March 25, 2008 -
By Robert Hsu, Editor, China Strategy -
Ever wonder who bails out the banks? I do.
So today, I'm going to give you an inside look at a global trend in
the growing world of giant investment funds, otherwise known as the
Sovereign Wealth Fund.
As we all know, almost every major Wall Street investment brokerage
firm and commercial bank has been hit hard by multibillion-dollar
losses from mortgage-related business activities. You name the bank,
and they've most likely been bit by the mortgage fall-out. But what
many investors don't realize is that many of these firms (like
Citigroup and Morgan Stanley) had to be bailed out by sovereign wealth
funds from China and other emerging Asian countries.
In fact, financial sup****t from these sovereign wealth funds have
prevented top-tier Western firms like these from going belly-up.
Bailing Out the Banks
Sovereign wealth funds (SWFs) are state-owned funds that contain
financial assets like stocks, bonds, property and other financial
instruments. SWFs are designed to allow countries to make large-scale
investments around the world. China formed its own $200 billion
sovereign wealth fund just last year, and thus became one of the
world's largest institutional investors overnight. I wasn't at all
surprised to see China start its own SWF. China established the fund
mainly to follow in Singa****e's profitable example.
That's because Singa****e's leading sovereign wealth investment company
is a huge player in Asian institutional investment circles, with
substantial investments in everything from shopping malls in Taipei to
state-controlled banks in Beijing. China wants to copy Singa****e's
success with its new sovereign wealth fund, China Investment Company
(CIC).
Sovereign Wealth Funds: What You Need to Know
Since Sovereign Wealth Funds have the potential to move the
international markets, let's quickly take a look at the three main
investment strategies these funds use.
Strategy #1: SWFs Buy Stakes in Leading U.S. and European Financial
Institutions. The recent mortgage and housing-related losses suffered
by commercial and investment banks have created a unique buying
op****tunity for sovereign wealth funds.
Countries that are manufacturing and natural resource powerhouses are
instructing their SWFs to invest in Western financial institutions
because they want to gain the financial market expertise that they
might lack. Despite recent troubles with Western banks, there is still
much for developing countries to learn from them.
Through they are investing in troubled banks, these Sovereign Wealth
Funds have stabilized financial markets during the recent credit
crisis. I believe we'll see this bailout trend continue as China and
oil-rich Middle Eastern countries become wealthier and seek out more
strategic assets abroad.
Strategy #2: SWFs Buy Stakes in Natural Resources. The global
competition for natural resources has become one of the most im****tant
investment themes of the 21st century.
However, one problem with this is that Western governments, led by the
United States, are increasingly regulating investments from foreign
SWFs. As a result, SWFs have invested elsewhere in the world,
including aggressively investing in Africa and other resource-rich
regions.
In fact, China has sent more than $10 billion in foreign aid to
African countries during the past five years. This kind of global
investment gives countries like China an advantage over private-sector
competitors like Exxon Mobil when negotiating with resource-rich
African governments.
Strategy #3: SWFs are Increasing Their Exposure to Untapped Emerging
Markets. Sovereign Wealth Funds are also investing in emerging markets
throughout Asia. In November, a Sovereign Wealth Fund controlled by
the United Arab Emirates set up its Asian investment headquarters in
Shanghai. This fund just invested $3 billion in Chinese infrastructure
projects and is planning to invest heavily in India as well.
Sovereign Wealth Funds are also investing in emerging markets
throughout Asia. In November, a Sovereign Wealth Fund controlled by
the United Arab Emirates set up its Asian investment headquarters in
Shanghai. This fund just invested $3 billion in Chinese infrastructure
projects and is planning to invest heavily in India as well.
The Sovereign Wealth Fund: The Kings of Global Finance
As Sovereign Wealth Funds increasingly impact national policies,
financial markets and strategic natural resources, it will pay off for
investors to buy what they buy.
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