Sovereign-Wealth Funds

With the fear of recession, the stocks of banks, financial institutions and several fortune 500 companies are at rock bottom. Nobody wants to speculate the size of bonds write-off and there are not many takers for the stocks now. In such a scenario, several Asian Governments (primarily the Oil rich nations and China) are buying substantial stakes in blue chip firms like RBS (Royal Bank of Scotland, Citibank, Syndicate Bank etc) and preventing bear markets to have a home run.

Unfortunately instead of thanking these brave governments for showing confidence in these troubled times and ensuring that there is sufficient liquidity in the market, the West seems to be scared. EU has imposed several restrictions and disclosure norms on them.

My only response to such practice:
“Beggars cannot be choosers.”

Whenever I see the US consumer spending charts, I am always reminded of the grasss-hopper story. US citizens were happily borrowing and living way beyond their means, while Asian Economies (like ants) were working hard day and night in their sweatshops.

Out of goodwill and to prevent a correction in USD (read devaluation of USD), we bought some USD and kept the prices up. After all a dollar decline helps nobody. Now that even the bond markets has collapsed, Asian Economies have a right to invest their own money in whatever securities they think is safe and serves best the interest of their nations and its political masters. They are doing a service to the world and business communities by infusing cash in the distressed companies and preventing them to go under. While the thankless West is simply making a big fuss out of it.

Whats ironical is that till a few decades ago, US/CIA used to invest in the under-developed world and then used those investments to get a political muscle in the region. There is a long history of developed world engineering a coup just to safeguard these investments. Although till now, no Asian Economy has even attempted such an outragious and selfish act, USA is blaming us for it.

Warren Buffet understands this. Hence he recently said:

“There’s been much talk recently of sovereign wealth funds and how they are buying large pieces of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the US. When we force-feed $2 billion daily to the rest of the world, they must invest in something here. Why should we complain when they choose stocks over bonds?”

BTW, with Indian Forex reserves crossing 290 Billion Dollars, I think its high time that India should also start a Sovereign Wealth Fund.

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7 thoughts on “Sovereign-Wealth Funds

  1. did we ask for the same standards of accountability when US firms invest in India…. infact even for IMF/World bank help has several strings attached and they even try to modify our political scenario…
    on the other hand these SWF don’t even ask for a seat in the board.

    about UTI like scenario and competence… yes the citizens of the countries owning the SWF should be worried, but the companies and countries which are getting the money should be least bothered.

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  2. exactly …
    take indian govt for example…
    RBI needs to borrow at 7.99% in INR (an appreciating currency) and then buy dollars (a depreciating currency) and get a US treasury returns of <4%.
    this lossy proposition tempts Indians and chineese govt to buy Mortgage CDO .. after all they also had AAA ratings….

    now if these companies invest a part of the portfolio in stock market, the higher returns which it offers could compensate for some of the losses without encouraging these funds to go gamble in bond market trends

    BTW Abu Dhabi Investment Authority has successfully managed a portfolio of >500 Billion dollars and funds like Kuwait Investment Authority have been formed in 1953 and both funds are delivering spectacular returns and were never had any underhand political agenda. so I guess govt not always do such a bad job

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  3. //well im not talkg about forex reserves//
    well typically the forex dollars are diverted to these SWF and thats how these are funded. hence the size of Forex gives a good idea about the investment capacity of that state

    //china is using their reserve as a weapon//
    if by this you mean give loans to African Dictators, and Latin American Governments that are not in good book of USA, then I agree. China has effectively carved out a niche for itself by funding projects in such countries and effectively reduce the political leverage that USA can use because of the aid/loan schemes.

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