation is likely to flow into non-bond assets, causing bond prices to fall and yields to rise over time.
"As these investors diversify into credit products, equities and other alternative investments, this would tend to put downward pressure on these types of risk premiums relative to where they otherwise would be," says Mr Toloui.
As a result of a shifting pattern of demand away from relatively safe assets such as bonds, Morgan Stanley estimates that bond yields will gradually rise by 30-40 basis points during the next 10 years. The equity risk premium - the excess return over the risk-free rate that compensates investors for taking on the higher risk of equities - could fall by 80-110 basis points.
Nicholas Brooks, senior economist at Henderson Global Investors, says of China's plans to create a State Investment Corporation that, if a primary goal of its asset allocators is to reduce the share of US Treasury bond holdings, yields on those should rise. If the SIC were to invest along the lines of Singapore's GIC (assuming bond allocation is 25 per cent and 60 per cent of this is in US bonds) and reserves rose at the same pace as in 2006, net new annual buying of government debt would drop from Dollars 89bn to about Dollars 56bn, he says.
In the absence of any big change in US government net debt issuance, this would imply around a half-point increase in the yields on US 10-year Treasury bonds. But Mr Brooks adds: "It is not in China's economic, financial or political interests to roil US debt markets or antagonise its smaller neighbours by creating undue upward pressure on their exchange rates and equity markets . . . (so) asset allocation changes will be gradual and timed to minimise their impact on markets."
Indeed, the level of risk tolerance of these funds is only likely to become clear over time. Central banks' asset allocation decisions are made at a "glacial pace", say ING analysts.
Some market watchers add that SWFs might initially shift allocations within the developed markets - for example, buying more US equities instead of US Treasuries.
Yet even in China's short career in foreign equity ownership, one of its most high-profile investments has so far proved disappointing. The Dollars 3bn stake it took this year in the initial public offering of Blackstone has lost some of its value as shares in the private equity group stand nearly 22 per cent below the offer price.
A shift towards riskier assets does not necessarily spell gloom for bonds. Credit markets, which have been the backbone of many equity market gains this year, are in turmoil. The sharp sell-off of shares last week is meanwhile a reminder that the boom in equity markets will not last forever.
"The rapidly growing savings in emerging markets have to be invested somewhere," says Pimco's Mr Toloui. "By far the more important driver of near-term action in bond markets will be economic factors and concerns about subprime and other credit markets."
LOAD-DATE: July 30, 2007
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