SWFs invested record amounts into venture capital last year with VC allocations ballooning. Overall assets were boosted by four new SWFs: Azerbaijan, Bangladesh, Cape Verde and Rio de Janeiro. While Israel, Namibia, Bahamas and Mozambique will all launch this year.

Global Sovereign Wealth Fund assets increased 6 per cent in 2021 exceeding $10 trillion assets under management for the first time, according to the latest report from Global SWF, the data platform that tracks the worlds SWFs. The report links growth to SWF allocations to booming equities; the recovery in the oil price and new funds coming on stream and is indicative of the sector’s robust health despite many being tapped to help rebuild domestic economies after the pandemic.

Overall assets were boosted by the arrival of four new SWFs last year. Azerbaijan Investment Holdings (AIH) was the most significant one in terms of assets. Bangladesh, Cape Verde and Rio de Janeiro also launched funds, while Israel, Namibia, Bahamas and Mozambique are scheduled to launch SWFs in 2022.

In 2021 state-owned investors deployed more capital than in any of the previous six years, both in terms of number of deals and deal value, investing 19 per cent more than 2020 levels and ploughing US$106.1 billion into 500 transactions.

GIC dominance

Singapore’s GIC invested much more than its peer funds, deploying an estimated $34 billion in 110 deals, almost double what it did in 2020. Almost half of that capital was invested in real estate, with a clear bias to logistics, the report finds.

Emerging markets only attracted 22 per cent of SWF capital in 2021, one of the lowest figures in six years.

SWFs continue to plough money into private markets. Abu Dhabi’s ADIA recently raised its allocation target bands for private equity and infrastructure, and Korea’s KIC is aiming to boost alternatives from 15 per cent in 2021 to 27 per cent by 2027.

Yet some sovereign funds like Saudi Arabia’s Public Investment Fund increased their allocations to public markets. At the onset of the pandemic the PIF invested $7.7 billion in 23 stocks in energy, entertainment, and financial services hunting short term gains report author Diego Lopez describes as untypical for SWF.

PIF has since “changed its strategy and consolidated its position by holding mainly ETFs and technology stocks,” states the report

China and India are providing an alternative to diversify public holdings. Most SOIs proved to be bullish on Chinese stocks, especially ADIA, which shut down its Japanese program to focus on China, and PIF, which recently applied for QFII status. Appetite for Indian stocks on the other hand was dominated by GIC, with $ 14.8 billion in holdings.

SWFs were also active sellers in 2021, divesting from properties and infrastructure assets particularly. Abu Dhabi’s Mubadala was active with two IPOs and sales of stakes in Aldar, Cologix, MATSA and Oil Search; PIF raised US$ 3.2 billion from the sale of 5 per cent stake in Saudi Telecom, STC, and ADIA exited Scotia Gas and various properties in Australia and China.

Venture

Although allocations to venture remain only a small slice of SWF total allocations, investment in venture capital ballooned.

“Not only did VC investments by SOIs surge by 81 per cent to a record $ 18.2 billion in 328 deals, but VC also contributed to the globalization of their portfolios,” writes Lopez.

Only 120 of these investments went to Silicon Valley, with the rest being distributed across 32 countries. Moreover SWF have shifted to later funding series, focusing on growth and late-stage investments. Sovereign funds invested more than $ 3 billion in pre-IPOs – a sixth of the total value in 2021 – with many of them acting as anchor investors in public floats of start-ups they had backed in earlier stages.

“Temasek, GIC and Mubadala.. are joined this year by QIA, which is showing more activity in VC than in any other department.”

The report notes how funds including ADIA and Temasek have profited from investments in vaccines with ADIA funnelled hundreds of millions of dollars into Moderna’s development of Covid-19 vaccines. Temasek also moved quickly and invested in BioNTech in June 2020. In the latest nod to the future, SWF interest in the space race and space tourism is growing led by Mubadala, already “heavily invested” in the Fourth Industrial Revolution (4IR).

Finally, the report notes SWFs are investing more capital in renewable energy compared to oil and gas.

“State-owned investors spent $ 22.7 billion in 37 green investments, including stakes in brownfield assets, investments in greenfield assets, shares in listed companies, and commitments to new climate-focused funds.

 

 

 

The world’s economic future is uncertain and inflation is likely to remain under a persistent pandemic, according to long-term major central banks adviser Professor Warwick McKibbin.

In a model scenario where the Covid-19 pandemic never goes away, McKibbin expects a permanent increase in the risk to economies where capital stock is too high and has to be reduced to raise the marginal product of capital to the real interest rate.

“This was unambiguously a big shock on real interest rates both because the marginal product of capital was hit really hard but also because the central banks just cut to zero and beyond and put in place a whole range of other policies,’’ he says.

Real GDP in Australia and elsewhere is likely to fall in step with the number of pandemic shock waves, as investment collapses and demand stimulus in the economy is taken out.

“Uncertainty is bad for investments, it’s bad for financial investments and it’s bad for the real economy,’’ he says.

“Sectors that get really hurt in the persistent pandemic shock are the durable manufacturing sectors that make capital goods as the investment has been hammered by uncertainty and you’re not buying durable goods.”

McKibbin and co-author Roshan Fernando’s “Global Macroeconomic Scenarios of the Covid-19 Pandemic” captured world leaders’ attention on how to respond to Covid-19 shortly before the World Health Organisation declared the disease a pandemic.

Former Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Janet Yellen were among the first to see a draft of the paper and its seven scenarios which explored the global economic costs to form the basis of policy decisions.

McKibbin says the idea is simple but the model complex, and really “just tools to think through complex problems” by studying individual behaviour of households, firms and governments and central banks and monetary and fiscal authorities and how they interact in markets and how these markets interrelate across countries.

“We have 20 countries, four regions, six sectors and individual behaviour,’’ McKibbin says.

“(There is) change in risk premia, production chains, market prices are being valued differently and some countries are worse than others. There’s been a shift in allocation and above this there’s been a change in health responses.

“It’s full of assumptions but the beauty of the model is it is full of assumptions, so you can change those assumptions and you can look at the implications for the results you get.’’

The idea that you keep vaccines in the developed economies shows a complete misunderstanding of the way epidemiological shocks occur

Starting with the world in 2016, with assumptions about population and labour force growth by countries, McKibbin surprised the model with a pandemic in 2020 and introduced shocks to labour supply, consumption due to supply disruptions versus a change in demand and productivity shocks or increasing costs due to shutdowns.

It modelled volatility, equity risk shocks, country risks based on health governance, financial risk and vulnerability to the pandemic.

Whether Covid-19 is a permanent or temporary pandemic, prevention is the key which means spending on public health in emerging markets, McKibbin says.

“Macro fiscal and monetary responses globally are important,’’ he says.

“There are a lot of countries that have no fiscal space that have been going through a severe pandemic in their emerging markets and who are way behind the capacity to respond and recover.

“That’s going to weigh a lot of commodity prices. Of demand in the world economy, emerging markets are more than 50 per cent of the world and the idea that you keep vaccines in the developed economies shows a complete misunderstanding of the way epidemiological shocks occur.”

McKibbin’s G-Cubed model is also being used by the Network for Greening the Financial System, a group of 83 central banks looking at the climate risk scenarios.

“In our modelling most of the economic costs come from human behaviour not the shutdowns themselves,’’ he says.

“Whichever scenario you look at, a pandemic, of any nature no matter how many waves, causes massive economic disruption and should be avoided at all costs.”

 

Read the paper here – Global macroeconomic scenarios of the COVID-19 pandemic

 

Asset owners think in years rather than months, but investors expect a handful of key areas will define the year ahead. A clearer view on inflation; poor bond performance and a resurgence in labour rights to name a few.

Inflation

This year investors will find out if inflation is just a temporary blip caused by energy and supply chain bottlenecks, or here to stay thanks to massive Central Bank stimulus in response to the pandemic.

“Central Banks’ ability to combine the conflicting objectives of economic recovery and maintaining the solvency of States with quelling demand-pulled inflation will be crucial in 2022,” says Olivier Rousseau, executive director of France’s Fonds de Reserve pour les Retraites.

While over the past year investors have had varying opinions on inflation, many now believe the Federal Reserve has largely read inflation right. It’s a view held by Charles van Vleet, assistant treasurer and chief investment officer of pension investments at US conglomerate Textron.

“I think the Fed is directionally correct on inflation. Most of the recent inflation is transitory. Q1 2022 will reveal the largest year-on-year increase but settle materially lower by Q4,” he predicts, adding that inflation will continue to drive flows into real assets like timber and property.

Central Bank policy to manage inflation will increasingly transform today’s low volatility high liquidity investment landscape into the exact opposite, predicts David Ross, managing director, capital markets at Canada’s OPTrust. Inflation and interest rates are important to the fund which has around 20 per cent in fixed income and has a liability-driven approach to building resilience in its portfolio.

“With real rates well into negative territory, the market’s uncertainty about the Federal Reserve’s reaction will leave interest rates as a source of volatility and likely driver of the performance of risky assets in the coming year,” Ross says.

Asset classes

This year will be a continued tough environment for  bond investors according to Rousseau.

“I see no value in bonds and among the asset class the least bad is probably high yield credit,” says Rousseau who oversees a portfolio divided between performance seeking assets and a liability-hedging allocation invested in government bonds and investment grade corporate bonds.

Elsewhere, the prospect of rising interest rates is already weighing on fixed income.

“The fixed income markets have priced three tightening’s without missing a beat. We expect the 10-year UST to close the year +/- 2 per cent,” says van Vleet.

Another CIO of a UK-based pension fund who declined to be named predicts bonds will have a second year of negative returns in a row: “The whole of the fixed income spectrum, both public and private, looks very unattractive to us.”

With mixed forecasts for equities, expect a “bumpy” year ahead.

“Equities is a very bifurcated asset class. Growth stocks are expensive and vulnerable to a sizable rise in interest rates. Value stocks are darn cheap in Europe and Japan and probably just a bit expensive in the US. Emerging markets may still face a difficult year, but their time will come,” says Rousseau.

In contrast, van Vleet is more positive on US equities.

“We are expecting a solid year for growth assets – S&P earnings growth of 12 per cent leading to SPX returns of 8 to 10 per cent.”

He also believes that China A-shares will be the surprise upside trade – while emerging market equity and fixed income will be the surprise downside trade.

Elsewhere investors see value in real assets (real estate and commodities) but note credit appears more vulnerable given the relatively tight level of spreads.

“Gold is likely to be challenged if real yields continue to rise from their historically low levels,” adds Ross who also argues that emerging market equities may, in fact,  regain lost ground in 2022.

“The current equity landscape has been characterized in recent years by the outperformance of the US market versus emerging markets and the rest of the world, as well as by large caps over small caps. With China easing policy and emerging markets likely to finally benefit from what has been a delayed recovery from the pandemic, there is scope for emerging market equities to regain some relative ground.”

At Textron, strategy will continue to lean into trades the pension fund already has onboard and continue to work, including value-added real estate, GP-secondaries, CLO risk retention, and BDCs

Bubbles

The classic bubble signs in tech, clean energy, crypto and SPACs are likely to deflate – although neither the precise timing is easy to predict, or the corporates best positioned to survive.

Rousseau believes crypto, particularly, could keep charging ahead for some time unless two factors spelling disaster appear: a significant rise of short-term interest rates, large scale fraud or government actions (à la China) leading to permanent investor losses.

“In this case, all trust would evaporate – potentially creating systemic problems,” he says.

Still, investors qualify that even if the speculative flows that have been driving price action in crypto and technology likely reverse, long term trends are not going away.

“The structural forces driving both the development of digital assets and financial technology and the necessary shift towards climate-friendly economies and portfolios are not going away. In fact, they are likely to intensify,” says OPTrust’s Ross. “From a long-term perspective, crypto, technology and green assets are major investing themes that are likely going to grow in importance in the years to come.”

Labour rights

This could also be the year labour rights get pushed centre stage with implications for companies on the back foot and wider corporate health.

“Expect a fight from labour to get a better share of the pie. In the US where things have been massively distorted in favour of companies, the cliff is potentially high,” warns Rousseau who argues labour has missed out on “decades” of its share of the distribution of added value.

“If the world starts imitating China in the fight against abuses from the tech monopolies the corporate world will have a rough ride. Europe is doing a bit of this but on a small scale. The US is still by and large captive of the corporate world,” he says.

 

 

 

The New York State Common Retirement Fund has ratcheted up pressure on companies in its listed equity portfolio to disclose their political spending in what it calls a “priority issue,” up there with climate, DEI and capital management.

“It is about governance,” says Liz Gordon, executive director of corporate governance at the $267.8 billion pension fund, speaking on the anniversary of last year’s siege on US Capitol Hill which prompted unprecedented scrutiny of corporate America’s response to the turmoil.

“As shareholders, this is our money and we are concerned if it is being spent in a way that is consistent with companies stated priorities and if there is a thoughtful process in place.”

Gordon argues it is in companies’ interest to participate in the political process and their right to do so, but transparency and governance around the process is also essential.

“We just want to make sure they are doing it in line with long-term shareholder value. The risk is real, no matter who you are giving to. It is about governance and the potential for misalignment.”

She dates NYS Common’s engagement on the issue from 2010 when corporate funding began to play an outsized role in campaign financing following a Supreme Court decision in Citizens United v FEC which removed any limits that corporations, or other groups, could spend on political elections. Since then, the pension fund has worked closely with the Centre for Political Accountability a non-profit organisation created in 2003 to bring transparency and accountability to corporate political spending.

Using its index on corporate disclosure, the pension fund targets the lowest scoring companies posing the greatest risk because of the absence of disclosure and oversight. The fund has filed 169 shareholder proposals since 2010 and successfully persuaded 49 companies to adopt and improve their disclosure.

Progress

Gordon is convinced things are starting to change – although laggards remain, she notes that companies are responding. Like clothing maker Hanesbrands, one of the companies targeted in the fund’s  latest batch of shareholder proposals, and where executives have already voiced their commitment to upping governance and disclosure around political spending, contributions to trade associations and other so-called dark money.

Moreover, she believes the debate has moved on as companies increasingly question if political contributions make sense for their corporations.

“Is this something they need to be doing? This is something companies increasingly need to explore themselves,” she says.

Although conversations depend on the culture of the company and its evolution, there is also clear best practice to follow and most are doing a good job around disclosure in “cordial and productive” conversations.

Still, she concludes efforts are confined to the fund’s public equity exposure. As an LP in private equity funds, it is much more difficult to engage directly with companies leaving NYS Common dependent on effective and robust engagement with its managers on the issue.

“They know what we prioritise and what we care about,” she concludes.

Many other asset allocators are also looking at political spending as a risk. Over the last three years, nine of the world’s largest asset allocators voted in favour of corporate resolutions for increased transparency and accountability on political spending, including APG, BCI, CalPERS, CalSTRS, CPPIB, NYC Retirement System, NBIM, OTTP and PGGM.

Scott Kalb, director of the Responsible Asset Allocator Initiative (RAAI) at think tank New America, says political spending is a risk that asset owners need to take seriously. He said screening out political risk required better asset owner education and investors using their proxy voting power to improve corporate disclosure on political spending.

“Asset owners should adopt policies on political spending as part of an ESG framework and put their asset managers on watch to the risk, notifying them that they won’t tolerate investment in companies spreading disinformation or engaged in violent activity.”

Moreover, he said these groups threaten the very system on which institutional investors rely like the rule of law.

“If you are a good steward of capital, investing in companies that have poor transparency regarding political funding contravenes good governance.”

 

 

 

 

 

 

 

In our latest episode of Double Take, we explore the sustainability of sustainable technology. Is the full life cycle of green tech truly sustainable when you consider all the mining, waste, and carbon emissions?

China has been the chief engine of emerging-market growth for the last two decades, and the pace of growth has stepped up under the leadership of President Xi Jinping in recent years. The speed of change has been so dramatic under the current government’s policies that investors are well justified in asking whether China has entered a new socioeconomic paradigm, or whether the current brand of socialism with Chinese characteristics is simply just a continuation of plain ‘old-fashioned’ socialism.

It is worth noting that China has pursued regulatory action at various times over the last 20 years against industries deemed as becoming too comfortable or affluent at the expense of the wider population. This policy assault, termed ‘common prosperity’, has most recently focused on telecommunications operators and banks, and is now turning its sights on the perceived excesses of the real-estate sector.

In many cases, the targeted industries have subsequently underperformed the wider Chinese market as they undergo enforced changes or restructuring, but recent history shows us that new industries have arisen to ultimately exceed them in capitalisation, and to drive the market higher.

Two faces of Chinese governance

We regard this reality as the ‘yin and the yang’ of the Chinese system of governance: moderate pruning of certain sectors that have grown too big or unwieldy allows for society and ultimately new investment opportunities to flourish. Western investors might be confused or even sceptical about the future prospects of China’s capital markets, but there is a wide perception that the constant cycle of renewal is what has allowed Chinese society to endure over many centuries, and we do not expect to see this dynamic change any time soon.

Under Xi, economic and social reforms, and a more widespread ‘opening up’ of the country which had characterised his most recent predecessors, have stalled somewhat. Some observers believe that problems emanating from parts of the heavily indebted real-estate sector, which have become a concern for many in China, have led to Xi stoking up nationalist sensibilities among the population to deflect any perceived criticism. Nevertheless, while the leader talks about Taiwan as a sovereign part of China and warns the US not to get involved, he has also won popular support at home by cracking down on corruption within the ruling party and beyond, and in the strides his administration is making to tackle air pollution in China’s cities.

Technology concerns

For multinationals still keen to engage with China, the technology sector is the area that throws up most concern. Both China and the US have begun a ‘decoupling’ process in which the US is trying to bring manufacturing capabilities back onshore, while maintaining its global leadership in technological intellectual property. China, which has become a leader in 5G technology, for example, is attempting to catch up with the US as a global technology leader and has aligned much of its high-level technology with both its internal and external geopolitical ambitions. The bilateral tensions between the US and China, not least in artificial intelligence, automation and semiconductors, have created an uncertain environment for companies looking to invest in China, especially for those in government procurement and high-level technology. Developed-world companies are also becoming more aware of Chinese companies – particularly those in the private sector – improving their competitiveness to go more global more quickly.

We are continuing to keep a close eye on the regulatory flurry of activity around China’s ‘common prosperity’ policy, to see how it manifests itself over time. Despite the continuing geopolitical tensions, many overseas investors continue to expand their investments within the country, as it is clear that, with its powerful economy and ever-expanding middle class, China will continue to be one of the strongest engines of global growth over the next decade. However, at the portfolio investment level, we believe it is crucial for investors to listen very carefully to the words of the Chinese leadership to discover which sectors will be favoured and which will be reined in over the coming months and years. By doing so, they can attempt to invest selectively with the flow, rather than against it.

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