Quote from F. Kotler’s book “Chaotica”
A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, precious metals, or other financial instruments. SWFs have existed in one form or another for many decades, and their numbers have sharply increased since 2000. Some of them are held exclusively by central banks, which accumulate funds while managing the national banking system. Funds of this type typically have the greatest impact on the economy and finance. Other SWFs are simply state savings that are invested by various legal entities.
During the global financial crisis in 2008, several American and European financial institutions avoided bankruptcy by accepting investments from the Chinese government and various Arab kingdoms. This speaks volumes about the development of third-world countries, as well as about who will specifically be making waves in the new era.
In this new chapter of economic history, the driving forces of globalization that have been at work for the past fifty years will no longer play their dominant roles. The process of redistributing money and power in the world away from the United States and Europe towards resource-rich countries and rapidly industrializing nations in Asia has been in full swing for many years following the terrorist attacks of September 11. During this time, China, Russia, the Middle East, and other developing economies began accumulating vast reserves of cash, as globalization provided a significant boost when prices for oil, natural gas, and other raw materials soared.
In recent years, sovereign wealth funds have gained significant influence in international markets. They invested in a number of Wall Street financial firms, such as Citigroup, Morgan Stanley, and the former Merrill Lynch, when these companies needed cash infusions due to losses incurred at the onset of the mortgage crisis in January 2008. The enormous damage caused by the crisis at the end of 2008 only accelerated this transformation.
The state-owned investment funds of China, Singapore, Abu Dhabi, and Kuwait manage assets totaling nearly $4 trillion, and they have access to Wall Street as well as major London and European trading platforms both today and in the foreseeable future. They are largely responsible for creating significant market waves (see Figure 1-5).
Most sovereign wealth funds are still adopting a cautious approach, taking into account events from the recent past. For example, the China Investment Corporation invested $3 billion in the initial public offering of Blackstone Group in June 2008, and prior to that, $5 billion in Morgan Stanley in December 2007. In both cases, this resulted in significant losses within months after the investments. Additionally, the drop in oil prices has reduced cash flow into these funds.
But time may be on the side of the GSFs. With long-term forecasts predicting a serious recession in the United States and Europe, continuing into 2010, American and European stocks are becoming cheaper every month, and objections from American and European sellers to buyers from Asia, Russia, and the Middle East are also becoming increasingly weak. While the world is experiencing a global recession, financial inflows from these regions, which help stabilize Western economies, will be welcomed.
Much of the turbulence, ultimately resulting from the GSF’s investments in these markets, may stem from underlying feelings of nationalism and protectionism. Before the West began reaching out in gestures of goodwill, asking the GSF for money to help stabilize their shaky financial markets, there was widespread skepticism both in the U.S. and among many European governments. A notable example of this is the events of 2006, when the U.S. government rejected proposed investments from Dubai Ports World in several major American seaports.
Cynicism continued to exist, giving rise to a large number of statements made in mid-2008 by American lawmakers and congressional analysts, who claimed that the unregulated operations of hedge funds and other speculators contributed to the dramatic fluctuations in oil prices in recent months, and that massive investment pools managed by foreign governments had now become the largest speculators in the United States in trading oil and other essential commodities such as grain and cotton. Then, at the end of 2008, French President Nicolas Sarkozy stated at a meeting of European leaders that Europe should have its own hedge fund to buy stakes in companies affected by the global financial crisis and protect them from “predators,” reaffirming his previous promise to shield innocent French (and other European) companies from “extremely aggressive” hedge funds.
The hidden fears surrounding incredibly wealthy and opaque national sovereign wealth funds will inevitably fuel protectionist sentiments when financially unstable times arise. This heightened fear will be fed by the inherent disdain that many people in the West have towards oligarchic and state capitalism, both of which are prevalent in many developing markets with the largest SWFs.
Ultimately, through acquisitions and investments made by state-owned funds in the USA, Europe, and other Western economies, the role of the state (often undemocratic) in the global economy will rapidly increase. This will inevitably lead to a backlash from Western governments and companies, creating new sources of turbulence and chaos in which businesses will have to operate.