Posted on Saturday, November 8th, 2008
By bsetser
If oil stays in the 60s — and if China isn’t willing to buy Agencies, let alone riskier assets — sovereign funds are not going to be the kind of force in the global economy that many forecast earlier this year. The investment banks are now busy revising their forecasts for the growth of sovereign funds down.
Nonetheless, sovereign funds are not going to disappear entirely, so understanding their various investment strategies remains important. In my view, the common argument sovereign funds are inherently passive, long-term investors interested mostly in financial returns oversimplifies.
For a recent example of this argument — one that happened to catch my attention — consider a recent column from Bloomberg’s Michael Sesit:
These funds represent the excess reserves of countries with large current-account surpluses and/or major oil exporters. They are overwhelmingly invested outside their domestic markets and so far have been managed passively, without political bias, to achieve enhanced returns.
No doubt some sovereign funds are invested passively and without political bias. Norway’s fund certainly invests passively, and its “political bias” is very transparent. The Abu Dhabi Investment Authority, Singapore’s GIC and the Kuwait Investment Authority all seem to focus primarily on managing a passive external portfolio — though in all three cases a lack of transparency makes it hard to know for sure. The KIA is certainly under pressure to do more to support Kuwait’s own market. The scale of the GIC’s investments in the financial sector also at least raises the question of whether the GIC’s strategic is evolving to include taking strategic states that might help to support Signapore’s own ambitions as a financial hub.
But many other funds invest both at home and abroad. Any many aren’t just passive investors either.
Singapore’s Temasek, for example, originally had some similarities to France’s proposed sovereign fund: it managed the Signapore’s strategic stakes in its large domestic firms. And it clearly takes large strategic stakes when it invests abroad.
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Posted in Sovereign Wealth Funds | 16 Comments »
Posted on Monday, November 3rd, 2008
By bsetser
The Gulf states are thought to have built up their cash reserves in q2 and q3 – though the supporting evidence was always circumstantial (the TIC data implied that no one was buying US equities) and anecdotal.
Now there is a bit of hard evidence. We know that the Saudi Arabian Monetary Agency (SAMA) added $40.9b to its foreign deposits in q3 2008 – and only $13.6b to its foreign securities portfolio.
We also now know that the Saudis added $144.3b to SAMA’s foreign portfolio between the end of q3 2007 and the end of q3 2008. Not a bad year. A little over $50b of that went into deposits; a little over $90b went into securities. In other words, the shift toward deposits is recent phenomenon.
SAMA’s non-reserve foreign assets now total $405.2b and it manages another $63b in foreign assets for Saudi government pension funds as well as $31.7b in foreign currency reserves. That works out to close to $500b in total assets — enough to potentially make SAMA the largest sovereign fund manager in the Gulf. Rachel Ziemba and I never were convinced ADIA was nearly as large as some claimed – and both the big slide in global equities this year and the creation of new Abu Dhabi sovereign funds reduced the size of its portfolio.
Of course, looking only at the size of formal sovereign funds – and institutions like SAMA – misses the large “private” assets of some of the Gulf’s key families. Notably the region’s royal families.
Those private fortunes are coming out in the open — in part because a new generation of princes (and royal advisers) seems less adverse to advertising their wealth than the older generation.
Abu Dhabi’s Sheik Mansour bin Zayed al-Nahyan seems set to buy 16% of Barclay’s for his private portfolio (fits nicely with ManCity). Sheik Sheikh Hamad bin Jassim bin Jabor Al Thani (Qatar’s prime minister) is investing in Barclay’s through his private fund as well. And the QIA is adding to its stake too. If Qatar keeps adding to its stake in Barclays I guess it figures it will eventually make money …
One of the investors in UBS last December also is thought to be a member of one of the region’s royal families.
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Posted in Sovereign Wealth Funds, oil | 14 Comments »
Posted on Wednesday, October 29th, 2008
By bsetser
To date, the CIC hasn’t exactly distinguished itself with its investment acumen. Its investments in Blackstone and Morgan Stanley are underwater. Its Blackstone shares are down something like 75%.
Even its “safe” investments haven’t been safe: it put money in the Reserve Primary Fund — the money market fund that famously broke the buck.
But it almost certainly has outperformed other sovereign funds this year. Its winning strategy?
Cash. Lots of it. SWF Radar highlighted a Thomson Reuters report that indicated:
[the] “CIC has been very stable so far, because at a time when global stock markets are dropping dramatically, it has more than 90 percent of its assets in cash,” the official Shanghai Securities News cited Lou Jiwei, head of CIC, as saying.
Apparently the CIC didn’t put most of its money to work. Which, if nothing else, means it didn’t lose all that much.
On the other hand, it really isn’t necessary to create a sovereign fund just to invest in money market funds.
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Posted in China, Sovereign Wealth Funds | 50 Comments »
Posted on Tuesday, October 7th, 2008
By bsetser
A few years ago, analysts looking at the same data that Dr. Krugman highlighted started to call the US a hedge fund. It borrowed short-term in dollars, providing the world wit a safe liquid asset (or it was said) and used the proceeds to buy risky assets abroad — collecting a risk premium in the process.
That kind of hedge fund is has had a bad run recently. The US — viewed as a hedge fund — is structurally “short” the dollar and “long” global equities, as it borrows in dollars to buy assets abroad. It consequently did well when the dollar fell and global equity markets rose, and correspondingly did poorly when the dollar rises and global equities fall. Unless something changes, the United States net international investment position will deteriorate quite sharply this year.
The US as hedge fund metaphor actually never quite worked for the US — as the US was borrowing as much to finance a current account deficit (current consumption) as to finance the purchases of assets abroad. It actually was a better description of Europe (which also is having a bad week) in general and the Eurozone in particular. The Eurozone attracted large inflows and used the resulting inflows to finance equally large outflows, not a large current account deficit.
But no national resembled a high-living hedge fund quite as much as Iceland. Its big banks and big firms had enormous international liabilities and enormous international assets — at least in relation to Iceland’s small economy. And for a while, Iceland used the profits from its intermediation to live very well, running a large current account deficit. In that sense, it also resembled the US.
Suffice to say it is a very troubled hedge fund.
And it has apparently turned to Russia — yep, Russia — for emergency financial support. Iceland’s prime minister claimed to have no choice. Iceland’s friends, he claimed, all turned Iceland down (maybe they were too busy rescuing their own banks). The FT reports
Geir Haarde, Iceland’s prime minister, said on Tuesday that the country’s “friends” had not offered financial assistance to his country, forcing it to seek a capital injection from Russia.
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Posted in Sovereign Wealth Funds, Systemic Risk | 61 Comments »
Posted on Sunday, October 5th, 2008
By bsetser
We aren’t there quite yet. At least not on an annual basis. The oil exporters foreign asset growth in 2008 will likely top their 2007 foreign asset growth.
But we may not be that far away.
On a quarterly basis, the foreign asset growth of the oil exporters probably peaked in either q2 or q3 2008.
The oil exporters certainly aren’t feeling quite as flush as they once did. Somehow an import bill that can be covered — without dipping into existing assets — if oil is above $70 and a $90 a barrel market price doesn’t feel quite as secure as an import bill that can be covered if oil is above $20 a barrel and a $40 a barrel market price.
Three things have combined to put a bit of pressure on the oil exporters — and the portfolio managers of their central banks and sovereign funds:
1/ Oil prices are no longer rising faster than domestic spending and investment. Instead oil prices are falling as domestic spending and investment (and associated imports) rise. That means the oil exporters have a smaller monthly surplus, as a higher fraction of their oil export revenue is spent on the imports associated with higher levels of domestic spending and investment. Rachel Ziemba and I believe that the oil exporters will “break even” (neither adding to their foreign assets or dipping into their external savings) this year if oil is around $70 a barrel. That break even price though has been rising quickly — and it isn’t inconceivable that the break even price might be $75 or $80 a barrel next year (unless some folks with ambitious plans cut back in the big way; with rents up 65% this year in Abu Dhabi there is certainly a bit of froth in the market) and, well, the market price of oil could potentially be lower than that.
2/ Any sovereign wealth fund that invested heavily in equities has been hurt by the global sell-off. Anyone who shifted from the US to Asia (remember all the talk of a new silk road?) has been hit particularly hard. Hedge funds haven’t been a safe haven either. Global equities indexes are down 25% on the year. I don’t think the Abu Dhabi Investment Authority is quite as large as some people think, so I don’t think it started the year with a $400b equity portfolio. But even it didn’t have a big enough equity portfolio to be in position to see a $100b loss on its equity portfolio, it clearly is down substantially. Indeed, Rachel and I now suspect that SAMA will have more foreign assets than ADIA by the end of the year. Holding a conservative portfolio has paid dividends this year.
3/ The oil exporters are increasingly using their reserves (and sovereign funds) to stabilize their own markets. Russia has indicated that it will lend up to $50 billion from its reserves to domestic banks having trouble rolling over their external credit lines. The UAE has announced a similar $13.5b facility, a facility that is considered to be a “quiet” bailout of Dubai by the much richer sheiks of Abu Dhabi. Dubai itself has indicated that one of its funds — DIFC Investments — will support the local market. Kuwait’s central bank is lending domestically as well — and the KIA has been intervening to support Kuwait’s domestic stock market.
A lot of the oil exporters had very large fiscal surpluses from oil — as the foreign exchange from oil sales was held in foreign currency at the central bank or invested through a sovereign fund. But a lot of private (or quasi-private, as the dividing line between public and private often isn’t clear) banks and firms in the oil exporters were borrowing heavily from banks abroad. That flow has dried up. And the state is being called on to step in to stabilize things — much as the state in the US and Europe is trying to offset a collapse in private intermediation.
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Posted in Sovereign Wealth Funds, oil | 17 Comments »
Posted on Tuesday, September 30th, 2008
By bsetser
Many argue that sovereign wealth funds have been a stabilizing force in global markets.
I keep wondering how anyone could possibly know.
The majority of sovereign funds do not report data on the composition of their portfolios. The increase in their funds over the past couple of years under management doesn’t seem to have made the world a more stable place — though you can argue it would be even more unstable absent their stabilizing presence. As far as I know, no one truly knows if sovereign funds have been piling into Treasury bills, European government bonds, bank deposits (if you can find a safe bank for big deposits) and money market funds along with everyone else — or if they have been buying US and European equities as they slide. I rather doubt sovereign funds have been buying a lot of toxic subprime debt off banks balance sheets. By contrast, we do know that the Chinese state banks, which are effectively playing with the dollars they received from the CIC as a result of their recapitalization,* have been reducing their holdings of risky US debt - -and perhaps otherwise reducing their exposure to the global financial system. We certainly don’t know if sovereign funds are going to start to pull funds from leveraged investors with poor recent returns — contributing to the “run” on hedge funds that Nouriel Roubini and others now fear — or if they are going to keep putting money into the hands of leveraged players.
But sovereign funds aren’t the real story. Central banks remains far more important. Unfortunately, we also know less and less about how central banks are impacting the markets through their reserve growth. There will be lots of analysis about the (small) fall in the dollar’s share of reported reserves in today’s COFER data release. Ignore most of it. There is a bit of data suggesting that those emerging economies that report data to the IMF started to diversify away from the dollar in q2 (but only after propping the dollar up in q1). But that doesn’t actually tell us much. Right now, the majority of global reserve growth now comes from countries that do not report data to the IMF — so we frankly simply do not know if the actions of those countries that do report data to the IMF are representative or not. Consider the following chart.
Here are a few numbers.
In q2, countries that do not report data to the IMF accounted for $82 billion of the $126b increase in global reserves. That actually understates the size of the “dark” central bank flows. The “other foreign assets” (think bank dollar reserves) of the People’s Bank of China increased by $74.5b, and the “non-reserve foreign assets” of the Saudi Monetary Agency increased by $29b. That brings total “dark” foreign asset growth to around $185b — and the total increase in global reserves to around $230 billion.
Between 60% and 80% of that likely went into dollars (I think countries that do not report data generally have a higher dollar share of their reserves than their more transparent cousins) — so “dark” dollar flows likely added between $110 and $148b to global dollar reserve growth. My baseline estimate is around $130b — which would bring total dollar reserve growth to around $143b in q1.
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Posted in Sovereign Wealth Funds, central bank reserves | 59 Comments »
Posted on Tuesday, September 23rd, 2008
By bsetser
Sovereign wealth funds have invested about $35b in US financial institutions. Adding in Qatar’s investment in Barclays and Singapore’s investment (through the GIC) in UBS brings the total up sovereign funds have invested in firms with a large US presence to around $55b.*
The US taxpayer is now being asked to invest $700b to help recapitalize the global financial system – a sum that is more than 10 times as much as the world’s sovereign funds put in.
But, at least as I read Paulson’s initial proposal, the US taxpayer would not get any equity in the world’s large financial institutions in exchange for this help.
Now the US isn’t making a pure equity investment, though some – like Doug Elmendorf and Sebastian Mallaby– think it should.
It is buying the banks’ illiquid assets.
But there is at least the possibility that it will “overpay” for those assets, and in the process effectively contribute equity capital to the US and global banking system. Indeed, there is a real probability it will overpay by more than the $55b sovereign funds have put into the global financial system.
There are broadly speaking two ways a government can recapitalize a banking system.
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Posted in Sovereign Wealth Funds, Systemic Risk | 105 Comments »
Posted on Saturday, September 20th, 2008
By bsetser
American commentators have argued that Russia’s current financial difficulties are evidence that Russia’s participation in the global financial system constrains Russian geopolitical adventurism. Russians have paid a (financial) price for the conflict in Georgia.
The Wall Street Journal notes that some in Russia see things rather differently: they believe that the US government put pressure on US banks not to rollover loans to Russian banks, and thus helped precipitate Russia’s current financial crisis. Gregory White reports:
As Russia’s stock market went into free fall this week, conspiracy theories circulated that Washington was egging on American financiers to punish Moscow for its incursion into Georgia last month. The theories gained enough credence that Russia’s finance minister, Alexei Kudrin, spoke with U.S. Treasury Secretary Henry Paulson late Wednesday and sought assurances that the U.S. wasn’t playing politics with Russia in the financial crisis, the Russian Finance Ministry said.
Mr. Paulson told Mr. Kudrin that the U.S. wasn’t, according to the Russian side. A U.S. account of the call wasn’t available. ….
The question broached by Mr. Kudrin in his phone call with Mr. Paulson reflects a view widely held in the opaque world of the Moscow elite. Russian officials have asked U.S. bankers in recent weeks if the banks have been ordered by U.S. officials not to lend to Russian companies, according to people familiar with the conversations. The banks deny any such order.
I believe Paulson. US banks haven’t been willing to lend to anyone, including other US banks, recently.
I suspect former Russian President and current Prime Minister Putin does not – perhaps because Putin and others know that they can influence the actions of Russian banks by whispering a few words into the right ears.
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Posted in Sovereign Wealth Funds, Systemic Risk | 23 Comments »
Posted on Saturday, September 20th, 2008
By bsetser
The reporting from Asia on Friday suggested limits to the CIC’s interest in Morgan Stanley. Restrictions on the ability of foreign banks to participate in the “TARP” (the current acronym for the bailout) might be another.
But the Wall Street Journal’s reporting (see Lucchetti, Enrich and Sidel) suggests that discussions are ongoing:
“Wall Street firm Morgan Stanley and Wachovia Corp. plowed ahead with merger talks Friday, even though announcement of the U.S. government’s crisis-fighting plan eased the pressure to race into a deal, people familiar with the matter said. Morgan Stanley’s board was expected over the weekend to discuss a deal, which may take an interesting twist. In one scenario being contemplated in New York, China Investment Corp. would take a significant stake in the combined company.In one scenario being contemplated in New York, China investment corp would take a significant stake in the combined company. … CIC’s interest might be contingent on Wachovia being able to offload some of its mortgage assets. So far, the CIC discussions has been preliminary and hasn’t been broached with Wachovia’s board.”
This sounds like a scenario that would need to be contemplated in Washington and Beijing as well as New York. Moving risky assets over to the books of the US taxpayer to create a “good bank” that appeals to the investment arm of China’s state council (an accurate, if undiplomatic, description of the CIC) would be a significant move – even in a week marked by a host of significant moves. The US government would effectively be a party in the deal.
I can see how say a voter in Ohio that – correctly – believes that China’s neo-mercantilist policy of accumulating foreign assets to hold its exchange rate down and support China’s export sector has contributed to the difficulties segments of US manufacturing have faced over the past few years might not look favorably on a deal that requires the taxpayer to assume downside risk and gives China’s government the upside. The US Congress has bulked at increasing China’s IMF quota because they haven’t wanted to reward China for intervening in the currency markets. The ideas that Morgan Stanley seems to be considering would seemingly require rather direct bit of US government assistance for a agency that helps to manage foreign assets that the US government doesn’t think China should be accumulating in the first place.
Yes, a CIC investment could help the banks raise needed equity capital and thus offers a potential alternative to an even bigger investment by US taxpayers. But a large CIC stake would also start to raise issues about who should provide the government backstop for the combined institution: China or the US? Bailing out US banks is one thing. Bailout out a Chinese-government-owned US bank is another.
That question hasn’t come up in the past because governments generally haven’t owned financial institutions with large operations outside their home markets. Singapore I guess is a partial exception; Temasek has large stakes in a lot of financial institutions. But it is at least worth starting to consider who has responsibility for such an institution in the new world of state capitalism.
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Posted in China, Sovereign Wealth Funds | 10 Comments »
Posted on Thursday, September 18th, 2008
By bsetser
I think we now know why the US Treasury is selling Treasury bills like mad to raise money for the Fed.
$180 billion is a lot of money to lend to other central banks so that they can supply dollar liquidity in their national markets. The ECB is now prepared to lend out more than $100 billion US dollars to European financial institutions:
Under the latest action plan drawn up by central bankers, the ECB said it would expand its armoury by offering “for as long as needed” $40bn in overnight funds to eurozone banks. The ECB is also expanding its reciprocal arrangements with the US Fed to increase to $25bn the amount it provides in the market for 28-day funds and $15bn over 84 days. Under the expanded plans, the amount of outstanding dollar liquidity provided by the ECB could reach as much as $110bn – compared with $50bn previously.
No doubt the Fed is financing a host of US banks and broker-dealers as well.
The Fed’s balance sheet indicates that it provided an additional $100b in direct credit to the US financial system over the last week (look at the Wednesday to Wednesday change in “other loans” rather than the change in the weekly averages) — “Primary credit” rose by $10b, roughly $60b was drawn from the prime dealers credit facility and another $28b was provided in “other credit.” Then throw in another $10b increase in the securities the Fed has lent to dealers, bringing that total to $127b. By my count — which could be off — the Fed has now provided around $500b in credit to the US financial sector over the last 12m months.*
And given how much has happened, that will probably be a couple hundred billion or so out of date. Or something like that.
Financial institutions have loss confidence in each other. American savers may soon lose confidence in money market funds — a key source of financing for a host of financial institutions. That effectively leaves the Fed — and other national central banks — as the only institution willing to supply financing to many financial institutions. Just think how extraordinary it is for the chief economist of Goldman Sachs to say that there has been a complete loss of confidence in the markets.
““There’s a complete lack of faith in the markets,” said Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London. “There’s a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.”
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Posted in Sovereign Wealth Funds, Systemic Risk | 39 Comments »
