What Should Sovereign Wealth Funds Do Now?
Should they buy or sell stocks? How will oil-based sovereign funds experience a slowdown in the accumulation of financial assets? When equity returns become an important factor for Gulf sovereign fund asset growth, the impact of falling listed equity markets raises issues of fund liquidity. This is why a number of Gulf funds have been redeeming equity mandates in late 2015. This appears to have been a smart move as 2016 is off to a terrible beginning with China and U.S. equity markets in free fall. Why? Just to name a few – concerned about yuan devaluation, low growth in emerging markets, and falling manufacturing figures in China. On January 7th, 2015, the People’s Bank of China lowered its reference rate for the yuan by 0.5%. The central bank policy move triggered panic; the Chinese equity market closed only 29 minutes after opening when the 7% decline threshold was met. Heading West, since the beginning of the year, the Dow Jones Industrial Average (DJIA) lost 5.2% of its value. If a global financial crisis were to break out, sovereign funds may not be in the position of being white knights like back in 2008. However, some will remain very opportunistic in distressed plays. Practically speaking, a number of strategies are getting greater recognition by SWFs such as smaller direct deals, generating steady income and keeping money at play in Europe and Japan.
With the exception of large real estate transactions, according to the Sovereign Wealth Fund Transaction Database (SWFTD), wealth funds are spending on average, smaller amounts on companies.
Concerns About Global Liquidity
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