Dr. Alexander Mirtchev, President of Krull Corp and a sovereign wealth fund independent director, believes that most of the sovereign wealth funds that gained prominence in the last 5 years will probably need to retool in order to face the challenges that arise out of the global economic and financial crisis. He expects them to shift their focus to productive assets that are related to their base economies, such as natural resources or technologies, and promptly restructure.
The “Glamour” Investments Party is Over – SWFs to Reconsider Core and Non-core Assets and Restructure Portfolios
Billed a year ago as saviours of Western capitalism, sovereign wealth funds now look as vulnerable to the credit crunch as anything else and are witnessing a rapid downgrade to their growth outlook.
Less than a year ago these state-owned funds from countries ranging from the UAE to Singapore were pouring some $80 billion (Dh294.24 billion) into major banks crippled by the fallout of a collapsing US housing sector.
Their sometimes flashy style of investment, at a time when hedge funds and other major players licked wounds from the credit crisis, prompted speculation that they could effectively underwrite malfunctioning global markets.
Now their future is looking less rosy as the value of their investments sinks, tumbling oil prices reduce future income and governments eye the extra capital to reflate local economies.
As the pace of wealth generation slows, these funds may not only row back from buying riskier assets but some may even be forced to cut investments to fund domestic fiscal needs, potentially adding stress to already frail world asset markets.
Many people are convinced of their increasing role in the global economy, but experts are slashing their forecast on how rapidly assets managed by sovereign wealth funds – currently around $3 trillion – will grow over the next several years.
Morgan Stanley, for example, now expects global SWF assets will grow to $10 trillion by 2015, down from their previous projection of $12 trillion.
Merrill Lynch, taking into account slower rates of transfer of funds from central banks to SWFs, expects total assets to hit $5 trillion by 2012, instead of by 2011 previously forecast.
The outlook risks a further downgrade if oil prices extend losses, and stocks and other asset markets do not recover soon.
“We need to acknowledge that SWFs’ firepower may have been constrained somewhat,” said Stephen Jen, global head of currency research at Morgan Stanley.
“We are now taking seriously the possibility that some SWFs may be forced to sharply slow down their pace of purchases of risky assets or, in extreme cases, liquidate parts of their portfolio in the coming year or so.”
He estimates SWFs may have seen paper losses on the order of 25 per cent this year as global stock markets and other alternative asset markets declined.
World stocks fell 47 per cent this year, while those in emerging markets, where many of the SWFs are from, endured an even bigger loss of over 60 per cent.
“They are going to face severe restrictions on their operations. They’re going to stop the trend towards … glamour investment and big splash spending,” said Alexander Mirtchev, chairman of the board of directors of Kazakhstan’s SWF Kazyna.
Mirtchev, who is also an economic adviser to the Kazakh prime minister, said SWFs were likely to shift their focus on productive assets that are related to their own economies, such as natural resources or technologies, in order to survive.
“They are going to unload non-core assets they have acquired during the boom times. They are not going to buy hotels in Bermuda when countries need something else,” he said.
Merrill Lynch expects that given losses in stocks and alternative investments and a marginal gain in fixed income, a 50-20-30 portfolio allocation split in these asset classes would have produced returns of -16.7 per cent in the third quarter.
The Abu Dhabi Investment Authority, considered the world’s largest SWF, invested $7.5 billion in Citigroup in November 2007. Since then, Citi’s share price has fallen 75 per cent.