State-sponsored money and the new market order

Asia has emerged during the past decade with many of the world's largest state funds. These funds include central bank reserves, social security funds, state pension funds, investment authorities and stabilisation funds. Indeed, the size of many state funds has continued to grow despite the onset of the recent global financial crisis, with countries such as China and South Korea increasing their foreign currency reserves.

China, Hong Kong, Japan, Singapore, South Korea and Taiwan each hold more than $250 billion in foreign exchange reserves – in total they control more than $5.5 trillion in funds. The largest Asian sovereign wealth funds (SWFs) – state-owned investment funds – include China's Safe Investment Company with $568 billion in assets, China Investment Corporation with $410 billion, the Hong Kong Monetary Authority Investment Portfolio with $292.3 billion, Government of Singapore Investment Corporation (GIC) with $247.5 billion, and Singapore's Temasek with $157 billion, according to figures from the SWF Institute.

"At an estimated $4.5 trillion, their assets are higher than ever, and continued current account surpluses in their home economies promise sustained growth in the near future. Asian and Middle Eastern state funds now hold about two-thirds of the global sovereign wealth fund assets," says Tarek Sherlala, MD of the sovereign institutions group at BNY Mellon in Hong Kong. "With total SWF assets forecast to more than triple by 2020 to $20 trillion, sovereign institutions are critical to the continuing health of the global financial system."

More funds may also be in the pipeline. "There are a number of countries in Asia-Pacific that are considering establishing SWFs, for instance India, Taiwan, Japan and Thailand," says Vineet Nagrani, head of SWF coverage for Asia-Pacific at Credit Suisse in Hong Kong. "Since emerging markets economies are growing rapidly, we will continue to see an increase in the number of SWFs."

Filling the gap

Asian and Middle Eastern state funds now hold about two-thirds of the global sovereign wealth fund assets

State funds have emerged as increasingly important participants in global markets. As leverage deployed by the two-trillion-dollar hedge fund industry has fallen – some market participants say from 4.5 times in 2007 to less than 2 times currently – sovereign funds, which do not need to borrow to make investments and tend to use only very limited amounts of leverage, have emerged as increasingly important participants in financial markets. Many sovereign investors have also started to increase their investments within the Asia-Pacific region, as new opportunities have emerged in high-growth markets. As a result, sovereign funds can have a profound impact on market moves as well as the fees received by financial intermediaries.

Many banks and asset managers have developed specific SSA teams to cater for sovereign-related entities – including debt issuers in some countries that need to pay for fiscal stimulus exercises. Such was the case at BNY Mellon, which set up a new sovereign institutions group in January. "We already counted around 90% of sovereigns as clients, however we wanted to enhance the service sovereigns receive from us," says Sherlala.

Financial intermediaries are deploying a range of strategies to engage SSA clients. "There are two primary revenue opportunities for banks: either working with their portfolio companies, or selling market products," says Mike Netterfield, head of technology, media and telecoms and financial sponsors for Asia at RBS in Hong Kong. Additionally, access to SWFs as cornerstone investors in IPOs as well as for strategic acquisitions is increasingly important. "If you bring them ideas that are proprietary in nature and that have a specific angle which nobody else has shown them, then they will usually appoint you," says Netterfield. "This can be a differentiating factor."

A large part of the effort by dealers and asset managers is to set up specific units tasked with "delivering the whole firm" to sovereign clients. This entails pulling all the various services and offerings of the institution together and offering these to clients. "In a product silo world you have the tendency to create capability in silos. We have similar silos in our organisation, but for this client segment we're trying to work across all lines of business," says Sherlala.