It is true that most sovereign wealth funds and global institutional investors have a high allocation to U.S. dollar-denominated assets. This has been the story for the past half century. Second, it has been a difficult time for the U.S. dollar this past decade. With the bailout of financial institutions, mounting federal and state governmental deficits, QE2, high unemployment, two wars, and now the possibility of a block in the augmentation of the debt ceiling, American currency is increasingly being watched like a hawk from foreign governmental investors. In addition, as skilled and unskilled labor prices are priced more efficient in emerging markets versus the United States, it will place a continued drag on the U.S. dollar.
Lastly, the United States cannot exclusively rely on wealth creation from the appreciation of financial and real estate assets over the long haul. Sovereign wealth funds painfully recognize this and learned their lesson from the bankruptcies of Fannie Mae and Freddie Mac.
In the aggregate, sovereign wealth funds are somewhat confident in American multinational businesses. From looking at direct sovereign investments in U.S. equities and U.S oriented external fund manager mandates, we can see the United States is still a viable destination for investment. Furthermore, we see a trend in investing in multinationals, where those companies’ incomes are not solely coming from the United States.
Not all sovereign funds and central banks are confident in the US government’s handling of currency and fiscal policy. In fact the Chinese government warns of excessive risks of U.S. assets, as the dollar keeps falling versus other currencies. The loose monetary policy is stimulating global inflation and asset bubbles, especially in commodities like silver. In November 2010, Russia and China renounced the U.S. dollar in terms of using their own currencies in bilateral trade.
It is true the United States has taken the position of an expansionary monetary and fiscal policy to encourage economic growth; however these economic policies come at a price, which includes higher interest payments and more debt. The Qatar Investment Authority sees the U.S. dollar’s weakness as a driver of its investment policy. Even if the United States can pull off some real economic growth, it will be hindered by incoming inflation.
Sovereign wealth funds across the board are looking at sectors that have a hedge against the American economy. One sector is commodities, which some favorite types include oil, natural gas, gold, silver, and agriculture. In particular, Middle Eastern sovereign wealth funds see it as a win-win, especially in agriculture, since those countries are in dire need of sustaining food supplies. In addition, over the long term as the population of India and China grow and their tastes and preferences alter for more prepared foods, food prices will rise. The Qatar Investment Authority, Kuwait Investment Authority, and even Temasek Holdings have been active investors in food companies.
What is saving the dollar is that there are very little alternatives to it. The euro and Japanese yen have their own issues, precious metals can bubble up, and other currencies lack liquidity.
Mubadala Investment Company and Saudi Arabia Military Industries Company (SAMI), which is a defence company owned by Saudi Arabia’s Public Investment Fund (PIF), agreed to a deal to partner and co-invest in defense manufacturing. This partnership grows defence ties between Saudi Arabia and the United Arab Emirates.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
Banking behemoth J.P. Morgan Chase disclosed its own digital currency called JPM Coin. The digital token will be used to settle payments between clients. JPM Coin will be backed by physical U.S. dollars and be based off Quorum. Quorum is J.P. Morgan’s private Ethereum-based chain. JPM Coin plans to compete with Ripple, which created XRP, another digital currency that is used for settlements. Ripple’s main target market is cross-border payments and remittances.
The Central Bank of the United Arab Emirates and the Saudi Arabian Monetary Authority have unveiled their plans for Aber, an interbank digital currency. Both banks have indicated that Aber will be limited to financial settlements using distributed ledger technologies. It will be rolled out on a probational basis, and used by select banks within the two countries. A date for rollout has not yet been declared. A joint statement hinted at a broader application of the currency in the days ahead. If “no technical obstacles are encountered, economic and legal requirements for future uses will be considered.” Blockchains and Distributed Ledgers technologies will be employed. The plan is for ‘Proof-of-Concept’ testing, which involves studying and fully comprehending the ways modern technologies can achieve practical applications. The digital currency has the potential to become a reserve system for central payments.
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La Française and Canada Pension Plan Investment Board (CPPIB) formed a strategic partnership for the launch of a real estate investment and development vehicle: Société Foncière et Immobilière du Grand Paris. The joint venture between CPPIB (80%) and Caisse Fédérale du Crédit Mutuel Nord Europe (CMNE) (20%), La Française’s shareholder, will invest in major real estate projects linked to the Grand Paris infrastructure in the Greater Paris area. The parties will initially allocate €387.5 million in equity to the venture. The partnership will target regeneration and infrastructure-led investments.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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