The FDI angle:

  • State-backed investors have grown in number and importance.
  • Their shift of investment to emerging markets could have huge implications for international business.
  • Why does it matter? More state-backed investment in emerging markets has come at the expense of more developed regions where there is greater scrutiny of investment.

Economists usually do not mince their words about sovereign wealth funds (SWFs). A paper published last year by Bill Megginson, Asif Malik and Xin Zhou of the University of Oklahoma described the rise of global SWF investment as “one of the most significant financial developments” of recent decades. 

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SWFs and public pension funds have grown in number and size, managing more than $34tn of assets globally at the end of 2023, according to GlobalSWF, a data provider. They have become more important sources of capital for emerging economies, particularly given that many in the west view them with a certain level of suspicion. 

Any shift in the investment strategies of these sovereign behemoths can have huge implications for the developing world. And 2023 was no exception.

More than $65bn was deployed by state-owned funds in emerging markets last year, an increase of 17.3% from 2022, according to GlobalSWF’s 2024 annual report. While this still only represented about a third of the global total of $205.1bn, it was the highest figure recorded since 2014. It is also contrary to the 21.5% decline in global state-owned investment between 2022 and 2023. 

Diego Lopez, CEO of GlobalSWF, says renewed interest in emerging markets is primarily driven by two forces. On the one hand, more capital was deployed domestically by state-backed funds in countries like Saudi Arabia, Turkey and the UAE.

At the same time, Mr Lopez notes that there has been strong interest among Middle Eastern and Asian investors for better investment opportunities in emerging markets like India, Brazil and Indonesia. State-backed investments in China jumped by 333% to $8.3bn in 2023 from a year earlier, running counter to the overall fall in FDI to Asia’s largest economy. 

More data trends to understand the new age of globalisation:

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Shifts are largely driven by the 10 most active funds, which accounted for more than half of the $205.1bn deployed in 2023. This was most notable from Saudi’s Public Investment Fund (PIF), the state-backed investor that deployed the most capital last year. It increased its investment by 33% from 2022 to reach $31.6bn committed across 49 deals.

PIF invested more in emerging markets than other regions in 2023, including a number of mega-projects at home aligned with the Vision 2030 reform agenda. 

Singapore’s GIC, which before 2023 was the world’s most active sovereign investor, also doubled its investment in developing economies in 2023. Singapore’s Temasek, Qatar’s QIA and Abu Dhabi’s ADQ also deployed more capital in emerging markets. 

GlobalSWF data includes estimates when state-owned investors do not disclose the exact totals of their assets and investments. Overall, it brings transparency to a part of global finance that would prefer to remain in the dark, particularly in undemocratic countries.

“For many SWFs, emerging markets are less risky than they seem to be from [a western-developed] perspective,” says Victoria Barbary, director of strategy and communications at the International Forum of Sovereign Wealth Funds. The intertwining of geopolitics with business is having an impact too.

The proliferation of FDI reviews and merger controls in western countries is making it harder for state-backed funds to invest. The Committee on Foreign Investment in the United States has reportedly increased scrutiny of transactions by several Middle Eastern SWFs in the US.

“SWFs, particularly non-democratic SWFs, have a very hard time buying big equity stakes in western companies, because the political reaction is always toxic,” says Mr Megginson of the University of Oklahoma. He notes that they prefer to invest in companies via private equity funds. 

“If you are being more scrutinised in one geography than another, then you’re going to move [your investments],” says Ms Barbary. 

Sovereign investment in Europe, which includes the UK, fell to $37bn, its lowest level since 2016. The developed Asia-Pacific region recorded a 10-year low of investment from state-backed funds, despite Japan seeing an increase of 63% to $5.4bn. 

In contrast, North America remained resilient with $85.6bn of state-backed investment last year, which was a smaller decline of 6% compared with its other developed region counterparts.

The mammoth influence of state-backed investors is expected to grow. GlobalSWF forecasts their total global assets to reach $50tn by 2030. The World Bank has said that developing countries need an “investment boom” to shore up low growth forecasts. The SWF shift to emerging markets ought to be closely watched by economic developers and corporate leaders alike.

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