By the same token, if they were to allocate 60 percent of their assets to the MSCI All Country World Index, they would collectively own about 5.5 percent of each company in that index as of March 31, 2008. If SWFs do, indeed, allocate some 60 percent of their assets to equities, there is scope for the global equity risk premium to fall and for real bond yields to rise. In the medium term, SWF allocations to stocks are likely to be supportive of equity valuations.

IMPACT ON FIXED INCOME

As of December 2007, foreign official institutions held 32 percent of the roughly US$4.5 trillion in marketable US debt held by the public, with 85 per cent of these holdings in Treasury notes and bonds. In a recent study of the US Treasury market, University of Virginia scholar Frank Warnock states, “Foreign buying has kept long-term US interest rates about one to one-and-a-half percentage points lower than otherwise.” To the extent that foreign central banks reduce their purchases of US Treasuries and SWFs sell a portion of their existing US Treasury notes and bonds to diversify, US real yields could rise.

IMPACT ON CURRENCIES

Since 2001, the US dollar’s share of allocated currency reserves has fallen from 71 per cent to 65 percent. Many factors affect the value of the dollar, but at the margin, as SWFs increasingly diversify into global portfolios, their activities may place further pressure on the dollar.

However, many believe the impact could be small, given that global foreign exchange markets trade about US$3 billion a day. There are several factors that impact the value of the dollar, including the attractiveness of the US as an investment destination, and we should be cautious in attributing movements in the dollar to any one factor.

OTHER IMPLICATIONS

Given their countries of origin, SWFs could produce sustained interest in emerging market equities and debt and at the same time facilitate the development of new asset classes, such as infrastructure, local currency emerging debt and frontier emerging markets. SWFs may also continue to provide strong flows into private equity, real estate and alternative investments, including hedge funds and commodities. Aggregate SWF investments in hedge funds and private equity funds had already reached $350 billion by the close of 2007.

SWFs may also accelerate corporate restructuring by taking 5 percent to 10 percent strategic stakes in global companies – financial services companies in particular. From the start of 2007 through April 2008, SWFs invested some US$80 billion in new capital to the banking sector.