TheStar
PETALING JAYA: Regional markets are bracing for the impact of the sovereign wealth funds (SWFs), which a Bloomberg report on July 29 said controlled an estimated US$2.5tril.
These funds, whose controlling assets are larger than the hedge fund industry and are run by highly qualified teams under government mandates, are expected to make an impact on markets and economies.
Meanwhile, the Chicago-based Hedge Fund Research Inc estimated that hedge fund assets amounted to US$1.7tril year-to-date, a 22% increase from the end of last year.
However, this could be misleading as hedge funds leverage many times the worth of their assets. In contrast, SWFs were unlikely to leverage, said Rating Agency Malaysia Bhd (RAM) chief economist Dr Yeah Kim Leng, who elaborated on SWFs in a paper at a conference organised by RAM last month.
“The purpose is to invest the country's excess funds and not (for the Government) to borrow money to invest for maximum returns,” Yeah said.
Morgan Stanley in a report on Aug 24 said SWFs would be one of the most important structural factors for the financial markets in the coming years.
“We have written on SWFs and urged investors to pay more attention to what we believe will be one of the key themes in the coming years,” Morgan Stanley said.
However, the report focused on another class of sovereign funds.
“A close cousin to the SWFs, sovereign pension funds (SPFs) also have great potential to augment the impact of the sovereign funds,” it said.
Morgan Stanley believes that the SPFs in many countries would become much more outward-oriented than before, “just like the SWFs,” adding that the home bias was likely to decline sharply for many of these massive funds, with important implications for the international capital markets.
“We urge investors to pay attention to this category of funds,” said Morgan Stanley, citing Singapore's GIC, Australia's Future Fund, New Zealand's Superannuation Fund, South Korea's NPS and Japan's GPIF.
As to how and when SWFs would influence markets and to what extent, analysts and economists from both local and foreign investment houses said the information was hard to come by.
KSC Capital director of research Choong Khuat Hock ventured a guess that mining, oil and gas, and plantation companies could see a boost in asset prices.
“If they (SWFs) come in, it will definitely push up the value of the assets of these resource-oriented companies,” he said, but added that this would depend on the strategic interest of the fund from that particular country.
Owing to the rapid growth in China's foreign reserves, the scope of growth was greater for China's sovereign funds than others in the region, Choong said.
China's newly set up China Investment Corp manages US$200bil versus the Singapore's GIC (US$200bil), Australia's Future Fund (US$40bil) and South Korea's Korea Investment Corp (US$20bil).
The United Arab Emirates' Abu Dhabi Investment Authority manages US$875bil.
Yeah said where and how sovereign funds would flow depended on strategic objectives relevant to the national economy.
“With the size and market influence of any such funds, they would have to strike a balance between transparency and the market impact of disclosures,” he said.
Malaysia's Employees Provident Fund would be a good example of the kind of market impact SWFs could have in reporting their investment decisions, he added.
Sovereign funds would also operate in a very broad-based way, using multiple avenues to invest their funds and Morgan Stanley even suggested that they would be an important source of foreign direct investment rather than just portfolio investment.
As for private sector management of some of these funds, Yeah said that it would be more for competition and benchmarking of the various governments' own asset managers rather than the tapping of expertise.
With a global consensus among economists of a weakening of the US dollar and the US economy being burdened by the twin current account and fiscal deficits, Yeah expects sovereign funds to the region to flow substantially, given the consistently high economic growth among Asian economies.
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