Stung on Wall St, Asian wealth funds eye home turf

SINGAPORE (Reuters) - Asian sovereign wealth funds may become more visible shoring up markets closer to home as emerging economies look to their deep pockets to steer around the damaging effects of global market turmoil.

The shift will come after funds' risky bets on Western banks such as Citigroup and UBS, where they pumped in billions of dollars during the early phase of the credit crisis, show little signs of paying off.

Wealth funds from Singapore, China and South Korea may instead look to invest growing cash piles in more defensive sectors such as Asian utilities and infrastructure firms, while keeping an eye on distressed property and financial assets in Western markets.

State funds, following their counterparts in Russia and the Middle East, could also pump cash into local banks to support domestic financial systems, and take part in private equity or debt deals to help firms refinance billions of dollars of debt.

"There has been another round of de-risking from assets like stocks in emerging markets over the last few days, but the SWFs are in for the longer haul," said Jan Randolph, who covers sovereign funds at London-based consultancy Global Insight.

"I think they'll still be looking for opportunities now that everything is a lot cheaper."

Asian sovereign wealth funds, which Deutsche Bank estimated manage around $1 trillion, or 29 percent of the assets held by global funds, have become more influential in financial markets, but began building cash piles after the credit crisis worsened.

The fallout from the collapse of the U.S. subprime mortgage market is now hurting the ability of the corporate sector to raise capital, forcing firms to look for state help.

According to Morgan Stanley, Asian sectors facing refinancing risks are banks, especially those dependent on markets for funding in South Korea, Australia, India and Hong Kong, as well as select property stocks in China, India and Australia, and some Australian utilities and infrastructure stocks.

In the corporate bond sector alone, $17.2 billion worth of bonds mature next year, led by companies in South Korea, Thailand and Taiwan, according to Thomson Reuters data.

The Government of Singapore Investment Corp (GIC) gave evidence of such deals when it agreed to buy $250 million in convertible debt of Australian property trust GPT, raising its presence in a country that accounts for just 2 percent of its portfolio.

"The convertible bond space is offering unprecedented opportunities right now," said Kirby Daley, senior strategist at Newedge Group in Hong Kong. "If you have capital you can take full advantage of that -- the opportunities are far better than getting in on the equity side of a lot of these companies."

Several investment grade sovereign and corporate bonds now give a yield of around 15 percent and present opportunities for long-term investors, said Liew Tzu Mi, head of GIC's global emerging markets team for fixed income, currencies and commodities.

But Liew told a seminar last week it was hard for investors to buy now as the cash market for many bonds has dried up.

GIC, which has over two-thirds of its investments in the United States and Britain, said recently it has been increasing its emerging market exposure in North Asia and the Americas.

DEFENSIVE

The sea of liquidity among wealth funds was illustrated by Singapore's GIC when it disclosed 7 percent of its portfolio was in cash -- over $20 billion out of an estimated $300 billion.

Korea Investment Corp (KIC), which has received $30 billion from the South Korean government, said it expects to be defensive in a falling market by diversifying.

"In addition to such traditional assets as equities and bonds, a gradual increase in the proportion of alternative assets can diversify investment risks," it said in a recent report.

But the crisis has not totally derailed SWFs' appetite for big deals in the West, as shown by an Abu Dhabi state-owned venture capital firm's move to invest $2.1 billion in a manufacturing joint venture with Advanced Micro Devices.

And despite China Investment Corp's (CIC) initial losses on its investments and recent concerns among regulators about overseas investments, the Chinese state fund went ahead to raise its stake in private equity firm Blackstone. CIC still holds 90 percent of its around $200 billion of assets in cash.

With the outlook uncertain for financials, these state-backed funds may also look to battered real estate markets and funds.

Property consultant CB Richard Ellis Group said allocations by sovereign funds to the commercial property sector could rise to 7 percent of their portfolio over the next seven years, with the focus on markets such as Britain and Japan.

Steffen Kern wrote in a Deutsche Bank report that sovereign funds' investment in the troubled financial sector may have peaked after they injected $92 billion in the last 18 months.

"With a view to portfolio diversification, they may now be looking to other sectors for future investment opportunities," Kern said.

(Additional reporting by Tony Munroe in HONG KONG, Yeon-Hee Kim in SEOUL and Kevin Lim in SINGAPORE; Editing by Neil Chatterjee & Ian Geoghegan)