SWFs still waiting for market bottom

Senior executives of some of the world's biggest funds said they held off any substantial investment for now.

Sovereign wealth funds (SWFs), many of which have seen their portfolios decline sharply in recent months, are cutting back equity investments until the market bottoms out in the second half of the year, according to a study. The report comes as many state-owned investment funds in the GCC region, such as the Abu Dhabi Investment Authority and Kuwait Investment Authority, have taken a battering on their stock-market investments. Analysts suggest they may have incurred losses of between 25 per cent and 30 per cent. Two of three senior SWF executives said they were not investing in equity markets at present, according to a survey by Financial Dynamics International (FD), a financial and corporate consultancy. Only 10 per cent of the surveyed executives said they were still investing. Managers surveyed account for more than half of the US$5 trillion (Dh18.36tn) in funds globally held by SWFs. "While SWFs are currently adopting a very cautious investment approach to world markets, they are clearly poised to re-enter the global equity markets in the not-too-distant future with compelling value propositions beginning to present themselves across North America and western European equity markets," said Charles Watson, the chief executive of FD. Managers singled out Brazil and China as the most attractive areas to invest, but saw the best value in North America and western Europe, where some markets have seen price-to-earnings values drop by as much as 40 per cent from their peaks. The survey confirmed that some SWFs saw the primary need to support their own economies. The liquidity squeeze and sharp corrections in regional stock markets have led to a wide debate about whether SWFs should, or would, divert cash to bolster their home-nation stock markets and economic activity. "A proportion of our free cash holdings have been diverted to supporting local investments, meaning that our international investment activities have been temporarily put on hold," said one executive in the survey. All spoke on condition of anonymity. Earlier this month, Abdul al Ghurair, the chief executive of Mashreqbank and Speaker of the Federal National Council, called on the government to use its SWFs to get liquidity into the financial system and restart the economy. The survey showed that many SWFs had less appetite to participate in further bailouts of companies in financial difficulties. "Having supported some of the earlier capital raising of distressed banks, we are not planning to make any follow-on investments of a similar nature," one executive in the survey said. Many regional SWFs face large capital, or book, losses after injecting billions of dollars into beleaguered banks such as Citigroup or Merrill Lynch, which is now part of Bank of America. Henry Azzam, the Deutsche Bank chief executive for the MENA region, said he expected the loss of assets of Gulf SWFs to reach $450 billion. The survey revealed that SWFs want to be passive investors and not seek an activist role trying to shape corporate decisions. "It is a serious misconception that we are active or strategic investors. Our sole objective is to invest across the broad range of assets and geographies to create long-term value," said one executive. A report for the Council on Foreign Relations, published last month, estimates that total assets held by Gulf SWFs and ruling families fell from $1.3tn in 2007 to $1.2tn last year. [e-mail]