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One of the catalysts for last week’s stock market rally was the news that Citigroup received a $7.5-billion injection from the Gulf Arab emirate of Abu Dhabi. In exchange, Abu Dhabi now owns 4.9% of Citigroup.
That’s on top of the 3.9% that Saudi Arabian Prince al-Waleed bin Talal already owned, which means that foreigners now own a huge chunk of one of America’s largest and most prestigious banks.
My, how times have changed!
It wasn’t that long ago that Congress was up in arms over Dubai Ports World’s proposed acquisition of U.S. port terminals and China National Offshore Oil Corporation’s attempted purchase of Unocal.
But now, as the financial crisis unfolds here in the U.S. … as petrodollars gush into oil rich nations … as Asian countries find themselves atop mounds of money … and as the greenback sits at record lows …
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| Abu Dhabi tossed Citigroup a life preserver last week. |
America Is on Sale, and Foreign
Investors Are Ready to Buy
Citigroup’s billions came from the Abu Dhabi Investment Authority (ADIA), a sovereign wealth fund (SWF). These funds are essentially government-sponsored offices that invest a country’s savings.
They’re nothing new. In fact, they’ve been around since 1953, when the Kuwait Investment Authority’s Reserve Fund for Future Generation was established. But today, sovereign wealth funds are growing in number and size!
Already, 30 different countries have SWFs, and half a dozen more are talking about creating funds of their own.
Norway has invested oil revenues since 1967, and uses the income from these investments to operate the government. France has a $42-billion fund, as does South Korea, Brunei, Malaysia, and Chile.
Meanwhile, the total value of sovereign investment funds is estimated to be $3 TRILLION and could reach $10 TRILLION by 2012!
The 3,000-pound elephant, when it comes to sovereign investment funds, is Asia.
According to McKinsey & Company, Asian central banks held more than $3.1 trillion in reserves at the end of 2006, and that number has been getting even bigger.
Why? These countries are stockpiling money by running massive trade surpluses. China, for example, had a $27-billion trade surplus just in the month of October!
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| China’s massive trade surplus is powering up the country’s investable assets! |
No wonder the country saw its foreign-exchange reserves surge to $1.46 trillion that month, up from $1.43 trillion in September.
Heck, this year China will surpass the U.S. as the world’s second-largest exporter, and in 2008, it should surpass Germany, to become the largest.
As Lou Jiwei, the chairman of the China Investment Fund, recently said,
“We now have $1.4 trillion in foreign exchange reserves, and I tell my foreign friends I have never been under more pressure. Such a massive reserve is both our strength as well as our huge responsibility.”
The message for investors is clear …
Figuring Out What Sovereign Investment
Funds Want Could Prove Very Profitable
Sovereign funds are going to dramatically change the investment landscape. At best, anybody who ignores this powerful trend is going to get gobbled up in the process. Even worse, they might miss out on one of the most powerful investment trends of our lifetime!
So, where will the money go? Here are some recent moves:
Financials: In May, China took a $3-billion stake in U.S. private equity firm The Blackstone Group. Most people think China just wanted a higher return on its investment, but I see a country very eager to learn the ins and outs of the takeover business.
| Internal Sponsorship |
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Fed’s response to rapidly unfolding money panic: Next Tuesday, December 11, pelted by a hailstorm of horrific news from nearly every sector of the U.S. economy and with a money panic looming … Ben Bernanke and his Fed governors will huddle behind closed doors, slash interest rates and gut the value of every dollar you own. That gives you less than seven, short days to insulate your savings and your investments … and to go for gains of up to 2,866% when the dollar dives and when these five, key foreign currencies leave the U.S. dollar in the dust! |
Energy: Even though CNOOC abandoned its $18 billion bid to buy Unocal, the proposed deal showed how important energy is to China’s future. And the purchase of Husky Energy by Hong Kong billionaire Li Ka-Shing confirms how hungry for natural resources China is.
Consumer Brands: China is seeking to control the markets that it currently manufactures for. Three recent examples:
- Haier Group, China’s largest home-appliance maker, tried to buy Maytag for $1.3 billion.
- Lenovo Group bought IBM’s computer division for $1.75 billion.
- Chinese consumer electronics firm TCL Corp. purchased the television business of French manufacturer Thomson SA (along with the rights to the RCA logo).
Now, it’s impossible to know exactly what company will be the next target of a sovereign wealth fund. But I do think the areas above will remain hotbeds of activity.
I also think this trend is yet another reason to invest in Asia, and China in particular. These countries are holding all the cards right now, and they’ll benefit from buying up valuable assets at fire-sale prices.
So whether you prefer mutual funds, exchange-traded funds, or individual stocks, consider adding a little Asian spice to your portfolio. I think you’ll be very happy you did.
Best wishes,
Tony
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