KEY POINTS:
For years, globalisation's malcontents have hoped to derail the free movement of goods, capital and people. Most governments held firm, betting there's more to gain than lose from the phenomenon.
Wouldn't it be rich, then, if many of those governments are unwittingly setting the stage for globalisation's demise? They may be doing just that with the proliferation of so-called sovereign wealth funds.
Such a vehicle, funded by currency reserves, is what China used to grab a US$3 billion ($3.9 billion) stake in Blackstone Group. It's also what will make the world's biggest hedge funds, mutual funds and private-equity outfits seem like small change.
Until now, sovereign wealth funds grew out of oil revenues and were used to stabilise energy markets. Amid high oil prices, they're morphing into public wealth accumulation accounts. And as currency reserves swell, governments are scrambling to make better use of them than parking the cash in US Treasuries.
How big are these sovereign wealth funds likely to get?
Stephen Jen, London-based global head of currency research at Morgan Stanley, estimates US$12 trillion by 2015. That's nearly the current size of the US economy, and it could create problems for the world economy.
"I believe that SWFs will become absolutely massive in size in the not-so-distant future, and will have powerful implications for the financial markets," Jen says.
Over time, powerful government investment companies could increase demand for stocks and decrease interest in bonds. The hunger for higher returns might increase the tolerance for risk globally. Jen estimates bond yields will rise 30 to 40 basis points over the next 10 years and p/e ratios on stocks will rise up to 10 per cent.
Such funds have "a longer-term investment horizon with a higher tolerance of short-term risk and so can have more diversified and less conservative asset allocation," Hong Serck Joo, head of Korea's US$20 billion state-run investment fund, said last month.
The growing size and reach of sovereign wealth funds are likely to have important implications for technology and commodity companies.
In the 1980s, Japanese investors bought US properties. In the early 2000s, Russian investors grabbed football clubs and Middle Eastern investors snagged racetracks. Countries looking for high returns will have a different taste in assets.
Singapore is an interesting example. It has the second biggest sovereign wealth fund after the United Arab Emirates and it has done what others are likely to do: searched for assets with solid financial returns that boast attributes not easily found in home-grown companies. That's exactly what China, South Korea, Brunei, Malaysia, Taiwan and other Asian governments are looking to do.
China already has seen its share of trouble. Two years ago, a bid by its third-largest oil company, CNOOC, for Unocal was scuttled by the US Congress. Singapore, meanwhile, is embroiled in controversy over its purchase of Shin Corp, the telco owned by the family of former Thai Prime Minister Thaksin Shinawatra, removed in a coup last September.
The question is, will the US sit idly if China goes shopping in Silicon Valley? Will Australia, New Zealand and Canada be okay with foreign governments eyeing resource companies? How might the UK or Japan react to acquisitions of their investment banks?
Few questions loom larger than what to do with the trillions of dollars of reserves amassed since the 1997 Asian crisis. Government's can't stockpile them (currencies will surge) or dump them (markets will get wind of it). Let's just hope they spend the cash wisely. Nothing less than the future of globalisation may hang in the balance.
-BLOOMBERG
