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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: 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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rffrydr
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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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| Posted: Mon Dec 17, 2007 10:28 am Post subject: |
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Some limitations to SWF's promise:
| Quote: | Why SWFs will not fix the western financial mess
By Tony Jackson
Published: December 16 2007 18:49 | Last updated: December 16 2007 19:48
There are some pretty big claims being made these days for sovereign wealth funds, or SWFs. They represent a fundamental shift in the global balance of power. They are going to galvanise world equity markets as they shift their enormous firepower out of bonds. And they are riding to the rescue of the western banking system. None of these would be a bad thing, and the last would be positively welcome. But they all seem rather exaggerated. In particular, they risk mistaking cycles for trends.
Let us take them in order. First, it is a truism to say that when the oil price is high, power shifts to oil producers. And according to Morgan Stanley, 72 per cent of the $2,800bn held in SWFs is oil or gas related.
There is no saying where the oil price is going. We cannot even say with certainty whether it is on a rising trend. But it is intensely cyclical, for reasons that are well understood. So at some point it will fall, the only question being by how much.
In previous cycles, oil producers have been active buyers of Western assets. Libya bought into Fiat in the 1970s, as Kuwait did with Daimler Benz, followed later by BP. Such opportunism was highly profitable, but it faded with the oil price. It will doubtless do so again.
That leaves the other 28 per cent of SWFs. Take the example of China, which is pursuing the policy – formerly adopted by Japan and South Korea – of pushing its exports and suppressing demand at home.
The obvious result is a surplus, which will eventually disappear as domestic investment and consumption catch up. That will take time. But insofar as it represents an imbalance, the shift of power is temporary.
What about the move by SWFs into equities? That is plainly happening, and seems set to continue. But the effects may be less than they look.
First, the big financial story of this decade has always been the build-up of excess savings by oil producers and developing economies, which led to the era of loose credit and pushed up asset prices across the board. The SWFs represent those savings in a particular form. The only new thing about them is their scale.
And when the Bank of China previously bought US Treasuries, it not only put cash into the hands of the sellers, but pushed up the price of Treasuries, thus making equities look cheaper by comparison. So the sellers put much of their cash into equities – or used it to support takeovers, which amounted to the same thing.
If China now switches into equities, the same equalisation process can be expected in reverse. The one big difference is that the era of loose credit has ended, so the phenomenon of high leverage is no longer there to hold the balloon aloft.
Finally, what about the SWFs buying into western banks? Again, this is certainly happening, and on a remarkable scale. Morgan Stanley calculates that SWFs have spent $55bn on strategic stakes in western financial firms, of which $46bn has gone in since Easter.
This is part strategy, part opportunism. Temasek, the SWF of Singapore, has 38 per cent of its portfolio in financials, and says – according to Morgan Stanley – that these investments “should correlate with the growth of the emerging middle class in Asia�. Why that should apply particularly to banks as opposed to luxury goods or hotels is not immediately apparent.
As for opportunism, the head of China’s new SWF said last month that within a year or so he would aim to buy stock in big western banks hit by the credit crisis, citing the example of Abu Dhabi and Citigroup. Sometimes this kind of thing works, as it did for Libya and Kuwait in the 1970s. But not always.
Take the example of Warren Buffett, as smart a buyer of distressed assets as the planet has to offer. His $700m purchase of preferred stock in Salomon Bros in 1987 was, as he candidly confessed, pretty much a disaster. The business was struggling and the stock had fallen. But it kept struggling, to the extent that Buffett had to take over as chairman to stop it going under.
Some of the big stakes being taken in banks today could wind up the same way. Indeed, China’s $3bn purchase of Blackstone, at the peak of the private equity cycle, has gone that way already, with the stock down 40 per cent.
None of which means the SWFs are not a force to be reckoned with. But they are not as new as they look, or necessarily as reliable. The western financial system has got into its own mess, and will have to get out largely unaided. |
Foremost among them, this moving from treasuries to equities only holds the fort so far a FED Model is concerned--that it removes the leverage on leverage however is a crucial difference.
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rffrydr
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rffrydr
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| Posted: Fri Dec 21, 2007 6:54 am Post subject: |
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Bank injections meet resisitence on political grounds:
http://us.ft.com/ftgateway/superpage.ft?news_id=fto122020071724599414
Sounds like buyer's remorse: but buyers nonetheless.
Merrill's Singagpore line extends the total to roughly 25billion (x15 in potential lending leverage)--which about covers the "subprime" part of the lending crisis.
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rffrydr
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rffrydr
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| Posted: Thu Jan 03, 2008 11:51 pm Post subject: |
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It's undeniable. China on the nines:
| Quote: | | SAFE holds 99,999,999 of the 100m shares issued. |
And the guanxi part:
| Quote: | An Australian banker pointed out SAFE had invested in each of Australia’s four largest banks except Westpac, which is the only bank not to have made a significant push into mainland China.
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http://www.ft.com/cms/s/0/c26ff650-ba2a-11dc-abcb-0000779fd2ac.html?nclick_check=1
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HenryTo
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| Posted: Wed Jan 09, 2008 12:55 pm Post subject: |
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While Alcoa will kick off earnings tonight, most folks will be paying attention on January 15th. Citigroup will report earnings before the bell on that day, along with US Bancorp. Intel and State Street will also report on that day.
There is no doubt that Citigroup will announce significant write-downs during the earnings report (Merrill says perhaps as much as $16 billion: http://www.bloomberg.com/apps/news?pid=20601087&sid=abo.wmEkGa1A&refer=home). The questions are:
1) Will investors see more write-downs to come, and if so, how much? It has been inherently difficult to value some of these securities, so virtually all if not all have been using the ABX indices or other structured indices to value these securities. This has resulted in a very conversative estimate of write-downs, given that the ABX and other indices have already discounted a much more dire scenario in the housing market than current figures imply. In terms of write-downs (but not housing prices), I think there is a good chance we are already near the 9th inning.
2) Will there be another significant injection of capital from a sovereign wealth fund? An announcement concurrent with a big asset write-down could do wonders for the stock price, as investors see an end to the write-downs, but more importantly, than Citigroup has access to capital and is able to lend and do business again.
3) Should the market continue to decline into the 15th, will there be a concurrent inter-meeting rate cut? Stranger things have happened before.
I still do not think we have seen the last of the sovereign wealth funds yet. Not by a long shot.
Best of luck,
Henry |
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HenryTo
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| Posted: Thu Jan 10, 2008 12:42 am Post subject: |
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Here is the answer to question number 2. Both Citigroup and Merrill Lynch are now actively seeking more capital from Sovereign Wealth Funds:
http://online.wsj.com/article/SB119993470776680093.html?mod=hps_us_whats_news
| Quote: | Citigroup Inc. and Merrill Lynch & Co., two companies that just named new chief executives after being burned by the troubles in the U.S. housing market, recently raised billions of dollars from outside investors. Now, they are in discussions to get additional infusions of capital from investors, primarily foreign governments.
Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.
Such large investments would be the latest sign big banks are undergoing a rapid recapitalization to stabilize their shaky financial foundations. Already, foreign governments have invested about $27 billion in Merrill, Citi, UBS AG and Morgan Stanley. |
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HenryTo
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rffrydr
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