The rise and rise of Sovereign Wealth Funds is set to resume
Total funds under management could double to US$8 trillion by 2015
DUBAI and LONDON 20 November 2009: A report by the Ernst & Young ITEM Club released today highlights that despite the impact of the last 12 months Sovereign Wealth Funds (SWFs) are poised to enter another period of sustained and impressive growth.
The disparity in economic growth that we have seen over the last decade between the developed and emerging markets will be heightened by the latter’s rapid emergence from recession. ITEM forecast that the BRICs are expected to contribute 40% of global growth between 2010 and 2020 – with China accounting for a quarter. Although the recession has reduced global imbalances, China and the Middle East in particular have continued to run large surpluses and amass reserves.
Francis Small, Global Sovereign Wealth Fund Leader at Ernst & Young explains, “Although the lessons of the financial crisis will lead many countries to build an even larger cushion of reserves, the desire to diversify and invest part of these means that the rise of the sovereign wealth fund will resume.”
SWFs outperforming PE and hedge funds
Funds managed by SWFs may have fallen in value in the last 12 months to some US$3-3.5 trillion, but they remain in a far stronger position than the private equity and hedge funds sectors that have suffered disproportionately far more in the recession and are also facing the threat of potential tighter global regulation.
ITEM is forecasting that, assuming growth in assets of some 12-15% per annum, total funds under management by SWFs could climb to US$8 trillion by 2015. Although this is down on the US$10 trillion plus that was predicted for this date prior to the global recession it will still ensure that SWFs will be powerful players in the capital markets in the years to come.
Rising oil prices driving recovery
The substantial increase in the price of oil and other commodities is the main driver behind the recent recovery in the strength of the SWFs and ITEM sees little chance of that dynamic changing in the medium to long term.
As Chris Portman, Economic Advisor to the Ernst & Young ITEM Club explains, “Commodity-based funds account for 65% of total SWF managed funds, while those in Asia and the Middle East account for 80% of the total. Rising surpluses in these two regions as well as other oil producers, including Russia, despite its current problems, will boost funds available for SWFs to invest.”
It is also likely that there will be an increase in the number of SWFs as other oil-producing countries including Iran, and possibly Iraq in the years ahead, look to invest surplus funds.
A changed model?
Investment strategies of SWFs have come under scrutiny in recent years, but their investments have generally been long-term and the stakes taken by some of them in western banks have helped to defuse any reservations. The set of investment and operational principles drawn up by SWFs in conjunction with the International Monetary Fund at their Santiago meeting in September 2008 has also assisted in allaying concerns.
Having sustained significant losses in 2008 and early 2009, there is no doubt that SWFs have gained experience from the downturn, in terms of investment strategy and organization. Many of the main SWFs have also sought to broaden their internal expertise by hiring from downsizing investment banks.
Small concludes that for a variety of reasons we will see a shift in the medium- and longer-term SWF investment strategies:
“In line with the growing power of the emerging markets and the associated changes in patterns of global trade and investment flows, as well as a desire to lessen dependence upon US dollar assets, SWFs will seek to invest more in the main emerging markets. This will in turn signal a diminishing focus on financial services as a target for investment.”
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