Sovereign wealth funds, which are very different institutional investors but with very rich assets of about ten trillion dollars which can further grow due to the effect of soaring oil prices, will not stop investing even in 2022 despite the uncertainties of the global scenario due to the war and the energy crisis. This year they have already invested 35,4 billion dollars, mainly in infrastructure, but they are changing their identities: for many reasons but above all as a result of deglobalization which drives them to invest more than before in their own homes. It is the so-called “sovereign reshoring”. But this does not mean that they are no longer willing to direct their firepower (10 trillion dollars!) also abroad and also in Italy if our country manages to become more attractive, perhaps through the creation of an Italian Sovereign Investment Authority. These are the reflections of Professor Bernardo Bortolotti, one of the leading Italian scholars of sovereign wealth funds, economist on leave from the University of Turin and currently Executive Director of the Transition Investment Lab of New York University in Abu Dhabi as well as Director of the Sovereign Investment Lab of Bocconi. Here's what he told FIRSTonline.
Professor Bortolotti, you have been scrutinizing and analyzing the state and strategies of sovereign wealth funds for decades and you are known in the scientific community as one of the leading experts on the subject: faced with a situation of great global economic, financial and geopolitical uncertainty such as the current one, how are sovereign wealth funds regulating? They invest As usual, reduce investments waiting for better times or do they select the sectors and countries in which to invest more than before?
“First of all, a clarification is useful. SWFs are a diverse group of institutional investors operating with very different mandates and funding sources. In fact, in the same category we find intergenerational savings funds, anti-cyclical stabilization funds and strategic funds, which can be financed by proceeds from hydrocarbons, by the trade surpluses of exporting countries or directly by governments through the sale of shareholdings or other assets. To this we add that they are born in fundamentally different economic and institutional contexts, for which we find together - to remain in the best in class - the Norwegian sovereign wealth fund which makes transparency its raison d'être and the Abu Dhabi Investment Authority, whose assets are a jealously guarded state secret… Despite the great differences, sovereign wealth funds are all investment vehicles wholly owned and controlled by the state, with the risks and opportunities that this governance entails and it is therefore right to consider them with the due distinctions as a whole.
Against this background, I come to your question on fund strategies in the current context marked by the violent crises we are experiencing. The outbreak of the pandemic has brutally put before the eyes of sovereign wealth funds the need to meet the liquidity needs of their governments to face the crisis through bailouts or interventions to support the economy. In 2020, the funds liquidated more than 200 billion dollars (about 3% of assets under management), of which more than 50 intended for the great bailout of national air transport. However, we must not forget that some funds, including the Saudi PIF and Mubadala of Abu Dhabi, have bet on the rebound of the markets and have heavily entered the American stock exchange with operations with a total value of over 20 billion dollars. Beyond the figures, the pandemic has marked an "identity crisis" in the sector. Conceived as safes of pure equity to preserve the financial wealth of nations over time, with COVID-19 sovereign wealth funds have discovered that they have liabilities implicit in the requests - however legitimate - that governments make in times of crisis. The problems of the slowdown of globalization and international flows of capital, the many economic and financial faces of the geopolitical crisis we are experiencing, are grafted onto this changed perception. The strategies of sovereign wealth funds obviously feel the effects of this radical change of scenario».
It is true that there is sort of restoring of sovereign wealth funds, in the sense that they tend to invest more in their countries of origin than in other areas of the world?
“The data confirm this trend unequivocally. In 2020-2021, the percentage of domestic operations is close to 20%, and has almost doubled compared to the years before the pandemic. The bailouts we mentioned earlier partly explain this trend which actually has deeper reasons. As is known, sovereign wealth funds are an important financial counterpart of globalisation. The expansion of world trade was matched by an increased international movement of capital which led to the accumulation of foreign exchange reserves by the central banks of the exporting countries which operated under fixed exchange rate regimes. The Gulf monarchies together with the other emerging countries - China in the lead - have therefore created sovereign wealth funds to increase returns through the diversification of their currency portfolios, investing them in all possible asset classes. Over the past 20 years, sovereign wealth funds have pursued all possible risk diversification strategies and thanks to the good performance of the markets, their assets under management have grown eight times, to recently reach 7 trillion dollars. In the space of five years, however, the global economic and geopolitical scenario has changed radically and funds find themselves facing new, unusual constraints in portfolio choices. Politics returns - we can say - to "sovereign" and some target countries are less accessible, also because in the meantime the regulation of foreign direct investments in many jurisdictions has become more restrictive. The war explodes the issue of sanctions affecting the assets of public institutions, creating new classes of political risk in the international investment of reserves in currency. The new "equilibrium" deriving from this twisting of the macro and geopolitical scenario is therefore not by chance characterized by a significant decline in international investment and therefore by an increase in domestic operations, which obviously are not influenced by these risks of a political nature. We could actually call it "sovereign reshoring", as it can be traced back to the great current issue of deglobalization".
In the first half of 2022 how much did sovereign wealth funds invest globally and where?
«In the current year, the equivalent value of the operations carried out globally by the funds is 35.4 billion dollars. If we compare this figure with the total $68 billion invested in 2021, we can conclude that despite the outbreak of war in Ukraine and the energy crisis, activity is average. The preferred sector in the semester was that of infrastructures. The Saudi Public Investment Fund – which aims for a portfolio of $600 billion in 2025 – has been the most active, and has seized the recent declines on the American market as an opportunity to invest over $7 billion in the digital sector (Amazon and Meta) and of finance (BlackRock). But in such a complex year, the second half of the year could reserve us some surprises».
How many sovereign wealth funds are there currently in the world and how much is their assets? What are the top five?
«There are 169 sovereign wealth funds active in the world, with an estimated assets of around 10 trillion dollars. The ranking by value of assets fluctuates because it is affected by the volatility of the underlying assets. The more liquid funds with large portions of the portfolio invested in the markets are now penalized compared to those more oriented towards private equity. At the moment, in the top five we find China Investment Corporation (1300 trillion), the Norwegian fund Government Pension Fund Global (1.200 trillion), Abu Dhabi Investment Authority (829 billion), Kuwait Investment Authority (769 billion), Government Investment Corporation of Singapore (690 billion)".
What weight does the energy storm that engulfs Europe after the war unleashed by Russia in Ukraine and after the slowdown in Gazprom supplies to the West affect the investment strategies of sovereign wealth funds which in many cases originate from gas-producing countries and above all petrolium?
«The crisis we are experiencing today is causing a colossal redistribution of resources in favor of oil-producing countries. According to IMF estimates, in 2022 the additional income deriving from the sale of hydrocarbons by producing countries is worth 250 billion dollars. We can realistically assume that prices will remain different and project a similar figure also for the next 2-3 years given the high rigidity of supply and demand in the energy market. It is a matter of manna from heaven which will largely flow into the coffers of sovereign wealth funds and which will therefore be able to significantly increase their firepower. We estimate that in the space of a few years the total availability of commodity funds (oil and gas) will be around 7 trillion, with an increase of almost 20 percent compared to the pre-crisis period. How will they invest this new wealth? My prediction – based in part on data from recent years – is that sovereign wealth funds will continue to invest massively in the energy transition, without completely abandoning conventional sources, confirming the trend that for every dollar spent on oil & gas, 4 are invested in renewable. Obviously, the pace of this transition will not be accelerated like those envisaged – on paper – by the European Green Deal. In producing countries, every step towards renewables generates stranded assets in the subsoil and serious social repercussions in economies still heavily dependent on oil. But the direction of travel is now established and sovereign wealth funds deem it inevitable and appropriate to exit the fossil fuel economy. In the arc of this transition already undertaken, sovereign wealth funds will aim at the diversification of their economies, through strategic investments in sectors that allow, where possible, the substitution of imports (consider, for example, agriculture) and the development of new industrial sectors anchored to the own sources of comparative advantage.
What place does Italy occupy on the radars of sovereign wealth funds and what do they expect from the upcoming elections on 25 September to decide whether, how much and how to invest in our country?
«In the ranking by target country of sovereign investments, Italy is 18th. The data therefore certify a known fact: Italy is not attractive for foreign direct investments and in particular for sovereign wealth funds. We are behind all the main European partners, France, Germany, Spain even Holland have done better than us in the last 20 years. With the exception of the large real estate investments of the Qatar Investment Authority, the presence of sovereign wealth funds in the capital of Italian companies is marginal, thanks to their small size which does not allow operations of an adequate scale for their portfolios, but above all the political and rules that displace above all the willingness to invest in infrastructure or long-term projects. And it is a missed opportunity because sovereign wealth funds would be willing to invest in Italy under certain conditions. For example, there was interest from some funds in the PNRR, but co-investment mechanisms that would have multiplied the scale and therefore the economic and social benefits of the plan have not been studied. Today more than ever the funds closely monitor political developments and the Italian case is no exception. After the elections, they will carefully evaluate the country's international posture and the future stability of the government. The Draghi government had contributed to that international credibility which is a prerequisite for attracting investments. Political continuity in this direction can only convince sovereign wealth funds to resume investments in our country".
What is the most important thing Italy could do to attract more investment from sovereign wealth funds?
«Italy must equip itself with the most sophisticated instruments of state capitalism, including a real sovereign wealth fund. Today Kissinger's joke is valid in Italy: “If I have to call the Italian sovereign fund, who do I call? Cdp, Cdp Equity, Allocated Assets or the Italian Strategic Fund?”. Seriously, today more than ever a new institution would be needed, fully legitimized at the highest institutional levels, financed by the main public financial institutions (MEF, Banca d'Italia and CdP), politically responsible, but independent in the managerial and operational sphere. The establishment of the Italian Sovereign Investment Authority could represent a valid tool for dealing with the next crisis in the Italian production system, as well as favoring the path of profound structural transformation that our country needs to recover competitiveness and increase growth potential. The new fund would also be that one-stop shop that we still lack and which would allow for strategic investments to be made in partnership with other international sovereign wealth funds. To remain in Europe, BpiFrance, Cofides in Spain and the UK Office for Investment are possible reference models».
