Sovereign Wealth Funds (SWF) continue to grow with more states opening funds and investing in top companies and assets. With large funds, most governments are poised to have more influence on the direction of the global economy.
Data presented by Buy Shares indicates the ten largest Sovereign Wealth Funds as of July 2020 controlled $5.7 trillion in assets under management. From the data, the Norway Government Pension Fund Global accounted for the largest share among the ten funds at $1.18 trillion or 20.81%. China-based National Council for Social Security Fund has the least assets worth $325 billion. On the list, China has three SWFs amounting to approximately $1.68 trillion or 28.07% of the top ten SWFs globally.
The research also overviewed the geographical distribution of the largest sovereign wealth funds. From the data, there are a total of 89 notable sovereign wealth funds globally. Asia dominates with 19 funds representing 21.34% of the global tally. Elsewhere, the Latin America region accounts for the least share of SWF at 9.
Role of Sovereign Wealth Funds
A Sovereign Wealth Funds (SWF) are funds owned by a state mainly made up of financial assets such as stocks, bonds, property, or other financial products. Most governments use Sovereign Wealth Funds to manage national savings for the purposes of investment. They act as a stabilizer to diversify the country’s money by investing in other areas with potential. When the state has surplus money, it uses SWFs as a way to funnel it into investments instead of storing it at the Central Bank. Overall, the motives for establishing a sovereign wealth fund vary by country.
Over the years, SWF has emerged as a key portion of the global economy. The large size and possible impact of these funds on international trade have led to opposition, and criticism among different countries. For example, in the United States, there are fears that foreign states can use SWFs to gain control over domestic financial institutions in return influencing political outcomes. Some political leaders calling for monitoring of SWF believe they pose a major threat to national security. Despite the concerns, there are calls to make SWFs more transparent.
Despite joining the market more recently compared to North America, Asia now accounts for the largest share of SWFs thanks to rapid economic growth in the last two decades. Several countries in the region opted for multi-billion funds that are now competing on a global scale. Notably, China remains the most ambitious country from Asia in the SWF market. The country is standing out considering that most of its investment portfolios are defying traditions by exploring the private sector.
In general, despite their enormous size, SWFs are not impervious to adverse market conditions. For example, the recent economic turmoil as a result of the coronavirus impacted most SWFs globally.
Over the recent months, the investment environment has been challenging and SWFs have been largely diversifying their search for new opportunities. Notably, there is an opportunity in sectors such as enterprise software, services, and biotechnology, which remained resilient during the pandemic. The traditional financial sectors were among the worst hit during the health crisis.
After the pandemic has been fully been contained and all lockdowns are lifted, most governments are banking on SWFs to balance public responsibility with private sector interest. The post-pandemic economy will see intensified public spending. Increased spending will definitely call for scrutiny and demand for fiscal discipline.
With the Covid-19 crisis, most economics stared at recessions while at the same time new fund structures emerged rapidly. However, under the circumstances, the emerging funds were not a direct reaction to governments having surplus money. The funds were meant to help restart economies from the health crisis-induced recession.
In the future, the SWF environment should expect turbulent months ahead mainly fuelled by the trade tensions between the United States and China. Notably, Europe will be caught in the middle as the growing economies pick sides between the US and China. The trade war between the two countries has been linked to the tough investment environment in recent years.