State-owned funds increasingly turn to developing markets

State-owned investors are showing a preference for BRICS and other developing countries as investment destinations, investing increasingly less in Group of Seven nations.

Global SWF, a data platform that tracks sovereign wealth funds and public pension funds, said in its August update that investment activity in the first few months of the year confirmed a trend that's shown up in recent years: increasing interest in so-called BRICS-plus markets. BRICS covers Brazil, Russia, India, China and South Africa, while the "plus" covers Argentina, Bangladesh, Egypt, Indonesia, Kazakhstan, Saudi Arabia, Nigeria, Senegal, Thailand, the United Arab Emirates and Uruguay.

Investment by state-owned investors into BRICS-plus countries grew to $25.9 billion as of its Aug. 1 update, accounting for 23% of a total investment, up from 13% in Global SWF's analysis as of the end of 2017. G-7 countries accounted for 55% of the total as of Aug. 1, down from 66% in the 2017 analysis.

"In the context of a highly polarized world, this matters," the update said.

Of the most active state-owned investors, Singapore's GIC and the Abu Dhabi Investment Authority still focus on G-7 nations; La Caisse de Depot e Placement du Quebec, Quebec City, and ADQ, Abu Dhabi, are focusing on BRICS-plus countries; and Canada Pension Plan Investment Board, Toronto, and Public Investment Fund, Riyadh, opting for "a good mix of both."

"Surprisingly, Temasek and Mubadala have demonstrated strong interest for developed markets this year so far," the update said.

Diego Lopez, founder and managing director of Global SWF, said in an email that the team expects the trend to continue, "although developed markets have always been a refuge for SWFs in times of uncertainty, and Europe and (the) U.K. could be hot in the short term due to cheap currency."

In that context, the $284 billion Mubadala and $298 billion Temasek "have traditionally been big investors in emerging economies, so it just surprised us that most of what they had closed this year was in developed economies," Mr. Lopez added.

Global SWF said in its 2022 annual report — covering 2021 activity — that the overall balance in 2021 was 78% for developed markets and 22% for emerging markets.

However, the firm has dug deeper into the figures and found that most of the growth comes from developed Asia — covering Hong Kong, Singapore, Taiwan, South Korea — and Australia and New Zealand.

Global SWF's update also noted the recent "disappointing" quarterly and half-year results reported by the most transparent state-owned investors.

"In the past few years, SWFs and PPFs (public pension funds) have enjoyed the bullish performance of bonds and stocks, which still form most of their portfolios. As a result, their assets under management continued increasing despite COVID-19 and other economic challenges. That is — until this year, when the drop in bond and stock prices may finally stunt growth," the update said.

In the context of the available results — including Norway's 11.66 trillion kroner ($1.2 trillion) Government Pension Fund Global, Oslo, which reported a -4.9% return for the quarter ended March 31, and the €228.8 billion ($233.9 billion) Pensioenfonds Zorg en Welzijn, which reported a first-half investment return of -17.6% — Global SWF estimated that the underlying losses across such investors could have been $2.1 trillion for sovereign wealth funds and $3.9 trillion for public pension funds. That represents a $6 trillion, or 18%, loss in total assets. Global SWF highlighted that these are not realized losses.

But funds that are sourced from commodities — accounting for 50% of the sovereign wealth fund industry, may receive large inflows by the end of the year due to the increase in oil prices, the update said. Similarly, pension funds are expected to continue to receive net contributions from participants — albeit at a slower pace.

"It is still early to issue any definite statement but 2022 may finally be the year in which we see a decline in the size of the industry as measured by its (assets) — something that neither the GFC (global financial crisis) nor COVID-19 managed to do," Global SWF's update said.