Sovereign investments are inextricably linked to the economy and finances of their host countries, and there are usually more issues at stake than merely pursuing higher returns. Due to their global and diverse nature, Sovereign Wealth Funds (SWF) are unavoidably impacted by everything that occurs in the world, from geopolitics and pandemics to climate change and technological upheaval. The business environment is always changing, and a single year can see major changes.
Global Sovereign Wealth Fund Performance – A Holistic Overview
Despite increased vaccination rollouts and 4.5 billion people around the globe getting vaccinated, the world has still not gotten “back to normal”. Even though a 5.9% growth was observed in the global GDP, concerns regarding poverty, inequality, and geopolitical tensions were not alleviated. To add to the mix, rising energy prices, global supply chain disruptions, and an astonishing surge in inflation rates that the West has not witnessed in the past three decades dominated the year 2021. Due to these reasons, Sovereign Wealth Funds and Public Pension Funds have continued to operate cautiously. While some funds were asked for capital or for domestic bailouts, others availed of opportunities overseas and greatly benefited from the stock rally.
According to a Global SWF report for the past year, 2021 was yet another successful year for state-owned investors. Since March 16, 2020, the stock markets around the world, and particularly the US stock markets, have continued to rise. In the 21 months to the end of 2021, the S&P500 has more than doubled, the Dow Jones Industrial Average grew 90%, and the S&P 1,200 Global Index was up 86%. For better or for worse, sovereign wealth funds and public pension funds continue to hold a very significant exposure to American stocks – which has allowed most to score their best-ever results and boost their AuM.
In 2021, the size of the SWF industry increased a 6% year on year and exceeded the US $10 trillion mark for the first time in history. This was helped not only by the price of equities, but also by the recovery of oil prices, and to a lesser degree by new funds established during the year. Public pension funds also accomplished a historical milestone after growing past US $20 trillion and experienced a higher y-o-y growth of 8.7% due to increased exposure to US stocks, and to rising contributions from pensioners around the world.
The performances of the different asset classes varied significantly during 2021. Fixed Income was the only asset class with negative returns, as measured by the S&P 500 Bond global index. While according to S&P Global 1,200 index, public equities continued to display a strong performance. Hedge funds disappointed again with returns significantly below stocks. Private markets are always more challenging to follow as SOIs do not necessarily carry out valuations every quarter, and if they do, they have a certain lag. However, according to indices of listed companies, real estate was the best performing asset class of 2021, followed closely by PE.
State-owned investors invested more money in 2021 than in any of the six years before it – both in terms of the number of deals and in terms of deal value, which was over US$ 219 billion. Compared to 2020, SWFs deployed 19% more, with US$ 106.1 billion in 500 transactions; while investments by PPFs increased significantly in terms of both value and volume, up to US$ 112.9 billion in 354 deals.
Much to the benefit of the Developed Asia-Pacific, emerging markets were only able to attract 22% of the capital this year, which is one of the lowest figures in six years. Another key trend during the period 2016-2021 was the change in SOIs’ sectorial preferences. In 2016, over half of the deals were in real assets, however, today that figure has decreased to a third of the total. Unsurprisingly, the industries of healthcare, retail and consumer, and technology have all gained importance. This increase has been attributed to Venture Capital for all three sectors.
But not all developments have been about the private markets. Sovereign funds are now very active in stock markets around the world, and some have started diversifying away from the US markets.
On the other hand, the Singaporean SWF deployed US$ 34.5 billion in 110 deals, almost double of what it did in 2020. Almost half of that capital was invested in real estate, with a clear bias toward logistics. GIC was again way ahead of everyone else. The next biggest spender was CPP with US$ 23.7 billion, of which 61% was invested in real assets. Both funds present a strong preference for North American assets and a smaller than average appetite for Emerging Markets. Other Top 10 funds including ADIA and Mubadala think differently.
Meanwhile, China and India are providing an alternative to diversify public holdings. Most SOIs proved to be bullish on Chinese stocks, especially ADIA, which has shut down its Japanese program to focus on China, and PIF, which recently applied for QFII status. Indian stocks on the other hand were dominated by GIC, with US$ 14.8 billion in holdings. This is in stark contrast with CDPQ, which sold most of its Indian positions.
Apart from growth in assets and deal activity, one of the major trends we are seeing is a shift in investment strategy, and whether it makes sense for SOIs to adhere to the conventional view of strategic asset allocation or to adopt a more streamlined and dynamic approach to portfolio construction. It has been observed that funds that use Total Portfolio Management typically have greater financial returns, indicating that additional funds might adopt this strategy.
2022 – Recent Developments
It seems for the year 2022, quite a bit of focus has been on the national elections across several countries throughout the world. This is being closely monitored by sovereign investors, including for regions such as Asia-Pacific (South Korea, Philippines, Australia) in Q1-Q2; in Africa (Kenya, Angola) in Q3; and in Latin America (Brazil) in Q4. In addition, there is a keen interest and observation of the new dynamics of Europe while for the US the mid-terms and potential candidacy of Trump 2024 are being closely watched.
Some key developments around the world worth noting include:
Norway
In light of some recent developments, it has been reported that Norway’s sovereign wealth fund, the largest in the world, has lost $174 billion in the first half, citing inflation and the war in Europe. According to details reported by CNBC, Norway’s sovereign wealth fund had a loss of 1.68 trillion Norwegian kroner ($174 billion) in the first half of 2022, as stock markets saw a tumultuous six months.
The $1.3 trillion fund returned a negative 14.4% during the period, as stocks and bonds reacted violently to global recession fears and skyrocketing inflation. However, the fund’s return was 1.14 percentage points better than the return of the benchmark index, Norges Bank, the country’s central bank, equivalent to 156 billion kroner.
The CEO of Norges Bank Investment Management, Nicolai Tangen, stated that “The market has been characterized by rising interest rates, high inflation, and war in Europe. Equity investments are down by as much as 17 percent. Technology stocks have done particularly poorly with a return of -28 percent.”
Fixed income investments and unlisted renewable energy infrastructure had declines of 9.3% and 13.3%, respectively, while the fund’s return on equity investments fell 17%. The fund’s fortune is based on Norway’s enormous North Sea oil and gas deposits. After the fund made significant investments in wind power in recent years, the energy sector was the only one that did not see negative returns.
“In the first half of the year, the energy sector returned 13 percent. We have seen sharp price increases for oil, gas, and refined products,” Tangen added.
NBIM’s (Norges Bank Investment Management) performance is “symptomatic” of a larger trend across most major investment funds, Economist Intelligence Unit analyst Matthew Oxenford told CNBC.
“The first half of 2022 saw a significant upheaval in financial markets globally, and most diversified funds have seen declines in their value,” Oxenford said.
“Globally, much of this decline was driven by aggressive monetary tightening by central banks, which led to a sharp decline in investment in fast-growing firms in high-growth sectors such as tech (with Meta being the largest single source of loss in NBIM’s portfolio) as the return on safer investments increased and the global pool of high-risk investment shrinks,” he said.
“Given that NBIM is highly diversified, and pursuing a longer-term investment strategy, it is likely to weather this storm, although the exceptionally high growth rates we’ve seen in 2020 and 2021 are unlikely to return as global central bank interest rates aren’t likely to return to the pandemic-era near-zero levels any time soon,” he said.
Inflation, interest rate hikes, and war in Europe have majorly affected the U.S. indexes, with the Dow Jones Industrial Average losing more than 15% in the first six months of the year, the S&P 500 down over 20%, and the Nasdaq Composite falling almost 30%.
Credit: Reuters
Saudi Arabia
Meanwhile, for the Middle East region, a report by Business Insider has stated that Saudi Arabia’s sovereign wealth fund has added a $412 million bet on tourism, with oil income boosting equity investments.
According to the report, the Kingdom’s Public Investment Fund has announced a $412 million, or 1.55 billion riyals, investment in Almosafer Travel & Tourism, which amounts to a 30% stake in the company.
The PIF, which is chaired by Crown Prince Mohammed bin Salman, has delved deeper into equity investments as revenues from oil have aided in the Kingdom’s drive toward a goal of overseeing $1 trillion in assets by 2025, up from $620 billion now. The PIF had previously poured $7 billion into stocks including Amazon and BlackRock in August after oil income soared in the second quarter amid plans to buy a total of $10 billion in stock this year. In May, the fund acquired a $1.5 billion stake in Prince Alwaleed Bin Talal’s investment company. The kingdom has been one of the primary beneficiaries of elevated energy market prices since Russia invaded Ukraine in February, though crude oil has come off its high in recent months. Last month, state-run giant Saudi Aramco reported that second-quarter net income soared 90% to $48.4 billion.
Credits:APP
Qatar and Pakistan
On the other hand, it has been reported by various media outlets that Qatar’s sovereign wealth fund is aiming to invest $3 billion in Pakistan. It has been reported that Qatar’s Investment Authority seeks to invest $3 billion in various commercial and investment sectors in Pakistan to boost the country’s cash-strapped economy.
The announcement was made during a visit to Doha by Pakistan Prime Minister Shehbaz Sharif, who held official talks with Qatari Emir Sheikh Tamim bin Hamad al-Thani, after a meeting with the QIA.
Pakistan is in deep economic upheaval and faces a balance of payments crisis, with foreign reserves having dropped as low as $7.8 billion, which is barely enough for more than a month of imports. It is also battling with a widening current account deficit, depreciation of the rupee against the US dollar, and inflation that hit more than 24% in July.
Egypt
Focusing on the African part of the Middle Eastern region, it is being reported that Egypt’s Sovereign Wealth Fund is working on a pre-IPO work plan and that the fund has already completed a list of some assets that will be included in the fund to be presented to strategic investors.
Minister of Planning and Economic Development Hala El-Said added that the subsidiary fund was established to prepare shares that will be offered in the IPOs committee and that the first shares that will be managed are the shares of an investment bank in a number of affiliated companies for the public sector.
Sources closely related to the file told Daily News Egypt (DNE) that the Sovereign Fund of Egypt is working on developing a work plan for the IPO Fund and a list of the companies to be offered is currently being drawn up, as well as the shares in question, and the timetable for seizing the favorable opportunities in the market to complete the offerings with the best evaluation. The sources confirmed that the fund has already completed a list of some assets that will be included in the fund to be presented to strategic investors.
The IPO program aims to develop foreign direct investments in the stock market and accelerate the implementation of the government’s plan to exit certain sectors as per the State Ownership Policy Document.
CEO of Egypt’s Sovereign Fund Ayman Soliman said in previous statements that the pre-IPO fund will provide investment opportunities worth hundreds of millions of dollars for these major funds, which will reflect on Egypt’s benefit from entering foreign investments quickly, coinciding with the presence of shareholders who maximize the value of the fund.
Soliman added that the fund aims mainly to accelerate some investments to enter into targeted partnerships through the IPO program to expand the ownership base, and the fund will allow these investments to enter even in the absence of favorable market conditions for the completion of public offerings.
In addition to this, he affirmed that the Sovereign Fund of Egypt carefully selects strategic investors by setting several conditions to be invited to subscribe to the pre-proposal fund, the first of which is for the strategic investor to create an added value for the company’s under-investment, maximize its value, and enhance the value of completing the public offering.
Furthermore, Ahmed Hesham — Head of the Strategic Research Sector at Beltone Securities Brokerage — said that the capital market needs more reform measures to become more attractive to investments and to be ready to receive proposals in general.
He also explained that it is necessary to work to increase the competitiveness of the Egyptian market, especially in light of the strong competition from the surrounding Gulf markets to attract foreign capital.
He added that Egypt has reached an agreement on a positive IMF loan for the money market, but the market needs more extensive measures.
Key Dynamics for Q4 2022
Investors will also keep an eye on Chinese dynamics, particularly those related to President Xi’s predicted continuation of his campaign against Chinese tech companies. In contrast to geostrategic investment, games and shopping may lose pace, which might have an impact on the entire Chinese venture capital market. Temasek and other investors appear to be “too deep” in China to seek an escape, while other investors may keep looking for alternatives in Southeast Asia, India, or other undiscovered areas outside of the continent.
International attention is expected to be focused on the Middle East and North Africa. The upcoming UN session on climate change (COP27) will take place in Sharm el-Sheikh in November, and the WBG-IMF biennial meeting overseas will finally take place there in Marrakesh in October. PIF will be finishing up phase 1 of the development of the Red Sea Project, one of its multi-billion, giga-projects, just 500 kilometers to the south over the border between Umluj and Al Wajh.
Lastly, the world is looking forward to seeing new SWFs being formed in Israel, Namibia, Ethiopia, Mozambique, and even Germany; and to merged pension schemes arising in the Middle East and Australia. It is also being stated that the depleted Latin American stabilization funds may finally start receiving capital again as oil revenues accumulate.
