Latest Soveriegn Wealth Fund Report: US Not The Favorite

This is a follow-up to a post from July. Isn’t it funny how when we need the money the politicians are not screaming about this anymore? In fact, one could make the argument they are begging for SWF Investment now.

File this under “be careful what you wish for, you just might get it”. The good news? SWF’s are not investing large sums in US businesses. The bad news? SWF’s are not investing large amounts in US businesses.

The latest Monitor Group analysis is an update to its June 2008 report: “Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy.” Key findings of the latest analysis include:

§ In the second quarter of 2008 (Q2 2008), funds in the Monitor SWF transaction database executed 43 deals totaling $26.5 billion. In contrast those funds executed 42 deals totaling $58.3 billion during the previous quarter (Q1 2008).

§ SWFs continued to invest actively in emerging markets. In Q2 2008, more than half the deals and funds invested were in emerging markets (vs 40% in Q1). SWFs carried out 26 deals and invested $15 billion in BRIC and non-OECD countries.

§ Investment in North America dropped dramatically. In Q2 2008, four deals totaling less than $1 billion were received by North America. In contract, this region received seven deals totaling $23 billion during the previous quarter (Q1 2008).

§ Half of the deals by value in Q2 were in real estate (shopping centers and real estate management companies). Real estate had the largest number of deals (12) and the highest investment ($13.7 billion) in Q2 2008.

§ During Q2 2008, investment has shifted away from financial services. SWFs carried out 10 deals and invested $4 billion in the financial services sector during Q2 2008. In the previous quarter (Q1 2008), funds carried out 13 deals totaling $43.4 billion.

“Our transaction data show that SWFs have focused recent equity investment away from volatile geographic markets and sectors, like North America and financial services, and are instead seeking more attractive returns in emerging markets and other sectors, including real estate,” said Drosten Fisher

The country taking the lion share of the business? India. There was heavy investment in the healthcare, consumer and aerospace sectors in India in Q2. This also follows the trend they exhibited in other nations. This is particular distressing to those who are looking for funds to flow to the US. Those are not sectors in the US that lend itself to foreign investment (thing Wal-Nart (WMT), Target (TGT), GE (GE) or United Health (UNH).

But, for shareholders of wither Wal-Mart (WMT), GE (GE) or even Dow Chemical (DOW) who are aggressively expanding into the region, it is good news. A steady flow of funds to the region raises the standard of living for all and by default the sales prospects for those doing business there.

Bill Ackman at the Value Investing Congress commented on “opportunistic capital” (hedge funds and SWF’s). He said that “opportunistic capital is always the first in” when it comes to investment (listen to press conference here). It should be noted that Russia has receive zero deals. For those thinking of investing overseas, if those with the money are avoiding a country, perhaps you ought to think twice before committing funds there? Based on their activity, India and Brazil seem to be the nation’s of choice both for opportunity and safety of capital.

Now, for those afraid of SWF’s, please note the following graph.

A disclaimer: This is my chart and Monitor Group in no way implies the “Bailout” equates the US to a SWF. This chart is purely for comparison purposes.

What is the point? SWF’s are a nice boogey man for people intent on stirring things up but they really are dwarfed not only buy US Mutual funds but what our gov’t itself. Let’s not forget, $250b of the US investment in banks wasn’t an option for the banks….that is not an issue with SWF’s.

Q2 report available by email akrull@racepointgroup.com
About Drosten:
Drosten Fisher is a principal with the international strategy consultancy Monitor Group. His focus is serving government and commercial clients in the areas of economic competitiveness, national security and international finance. A Middle East specialist, he speaks Arabic and has lived and worked in the region. Before joining Monitor, Drosten was a researcher for former Director of Central Intelligence George Tenet on his memoir At the Center of the Storm.

He was educated at Oxford and Georgetown and is a term member of the Council on Foreign Relations.Drosten is a co-author of a recent Monitor report into sovereign wealth fund investment and is a regular speaker and commentator on Middle Eastern investment, politics and business.

Disclosure (“none” means no position):Long WMT, GE, Dow , none
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