Something strange is happening at the Gulf’s sovereign wealth funds. For most of this decade, the funds, which are supposed to protect Gulf economies from falling oil revenues by providing an alternative source of income, have scoured international markets for investments. They have turned up on the share registers of companies as diverse as US department store chain Barneys and the London Stock Exchange. But in the recent months, several have found a new place to invest: their domestic markets.

GCC governments are turning to their sovereign wealth funds to prop up their ailing stock markets and recapitalise stricken local banks. The largest intervention to calm market jitters is taking place in Kuwait, with Qatar and Oman also joining in, but the effectiveness of all three rescue packages is still in question.

The Kuwait Investment Authority (KIA) was asked by the government in November last year to buy shares on the Kuwait Stock Exchange (KSE) in an attempt to calm the market. Kuna, the government’s news agency, reported that the KIA would buy up 10 per cent of the market.

As the value of the companies listed on the exchange was $137bn at the time, the government appeared to commit the KIA to spend more than $13bn in its domestic market. However, since then, the likely investment sum has dropped substantially.

Share purchase

Finance Minister Mustapha al-Shamali claimed in December last year that the KIA would spend KD1.5bn ($5.2bn) buying Kuwaiti shares. But when Bader al-Saad, managing director of the KIA, finally revealed details of the fund’s plans at a press conference with Central Bank of Kuwait governor Salem al-Sabah on 4 January, he said the fund would only invest KD1bn in its domestic market.

The KIA’s investment is only one-third of the value the market expected in November, but it still marks an important change in strategy.

As the amount the KIA is prepared to invest has fallen, the effectiveness of its intervention has become open to question. KIA spent KD300m buying shares in domestic companies in November and December, but the market has fallen steadily since then. “That money was not significant enough to have an impact on the Kuwaiti market,” says Jithesh Gopi, senior analyst at Bahrain-based broker Sico. “Market sentiment was not strong enough.”

Local brokers in Kuwait say the KIA has yet to spend any of its KD1bn fund announced in January, although it is difficult to know for sure as investors only need to declare their holdings when they exceed 5 per cent of the value of the company. Other shareholders hope the KIA will soon announce a second fund worth KD2.5bn to take the sovereign wealth fund’s total injection of capital into the market to KD3.8bn.

“Investors are hoping that once this jumbo fund starts buying, it will give a lot of strength to the market,” says Mujib Moosa, vice-president of local and GCC investments at Kuwaiti fund manager Markaz.

However, it is far from certain whether even a KD3.8bn investment would turn around the downward spiral in the Kuwait market.

“How far this may go in terms of eradicating the negative sentiment in the market is debatable because the fundamentals of Kuwait’s listed companies are deteriorating,” says Moosa.

Given that the KSE has fallen by 48 per cent since the beginning of 2008, the fund’s intervention could be seen as a government-sanctioned opportunity to buy local shares on the cheap. “In Kuwait, if share prices have been driven down to bargain levels, it could be a good investment for the KIA, so why not?” says Charles Seville, associate director at London-based credit ratings agency Fitch Ratings.

The KIA certainly has money to spend. Although it does not publicly disclose the size of its fund, it updates Kuwait’s parliament on its assets each year and the figure is promptly leaked by members of parliament (MPs) to the local press. In its last update, at the end of March 2008, the KIA told MPs it had assets worth $264bn. Given its wealth, a KD1bn investment in the KSE would be spare change.

Reassuring investors

“The amounts of money involved are fairly small compared with government finances,” says Seville. “The sum goes some way towards reassuring investors, and enables the fund to pick up some investments that would be good in the long term.”

But all Gulf sovereign funds could find themselves with less to invest this year, as the value of their existing investments falls in line with plummeting global stock markets and real estate valuations.

According to a recent paper by Brad Setser, fellow for geo-economics at US think tank the Council on Foreign Relations, and Rachel Ziemba, lead analyst for oil exporting economies at RGE Monitor, a US economics consultant, Gulf sovereign wealth funds and foreign-reserve funds suffered a 27 per cent drop in the value of their assets in 2008, a loss of up to $350bn.

With falling oil prices, governments could turn to their sovereign funds to offset a drop in revenues. If this happens, the funds may need to sell foreign assets.

The Council of Foreign Relations and RGE Monitor together estimate that the Gulf’s government funds will have to make net sales of foreign assets of more than $100bn in 2009 if oil prices average $25 a barrel.

Despite the threat of falling portfolio values, other sovereign wealth funds are being called upon to prop up stricken listed companies. The Qatar Investment Authority (QIA), which is estimated to be worth $50bn, is halfway through a programme of recapitalising Qatar’s commercial banking sector. The seven banks listed on the Doha Securities Market are all issuing new shares that the sovereign wealth fund will buy.

While the KIA’s rescue of the KSE could help other shareholders by stabilising or even driving up share prices in time, the QIA’s actions will hurt existing shareholders as the proportion of their stakes in local banks falls. In the week ending 22 January, the Doha market lost 15 per cent of its value, a steeper fall than any other major regional market.

Qatar’s DSM 20 index has dropped by 50 per cent since the beginning of 2008. Its performance has been bad, but in no way is it as poor as the region’s worst performer - the Dubai Financial Market is down 75 per cent since the beginning of 2008. The UAE’s other major exchange, the Abu Dhabi Securities Exchange (ADX), is down 53 per cent over the same period.

Both UAE exchanges are dominated by the real estate and banking sectors, and investors have turned on both as the outlook for property in the UAE has deteriorated. But despite the falls, UAE authorities have avoided offering additional financial support to their exchanges.

Tom Healy, chief executive officer of the ADX, says the Abu Dhabi Investment Authority, the region’s largest sovereign fund, with estimated assets of more than $800bn, has not intervened in the local market, although he adds that it could have done so secretly and, if that is the case, “they have not told me about it”.

Riyadh also has the means to prop up its market, but senior executives at Saudi listed companies maintain that the government has not and will not spend billions of dollars in the domestic market.

Mohammad al-Attas, chief financial officer at Saudi Cable Company, which counts oil producer Saudi Aramco and Saudi Telecom among its customers, says the government will not buy shares to restore investor confidence.

Market activity

In practice, the picture is more complicated on the Saudi stock exchange (Tadawul) as several government institutions, such as the Public Investment Fund (PIF), are already among its largest investors. In August 2008, for example, the PIF bought a 40 per cent stake in Alinma Bank, a new retail bank.

“In Saudi Arabia, we have not heard the government make specific announcements about propping up the market, but the PIF may have intervened in the market,” says Seville.

Oman is the third GCC state that is known to have intervened in its capital market. On 15 January, the government announced that it had set up an OR150m ($390m) Investment Stability Fund with the intention of reassuring investors by taking direct equity stakes in the largest companies on the Muscat Securities Market.

At the time, Rashid Salim al-Masroori, chairman of the fund, said it would soon be holding talks with investment companies to discuss the best way to stabilise the market.

Oman’s Investment Stability Fund has yet to invest any money. “The expectation in the market is that it will start in a week to 10 days’ time,” says Rajat Dewan, head of asset management at National Bank of Oman. “It is difficult to say whether the fund will achieve its objectives.”

The authorities have not said what mandate the fund will use to intervene in the market, making it “virtually impossible” to say whether the fund will succeed in propping it up, adds Derwan.

The final GCC state, Bahrain, has less ability or inclination to intervene in its market. With its limited oil revenues, Manama would struggle to afford any major intervention in the Bahrain Stock Exchange, but its capital market is in any case relatively undeveloped and few locals have invested in the market.

The government funds that are intervening in the market are exploring new territory. However, in one way at least, they are staying true to form: maintaining their traditional secrecy and doing little to update the markets on their plans. The KIA’s KD1bn spend, for example, could be spread across all of the KSE’s listed securities or restricted to a handful of large liquid stocks.

As such, it will be difficult to judge whether the governments’ market interventions are a success or not. But given the continuing falls across the Gulf stock exchanges, they appear to have had little impact so far.