Hard-Hit Sovereign Wealth Funds Avoid Further Bank Bailouts but Expect to Re-Enter Market by Year End

LONDON—There is good news, bad news and just fair news today on when the U.S. economy might begin to turn around – and it isn’t coming from 1600 Pennsylvania Avenue.

It’s coming from London-based Financial Dynamics International, a 27-year-old global financial and corporate communications consulting firm.

The good news: The world’s major Sovereign Wealth Funds are betting the downward price spiral of American companies’ stock values will bottom out by the end of this year.

The bad news: Values are expected to drop even further over the next six months.

The just-fair news: Ailing U.S. financial institutions may no longer be able to depend on a life jacket from SWFs.

FD has just completed personal interviews with senior executives from many of the world’s leading Sovereign Wealth Funds. Those funds account for over 50 percent of the U.S. $5 trillion worth of collective global funds held by the SWF asset class.

The FD data focused on current SWF attitudes towards valuations, investment strategies and where they see regional investment opportunities.
Here are the highlights:

SWFs are broadly adopting a very cautious approach to the current market, expecting better value to materialize later during the year.

SWFs are primarily interested in acquiring minority equity stakes in listed companies, with no desire to take management control, have board representation or act as “activist” investors.

SWFs are particularly cautious with regard to supporting further bailouts of distressed companies.

SWFs currently see the most attractive regions for investment being Brazil, China and areas of Central America.

Western European markets are also seen as offering the most compelling value with PE ratios of publicly listed companies down more than 40% from their peak, and markets trading at the lowest absolute price earnings ratios of under 10.0x.

SWF investment decisions on average are made on a minimum of a five year investment perspective, with dividend yield being as critical an investment criterion as capital growth.

In the short term, some SWFs are seeing their cash in-flows diverted from their global portfolios to invest in their home countries/regions to add stability and economic stimulus to local markets.

“Our research confirms that while Sovereign Wealth Funds are currently adopting a very cautious investment approach to world markets, they are clearly poised to re-enter the global equity markets in the not too distant future with compelling valuation propositions beginning to present themselves across North American and Western European equity markets,” notes FD Group CEO Charles Watson. (top right photo)

"Our research has also determined that contrary to widespread perceptions, Sovereign Wealth Funds are primarily genuine long term passive investors who have no agenda to exercize management control or behave in an activist way.”

Watson finds that “while a number of key SWF investments have been made over the last 18 months and SWFs are still interested in broadening their portfolios, the findings showed that this particular class of investor is keeping a watchful eye on global markets, waiting for the right time to make deep value investments.”

FD carried out the research to identify which markets still held the best value for investors. The findings showed that actually despite market conditions, Western Europe and North America were identified as the best investment regions in financial terms.

Declan Kelly (top left photo) and Oliver Pawle (middle right photo) are co-founders of Financial Dynamics International. Pawle is chairman and works out of the company’s London office. Kelly is CEO of the company’s U.S. and Ireland offices. Declan Kelly of Financial Dynamics is not related to Declan Kelly, Ireland’s Ambassador to Canada.