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Economists often have strong opinions about sovereign wealth funds (SWFs). A paper by Bill Megginson, Asif Malik, and Xin Zhou of the University of Oklahoma described the rise of global SWF investment as a major financial development in recent decades.

SWFs and public pension funds have grown significantly, managing over $34 trillion in assets globally by the end of 2023, according to GlobalSWF. They have become crucial sources of capital for emerging economies, despite some Western skepticism.

Any changes in the investment strategies of these sovereign giants can greatly impact developing countries. In 2023, more than $65 billion was deployed by state-owned funds in emerging markets. This marks a 17.3% increase from 2022, according to GlobalSWF’s 2024 annual report. Although this was only about a third of the global total of $205.1 billion, it was the highest figure since 2014. This contrasts with the 21.5% decline in global state-owned investment between 2022 and 2023.

Diego Lopez, CEO of GlobalSWF, identifies two main drivers behind the renewed interest in emerging markets. First, more capital was deployed domestically by state-backed funds in countries like Saudi Arabia, Turkey, and the UAE.

Simultaneously, Middle Eastern and Asian investors showed strong interest in better investment opportunities in emerging markets such as India, Brazil, and Indonesia. State-backed investments in China soared by 333% to $8.3 billion in 2023, despite the overall decline in foreign direct investment to China. The top ten most active funds, including Saudi Arabia’s Public Investment Fund (PIF), drove these shifts. PIF, the most active state-backed investor last year, increased its investment by 33% from 2022. It committed $31.6 billion across 49 deals.

PIF prioritized investments in emerging markets, including major projects at home aligned with the Vision 2030 reform agenda. Singapore’s GIC, previously the world’s most active sovereign investor, also doubled its investments in developing economies in 2023. Singapore’s Temasek, Qatar’s QIA, and Abu Dhabi’s ADQ followed this trend, deploying more capital in emerging markets.

SWFs Boost Emerging Markets

GlobalSWF provides transparency in global finance, even when state-owned investors do not disclose exact asset and investment totals. This transparency is crucial, especially in undemocratic countries.

Victoria Barbary, director of strategy and communications at the International Forum of Sovereign Wealth Funds, noted that emerging markets are less risky than perceived from a Western perspective. Geopolitical factors and increased scrutiny in Western countries complicate investments for state-backed funds. The Committee on Foreign Investment in the United States, for instance, has increased scrutiny of transactions by Middle Eastern SWFs in the US.

Bill Megginson of the University of Oklahoma pointed out that non-democratic SWFs face difficulties in buying large equity stakes in Western companies due to negative political reactions. They prefer investing through private equity funds.

As scrutiny varies across regions, SWFs adjust their investment strategies. Sovereign investment in Europe, including the UK, dropped to $37 billion, the lowest since 2016. The developed Asia-Pacific region saw a ten-year low in state-backed fund investments. This doesn’t include Japan, which saw a 63% increase to $5.4 billion. In contrast, North America remained resilient with $85.6 billion in state-backed investments. It is a smaller decline of 6% than other developed regions.

The influence of state-backed investors is expected to grow. GlobalSWF forecasts their total global assets to reach $50 trillion by 2030. The World Bank has stated that developing countries need an “investment boom” to boost low growth forecasts. Therefore, the shift of SWF investments to emerging markets deserves close attention from economic developers and corporate leaders.

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