BIS Review 31/2008  1  Modern sovereign wealth funds are not new, in fact the first – the Kuwait Investment Office – was set up here in London in February 1953 – just as Edmund Hillary and Tenzing Norgay were setting out to climb Everest. 2 And the number of funds has been increasing since then like the traffic on the slopes of Everest. The next wave were set up by other oil producers after the price increases in the 70s and 80s for persuasive reasons (Chart 2). First oil is a non-renewable resource so it can make sense for governments to spread the benefits of this endowment across generations by investing part of today’s income in assets that will provide an income tomorrow. That would be so even if the path of oil prices was predictable but in fact it is not. That uncertainty about future income provides a second case for saving today. In the late 1970s, some oil exporters increased spending to match higher incomes and faced a painful adjustment when prices fell back again. Third, even if the rise in income was permanent there would be a case for phasing the growth of domestic spending and investment to prevent supply bottlenecks leading to inflation. Recent growth of SWFs Since the millennium at least 10 new SWFs have been set up and there are reports of plans for more for example in Brazil, Japan and India. This reflects the remarkable shift of emerging-market economies from debtors to creditors.
Therefore, in periods of market stress they are likely to face less pressure than most private investors to reduce the size or increase the liquidity of their investments. They are well placed to play a contrarian role and help to stabilise markets by investing in times of stress. For example, when the global equity market fell sharply between 2000 and 2002, the Norwegian Government Pension Fund was a large buyer of global equities. And a number of sovereign wealth funds have played an important and welcome stabilising role during the current turmoil by providing around $ billion of new capital since November to some of the world’s biggest commercial and investment banks (Table 1). 8 Taking a broader view, the switch of some reserves from government debt into SWFs which invest in a wider range of instruments should help to improve the allocation of resources if these investments are based on commercial criteria. Investing in equities may also help to reinforce and bring to the surface the common interest that EMEs and the advanced economies have in the good performance of the companies involved and the markets they operate in. It may thus help to integrate EMEs into the global financial system and encourage them to participate more in global policy making. From a parochial point of view, the prospective increase in demand for equities relative to bonds could have a positive impact on London and sterling.