If you’re looking for an antidote to the West’s hand-wringing over its predicted declining influence over 21st century geopolitics, have a gander at sovereign wealth fund investments. In 2007, former US Treasury secretary Larry Summers wrote, “for some time now, the large flow of capital from the developing to the industrialized world has been the principal irony of the international financial system.” Remarkably, the majority of SWF cash continues to flow in that direction 12 years on.
That’s despite emerging markets’ many obvious attractions to SWFs: They have provided the 21st century’s most explosive growth, and their urbanization rates and young populations promise only more expansion. SWFs also have a built-in advantage in these markets, as many are in their backyards.
However, they still make up a comparatively small portion of SWFs’ portfolios. Sure, everyone has a decent chunk of Asian assets and maybe a handful in Africa and Latin America, but SWFs’ holdings don’t exactly paint a bullish picture of the Global South. Slyngstad of Norway himself sounded surprised about the matter in a recent Bloomberg interview, pointing out that less than 3% of their portfolio is in China:
If you’d asked me 10 years ago, I would have expected that we would have a higher percentage of our fund’s investment in China today than what we actually have. The development of the market and our investment there have been less rapid than what I thought.
Part of this, Slyngstad adds, is due to China’s tricky investment environment, and he does expect their allocations there to grow. But China’s own SWF fund was only apportioning 11% of its portfolio to emerging markets in 2017, according to the Sovereign Wealth Lab.
PwC reported last year that SWFs have actually been pulling cash out of emerging markets “in search of safer locations to shelter their assets,” as a result of geopolitical instability, low commodity prices, and China’s slowdown.
This is not to say there’s no excitement about emerging markets. SWFs are all looking for good investments in them, but, ultimately, in times of global turmoil, they have been guarding their money in the West—even when it’s the source of much of that chaos (see: saber rattling on trade; weakening global alliances). In an interview with Quartz, Alaska Permanent Fund CEO Angela Rodell was sunny on the opportunities in India, Africa, and Southeast Asia, but confirmed that “geopolitical concerns” and “trade noise” may require “a different risk assessment then you might’ve done a year or two ago.”
SWFs make this seemingly counterintuitive bet—putting money in a part of the world that’s becoming actively less stable—because, despite current politics, they have faith in Western institutions. “We know that politics do affect our business, they do affect the world, but also that at least in the Western world, politics tend to change,” says Jean-Paul Villain of the Abu Dhabi Investment Authority. “We are clearly in a period in which voters in many countries, from the US to the UK, and a number of European countries, are expressing a deep dissatisfaction with the status quo. The disruptions caused by this will probably be with us for five or ten years, but history suggests that developed societies eventually rebalance and return to stability.”
That even includes the UK, where extraordinary incompetence in Westminster poses a genuine threat of Britain barreling out of the EU with no exit deal. In his Bloomberg interview, published in February, Slyngstad was sanguine on the matter. “We are invested in the UK with a long-term horizon,” he said. “If we look past this—10, 20, 30 years—the UK will be an important economy in Europe, and it will remain in Europe.”
The major exception to the Western-heavy focus is India, where heavy investments in its infrastructure and elsewhere have been driven by a mixture of the country’s continued growth, its democratic governance and legal system, plus prime minister Narendra Modi’s liberalizing reforms, says Duncan Bonfeld, CEO of the International Forum of Sovereign Wealth Funds. “There is a sense that India is just becoming a more mature, and therefore more investible, market,” he says. “That India’s time—from several false dawns—has really started to arrive.”