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Debt Ceiling and a Mega Deficit are Concern for Sovereigns

Uncertainty is the breeding ground for greater risk and volatility; behemoth conservative investors adore certainty. Sovereign funds have the distinct advantage of being long-term investors; however, short-term risk is increasing as uncertainty looms around deficit and debt ceiling issues. The August 2nd debt ceiling deadline is creeping up. No official deal has been approved by all parties involved. The major rating agencies have continued to project concerns on U.S. sovereign ratings for certain scenarios. With regards to sovereign wealth funds, there is a tremendous issue of macroeconomic concern for their investment portfolios and holding companies.

At the Sovereign Wealth Fund Institute, we predict that there is a 50% chance of a downgrade in the remaining part of 2011 for the United States.

A high probability remains that the United States will not sufficiently address long term deficit issues. Raising taxes or trimming beloved entitlement programs in the midst of a period of high unemployment is politically dangerous. Thus the downgrade could fall into the AA category. There is a slight chance of a debt ceiling rupture. This could possibly lead to a technical default on U.S. treasuries or a default on other U.S. financial obligations. This would be a disastrous scenario that would impact all financial markets.

United States – Gross External Debt Position: March 31, 2011 – Currency Composition of Gross External Debt

Foreign Currency
Short-Term 215,905
Long-Term 956,310
Total 1,172,215
Domestic Currency
Short-Term 4,788,708
Long-Term 6,990,774
Total 11,779,482
Unknown 1,873,611
Gross External Debt 14,825,308

Source: U.S. Treasury – Millions of U.S. Dollars – 6/30/2011

With all this talk, a downgrade to AA for the United States will result in more of an embarrassment, than catastrophic depression. Sovereign funds and other large institutional investors will continue to buy U.S. treasures, but maybe not at the rate of the past five years. In addition, SWFs will perceive U.S. treasuries as no longer a riskless asset, if they haven’t already. The process of diversification from U.S. treasuries would accelerate dramatically whether in countries like Germany or Canada, or gold.

Institutional Investors Remain Skeptical as Bitcoin Continues to Rise

Bitcoin has continued to rally over the past month – hitting a record US$ 8,224 in the early hours of November 20 – and institutional investors are beginning to take notice of the cryptocurrency’s increasing popularity. With a market value of more than US$ 130 billion, the digital currency has seen unprecedented growth of over 700% over the past year. But Bitcoin’s rise has also been marked by a number of volatile slumps, leaving institutional investors divided over its durability as a long-term store of value and wondering whether to get in on the action. Despite these headwinds, more than 100 hedge funds have been formed to trade in digital currencies.

Split Consensus on Wall Street

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3 Reasons Why Other Sovereign Funds Will Not Dump Oil Stocks

Norges Bank informed the country’s ministry of finance to recommend the wealth fund to remove oil and gas listed equities from the fund’s benchmark index. The central bank came to the conclusion that Norway’s Government Pension Fund Global (GPFG) would be less vulnerable to a permanent drop in oil prices if the wealth fund was not invested in oil and gas listed equities. For some academics there are arguments that wealth funds should diversify away from their sources of wealth. Contradictory studies have demonstrated that wealth funds should support industries that enhance the country’s sources of wealth. For example, earlier on, Norway’s fossil fuel wealth was buoyed by increased capital investment to the oil sector to increase output, a pre-cursor to the wealth fund’s explosive growth.

1. Stock Performance
For some sovereign investors, investments in master limited partnership in oil and gas have been strong driver of returns, or even in smaller fossil fuel listed companies. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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GIC Financially Backs Innovation Precinct Project in Melbourne

Singapore’s GIC Private Limited acquired a majority interest in a joint project located in Melbourne, Australia. The joint project is between Sydney-based Lendlease, Australia-based Urbanest and GIC. In 2014, the project was labeled Carlton Connect Initiative with the goal of being an innovation hub.

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