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Sun 2 Nov 2008 04:00 AM

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Sovereigns reign again

Concern over sovereign wealth funds has subsided in the West as the global financial crisis deepens.

Concern over sovereign wealth funds has subsided in the West as the global financial crisis deepens. But with a recession in the US and Europe looming large, their interest in those markets seems to be fading.

The shipping and logistics sector is not usually a topic favoured by radio talk show listeners in the US, nor the politicians hoping to win them over.

But in the spring of 2006 it seemed they couldn't get enough, as Dubai government- controlled DP World was about to take over the American arm of the Peninsular and Oriental Steam Navigation Company, or P&O, as it's usually known.

Opponents of the deal came from across the political spectrum and included former Democratic presidential candidate Hillary Clinton.

Less than three years later, and few US politicians are likely to get worked up over investment from government-controlled Gulf funds.

In a sign that times have changed, the deputy secretary of the US Treasury said last week he was meeting with SWFs in the Gulf to promote his country as an investment destination.

"What we are really doing is simply continuing to make clear to sovereign wealth funds that we are open to investment that's done on a commercial, not political basis that does not raise security concerns," Robert M. Kimmitt told reporters in Dubai.

"We think that they are continuing to look very closely at opportunities in the United States. We have a number of cases before the Committee on Foreign Investment right now," he added.

British prime minister Gordon Brown was similarly upbeat on SWFs while speaking to a group of economists and business executives at London's Imperial College last week.

"They are a big means by which we can secure investment in some of the vital things we want to do for the future," he said.

Funds from oil producing countries could play a crucial part in weaning the world off oil, he said.

"My idea is that the oil revenues that have been very high in the last two or three years, should be recycled in part into non-oil energy sources," he said.

"That gives the oil countries a hedge against what happens to the price of oil. It also gives all of us an interest in a balanced and stable energy market, not in the volatility of one particular price."

Gulf SWFs have invested billions of dollars over the last year in troubled US financial institutions grappling with the fallout from the subprime mortgage crisis.

The Abu Dhabi Investment Authority (ADIA) agreed last November to buy $7.5bn of stock in Citigroup, while the Kuwait Investment Authority (KIA) in January invested $5bn in Merrill Lynch and Citigroup.

The KIA has also bought almost $800m of shares in the initial public offering of credit card firm Visa.

Elsewhere, Abu Dhabi's Mubadala Development Co more than doubled its stake in chipmaker Advanced Micro Devices (AMD) last month and entered into an extensive business cooperation agreement with General Electric (GE) in July this year.

Assets under management by the world's 64 largest SWFs are currently estimated to be worth $3.6 trillion, Deutsche Bank said in a research report last month.

Almost half that is held by Middle Eastern funds. The amount is likely to be substantially higher, since data on the size of SWFs for a number of states in the region is either unreliable or outdated.Assets are predicted to grow by 15 percent annually until reaching a value of $10 trillion in 2015.

According to the report, two thirds of SWF investments since 1995 have been made since the middle of last year, reflecting the large investments in financial institutions in the US and Europe.

"The engagement in the US and European financial sectors has brought individual SWFs, and the asset class as a whole, a perceivable gain in reputation," the report states.

"After all, just before the subprime crisis erupted, SWFs had found themselves at the core of a controversial debate especially in the US and many European countries about whether SWFs and other state-owned investors from the emerging markets were posing a threat or an opportunity.

"Following their investments in the financial industry - at a time when some banks were facing serious problems with regard to their capitalisation, and conventional, market-based sources of capital had dried out - SWFs have experienced a more benign reception in the US and Europe, with policymakers and the wider public recognising the helpful role they played in a critical phase of market developments."

But looking ahead, Deutsche Bank believes the demand for American and European financials has peaked and is fading. This is partly because some of the larger funds now need to diversify their holdings, and partly due to the plummeting share prices that have lost them significant amounts of money.

Still, the Qatar Investment Authority's (QIA) recent investment in Credit Suisse could be an indication that banks are not off the table. The fund last month led an $8.8bn capital infusion into the Swiss bank. Kuwaiti state-owned media said in September that KIA is stepping up investment at home and is looking at investing more in Asia, after losing interest in US stocks.

The fund has come under fire from Kuwaiti parliamentarians over its $5bn investment into Citigroup and Merrill Lynch. The Citigroup stake is estimated to have lost the country $270m.

Following steep declines on the Kuwaiti Stock Exchange, investors there have also staged protests outside government offices, urging the government to intervene.

Nasser Saidi, chief economist of the Dubai International Financial Centre Authority (DIFCA) believes Gulf states will increase investment in their home markets since growth prospects are stronger there than in the West, and not because they want to shore up sliding stock markets or boost economic growth.

"Most likely they will be turning more and more towards the region, which has very promising growth opportunities that continue to remain strong, and I think you'll see them heading more and more towards Asia," Saidi told reporters at a press conference last month.

But they will remain global players.

"Any SWF needs to look at diversifying against the risk of fluctuations in oil prices. So if a lot of my economic prospects are tied to oil and gas prices, what I need to do is to diversify internationally into regions and countries that can diversify against the risk of oil and gas prices."

He likens most SWFs' strategies to that of a pension fund.

"Pension funds look at investments that will provide them with returns and revenues not just for a few years but over lifetimes and generations.

"Therefore you're seeing SWFs more and more going towards emerging markets, because the returns of investment in emerging markets are promising, they're higher than the returns in developed markets, particularly in this period."

Asked about SWF activity in the US, Dr Omar bin Sulaiman, governor of DIFC and vice chairman of the UAE Central Bank, told reporters on the sidelines of a press conference last week that "investors in general" are currently wondering whether Western markets have bottomed out.

"Overall, I think this region in general and the GCC in particular are the hope for global companies for growth," he said.

"There is a light at the end of the tunnel and it's at the other side of the world."

With reporting by Tom Arnold.

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