First Citigroup, then Morgan Stanley, and now Merrill Lynch is apparently the target of a “distressed” investment from one of the world’s leading Sovereign Wealth Funds (SWF).
I have written about this trend before (China Rivals Middle East as Biggest SWF Investors in U.S.), but what’s most striking to me is the fact that it all seems so familiar ... it’s like déjà vu all over again, as Yogi Berra might say.
The Wall Street Journal reports today that Singapore’s state-run SWF, Temasek Holdings may take an investment stake worth as much as $5 billion in Wall Street’s venerable Merrill Lynch. The brokerage firm is of course reeling from the aftershocks of the sub-prime crisis. In fact, Merrill just reported its biggest loss in its 93-year history, so it’s in need of a financial shot-in-the-arm.
SWFs Add to Their Holiday Shopping Lists
Merrill joins a growing list of Wall Street icons that have been bailed-out... er, that is seen as a good investment – by SWFs. Citigroup of course led the charge obtaining a cash infusion of $7.5 billion from the Abu Dhabi Investment Authority.
And China’s state-run SWF, China Investment Corp., just announced a $5 billion investment in Morgan Stanley. That’s on top of a smaller stake that China’s Citic Securities took in brokerage firm Bear Stearns in October.
Overall SWFs based in the Middle East and Asia have so far agreed to invest about $25 billion in Wall Street firms since the sub-prime market shock began -- but there’s a lot more cash and eager buyers where that came from.
A Strong Appetite for Beaten-Down U.S. Financial Shares
The willingness of these global financial power-brokers to invest in the distressed U.S. financial sector seems like a very good thing. Especially at a time like this when the U.S. banking sector is under such intense stress.
Investors welcome the fact that these SWF are seeing some value in beaten-down financial shares. The SWFs are bringing a “bid” to the market for free-falling financial shares; in effect putting a “floor” under the falling stock prices. This is one of the reason’s I recently turned bullish on the banking sector, expecting at least a bounce in the near term.
What about the longer-term consequences of offshore investment funds owning such big stakes in the key U.S. financial sector? That’s a question that no one seems to be addressing just yet. Financial shares make up 20% of the U.S. S&P 500 Index by market cap, by far the largest sector of our domestic market.
Up until the recent losses now being posted by Wall Street, financial stocks accounted for a big chunk of U.S. corporate earnings too. In 2006 in fact, stocks in the financial sector accounted for nearly one-third of the total profits earned by S&P 500 companies.
Repeating the Experience of Japan Inc!
So what’s the long-term cost of selling such a vitally important part of the U.S. economy to SWFs? Only time will tell.
It reminds me of the experience with Japan two decades ago. Japan Inc. (as it was then know) was “accused” of buying up American assets en mass in the 1980’s. Pebble Beach Golf Course in California, perish the thought... Rockefeller Center in New York City, outrageous! It seems like more than half of the Hawaiian Islands are still owned by Japan. Circumstances were slightly different with Japan then, than they are with SWFs now.
Chronic weakness in the U.S. dollar in recent years makes U.S. assets look very attractive indeed to foreign buyers. Just ask all the Brits and Irish who fly into New York with empty suitcases for their holiday shopping sprees this year.
Flush with Cash and Willing to Spend
Back in the 1980’s it was more the case of a very strong Japanese yen than it was a weak U.S. dollar that spurred Japanese investment spending. Striking similarities exist too. Japan was flush with cash two decades ago, just as the SWFs are today.
In fact a recent study by global consultants McKinsey & Company shows that SWFs in the Middle East and Asia, combined with global hedge funds and private-equity firms, are sitting on an $8.5 trillion pile of investment assets. Talk about flush with cash!
In the late 1980’s an intense backlash sprung up in America about Japan Inc.’s ownership of so many high-profile U.S. assets. So far, we haven’t heard similar protests about SWFs... at least not yet, but stay tuned.
Perhaps as Wall Street worries about the U.S. consumer's ability (or willingness) to spend this holiday season -- it's comforting to know that the free-spending SWFs are on a shopping spree of epic proportions -- doing more than their fair-share!
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