Complex Made Simple

Have Sovereign Wealth Funds bought into banks too early?

It is not often the chance to buy a large stake in a global bank becomes available, particularly at a knock down price. This explains why Sovereign Wealth Funds (SWF) from Abu Dhabi to Singapore have been happy to help the ilk of Citibank and UBS with a capital injection in exchange for equity. But should smaller investors now follow in their wake?

It has to be said that the recent evidence suggests not. The arrival of a new SWF as an investor over the past year has been an excellent ‘sell’ signal for any stock as the initially positive share price reaction has always given way to a fall in price.

Indeed, large private investors who have been acting in the same fashion as the SWFs are nursing losses. Stephen Lewis has lost around $200m so far on his post sub-prime acquisition of almost 10 per cent of Bear Stearns.

The problem is that when share prices have come down a long way that does not mean that they will not fall further in price.

Bigger falls?

Abu Dhabi has taken a $7.5bn stake in Citibank, whose shares have fallen by half in price to hover close to $30. But who is to say that this is the end of the story?

The Dow Jones Index actually closed 2007 with a marginal gain for the year, despite all the setbacks of the US housing crash, sub-prime crisis and credit crunch, although admittedly the index does hide the poor sector performances of banking and real estate.

But what if 2008 saw something of a more traditional crash in share values and a true bear market with the whole stock market re-rated downwards? Then banking stocks would take another hit, and fall to an even lower level.

Patient smaller investors – who do not need stakes the size that a SWF likes to buy, or even Stephen Lewis, would be well advised to wait and watch for lower levels to accumulate banking stocks, or to short them in the meantime.

Warren Buffett waits

Perhaps this is why we have not yet seen Warren Buffett riding to the rescue of any of the major banks, although he has bought some stock in his long-term hold Wells Fargo. He may well be waiting for the credit crunch to work its way through the banking system – requiring further write-downs – before plunging in.

For at some point it will become clear that buying shares in a bank is likely to prove far more profitable than holding a deposit account in the same institution.

Of course, SWFs are unlikely to be out-of-pocket in the long-term on their investments but it could be that for once the best deals will be available to the smaller, more nimble private investor. And perhaps by the summer these opportunities will be available to anyone with cash to hand, and modest bravery.

See also:
2008 outlook for currencies, stocks and commodities
How will the credit crisis impact the GCC in 2008?