Is SWF investment a sign of global structural change?

When UBS went cap in hand to the Government of Singapore Investment Corporation in December 2007, it was willing to sell 9% of its stock (via convertible bonds) to gain SFr11bn ($97bn) with which to shore up its ailing balance sheet. One month before, Citi had accepted $7.5bn from of Abu Dhabi Investment Authority’s investment of $7.5bn in exchange for 4.9% of its equity.

Investment in Western financial institutions by mainly emerging market sovereign wealth funds (SWFs) has become a new theme in the current financial markets crisis. Of the $39bn-worth of strategic investments SWFs made in Western financial groups in the year to November 2006, the lion’s share was made in the eye of the subprime storm, according to data from Morgan Stanley.

But if politicians once gnashed their teeth about SWFs, since the subprime crisis and credit crunch took their toll they seem more willing to overlook the origins of the money if it helps to support their critical financial institutions.

Many see such investment as further evidence that the global balance of power is shifting. Emerging markets are certainly in the economic driving seat. While the US teeters on the brink of recession and the eurozone’s brief upturn begins to look fragile, China, India and the Gulf states, to name but a few, are forging ahead.

We have witnessed changes to investment flows before – from the Middle East in the 1970s and from Japan in the 1980s, for example – but neither resulted in a permanent structural change. Maybe this time it is different. In the past when the West suffered, contagion passed to developing markets. This time around, the latter are safe havens for global capital – so far, anyway.

Where for years it has been the US lecturing the Chinese over handling of their economy, now Beijing is scolding Washington about the global implications of a weak dollar, recent rate cuts, and the subprime crisis.

Should Western countries be worried that foreign government funds are buying their banks? Not a bit. SWFs are putting money into areas of the market that matter the most, and benefits of that flow both ways. And just as the CEOs of European corporates such as Lafarge and Edison recently said they increasingly appreciate the long-term investment horizon of SWFs (as opposed to the hedge funds, which are willing to sacrifice long-term growth for short-term profit), the financial sector should appreciate them for their willingness to pour liquidity into a banking system in great need of it.