Purchasing power

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If high profile companies were designer accessories and the world's financial markets a catwalk, GCC-based investment vehicles would be among the best-dressed models on show. Amassing significant stakes in businesses across the globe the power of these, and similar funds in Asia and Russia, is on the rise; as are fears that a lack of transparency clouds their real motives.

While pressure mounts from those fearful of these financial giants, however, others welcome their open wallets and increasingly confident global investment strategies. But will shifting balances of power in international markets have far-reaching impacts that go beyond a realignment of the financial situation, reflecting political motivations at a higher level? And will these organisations heed calls for increasingly boisterous demands for disclosure on ambitious investment strategies and current holdings?

Tristan Cooper, an expert in regional sovereign funds and senior analyst at ratings agency Moodys, is sceptical. "For governments in the region there is a reason for these funds to be opaque," he explains, one of which is an attempt to limit the expectations of domestic populations. Calls for transparency may grow, "whether they'll heed those calls is different."

Speaking in Abu Dhabi recently, US Treasury official, David McCormick crystalised the sentiments of those uneasy about the power of these funds. "We are hopeful that the sovereign wealth funds will come together in a dialogue and maybe through the IMF and perhaps in other ways that could be the basis for shared understanding," he said. "A little more clarity on the funds will be useful for all parties, for those who are trying in invest sovereign wealth and those who are receiving it."

The snapping up of trophy assets by Gulf state-controlled investment bodies has thrust these previously little-known organisations into the public gaze. In June the US Treasury warned that the opacity of sovereign wealth funds across the world could stimulate renewed financial protectionism. With the value of sovereign wealth funds set to reach US$10 trillion within a decade, concerns that these funds may be wielded as financial weapons are bound-up with fears of political power games.

But judging a country's political motives from an outsider's point of view is a subjective exercise. Dr Eckart Woertz, economics programme manager at the Gulf Research Centre in Dubai, believes that when it comes to investment in strategic assets in Europe, governments feel more threatened by Russian manoeuvres than Gulf interest. "A European country won't be so afraid of Abu Dhabi owning power stations in Europe than of Gazprom owning power stations in Europe," he comments. In November 2006, Northern Ireland's electricity provider Viridian was bought by ElectricInvest, part of Bahrain-based investment house Arcapita, in an uncontroversial takeover bid backed by Viridian's shareholders.

Woertz believes that "GCC funds are rather performance orientated," a view shared by Mohammed Ali Al Hashimi, executive chairman of Dubai-based Zabeel Investments. "I don't care what the kind of deal is at the end of the day if that deal is a good business deal for me," he tells Arabian Business. "It's not about putting something on my wall and saying, ‘I own this' and letting it bleed money. That's not what I'm about. That's not what any of us are about here."

An October report by McKinsey Global Institute concludes the influence of traditional money managers will be eclipsed by that of opaque groups including petrodollar investors, Asian central banks, hedge funds and private equity groups. Petrodollar-fuelled sovereign wealth funds were also recently identified as major powerbrokers in global financial markets by the chairman of banking giant, Credit Suisse Group. The IMF estimates that the world's sovereign wealth funds, including state investment bodies established by countries such as China, Norway and Russia, already control more than US$2 trillion.

Estimates of the value of assets held by secretive Gulf sovereign funds like the Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA) vary. The Washington-based Peterson Institute for International Economics estimates ADIA controlled at least US$500bn in assets in August. By most estimates it ranks as the world's largest sovereign fund. Official figures available in March indicate KIA is worth around US$213bn, while data recently released by the Saudi Arabian Monetary Agency valued foreign assets at US$248bn in August.

Woetz sees sovereign wealth funds taking an increasingly authoritative position, not only in the market, but also on the boards of the companies they invest in. "They will play an increasing role in markets and they will play an increasing role on the boards of companies where they will decide to have a say." Ultimately, says Woertz, the activities of these bodies "will affect the asset allocation of global markets in the sense that equities are more sought-after. That means price/earnings ratios will trend higher while the attractiveness of bonds will go down. When bond prices go down interest rates go up."

This dynamic is driven by changes in the investment strategies of countries like China. "China especially has rather followed a policy of export promotion, keeping the local currency low, buying US dollars. And the performance of these assets was not that predominant in the past," says Woertz. "But it seems to have changed slightly as they are now moving money away from fixed income investments into equity investments." China recently purchased nearly 10% of US private equity firm, Blackstone.

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Purchasing Power
Posted by Zuhair Baghdadwala, Dubai, UAE on 4 November 2007 at 21:00 UAE time


I dont agree that swfs are helping to stabilize world markets, by excessive investment in over prized assets they create un-necessary affluence in an already affluent world which in turn fuels huge demand for affluent goods and services, this has translated in higher prices for all commodities accross the board being witnessed currently. This is being further aggravated by banks through their easy lending.

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