SWFs make long-term commitment to emerging markets

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Singapore state investor Temasek Holdings’ purchase of $2.3bn worth of ICBC’s Hong Kong-listed shares from Goldman Sachs is a “very smart move” that underscores the growing trend among sovereign wealth funds and large fund managers of investing in emerging markets, according to Principal Global Investors.

 Temasek said in April it bought 3.55 billion H-shares, or around 1%, of Industrial and Commercial Bank of China (ICBC), taking its stake in the world’s biggest bank by market value to 1.3%, including ICBC shares the state investor owns directly and various other stakes held by Temasek-linked firms.

 Andrea Muller, PGI’s Chief Executive of Asia, says: “A lot of the SWFs have made public announcements, clearly there is a growing interest in investing in emerging markets or investing back in Asia.”

 “As far as Temasek’s investments in China are concerned, they are long-term, savvy sophisticated investors. Like us they also have an investment in China Construction Bank (CCB), we quite agree with their approach. ”

 She added the U.S. market is very positive right now and is a good place to be, “but if you are a long-term investor, there is no denying the long-term-trend in the global emerging markets and in Asia. It’s a very smart move.”

 Temasek, which manages about $150bn in assets, also owns 9.42% of CCB and has stakes in Bank of China. Analysts view its latest move as a commitment to capturing emerging market growth, anchored by China, where the banking sector has emerged from insolvency six years ago to a sector that holds four of the world’s top 10 banks by market value.

PGI’s joint venture with CCB, China Construction Bank-Principal Asset Management (CCB-PAM), manages both equity and fixed income products for Chinese clients and aims to be a top 10 player in China. One of the joint venture’s focuses is on the QDII scheme, which gives Chinese investors access to overseas capital markets. This includes the launch of an overseas investment product in global emerging markets.

 “And before the first half of this year, the joint venture will launch a global natural resource product that we worked with them on,” Muller says. “So, while it’s a market that’s complicated and can be frustrating, we are in it, we have a good partner, we believe in China long term, so Temasek’s investment makes perfect sense.”

 In addition, PGI is promoting its Preferred Securities Fund among sovereign wealth funds, institutional investors, pension funds, private banks and high net worth individuals in Asia, which accounts for just 6% of such fund, Muller said. In contrast, 60% of preferred securities are issued out of the United States and 34% in Europe.

 Preferred Securities, or hybrid securities, are bonds that are subordinated to senior bonds but senior to equity of a company and comprise perpetual trust securities and contingent capital. These products have returns of 7% year-on-year, which is quite high and less risky than high yield, making them attractive in a low-interest rate environment, while their default rate is lower than high yield, Muller adds. “It’s a new phenomenon now to see those products in Asia.”

 “In Asia we have been talking to institutional investors about the advantages of investing in the product and why it’s a sweet spot.”

 SWFs in the Middle East, which “is a capital exporting region”, are also looking for sweet spots in the growth markets of Asia, and opportunities for appropriate risk-adjusted returns, says Shashank Srivastava, Acting CEO of the Qatar Financial Centre Authority. “You see interest and there is a rising desire towards allocating capital in Asia.”

 “Institutional investors are clearly also looking for diversification,” Srivastava says. “You need allocation, increasingly in today’s world, towards RMB, and you need to chase yields and you need to chase growth and that’s what you have in Asia, and across emerging markets.”

 Qatar Asset Management, a collaboration between the QFC Authority and the Qatar Investment Authority, in April agreed to co-invest $250m in Barclays Natural Resource Investments’ current and future portfolio companies, of which a substantial proportion will be allocated to BNRI’s existing $2.1bn portfolio of companies. BNRI will continue to source, execute, manage and exit private equity transactions in the natural resources sectors on a global basis and co-investors will be invited to participate immediately upon completion of each transaction.

 Resource-rich countries in Africa and Central Asia, with close proximities to the Middle East, are also potential markets for investment and growth, Srivastava says. “Latin America is of course, a bit further away, but it’s the same economic fundamentals, good demographics and growing rapidly.”

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