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Newsmakers

Canada Overdue for New SWFs, Says Report

The Great White North needs more than its current two sovereign wealth funds to shelter and grow its resource wealth, a report argues.  

(January 11, 2013) – Canada is ready and overdue for new sovereign wealth funds to preserve its resource wealth for later generations, according to new report from the Canadian International Council. 

“I think every province that has revenues from non-renewable resources should set one up,” Madelaine Drohan, the report’s author, told aiCIO. “And the ones that have them should be putting away more money. When the Alberta Heritage Fund was started out in 1976, contributions were supposed to be 30% of oil and gas royalties. Now, if you compare Alberta’s contribution record with that of Norway’s, Alberta would look pretty bad.” 

In 2008, the Alberta Heritage Fund was rolled into the Alberta Investment Management Company (AMICo)—one of Canada’s two sovereign funds. AMICo manages $70.8 billion, much of it oil wealth. Quebec’s Generation Fund Managed by Caisse de Dépôt et Placement du Québec, holds $4.3 billion in mineral and hydroelectric profits. 

Natural resources belong to the Canadian provinces, which is why a national fund like Norway’s is unlikely to be set up in Canada. But new funds for resource-wealthy provinces like Newfoundland and British Columbia are a possibility, according to Drohan. 

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“I think the chances are pretty good more will pop up in Canada,” she said. “It is not likely that they’ll be a national one anytime soon. The federal government does get some direct revenue from mining in NWT and Nunavut, but it’s tiny.” 

Drohan’s money is on British Columbia, which benefits from strong forestry, fishing, mining, and hydroelectric industries, to open Canada’s next sovereign fun. Whereas Newfoundland, in contrast, “has made some pretty strong statements against it.” 

But if British Columbia or another province decides to take the leap, it’s worth taking the time to proceed as thoughtfully as possible, according to an HSBC Business School professor. In a recent paper, Christopher Balding critiqued a raft of recent funds for being poorly conceived and hindrances to their country’s economy. 

“Most original sovereign wealth funds were making valuable economic policy innovations to prevent inflation and macroeconomic instability,” Balding contends. “Most new sovereign wealth funds are being used to distort markets hindering national development. The landscape is dominated by vanity funds that seem better suited for the purpose of joining a sovereign country club rather than funds designed to solve difficult policy and development questions. The highest quality ‘innovations’ in sovereign wealth funds come from some of the oldest funds but are lessons well learned.”

Read Drohan’s entire report here.

Home > News > Risk > How Global Shocks Drive Investors to Oil-Rich Frontier Markets
Risk

How Global Shocks Drive Investors to Oil-Rich Frontier Markets

Gulf Arab markets are notoriously secretive and closed to foreign investors, but one academic paper aims to unearth conclusions about the area's appeal.

(January 11, 2013) — During volatile economic climates, herding behavior among investors is a reality in oil-rich frontier stock markets of Abu Dubai, Dubai, Kuwait, Qatar and Saudi Arabia, a newly released academic paper shows.

The paper hones in on the markets of the Gulf Cooperation Council (GCC)– the political and economic union of the Arab states bordering the Persian Gulf.

“Diversification benefits in Gulf area markets for global investors are numerous,” co-author Riza Demirer, a professor at Southern Illinois University, tells aiCIO. He adds, however, that investors’ hands are often tied from harnessing these typically secretive and closed-off markets. “The Gulf area is trying to upgrade from frontier to emerging market status, and when that happens, they will be more often to foreign investors.”

He adds: “Gulf area market stocks will always benefit from high oil prices, and with oil prices continuing to be volatile, investors can harness opportunities in the region.”

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Thus, in anticipation of that, according to the research, global investors should be aware of the potential of the area.

As outlined by the paper, GCC frontier stock markets respond significantly to global market conditions in two distinct ways:

(1) global factors play a significant role in determining various economic cycles in these frontier markets as well as their transitions from one cycle to another

(2) shocks in global systematic risk factors significantly contribute to investor herding in these frontier markets.

“Higher levels of global risk indexes including the VIX and the FSI as well as positive changes in the US stock market performance and in the price of oil govern the transitions out of low into higher volatility states during which herding behavior is found to be present,” the paper asserts.

Additionally, the paper notes that these findings imply that equity investment, particularly in Dubai and Kuwait. Policy makers in these two markets should be cognizant of the findings, and thereby build safety circuits and hedging instruments to deal with volatility. “It will be a remiss if we do not point out that the volatility in Abu Dhabi is anti-persistent even in the low volatility environment. This speaks out for the different type of spending and economic growth policies pursued in this oil-rich emirate, which has the second largest sovereign wealth fund in the world. It is safe to say that the Abu Dhabi market is for the risk-averse and faint-hearted investors,” the authors write.

Read the full paper here.

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