UK Takes First Steps Toward Sovereign Wealth Fund

Newly appointed U.K. Chancellor of the Exchequer Rachel Reeves Tuesday announced plans to create a national wealth fund to make infrastructure- and energy-transition-related investments. The fund could be active in less than a week.

“We need to go further and faster if we are to fix the foundations of our economy to rebuild Britain and make every part of our country better off,” Reeves said in a statement. “That is why in less than a week we are establishing a new National Wealth Fund and bringing together the key institutions that will help unlock investment in new and growing industries.”

The U.K. Infrastructure Bank will allocate 7.3 billion pounds ($9.37 billion), which would be available for investments immediately, to the national wealth fund. The U.K. Infrastructure Bank, as well as the British Business Bank, will manage the assets of the fund in the near term.

The plans for the National Wealth Fund were part of the now ruling Labour Party’s platform, which the party began drafting in March. Labour won a significant victory in the U.K. general election on July 4, resulting in party leader Keir Starmer taking over as prime minister and installing a Labour-based cabinet.

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The Green Finance Institute, a task force that will advise the fund, has identified five sectors that would benefit from investments from the fund, including green steel, green hydrogen, industrial decarbonization, ports and gigafactories for the production of electric vehicles and batteries.

While the preliminary funding will be available, the GFI estimates that the supplemental private and public investment needed by 2030 could range from 35.9 to 56.9 billion pounds ($46 billion to $73 billion). Likewise, the Climate Change Committee, which advises the U.K. government on emissions targets, has called for a sustained investment of 50 billion pounds per year for energy transition investments between 2030 and 2050.

“Our mission to make Britain a clean energy superpower is about investing in Britain,” said U.K Energy Secretary Ed Miliband in a statement. “Our National Wealth Fund will help create thousands of jobs in the clean energy industries of the future to boost our energy independence and tackle climate change.”

To meet these investment goals, the U.K. government will need to “deploy the right combination of policy, regulation, tax, and subsidy, as well as catalytic capital to crowd in sufficient private capital. Policy will be a key enabler,” the GFI noted in a report. In the long term, the fund expects the ratio of private to public capital to be 3:1.

In a separate report, the GFI recommended that private capital be invested on a deal-by-deal level, with private investors investing in individual projects, rather than investing at the fund level, to accelerate activity in the immediate term.

That was the message from Goldman Sachs Asset Management’s mid-year outlook, released Tuesday, as the firm welcomed a new era of rate decreases: “Expectations of U.S. rate cuts were repeatedly pushed back in 2024’s first half due to inflation pressures, while other central banks signaled the intent to or began to cut rates,” Ashish Shah, Goldman’s CIO of public investing, told a news briefing Tuesday.

He warned that there still is significant instability, particularly given conflicts in Ukraine and the Middle East, plus the upcoming U.S. presidential election, but noted that opportunities are rife in many spots. He pointed to investments in the artificial intelligence and sustainability sectors.

Shah described the ongoing trend toward lower rates, with the Federal Reserve expected to cut later this year, the Bank of England on the same track, the European Central Bank dropping rates in June and, per the firm’s written analysis, “China’s policymakers maintaining an easing bias.”

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Lindsay Rosner, Goldman’s global head of multi-asset fixed income, observed that the threat of a recession appears to have dissipated, so these days, “investors are not demanding too much compensation for credit risk” and “corporate balance sheets are generally healthy.”

This presents opportunities in several areas, Goldman strategists suggested, such as:

Bonds. It’s axiomatic that, when rates fall, fixed-income prices rise. Some bonds are the best positioned for a rate drop, in Rosner’s view. She cited investment-grade bonds of large banks (lower rates mean more loans on which banks can collect fees and other income) and high-yield debt from industrial and energy companies (they both need lots of debt, and healthy ongoing economic growth is friendly to revenue in both sectors).

In addition, Rosner said, “AAA-rated collateralized loan obligations are appealing for their attractive carry, supported by strong fundamentals and favorable technical conditions.” Right now, these packages of loans to high-debt borrowers (i.e., leveraged loans) are in strong shape with low defaults and very manageable interest.

Small-capitalization stocks. Smaller companies depend on debt more than larger businesses; thus, rate cuts are always a godsend to them. Shah noted that small caps mostly enjoy nice profit margins and good reported earnings. The Russell 2000 has more than doubled in price since the March 2020 pandemic nadir and still is very affordable—the index’s price-to-earnings ratio, at 25, is only slightly above that of the S&P 500, 22, and below the high-growth Nasdaq 100 at 29.

Many of the Russell 2000’s constituents sport much lower P/Es than the index average, of course. “U.S. small caps are poised to rebound, offering attractive absolute and relative valuations,” Shah commented. “Small-cap companies can provide access to the higher growth potential of future mid- and large-cap leaders.”

European stocks. After a spell in the doldrums, Europe’s equities show signs of a rebound, according to Shah. To be sure, the STOXX Europe 600 (owned by ISS STOXX, which also owns CIO) is up just 8% this year, half of the S&P 500’s showing. France’s CAC is ahead by a mere 1% in 2024, amid uncertainty over the country’s political direction ahead of its recent snap election. Certain individual exchanges are doing much better, though: Stocks in the Netherlands are up 18% and in Denmark 25%.

Nonetheless, lowering inflation prompted the ECB to push down rates. Labor markets are strong, along with wage growth. “Europe’s improving growth and inflation mix, combined with better corporate earnings dynamics and modest valuations, bodes well for” its equities, Shah stated.

UK Takes First Steps Toward Sovereign Wealth Fund

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