Sovereign Wealth Fund likely to boost stakes in Gulf markets

The US and European move to impose restrictions on Sovereign Wealth Fund (SWF) investments will prompt Gulf-based SWFs to further boost their stakes in the GCC stock markets, where they currently account for 27 per cent of the market capitalisation valued at $300 billion, global investment analysts said.

In the region, 36 SWFs, including seven from the UAE and eight from Saudi Arabia hold, 131 GCC listed companies. While collectively their holdings reach to about 131 companies, the top 25 companies account for 90 per cent of the total, according to Markaz in a recent research.

Investment analysts said the proposed code of conduct to be imposed on SWFs by the West, seen by many as a protectionist response to the growing influence of these funds, is likely to trigger a shift in their investment pattern that would have positive impact on the regional markets. The US and EU have both drawn up codes of conduct for SWFs.

Last month the International Monetary Fund (IMF) and 25 SWFs established an international working group to draft the first ever best practice guidelines for the state-owned funds.

"In the wake of these developments, there would be a paradigm shift in SWF’s investment policies toward equities and alternative investments and their geographical diversification," said a Dubai-based analyst.

Gulf-based SWFs have combined assets estimated to be more than $3 trillion, of which Abu Dhabi Investment Authority (ADIA) alone accounts for more than $900 billion. GCC's government-backed wealth funds and SWFs from Asian countries with large trade surpluses have hit international headlines in the last 12 months after stepping in to bail out a number of US and European banks in the wake of the subprime mortgage crisis and ensuing credit crunch.

According to some analysts, the value of assets controlled by SWFs could grow to $12 trillion by 2015 — roughly the size of the US economy's gross domestic product (GDP).

Analysts said regulatory initiatives have been fuelled by the astounding growth of SWF assets, and probably even more by a number of major investment decisions made by individual sovereign funds and other state-owned or state-controlled corporative entities. Their profile has been raised through a series of recent significant acquisitions in Europe and worldwide.

"The growing clout of SWFs is raising concerns in the West over transparency and accountability, with some claiming foreign governments may harbour political motivation when investing in the US and Europe. In what is seen as the biggest confrontation between a SWF and the West, the DP World was forced to sell US port terminal operations it acquired through its takeover of UK-based P&O amid a political firestorm that the deal posed a threat to American national security."

The West's response has come in for criticism, with wealth funds claiming that restrictions on investment will see them take their money elsewhere. The latest to slam the US-EU move is the Duke of York Prince Andrew at the World Economic Forum (WEF) in Sharm El Sheikh. He said there was no reason for countries to restrict investment by wealth funds.

Sultan bin Sulayem, the head of Dubai World, also voiced his concern over the issue, while echoing a similar warning by the Kuwait Investment Authority against the EU proposal for an SWF code of conduct.

The Organisation for Economic Cooperation and Development (OECD), a club of 30 industrial democracies, also said new laws or regulations to govern sovereign wealth funds were not needed as long as the funds are transparent and invest on commercial rather than political grounds. Angel Gurria, secretary-general of the OECD, said the Paris-based forum had not come across an example of a sovereign wealth fund acting for any reason other than the pursuit of profit.

Nermina Biberovic, a research associate of economics at the Dubai-based Gulf Research Centre, said an international dialogue should build upon existing rules and regulations within an agenda of well-defined mutual strategies. It might contribute to mutual trust while keeping markets open in times when economic ties have deepened and widened — especially in the context of the EU-GCC FTA.

According to Biberovic, the geo-economic relationship between the EU and the Gulf cannot be overlooked or understated. In 2007, the GCC member states have been able to build their net foreign asset position to $1.8 trillion, as the latest research of the Institute of International Finance indicates. The EU is attracting a significant share of these account surpluses, which might further rise, in case the Gulf States move towards an agenda of diversifying currency holdings.

"It is estimated that GCC’s capital outflows towards the European Common Market accounted for around one fifth of Gulf’s total capital outflows between 2002 and 2006. Around 20 per cent of GCC’s overall portfolio investment and around 55 per cent of Gulf’s total direct investment were directed towards the EU. While the ratio of direct investment is marginal, yet it clearly indicates a strategic alignment towards the EU."
/Khaleej Times/