Like Stumbling Upon A Million-Dollar-Bill

When Poor Countries Get Rich
By Chris Mayer
"There is no precedent for such fortunes suddenly finding their way into global financial markets" - The Economist, May 26, 2007
When you hear the phrase, "There is no precedent," you should sit up and take notice. As this world totters on its way to some veiled future, it is in such small phrases that you will find big clues as to where the trade winds of the market might blow next.
In this case, your clue is the massive pool of money building in a way that has never happened before. It's bigger than the hedge fund industry - which makes so much noise and inspires so much comment. In total, these funds run into the trillions of dollars. Yet it is almost like a secret club. Few investors are even aware they exist.
Traditionally, this money has been content to sit on low-risk, low-paying investments – like U.S. Treasuries. That is changing. And where this money is heading next could have a huge impact on market prices - and on your investments.
"How and where this massive - and often secretively managed - pool of funds is deployed," opines the Financial Times, "will be one of the big investment themes of coming years."
On May 21, China announced its intention to invest in Blackstone, a U.S. buyout firm. China has $1.2 trillion piled up in reserves. It is the flip side of the U.S. trade deficit, you might say. That pile of money grows by about $1 billion every day.
Before May 21, China had been content to invest in highly liquid and "safe" investments - such as U.S. Treasury debt. Now, China let the world know that it would set aside about $300 billion this year to invest in things other than Treasuries.
Stratfor, a consulting firm, adds this: "That amount represents the single largest pool of cash that any government has thrown at anything, ever. Adjusted for inflation, the U.S.'s largest effort, the Marshall Plan, comes in at just over $100 billion."
China controls one of the world's largest stacks of foreign currency reserves. Yet there are other stacks of similar money out there – the excess foreign currency reserves of other foreign nations.
Andrew Rozanov, writing in the scintillating journal Central Banking, named them sovereign wealth funds (SWFs). As Rozanov says: "These are neither traditional public pension funds nor reserve assets supporting national currencies, but a different type of entity altogether."
Sovereign wealth funds control about $2.5 trillion in assets worldwide, compared with about $1.6 trillion in the hedge fund universe. And money continues to pour in. By some estimates, these funds could control $12 trillion in assets by 2015.
Where did these enormous funds come from?
Many of them were set up decades ago. But they've come on our radar only recently for three reasons, as pointed out by Rozanov: There are a lot of new ones coming online (such as China's); they are growing rapidly; and they are getting so large - on par with the largest public pension plans.
Governments created many of them with surplus revenues from oil, gas and other natural resources. The UAE and Norway and Russia all got the bulk of their dough from oil. Chile's funds came from copper revenues. Even Botswana has a $5 billion fund (the Pula Fund) flush with the proceeds of diamond sales. Not all of them are commodity related. Singapore and Hong Kong are exceptions.
So these governments are flush with cash and have set up sovereign wealth funds to invest the money. Today's unmistakable trend is to invest more and more of that money in private enterprise, stocks and real estate.
Norway recently upped the amount it will invest in the stock market. In the past, about 40% was set aside for stocks. As of last month, it became 60%. Norway runs a giant $300 billion fund. That's a lot of buying power. Russia, India and others are also in the process of setting aside more money for riskier assets.
As The Economist notes, "Sovereign wealth funds could soon become the most important buyers of such assets, and many others besides."
Consider China. For China to put its money to work in the U.S., it would, says the Financial Times, "have to become the biggest player in the U.S. market." To put even 40% of its staggering fund to work, China "would have to buy more than 10% of the capitalization of the Dow Jones Industrial Average."
Putting that kind of money to work could be politically impossible. After all, when China's CNOOC, a partially state-owned oil company, tried to buy Unocal, an American-based oil company, there was such resistance that CNOOC called it off. That may be why China's first purchase is in a private firm that does not own any "strategic" assets.
Still, China's appetite for natural resources is extraordinary. Just last week, China deployed some of its cash horde to acquire exploration rights in the oil sands of Canada. China National Petroleum Corp., the parent of NYSE-listed Petrochina, paid the Province of Alberta for the rights to explore 104 square miles in the oil sands. Two years ago, this same state-owned oil company paid $4.2 billion to acquire PetroKazakhstan. Clearly, many of the powerbrokers in China believe that their country's growing currency reserves ought to be used to acquire vital supplies of natural resources. The flourishing Chinese economy desperately needs many other commodities - aluminum, steel, copper, grains, clean water and more. So it would not be surprising if China put some of its money to work in these areas.
The Blackstone deal was just the first little spoonful behind an enormous appetite. Look for more headlines as China and these other giant sovereign wealth funds put their money to work in a history-making buying spree.