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Analyst report
Rivers of cash from sovereign funds to impact equity and currency markets
January 9, 2008
Brendon Lau, ShareAnalysis
It was not that long ago when private equity firms featured heavily on equity markets. That was until the credit crisis struck. In 2008, government-backed investment funds are likely to steal the spotlight if the past two months are anything to go by.
Furthermore, the turmoil on the credit markets (as highlighted by the credit squeeze facing Centro Properties Group) is likely to give state-backed funds the upper hand, as these funds do not rely on debt markets or leveraging.
Although sovereign wealth funds (SWF) have been active in acquiring assets over 2007 if not before, it is the Abu Dhabi Investment Authority's (ADIA's) US$7.5B stake in embattled Citigroup that has brought increasing international attention and scrutiny to such funds. ADIA is the world's largest SWF with over US$600B in assets.
Citibank was certainly not alone in regarding such funds as saviours. UBS went cap in hand a few weeks later to the Government of Singapore Investment Corporation (GIC) for US$9.75B. This trend could well pick up pace as many governments in the Middle East and Asia, flushed with cash, seek to diversify their asset base.
The growing dominance of SWFs is having a significant impact not only on equity markets but also currencies. One of the reasons the US dollar has fallen significantly over the past few months is the perception that Middle East governments might be keen on diversifying out of US-denominated assets.
These governments have huge US dollar reserves from the sale of crude oil, which is priced in US dollars. The decision by Saudi Arabia not to cut interest rates along with the US for the first time in its history is fuelling speculation that the kingdom is trying to break away from the dollar currency peg.
However, any move to rebalance cash reserves away from the greenback is likely to take years, as these governments know that even a slightly abrupt move can trigger a damaging run on the US dollar. For the time being, these governments have to think of more creative uses for their hard US currency that might offer some hedge against further possible declines in the dollar. This could explain part of the reason why ADIA has bought a large stake in Citigroup.
While a pickup in SWF activity is generally good news for investors, there are clearly limits on what these funds can buy. Unlike private equity firms, this limit has less to do with cash constraints than with national security issues (or national pride disguised as national security) and SWFs are well aware of the risks this poses.
Singapore's investment firm Temasek Holdings (which is a separate entity from GIC) faced a strong backlash in Thailand when it bought telecom giant Shin Corporation from ousted Thai Prime Minister Thaksin Shinawatra. The deal soured relations between the ASEAN neighbours for months.
Since then, public opinion in the US has prevented the sale of Unocal and P&O in the US to state-backed investors from China and Dubai. A similar example here would be Royal Dutch Shell's failed takeover attempt of Woodside Petroleum.
It would seem our parents were right. Money isn't everything.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Trader profile: Life as a full-time trader – Fay Benjamin offers her survivor tactics
Stocks: A stock for a lifetime
Resident Trader: 2007 was a good year to trade Aussie microcaps
Investing: Rivers of cash from sovereign funds to impact equity and currency markets
Smart Investing: Early retirement - dreams versus realities
Expert Panel (Futures): Ask the expert - how do I predict commodities prices?
Forex: Australian Dollar - to parity in 2008
Housing: Recovery emerging in housing sector
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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