Sovereign Wealth Funds (SWFs) are preparing to pour billions of dollars into shares around the globe as they take advantage of low prices in the latest stock-market collapse.
Mike Burns, the executive director of the $40bn Alaska Permanent Fund, told The Independent on Sunday that the SWF’s board will meet on Friday to discuss moving hundreds of millions of dollars from fixed-income products, such as bonds, to shares.
He said: “We are looking at rebalancing our investment portfolio by putting money into equities. I would think that all SWFs are looking at equities at the moment.
“The decline [in shares] over the past couple of weeks has been attention-getting.”
The Korean Investment Corporation is reportedly looking at increasing its 0.67 per cent stake in Bank of America, which has seen its shares badly hit in what was a traumatic week for global equities. The FTSE 100 index even dipped below 5,000 points – the low level that is considered psychologically significant for the stock market – briefly last week, bringing back haunting memories of the worst periods of the financial crisis.
Mr Burns added that SWFs look to invest long-term, and do not have short-term targets, like pension funds which need to pay out liabilities every month. SWFs can therefore buy shares and risk an immediate price plunge on the basis that prices will increase in the future.
However, for now, the Square Mile is not thinking years ahead.
One leading City figure said “the world is over” – echoing the feelings of the businessmen and the fund managers who specialise in some of the worst-hit sectors, such as mining and banking. When the markets finally closed on Friday, it turned out to have been the second worst week of the year for the London market.
Mining: commodity collapse
Miners suffered the worst losses, with South American-focused Antofagasta, copper producer Kazakhmys, and India’s Vedanta Resources seeing more than a fifth wiped off their value.
Aleading fund manager said that, in 2008, commodity groups, particularly those that concentrated on emerging markets, had escaped relatively unscathed. But the emerging markets sector is no longer seen as “decoupled” from what was previously perceived as a Western crisis.
Also, commodities are no longer thought of as the great haven after the world’s great consumer, China, showed manufacturing data decreases.
Banking and the eurozone: ECB the saviour
Senior members of the European Central Bank indicated that they were looking at introducing a number of measures next month to boost the bloc’s economy. These measures include bringing back 12-month loans to banks to improve liquidity and stop the eurozone crisis spreading.
The suggestions helped offset a series of negative forecasts for the eurozone on Friday morning, including Royal Bank of Scotland’s stark warning that the bloc would go into recession in early 2012.
Banking stocks generally held up well through the week, with RBS up 3.54 per cent on Friday.
Luxury goods: Asian fears
The once infallible luxury-goods market showed signs of coming unstuck as share prices fell on fears of stalling Chinese and Japanese sales growth.
Burberry, whose shares had risen nearly 27 per cent in a month, fell to a three-month low, while LVMH in Paris saw its share price fall to 105.45 euros, down 8.5 per cent on the week.
HSBC analysts said that jewellery will remain resilient in the long term, while US experts predicted that Tiffany & Co could become a takeover target. Long term, though, HSBC thinks China will continue to grow.
Consumer goods & retail: the risers
Consumer goods have been one of the few stocks that were up on the week, with Imperial Tobacco and Unilever in the top three risers.
Supermarket giant Tesco’s shares rose 1 per cent on the week after it announced its “Tesco’s Big Price Drop” – a promotion that is expected to start a price war with other major supermarkets.
Analysts at Evolution Securities upgraded Tesco from “sell” to “neutral”, on the back of the announced £500m of cost cutting.
Osborne and the OBR
George Osborne is facing up to the realisation that the recently created Office for Budget Responsibility has made some very exaggerated predictions in terms of fragile UK growth.
Well respected Robert Chote, pictured below, now the head of the OBR, and previously a director of the Institute for Fiscal Studies, forecast that economic growth this year could be 2.6 per cent. This is now beyond reach and his estimate for the future growth now also looks unachievable.
Since Mr Chote made his predictions, there has been a further global slowdown and the UK has contended with a eurozone crisis. With this, UK growth prospects have declined and inflation is now at 4.5 per cent.
Latest forecasts by the IMF cut the UK's growth to 1.1 per cent this year – down from 1.5 per cent in June. It has also been revealed that the Bank of England is considering cutting interest rates below their record low of 0.5 per cent.
The OBR, originally set up as an independent resource, impacts on Mr Osborne's planning at a time when he must maintain his respect within the City.