Wealth funds of emerging nations blighted by western banking crisis

SOVEREIGN Wealth Funds, the multi-trillion-pound investments owned by the governments of many emerging economies, will be badly hit by the recession spreading from the western world this year, experts have warned.

As the worth of these funds decreases, they can no longer be regarded as a saviour for struggling western stock markets, said Callum D'Ath, director with Bell Lawrie stockbrokers.

Russia, China and the Middle East have all seen their funds increase in value in recent years, partly on the back of booming oil and natural resources, but that trend is now starting to turn. Morgan Stanley estimates that sovereign wealth funds (SWFs) have seen their combined net worth fall 25% from $3 trillion at the beginning of 2008 to $2.25 trillion at the end of the year.

Russia has been particularly badly hit from being forced to spend substantial amounts of foreign reserves trying to prop up its rouble currency.

SWFs have also been adversely affected over the past 12 months from investing in ailing western financial institutions. For example, the Kuwait Investment Authority invested $3bn in Citigroup, to see that turn into $1bn, according to D'Ath. While Barclays recently managed to raise 5.8bn in preference shares from Qatar and Abu Dhabi, D'Ath says SWFs are now wary of western banks.

He says: "I don't subscribe to the view that SWFs are going to come riding to the rescue of western stock markets. They've had their fingers badly burnt from putting a lot of money into fairly duff western institutions.

"We've seen a big slowdown in the economies that have SWFs. I'm staggered by the amount of debt some of the Russian oligarchs had taken out."

He believes China and Asia will suffer this year from their reliance on exports to UK and US consumers and this will have a knock-on effect on their SWFs. "When the UK and US go into recession, so does China. What they need to start is building on their own consumption."

In the future, SWFs are more likely to invest in natural resource firms such as BHP Billiton, rather than banks, based on their recent experience, says D'Ath.

While SWFs were established in the 1950s, they have only become widely recognised recently through their role in taking stakes in investment banks which were hit by the sub-prime crisis. They have come in for criticism for a lack of transparency and regulation.