SWFs Rekindle Interest in Emerging Markets

Sovereign wealth funds (SWFs) and public pension funds have emerged as pivotal players in global finance, managing over $34 trillion in assets globally by the end of 2023, as reported by data provider GlobalSWF. Their significance in providing capital for emerging economies has grown, notably in contrast to Western apprehension. A paper by the University of Oklahoma lauded the rise of SWF investments as “one of the most significant financial developments” in recent decades.

The year 2023 witnessed a notable surge in state-owned funds deploying over $65 billion in emerging markets, marking a 17.3% increase from the previous year, according to GlobalSWF’s 2024 annual report. This figure, though representing a third of the global total, stands as the highest since 2014, contrary to the 21.5% decline in global state-owned investment from 2022 to 2023.

Diego Lopez, CEO of GlobalSWF, attributes the renewed interest in emerging markets to increased domestic capital deployment by state-backed funds in countries such as Saudi Arabia, Turkey, and the UAE. Simultaneously, Middle Eastern and Asian investors show robust interest in investment opportunities in emerging markets like India, Brazil, and Indonesia. Notably, state-backed investments in China surged by 333% to $8.3 billion in 2023.

The trend is predominantly driven by the ten most active funds, with Saudi Arabia’s Public Investment Fund (PIF) leading the charge. PIF increased its investments by 33% from 2022, committing $31.6 billion across 49 deals, prioritising emerging markets aligned with the Vision 2030 reform agenda. Other significant players, including Singapore’s GIC, Temasek, Qatar’s QIA, and Abu Dhabi’s ADQ, also doubled their investments in developing economies in 2023.

The intricate nature of geopolitics and business intertwining contributes to this shift. Increased scrutiny and controls on foreign direct investment (FDI) in western countries make it challenging for state-backed funds to invest, particularly in equity stakes in western companies. Consequently, SWFs prefer investing through private equity funds, avoiding the toxic political reactions associated with direct investments.

Europe witnessed a decline in sovereign investment to $37 billion, the lowest since 2016, while the developed Asia-Pacific region hit a ten-year low in state-backed fund investments. In contrast, North America remained resilient, with $85.6 billion in state-backed investment, experiencing a smaller decline of 6% compared to other developed regions.

As the mammoth influence of state-backed investors continues to grow, GlobalSWF forecasts their total global assets reaching $50 trillion by 2030. With developing countries seeking an “investment boom” to boost low growth forecasts, the shift of SWFs toward emerging markets becomes a critical factor to monitor for economic developers and corporate leaders.