Anticipated Post-Crisis Momentum Could Reposition Emerging Markets – States Retooling to Utilize New Geo-Economic Instruments such as SWFs

Dr. Alexander Mirtchev discussed strategies used by emerging markets to counter the global crisis and position themselves for recovery. One key strategy is the retooling of their economic arsenals, in particular sovereign wealth funds. Mirtchev believes that the crisis is going to lead governments toward re-tasking SWFs to abandon previous vectors of investments and move towards more tangible profit-driven and productivity-oriented strategies, becoming more and more focused on and sensitive to their governments’ need to react to the economic downturn.

Anticipated Post-Crisis Momentum Could Reposition Emerging Markets – States Retooling to Utilize New Geo-Economic Instruments such as SWFs

In a Reuters interview that was featured in UK’s The Guardian, Dr. Alexander Mirtchev, founder and chairman of the Krull Corporation and an expert on global financial markets, who is also a member of the board of directors of the Kazakhstan sovereign wealth fund “Samruk-Kazyna,”
discussed the specific effect of the financial crisis on sovereign wealth funds (SWF).

The article cites that SWFs have recently sustained losses of nearly 60 percent. Dr. Mirtchev indicates that the current crisis has caused them to regroup to adhere more closely to the core of their strategy. “They are going to face severe restrictions on their operations, imposed by the current and prospective market conditions, increased regulatory scrutiny and the necessity to retool,” he says. “The glamour investment, trophy assets and big-splash spending” will be significantly curbed by fund leaders, while the notorious big-name acquisitions, in particular in the financial sector, are now a “play” of the past. “The smart SWF managers will prioritize their portfolios in line with the targeted growth of their own national and regional markets, and the respective technologies, capacities or resources that they are in need of,” stated Alexander Mirtchev. Accordingly, “they are going to unload non-core assets they have acquired during the boom times.”

In the medium term, the leading SWFs are likely to concentrate exclusively on targeted investments such as infrastructure, energy and technology, and “may look to the emerging markets for strategic opportunities, taking over key segments in some of those markets.”

Mirtchev also indicated that even though SWFs’ strategies are often policy-driven, and will continue to be so, they will more and more be guided by the markets. This may require that they bargain harder to bring prices down in their upcoming deals. The present lower values in the market and the fact that cash is in short supply will put them in an advantageous position. The more sophisticated SWFs may “introduce elements of comparatively independent supplementary financing mechanisms that could evolve into an additional layer of the global financial system.” However, he thinks that “the inevitable increase in government scrutiny of sovereign wealth funds’ activities by the U.S. and the EU will force the funds to invest in their reputation as responsible market participants.”

“The Funds are already talking to international authorities such as the IMF, the OECD and the European Union,” noted Dr. Mirtchev. He pointed to the Protocol of Santiago and the European Commission proposals for SWFs and investment recipient countries of a code of good practice which aims to improve the funds’ transparency whilst maintaining an environment which is open to investment.

Mirtchev did express confidence in the long-term ability of these funds to play a significant role in the global markets. SWFs are likely to remain an important source of equity capital and financing, together with the governments of the developed economies.”

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