Sovereign Wealth Funds: $7 Trillion Reasons to Stay Invested
by Alexander Green, Investment Director
Tuesday, May 19, 2009: Issue #1000
In February, I wrote that the decline in stocks was just about over. Why?
There was more money available to buy shares than at any time in almost two decades. The $8.85 trillion held in cash, bank deposits and money market funds was equal to 74% of the market value of U.S. companies, the highest ratio since 1990, according to the Federal Reserve.
What happened in the past when cash reached these levels?
- In September 1974, cash on hand reached $604.5 billion, representing a record 1.21 times the U.S. stock market's capitalization. That preceded a 31% gain in equities between October 1974 and March 1975.
- In July 1982, just as a 20-month bear market was ending, cash as a percentage of the U.S. stock market's value rose to 95%. The S&P 500 began a six-month, 36% advance. According to Bloomberg, the eight previous times that cash peaked compared with the market's capitalization, the S&P 500 rose an average 24% in six months.
This time, of course, it didn't take nearly as long for the market to rally.
Still, the greatest appreciation so far has been in smaller stocks. That's normal in an early bull market. But if the bull market continues, the big, blue-chip stocks are likely to lead the market higher for two key reasons:
- First, there is still over $8 trillion on the sidelines earning next to nothing in short-term deposits. Investors tip-toeing back into the market are likely to gravitate here since these stocks are the safest.
- And then there is the growing influence of cash-rich sovereign wealth funds...
Sovereign Wealth Funds - The Financial Assets of a Country
Sovereign wealth funds are the financial assets of a country - usually part of the national savings - that are owned and organized into a state-controlled fund and put to work to earn a higher return on investment.
(Sovereign wealth funds are not the same entities as foreign exchange reserves, which are often used for short-term currency stabilization and liquidity.)
In the past, most countries put their liquid assets to work in foreign currency deposits, government bonds or gold. (The hard-working Japanese and Chinese, for example, have kept our interest rates low by maintaining a steady appetite for U.S. Treasury obligations.)
But with the dollar relatively weak and interest rates on Treasuries near record lows, U.S. government bonds are not generating the kind of returns you write home about.
So world governments are slowly moving money into global equity markets. And the sums involved are fairly staggering.
Sovereign Wealth Funds Control More Than $7 Trillion...
According to The Economist, sovereign wealth funds already control more than $7 trillion today. The exact amount is impossible to ascertain due to lack of transparency.
But China, Saudi Arabia, Singapore and the United Arab Emirates alone are known to control more than $2 trillion. And more money is being allocated to these funds all the time.
What does this mean for you as an investor?
Expect to see cash coming off the sidelines to accumulate shares of the largest, most liquid firms around the globe. Quite frankly, they are the only companies that can easily absorb buying on this scale.
For example, take a look at the Dow Jones Global Titans Fund (NYSE: DGT). It holds the world's 50 largest publicly traded companies.
World-Class Diversification in a Blue-Chip Portfolio
When you buy this cheaply valued blue-chip portfolio, you're getting world-class diversification.
- Exxon Mobile,
- Proctor & Gamble,
- Toyota Motor,
- Roche Holdings,
- Samsung Electronics
... Are just a few of the names that are major holdings of the DGT fund.
These firms will almost certainly be an early stop for U.S. investors who get frustrated with low yields and start venturing back into the game.
These same companies are a natural home for sovereign wealth funds - and the growing trillions they control.
History shows that cash on the sidelines always grows itchy with time. The Dow Jones Global Titans (NYSE: DGT) is a good way to take advantage of it - ahead of the crowd.
Investment U's 1000th Issue Milestone
It's taken almost ten years, three Investment U Presidents, dozens of investment experts and countless recommendations, but we've finally reached our one-thousandth issue. Congratulations and thank-you's are in order.
In 1999, when Investment U was founded few knew it would grow to over 350,000 subscribers.
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So its with great pride and gratitude that I thank you for joining us.
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