Economic recovery ignites interest in sovereign wealth funds

Singapore ranked among highest in country reputation category, which impacts SWF image, investment potential.

The global downturn has spurred interest in sovereign wealth investment (SWF) but concerns over transparency could obstruct their investment strategies, according to the Sovereign Brands Survey 2010, the most extensive study into the attitudes of global broad elites to sovereign wealth as a concept, the reputation of host nations and sovereign wealth funds.

Conducted by Hill & Knowlton and Penn Schoen Berland, the study interviewed elites in 7 markets on their views of 19 host countries and their SWFs.

Some of the main findings:

Economic recovery likely to accelerate interest from Brazil, India & China
The economic recovery has spurred interest in SWFs, with 51% of elites questioned saying they are more favourable towards this type of investment since the global downturn, compared to 14% who are less favourable, and 36% whose views haven’t changed. Brazil (80%), India (63%) and China (78%) are more favourable than the UK (39%), US (29%), Egypt (38%) and Germany (28%), and their interest is likely to accelerate as the global economic outlook improves. However, Brazil, India and China are also the most cautious about SWFs investing in their countries with India (60%) and China (97%) expressing this view most strongly.

Fears persist that SWF investment could be used to exert political influence
Concerns over transparency may be fuelling mistrust that SWF investment could be used to exert political influence and acquire strategic assets. Despite the voluntary Santiago Principles introduced by the IMF in September 2008, poor adoption by the funds may be deterring consideration of this asset class amongst the elites interviewed.

  • SWFs from Russia (87%), China (84%) and Libya (74%) were considered most likely to be motivated by political objectives, and Botswana (55%), Singapore (50%) and Norway (43%) least likely.

All elites were adverse to SWFs investing in their defence sectors (45% approval overall), this view felt most strongly by elites in the UK and Germany, where only 30% and 21% would approve respectively. Some were keener for SWF investment into their finance sectors - Brazil (84%), India (73%), China (78%) and Egypt (95%) - than the other counties surveyed. Overall, investment into the technology (86%), construction (81%) and energy (79%) sectors was most welcomed.

  • Elites from the countries surveyed gave the lowest approval ratings to SWFs from Kazakhstan, Algeria, Nigeria, Brunei, Botswana and Libya investing in any of their countries' sectors.
  • Along with Kazakhstan, Russia and China were also viewed as having SWFs that were more prone to rapid and unpredictable change than the other countries of origin, and that their investment activities were more likely to have contributed to market turmoil compared to other forms of investment.

Country reputation determines SWF image
A country's reputation is a strong driver of the perception of its SWF (98% of all Elites interviewed believing this to be somewhat / very important), and appears to affect perceptions about that fund including its governance, transparency of financial records, performance over the last two years, and whether the SWF invests in a responsible manner, now and in the future.

  • SWFs from Norway, Singapore and Hong Kong scored highest across all these categories, and Libya, Algeria, Botswana and Nigeria the lowest. Unsurprisingly, these rankings also translated into the country of origin which elites would most welcome SWF investment from.

When asked which attributes they considered to be the most important in influencing their views of a country, being politically and economically stable (78% and 74%), committed to the rule of law (69%) and adhering to international regulatory standards (67%) were considered key overall.

  • Again, countries such as Norway, Singapore and Hong Kong rated highly across these factors and Libya, Algeria, Botswana and Nigeria were regarded less favourably.

Overall, softer factors such as sharing their country's values (43%) and being tolerant of people from different countries, cultures and religions (50%) were considered less important.

Andrew Laurence, Chairman Worldwide Corporate Practice Committee, Hill & Knowlton commented: "Sovereign wealth funds have become global players and need to play by the global rules of transparency and communication, if they are to compete effectively for prime assets and investment positions. In some cases they may also want to work with their host governments on improving their country’s image."

Joel Levy, Chief Executive Officer, Penn Schoen Berland, EMEA commented: "The economic downturn has created a real opportunity for sovereign wealth funds. SWF’s images are largely determined by country reputation, and despite low familiarity and concerns over transparency, broad elites see SWFs as least likely to have contributed to recent market turmoil. This puts sovereign wealth funds in a prime position to consider their positioning and reputation in contrast to other funds and asset classes."

Sovereign wealth viewed as least likely to have contributed to market turmoil
Overall, the investment activity of sovereign wealth is considered one of the least likely to have contributed to market turmoil (40% thought it had) than other sources of investment such as hedge funds (65%) and investment banks (65%). Only 16% of elites in Germany thought SWFs had contributed, the lowest of all the markets interviewed, with Brazil (63%), India (44%) and China (61%) believing they had more of a bearing.

Germany (56%) also considered SWFs to be more reliable than other forms of investment, unlike the UK (11%), US (9%) and India (10%) who consider SWFs less reliable and were less trustful than the other countries questioned.

Low familiarity drives low favourability towards SWFs
Despite being considered one of the least likely to have contributed to market turmoil compared to other sources of capital, low familiarity may drive low favourability towards this asset class. Of the countries surveyed, the US, UK and India were least familiar and least favourable to SWF investment, whilst Egypt, Germany, Brazil and China were most familiar and most favourable. Overall, this audience was least familiar with Sovereign Wealth as a source of investment compared to the other five sources listed.

Transparency, accountability and good governance considered key for successful SWF investment
When asked which factors were most important in deciding whether they would approve of a sovereign wealth fund investing in their country, overall elites ranked transparency (72%), accountability (68%) and good governance (65%) as key considerations. The SWF’s performance (56%), social responsibility of the fund (55%) and motivation (53%) were considered less important overall.

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