State funds not missing, just wearing camouflage
with Tom Holland
Amid all the global market mayhem, the collapses and the rescues of this week, some of the biggest financial players in the world - sovereign wealth funds - have been noticeable by their absence.
Their non-appearance has prompted some observers to wonder why they seem to have gone missing in action. The answer may be that they weren't missing at all, just that they resorted to covert operations.
With an estimated US$3 trillion under management, much of it unallocated, sovereign funds have emerged as key players in world markets over the last couple of years. Yet for all their financial firepower, they can hardly be blamed for deciding against making high-profile acquisitions this week.
In the early stages of the credit crunch, state funds such as the US$200 billion China Investment Corp (CIC) and Singapore's US$130 billion Temasek Holdings were enthusiastic investors in financial companies.
They were severely punished for their eagerness. In June last year, CIC infamously invested US$3 billion in United States private equity company Blackstone, only to see its shares slump by 50 per cent.
Then in December CIC stumped up another US$5 billion for a stake in US investment bank Morgan Stanley. That investment was protected from short-term volatility by a clever convertible bond structure. But if Morgan Stanley's shares were to fail to recover from Wednesday's closing price, CIC would be facing a loss of close to another US$2.75 billion.
Similarly, Temasek pumped US$5 billion into Merrill Lynch last December, only to see the shares sink 64 per cent below the price it originally paid.
So it is hardly surprising that the world's sovereign funds baulked at throwing good money after bad, and decided to hang back from bailing out distressed financial companies such as Lehman Brothers and AIG this week. The risks were simply too great for them to stomach.
But that doesn't mean sovereign funds were entirely inactive. Some market participants believe Chinese state funds took advantage of yesterday's extreme volatility to swoop in and scoop up Hong Kong-listed stocks on the cheap.
If true, such state-backed intervention at times of exceptional volatility does have precedents. Yesterday, the Hang Seng Index fluctuated through an astonishing 9.6 per cent intraday range. The closest the index has come to that level of volatility in the past five years was on August 17, 2007 when it moved 7.1 per cent, prompting Chinese regulators to lift the market by announcing the 'through train' scheme - later aborted - to let mainland investors buy Hong Kong stocks.
The previous time intraday volatility came anywhere close to yesterday's level was in August 1998 when the index, under attack from hedge funds, fluctuated 9.5 per cent in a single session. That brought the Hong Kong government into the market, buying stocks directly in a HK$150 billion operation to sweep out the speculators.
The problem yesterday wasn't a speculative assault, but rather extreme risk aversion in the face of global financial panic. Nevertheless, for steel-nerved investors - or for those buying government funds - yesterday's market conditions did indeed present an attractive buying opportunity.
The Hang Seng wasn't quite as cheap as in August 1998, when the Hong Kong government bought in at a rock bottom price of just seven times annual earnings. But with the index's valuation falling as low as 10 times earnings during the day, Hong Kong stocks were cheaper than at any time since the dotcom bubble of 1999 and 2000.
For long-term investors like sovereign funds, that made Hong Kong stocks, and especially the Hong Kong stocks of mainland companies, look highly attractive after yesterday morning's sell-off. Perhaps they weren't missing in action after all.