What are sovereign wealth funds? They are the assets of sovereign countries that have been earned. Instead of holding them in government bonds as they once did countries are investing part of the money in stocks and commodities on a global basis.
The Saturday, May 26 Financial Times devoted a large section to an issue I have mentioned several times; the 2.5 trillion dollars of sovereign wealth funds from China, Norway, Saudi Arabia, United Arab Emirates and many other countries [about 16 in all] that is to be invested globally. In addition, there is probably twice that much money sitting in these countries’ reserves that have not yet been earmarked for global stock, bond and real estate investing.
Let me put it another way, these countries and others will use their capital to invest in stocks bonds and commodities. Gone are the days when they would just buy government bonds with this type of money. Now they are putting it where it will earn better returns.
THE MAJOR INFLUENCES OF THIS NEW TREND
1. Countries that have to sell bonds to finance budget deficits will have to raise interest rates to get their bonds sold.
2. Countries that can grow will attract these assets to their financial markets.
3. The commodities which will are needed to fuel this growth will also benefit. For example, it takes little imagination to realize that base metals and energy will be purchased. Suppose we are China, and we know that we will be using a lot of energy and base metals to build out our economy for the next fifty years, why not buy the stocks that will produce these things? Since we will be making them profitable why not participate in the profits?
4. Richer people in the developing world and richer central banks in the developing world will hedge their currency assets against losses in depreciating currencies by holding precious metals. Demand for precious metals will continue to rise.
This gigantic pool of capital will change the way investing is done for years to come. It will be a lever to substantially raise the value of the growing stock markets of the world. It will also be used to raise the value of the commodities that will be in demand…such as energy, base metals and precious metals.
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