Responsible Investor

Why sovereign wealth funds have provoked schizophrenia in western markets

Market saviours or dangerous political investors? Sovereign wealth funds have got governments in a funk.

Sovereign wealth funds seem suddenly to have become the new behemoths bestriding the financial markets, whose financial might could influence economic activity from New York to Sydney. Their investments amounted to a record US$48.5bn in 2007 and US$24.4bn in just the first two months of 2008. Government controlled funds from the Middle East and Asia are now significant investors in Merrill Lynch, UBS, Citigroup and Standard Chartered – to name but a few venerable financial institutions.
By some, sovereign wealth funds are hailed as the providers of much needed liquidity to global markets and as the saviours of those investment banks deeply wounded by the credit crunch. By others, especially some Western governments, they are viewed with caution, aroused by the very size of the funds under management and the potential influence that these could have, a fear accentuated by the funds’ lack of transparency surrounding their activities and objectives.
Sovereign wealth funds are estimated to manage US$2-3 trillion globally, and may reach US$5 trillion in the next two years.
The tripling of oil prices since 2002 has created enormous wealth for oil-producing nations, which have

become eager to find investments outside their home regions on which to spend their petrodollars. At the same time, Asian central banks are sitting on enormous reserves of foreign exchange, and many are looking to diversify their investments into higher yielding assets than US Treasury bills.
The establishment last year of the China Investment Corporation with its US$200bn created some noise, but several other countries in Asia have their own funds, which they prefer to keep very low profile: the Government of Singapore Investment Corporation, for example, is thought to run US$330bn.
These identified funds, plus a plethora of other government linked investment vehicles: state holding companies like the mighty Dubai Holdings, national pension funds and major state dominated enterprises such as China Life or CNOOC in China that should perhaps be classed together with them, have aroused concerns about their potential to disrupt financial markets. Rumours of investments by one player or another have already been seen to have influence on specific asset classes. Some analysts are warning of the serious market disturbances that could be triggered if funds were abruptly to sell large overseas holdings.

Not a member? Register here »