George Kerevan: Welcome return of the sovereign wealth fund
REMEMBER sovereign wealth funds (SWFs), the global investment arms of states which have more oil revenues or foreign exchange earnings than they know what to do with?
Back before the credit crunch of 2008, SWFs were big news because they were snapping up western companies using their massive earnings from the commodities boom.
But interest in SWFs faded with the credit crunch when a collapse in the value of their equity portfolios forced the funds to become more cautious. SWFs that invested heavily in bank shares took an especially big hit.
However, yesterday’s acquisition of an 8.68 per cent share of Thames Water by the Chinese Investment Corporation suggests the SWFs are back and about to play a key role in market developments. In December, the Abu Dhabi SWF also bought a 9.9 per cent stake in Kemble Holdings, the parent company of Thames Water.
Despite the euro crisis, growth in the developing economies and higher oil prices have boosted SWF coffers again. The latest rankings put the total value of SWFs assets at $4.5 to $5 trillion. Of the top ten funds, three are Chinese, two are in Singapore, plus one each in Abu Dhabi (probably the world’s biggest), Norway, Saudi Arabia, Hong Kong and Kuwait.
Where will they invest? European equities are cheap by historic standards but the debt crisis and anaemic growth are drawbacks. Hence the interest in utilities with solid, predictable earnings.
Property is also on the menu, with London and Paris seen as safe havens. In December, the Korea Investment Corporation paid £70 million for an 80,000sq ft property opposite the Bank of England. Norway’s giant SWF has also moved into real estate. Last year it acquired a 25 per cent stake in the Crown Estate properties in Regent Street as well as prime chunks of central Paris.
SWFs have the advantage over hedge funds that, being state-owned, they can take a longer view. But the battering received by equities since 2009 has made independent managers of SWFs more sensitive to short-term losses, especially in transparent funds such as Norway’s. So diversification is the name of the game.
Why doesn’t oil-rich Britain have a SWF, turning wasting assets into permanent ones? President Sarkozy set up a French “strategic investment fund” in 2008, with a €20 billion (£16.6bn) pot: “I want France to go on being a country where we manufacture cars, build ships, trains and planes.”
The return of the SWFs will doubtless revive worries about political interference. On past experience, such fears are exaggerated. If the Chinese want to pump capital into British utilities, that’s our gain.
India won’t take tax case loss lying down
VODAFONE shares jumped on news that India’s Supreme Court has upheld its case against paying a £1.4bn tax bill, following the company’s 2007 acquisition of a Hong Kong-owned Indian mobile phone utility, Hutchison Telecom. The decision gives a green light for Vodafone’s IPO in India and clears a path for new foreign investment. Maybe.
Don’t think yesterday’s disputed decision – one of the three judges dissented – means Delhi will give up its crusade to tax offshore deals involving Indian-based firms, domestic or foreign-owned. Next year will see a new, modern direct tax code to enshrine this. China has gone down the same road. Ditto our own HMRC’s crackdown on offshore tax avoidance.
Vodafone bought Hutchison in a complex transaction involving its Dutch subsidiary and a company registered in the Caymans. The Indian authorities want to tax the capital gains made by the Hong Kong seller. They argue Vodafone should have withheld the tax from its purchase price and passed it on. Vodafone took the high-risk option of ignoring the withholding tax, probably because Hutchison would have vetoed the deal. Commentators in India think Vodafone only got away with it because the company is India’s largest foreign investor and the country needed to signal it is open for business.
Vodafone also plays hardball with the UK taxman. In November, MPs on the Commons public accounts committee accused HMRC of letting Vodafone pay only £1.5bn of an £8bn tax liability. Bottom line: what’s bad for the taxman is good for Vodafone shareholders.
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Thursday 23 May 2013
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