Sovereign funds soon may surpass official foreign reserves

By Vivianne Rodrigues
Reuters
Tuesday, March 11, 2008

http://www.reuters.com/article/ousiv/idUSN1160324820080311

NEW YORK -- Sovereign wealth fund assets may soon surpass total official foreign reserves held by central banks and become the main vehicle for capital investment, a Morgan Stanley economist said on Tuesday.

The investment funds -- large pools of capital controlled by a government and invested in private markets abroad -- altogether control more than $2.8 trillion, but could reach $12 trillion in total assets by 2015, Morgan Stanley managing director Stephen Jen said in a conference call.

"The rate of growth is impressive. We are talking here of about $1 trillion per year in their asset pool, generated mainly by a boom in oil prices and other commodities," he said.

Most of the growth in the funds will come from Asia, although assets in Russia's National Wealth Fund could jump to as much as $619 billion by 2019 from about $32 billion at its inception in 2003, according to Jen.

"Russia's fund is a very interesting case because it may simply grow tremendously, or stall if the government decides to use its assets to fund investments in infrastructure," he said.

The sovereign funds have been focusing on recapitalizing the sectors, like banking, where cash is needed to rebuild their balance sheets after the subprime meltdown resulted in massive losses. U.S. and European banks have been actively seeking cash from sovereign wealth funds.

Some of the biggest beneficiaries of the multi-billion dollar investments included UBS, Merrill Lynch & Co., Morgan Stanley, and Citigroup Inc.

The move is likely to intensify and spread to other sectors including resources, infrastructure and high tech, Jen said, as low valuations after a global equity market rout may entice the funds.

"As the funds use the oil proceeds to tap into more equities outside their regions of origin, I would also expect currency markets to feel the impact," he added.

"The Japanese yen and some emerging market currencies stand out to benefit the most. On the other hand, the dollar is likely to suffer."

* * *

GATA is grateful for financial contributions, which
are federally tax-deductible in the United States.