Despite an investment in Tesla Inc. (TSLA) by Saudi Arabia’s Public Investment Fund, the decade-long run of investments in U.S. companies by government-run funds could be coming to an end soon, according to Bank of America.
With the U.S. economy surging, unemployment below 4% and stocks up near record highs, government-run funds have made a killing on their investments over the past few years. But Bank of America is warning the party will come to an end at some point as investors set their sights elsewhere. “Investors such as SWFs and public pensions have been focused and enjoying the ride in the U.S. for the last couple of years, and certain indicators seem to still be constructive,” Woody Boueiz, global head of sovereign wealth funds at Bank of America told Bloomberg in an interview. “It’s unclear what the trigger will be, but at some point, I’d expect the weighting towards the U.S., and specifically certain sectors, to witness a rotation.” (See more: 5 Largest Sovereign Wealth Funds.)
U.S. Valuations High
According to Boueiz, valuations are at high levels which makes it harder for the sovereign investment funds to make their money work in the U.S., As a result, he said he wouldn't be surprised to see money leaving U.S. companies and rotating into emerging markets and Asia. He said that sovereign wealth funds and public pension funds are lured by assets the provide income such as real estate, power, data centers and infrastructure, areas that have gotten crowded in terms of investments in the developed markets. In emerging markets, there is more room to make money. Bloomberg pointed to the housing market and the S&P 500 Index at two signs the U.S. markets may be peaking. The U.S. real estate market is on its way to seeing a broad-based slowdown that hasn’t been present for years. Meanwhile, the S&P 500’s price-to-earnings ratio is set to surpass 20 for the third year in a row which Bloomberg said is the longest run since the turn of the century. That means investors are willing to pay $20 for $1 of current earnings. (Read also: Where Do Pension Funds Typically Invest?)
Sovereign Wealth Funds Go It Alone
Citing data from Preqin, which tracks investments on the part of sovereign wealth funds, Bloomberg reported the assets doubled during the past ten years to $7.45 trillion. In 2008, sovereign wealth fund assets stood at $3.1 trillion. The funds' investments cover all asset classes including stocks, bonds, private equity, real estate and more recently direct investments in companies. With the funds able to execute deals on their own they are no longer looking for co-investors such as private equity firms, noted Boueiz. As they become more confident and increase their international teams they are increasing the number of direct deals and are providing liquidity for large deals whether it's in the form of debt or equity. “They are long-term investors with less constraints than general partners and that plays to their advantage,” Boueiz told Bloomberg.