From Merrill Lynch
(whatever happened to Mr. Beane, you ask?):
The overflowing bathtub, the running tap and SWFs
US$1.2tn a year, US$7.9tn by 2011 ...
Assets under management by Sovereign Wealth Funds (SWFs) are set to explode. Under reasonable assumptions we think they will grow by US$1.2tn a year to reach US$7.9tn by 2011, from US$1.9tn currently.
... as the bathtub overflows ...
This is a result of the massive build-up of reserves in recent years. Central banks control over US$5.6tn in assets, with Asia and the oil-producers leading the pack.
... while the tap is still running at full pressure
Reserves are still growing at a rate of nearly US$1tn a year, centered on China, Russia and the Middle East. We expect the tap to slowly start being turned off, as the US current account deficit reverses and global savings are re-channeled.
A massive re-allocation to riskier assets
We expect the share of SWFs in riskier global assets to double or triple by 2011, with net inflows of US$3.1-US$6tn. This should support riskier assets relative to safer assets and put upward pressure on bond yields; it is unclear, however, whether prices of riskier assets would rise per se. It also supports the corporate sector at the expense of governments, supports global liquidity and removes one pillar of the private equity industry.
Downward pressure on the USD
Growth in SWFs implies a shift out of the US dollar into other currencies, with the share of the euro likely to be largely unaffected.
Extensive use of external managers likely
The high costs and difficulties associated with setting up internal portfolio management, together with the risks of a protectionist backlash, augur for an extensive outsourcing of risk and the use of passive strategies.
Incremental revenues for the asset management industry
We highlight a potential shift of US$1.5-US$3tn of assets into the global asset management industry, generating estimated incremental fees of US$4-US$8bn.
Risks of protectionism overblown
Other than using external managers, we would expect SWFs to address protectionist fears through strategies such as swapping access to achieve a deal.
Let’s take a bubble bath
As governments focus on turning off the tap and emptying the bathtub, investors should rejoice in the more balanced global economy that this produces and the impetus it provides to continued growth and development of global asset markets.
Much more, 26 page PDF
HT: FT Alphaville (including link to update)