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In the Midst of the Crisis “Bottom Fishing” has Already Begun – Multinationals Navigating the Emerging Multi-centric Global Economy

Tue, 7 Apr 2009

By Natsuko Waki

LONDON, April 7 (Reuters) - Sovereign wealth funds, hit hard by ill-timed investments into Western banks, may soon dip their toes back into risky assets with a more focused approach that avoids bargain-seeking for its own sake.

After their $80 billion investment into major banks since 2007 turned sour, these state-owned investment funds are likely to aim for investments that help to meet their countries' economic needs.

There are tentative signs that sovereign wealth funds (SWFs) are coming back to the international capital market, with cash-rich funds from countries like China and Saudi Arabia expected to lead the way. As interest rates drop towards zero globally and world stocks rise 25 percent since mid-March, risk appetite even among traumatised SWFs may be on the mend.

"To a large extent the period of 'withdraw and regroup' for the SWFs is more or less over. Everybody in the sector would say that the bottom has not been reached yet, but bottom fishing has already started," Alexander Mirtchev, independent director of Kazakhstan's SWF Samruk-Kazyna, told Reuters.

"It is more than likely that the targets they will choose eventually would have specific strategic significance for their own economies," said Mirtchev, who is also a senior economic adviser to the Kazakh prime minister. Talal al-Zain, who heads Bahrain's SWF Mumtalakat, told Reuters late last month that the fund is eyeing stakes in U.S., European and Asian firms in sectors including commodities and financial services. Ninety-eight percent of its holdings are currently in local companies.

Also in March, Gulf emirate Abu Dhabi bought a 9.1 percent stake in German carmaker Daimler through its listed investment vehicle Aabar.

China's $200-billion SWF China Investment Corp has said it has avoided "big risks and losses" by adjusting its investment strategy last year by reducing stock exposure and increasing cash positions.

"The CIC has cash, but the politics of further losses on its external investments are likely to induce caution," said Brad Setser, geo-economics fellow at the Council on Foreign Relations in New York.

"Recent Chinese investments abroad have largely come from state firms looking to buy into mining/natural resource assets abroad. I would expect that basic trend to continue."

DEAL APPETITE

The oil-rich Gulf region is home to the world's largest SWF, the Abu Dhabi Investment Authority, which by some estimates has lost up to a third of its estimated $500 billion in assets since the start of the credit crisis.

Qatar's emir, Sheik Hamad bin Khalifa Al-Thani, told a German newspaper late in March that the country planned to invest in the German automotive industry and was also interested in German high tech companies.

CIC has also committed $800 million to a new real estate fund of Morgan Stanley, in which it holds a stake, according to a source with direct knowledge of the deal.

Spanish food group SOS Cuetara said earlier this month it was in talks to sell a significant stake in the company to a sovereign fund.

"There are pockets of money which continue to seek out deals. There is a greater focus on long-term strategic investing," said Ken Griffin, president of BGR Capital and Trade in Washington.

BGR Capital and Trade is an investment banking arm of government relations firm BGR Group, which represents and advises Middle Eastern sovereign wealth funds.

"There needs to be a continued pattern of positive developments over the next quarter before you see ripple effects in deal markets. When there's more stability in the U.S. markets you will see greater appetite coming out of SWFs as well," he said.

RISK MODEL

Even as the firepower of the SWFs has been scaled back, the $2-3 trillion industry is estimated to double or even triple in the next several years.

Mindful of future inflation risks that could erode the value of assets, state-owned funds are under pressure to balance the need for adequate liquidity and the need to take risks and invest actively into assets that would benefit their own economies.

"Through natural evolution, investments strategies are now increasingly based on the underlying strategic rationale ... and the need to maintain prudent levels of liquidity and risk diversification within their portfolios," BGR's Griffin said.

"You are going to see large SWFs maintain a full spectrum of investment opportunities from targeted venture fund-like opportunities within targeted sectors like green energy all the way down to U.S. Treasuries." (Additional reporting by Frederik Richter and George Chen; editing by Stephen Nisbet)