Sovereign Fatigue

Not that long ago sovereign wealth funds (SWFs) were being hailed as potential saviors of the West’s financial system, as they invested heavily in banks such as Citigroup, Merrill Lynch, Morgan Stanley, Barclays and UBS. Unfortunately, for many of them those investments have incurred losses. Not only that, but their actions were not enough to stabilise the financial markets as the credit crunch is turning out to be worse than most experts imagined just a year ago. .

The Kuwait Investment Authority, the Government of Singapore Investment Corp (GIC) and the China Investment Corporation have come under criticism at home over some of their investment decisions. At the time these investments were being made, some wags in the West referred to SWFs as “dumb money” for picking up shares in banks that Western investors couldn’t dump fast enough.

However, critics should note that these funds have very long time frames, in many cases spanning decades, much like pension funds. Looking from such a perspective, these investments may in the end turn out well. The last 12 months may have been a great opportunity for investing in big blue chip banks – though that certainly doesn’t seem the case at the moment.

Also, with such vast sums of money to deploy, SWFs can never truly get the bottom of the market, even if it’s possible to accurately time such an event. It’s a case of buying into the market as it sinks, bottoms and then rises. That naturally means sitting on losses for a while.

Should domestic criticism grow too vocal, SWFs can always try to point to the fact that these investments are more than about just generating investment returns. They’re about tapping into essential expertise to help develop their domestic industries, something that rattles nerves in the West. But the worse the economic environment is, the stronger the SWFs negotiating position becomes.

Indeed, financial centres such as Dubai and Singapore may see the current crisis as a unique opportunity to push further forward on the global stage. With the weight of SWF money behind them and government determination to succeed, it would be a fool hardy person to bet against them.

In the meantime, SWFs will be more cautious and probably demand even more stringent terms when making direct investments. So called dumb money might be about to smarten up considerably, especially as Western organisations become more desperate for financial life lines.