SWFs Say Goodbye West, Hello East

Watch out, growing government SWFs in the emerging markets are set to become the world’s largest asset class.

Despite the mire of the recession, global sovereign wealth funds (SWFs) continued to fill their commodity-lined boots.

Soaring GDP in emerging markets has fuelled a 28 per cent rise in the total assets held by SWFs since the inception of the financial crisis.

The notoriously cash-rich and media-shy government investment vehicles boasted a total haul of $4.8 trillion in December 2011, compared to the $3.75 trillion recorded in September 2008.

Amid the Eurozone debt crisis and a global liquidity crunch, sovereign wealth funds have emerged as vital forefront players in the international financial market.

With squeezed funding options, investors the world over are keen are tap into the liquid power of SWFs.

Fabio Scacciavillani, chief economist at Oman Investment Fund, the sultanate’s SWF, told Gulf Business: “Before the great crisis, SWFs used to stir a bout of economic patriotism, particularly when they acquired large stakes in banks or corporations that governments deemed “strategic”. Today these hostile reactions are a distant memory.”

In a tectonic shift, reflective of wider global economic and political dynamics, emerging markets hold the bulk of SWFs.

“Emerging economies hold an impressive 81 per cent of government FX reserves, reflecting two decades of soaring current account surpluses and strong capital inflows. This wealth is now increasingly being deployed across the world through SWFs,” said Scacciavillani.

Going forward, SWFs may well trump traditional asset classes – such as mutual funds and pension funds – as emerging markets shift the spoils of double-digit GDP growth and rising commodity prices into their growing national pots.

This trend will only become more marked as regional SWFs chase higher returns and appoint their emerging market peers over Western markets as prime investment opportunities.