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Are Sovereign Funds Ready for Another Market Shock?

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Sovereign wealth funds such as Singapore’s GIC Private Limited, Australia’s Future Fund and the New Zealand Superannuation Fund carefully issued warnings to the media and stakeholders about expecting lower investment returns in the coming years. Will their expectations come to fruition? The first shock, the rapid drop and prolonged period of low oil prices, applied mostly to commodity-based sovereign funds. While hundreds of asset management executives and salespeople are returning from their August vacations, equity markets in the U.S. experienced losses. Hedge funds and technical traders acted on information and trading volumes and timed exits, pushing down U.S. equities on August 20th. In fact, August 20th, 2015 was the worst day for the S&P 500 and Dow Jones Industrial Average since February 3, 2014. Markets are truly about investor confidence and when money managers see headlines that Greece’s Prime Minister is resigning, China is attempting to stave off major market drops in equity markets and possibly stimulating currency wars, the fragility of U.S. markets becomes more apparent. Faring worse, commodity trading giants like Glencore Plc have lost 70% of their market value since flotation in May 2011. Qatar Holding, a unit of the Qatar Investment Authority (QIA), once was the biggest shareholder in Glencore, backing its efforts to takeover Xstrata in 2012. Since 2014, the QIA has been slashing its ownership stake in Glencore, reading the writing on the wall with regard to lower global demand commodities and precious metals. Glencore’s CEO Ivan Glasberg’s stake in May 2011 was worth US$ 9.4 billion, in mid-August 2015, his stake dropped down to US$ 2.8 billion. Other commodity trading firms are at risk such as Noble Group which has ties to sovereign funds.

Continual Migration of Fixed Income into Real Assets

Sovereign wealth funds, known for their long-term horizon, have gradually expanded exposure to asset classes such as real estate, private equity and infrastructure; however, in total, a large percentage of assets are allocated to fixed income and listed equities. For example, Norway’s Government Pension Fund Global’s (GPFG) performance is highly dependent on the whims of equity and fixed income markets, real estate makes up a measly 2% of assets (given it takes time to deploy massive amounts of capital and Norway’s SWF ranks in the top #10 of biggest allocators to real estate by dollar amount.) Large sovereign funds, funds over US$ 100 billion, have few options to prepare themselves, when markets begin to face down. Many funds have made moves to get out of fixed income and invest in real estate, even perceiving the properties as a de-factor currency or store of value. Government bonds have been performance draggers for many institutional investors.

Currency Wars

Currency devaluation, or in some cases manipulation, is a politically-sensitive topic. The countries of China, Vietnam, Taiwan, South Korea and Japan carefully watch each other on currency devaluation and monetary policy as their economies are export-driven. On August 21, Japanese Finance Minister Taro Aso gave warning to China against pre-mediation of moving yuan rates, urging the country to move the yuan toward a market-oriented fashion. Over the last twenty years, China had the strongest currency in emerging markets and most resilient economy in emerging markets. China has changed its course. The August 11th yuan devaluation was followed by two more similar measures in a quick succession. However, China has a case against Japan, the European Union and United States, which have all enacted major unprecedented economic stimulus policies for extended periods of time. China’s economic figures, such as a slowing down of exports, shrinkage in the powerhouse’s manufacturing sector, falling wholesale prices and concerns of growing debt in the shadow banking market in mainland China, have been reasons for the country to devalue the yuan. With all this being said, China’s devaluation has triggered a wave of depreciations, leaving many emerging markets in a far worse position. In the following week after August 11th, the Kazakhstan tenge, Turkish lira and Vietnamese dong experienced currency depreciation. Thus, wealth funds that have allocated to emerging market equities will probably take further hits in their EM portfolios.

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

SWFI First Read, September 19, 2018

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QIA Eyes Investment in Chinese Lender Lufax

The Qatar Investment Authority (QIA) is in talks about a possible investment into Shanghai-based Lufax, one of China’s largest online lenders. The seller of the possible stake is China’s Ping An Insurance (Group) Co. Ltd. Lufax’s official name is Shanghai Lujiazui International Financial Asset Exchange Co. Ltd.

Wealth Funds Back Hotpot Giant

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Japanese Government Capital Provides Initial Life for Texas Bullet Train

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Dallas-based Texas Central Partners, LLC is the developer of a proposed high-speed rail system, dubbed the Texas Bullet Train, between Dallas and Houston. Project costs are estimated between US$ 12 billion to US$ 15 billion. The developer secured US$ 300 million in project loans from Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development (JOIN) and the Japan Bank for International Cooperation (JBIC). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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DOJ Investing Tesla Over Musk Comments

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The U.S. Department of Justice (DOJ) is conducting a fraud investigation over Tesla as its CEO Elon Musk made public statements on twitter. This is a criminal probe. In addition, earlier, SWFI reported the U.S. Securities and Exchange Commission (SEC) is conducting a civil inquiry into Elon Musk regarding his statements.

This all surrounds Musk tweeting in August that he was thinking of taking Tesla private and had “funding secured” for the transaction. Both government authorities are seeing if Musk misled investors and violated federal securities laws with his public statements.

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