Sovereign Funds Are Helping Strike A New World Economic Balance

Transcription

1 Sovereign Funds Are Helping Strike A New World Economic Balance ESADEgeo Position Paper 18 July 2011 Javier Santiso Professor of Economics, ESADE Business School Academic Director, ESADE Centre for Global Economy and Geopolitics (ESADEgeo) Javier Capapé Research Assistant, ESADEgeo

2 ABSTRACT Sovereign funds and emerging markets. In 2010, Sovereign Funds (SF) invested over 60% of their portfolios in non-oecd nations. Over US $30 bn 1 of the money came from China, Latin America (basically Brazil) and South-East Asia (Malaysia and Singapore). Sovereign Funds and the Spanish link with Latin America. Recent movements in CEPSA, Iberdrola and Santander show the interest Spain has in entering the burgeoning Latin American market. ESADEgeo: Agenda for activities covering Sovereign Funds. We propose a range of activities combining theoretical arguments and practical activities (SF operations and strategies, drawing up business case studies, annual conferences and a special Executive Education programme). Sovereign Funds and emerging markets The world has changed greatly over the last ten years. China s economic might is plain to see (the country is now the world s second biggest economy in GDP terms). The country seeks global investment opportunities as an outlet for its vast currency reserves. The Gulf States old fears of what they will do when the oil runs out have now given rise to action as they attempt to wean their economies off over-dependence on petroleum and natural gas. There are also the countries of South-East Asia, which are determined not to repeat the mistakes of and are building up large currency reserves and healthy balance of payments surpluses. Although all three processes affect different corners of the world, Sovereign Funds represent a common denominator. China has earmarked part of its 1 The short scale (échelle courte) applies throughout to billion (10 9 )and trillion, reflecting US usage. 2

3 international reserves (which rose to US $3 trillion in March ) for its SF China Investment Corporation which already manages funds of US $300 bn and takes a more aggressive investment strategy, far removed from the usual investments in central bank bonds (especially US Treasuries). Furthermore, it is precisely SF such as the Qatar Investment Authority and Mubadala (United Arab Emirates) that are given the task of transforming the economies of their respective States through acquisition of stakes in Western companies (General Electric, Piaggio Aero, Aernnova, and so on). In the process, SF gain the know-how needed to drive such transformation. Last but not least, there are what used to be called The Asian Tigers, which have pursued a policy of building up balance of trade surpluses. Funds such as Khazanah (Malaysia) and Temasek (Singapore) have thus been able to catalyse change in their respective countries, acting as venture capital funds and transferring knowledge and experience to local managers prior to disposing of their stakes. Consequently, the world in which we find ourselves is a new one in search of a new global balance. Many currently speak of a multi-polar world and indeed, this model will characterise economic growth over the next few years 3. For example, so far we have said nothing of Europe or The United States. That is because the global rebalancing role is being played by SF, which are accelerating the economic transformation through investment models that are far-removed from the old centre-periphery one. Indeed, the old periphery is becoming the centre of action and vice versa. Sovereign Funds are keenly aware of this shift, hence their interest in countries such as Brazil, Peru, Indonesia, India and even sub-saharan Africa. 2 Bloomberg, 2011 ( 3 World Bank Global Development Horizons 2011, Multipolarity: The New Global Economy 3

4 The latest report published by Monitor 4 confirms the trend: practically 60% of the investments made by SF are in non-oecd countries. We sought the causes of this sea change in the funds portfolios. Some of the reasons were: vast losses incurred in the bail-out of financial entities at the beginning of the crisis (conservative estimates put portfolio losses at almost US $600 bn in 2008). This accentuated a domestic bias in investments and the forging of stronger South- South ties and co-operation. This trend in Sovereign Funds is also linked to big changes in the world economy, which fall under the umbrella term of multi-polarity. The concept covers the increasing complexity of geo-political and economic changes that go beyond the old North-South stereotype. An example of this change is the recent shift towards Foreign Direct Investments (FDI), which for the first time in history have led to more inward investments in developing countries than in developed ones (Figure 1). Figure 1 Inward Foreign Direct Investment in billions of US dollars Source: ESADEgeo with UNCTAD data (2011); * Includes Russia and other emerging economies. 4 Monitor Group Braving the new world: Sovereign Wealth Fund Investment in the uncertain times of

5 How does one reach The South? Sovereign Funds and the Spanish link to Latin America. Once we found this trend towards South-South investment, we decided to delve into how the money is spent. One of the strategies followed by SF such as the Qatar Investment Authority and IPIC involves Spain, which has become a strategic nexus for companies wishing to investing in Latin America s boom-time nations: Peru, Brazil, Columbia. In 2010, QIA invested US $2.7 bn in Santander Brazil to acquire a 5% stake in the bank. It also made a big investment in Iberdrola (over 6%), which boosted its trading profits from its Latin American operations to over 30% of the total in After the Qatar acquisition of a stake in the Iberdrola electrical utility company, it acquired a Brazilian utility Elektro Electricidade in a deal worth US $2.4 bn, expanding its presence in Brazil (whose economy is growing by over 7% a year). IPIC has also carried out a similar strategy, acquiring 100% of CEPSA, a company present in Brazil, Colombia, Peru, Panama, Egypt and Algeria. Beyond these examples of deals struck in 2010, we consider that this modus operandi has great scope for further development. This is evidenced by the fact that leading Spanish companies in Latin America earn a big slice of their revenues from the region: Santander and Endesa (78% and 82% of net profits, respectively); Telefónica (43% of revenue). BBVA earnt 57% of its gross revenues from America and Asia. Sovereign Funds in Spain Not all Spanish investment is linked to Latin America. In 2008, Mubadala, the Abu Dhabi Sovereign Fund acting through its Masdar subsidiary (specialising in renewable energies) began a joint venture with SENER in the field of thermosolar plants. This innovatory initiative has received international recognition for its application of techniques for boosting energy efficiency. Mubadala also hit the headlines in Spain when it took a 70% stake in the Basque company Aernnova for some 500 m. The purpose of the operation was to acquire know-how for the expansion of the United Arab Emirates (UAE) 5

6 aerospace hub 5. This kind of investment in know-how was carried out in Finmeccanica, PiaggioAero and SR Technics, turning the UAE into a global aerospace hub embracing the building of components, structural design and comprehensive repair facilities for airlines. Norway s Government Pension Fund - Global 6 (despite the name, it does not operate as a pension fund) had invested close on 18,000 m 7 by the end of 2010 (70% in bonds and 30% in stocks and shares). Most of the bonds are Spanish Treasuries ( 3.2 bn). The fund s shareholdings are concentrated in Telefónica, Santander, Iberdrola, Repsol and BBVA, making up 65% of investments in equities. Figure 2: Investments by Norway s Government Pension Fund Global [SPU] in Spain (31/12/2010) Source: ESADEgeo, based on the report to , published by the Norges Bank Investment Authority. 5 This has taken part in the building of the world s biggest airliner, the A Statens pensjonsfond utland, SPU 7 Data taken from the web site of the NBIM fund: 6

7 ESADEgeo: Activities agenda for Sovereign Funds From what we have already said, it is clear that SF play a key role in striking a new global balance. That is why we consider systematic, advanced research needs to be conducted on Sovereign Funds to fill the current gaps in our knowledge. Hence our proposal for a series of business case studies linked to SF, covering: investment strategies, governance in relation to outside fund managers, ethical issues (which have reared their heads in connection with the Libyan Investment Authority). Another line of research concerns identification of best and worst practices in funds. Temasek and Khazanah are success stories in terms of transforming the economies of their respective nations. Meanwhile, Mubadala s complex network of investments challenges the traditional taxonomy of Sovereign Funds. Furthermore, we believe it is worth studying best practices in the so-called strategic funds (and the difficult balance they strike between financial objectives and the national interest). Mubadala, Temasek, Khazanah and the Qatar Investment Authority are of particular interest here. In keeping with the idea driving ESADEgeo, we centre our study on South- South links. Our work in this field should help ESADEgeo serve to both launch and catalyse such relations. Among initiatives fostering the transfer of knowhow between Sovereign Funds is our proposal for an Annual Conference on Long-term Investment and the creation of an Executive Education programme wholly aimed at the managers of Sovereign Funds. The aims of these initiatives include broadening opportunities and frontier markets, providing the first consistent focus on Africa. 7

8 For further information about ESADEgeo s Position Papers, please feel free to contact: Irene García García Researcher ESADE Center for Global Economy and Geopolitics Av. Pedralbes 60-62, Barcelona, Spain irene.garcia2@esade.edu Ext