New sovereign funds to emerge as crisis eases

By Natsuko Waki

LONDON (Reuters) - As the world emerges from financial crisis, a new generation of sovereign wealth funds is set to be born, and it may act as a catalyst for the recovery of global markets.

An estimated $3 trillion is currently parked in state-owned funds which manage nations' windfall earnings from sources such as oil, commodities and trade surpluses. Newly established funds could help to double that figure in coming years.

The new funds are likely at first to be conservative investors, mindful of how much existing funds have suffered during the crisis.

But over the long term, the shift of capital from central bank reserves, much of them invested in safe-haven government debt, into return-seeking sovereign funds could help revive demand for risky assets such as stocks, corporate bonds and even some of the complex derivatives which the crisis hit so hard.

"Once the financial crisis subsides, excess revenues in the emerging economies from their export activities will resume," said Steffen Kern, economist at Deutsche Bank in Frankfurt.

"This will strengthen again the rationale for setting up new SWFs."

Japan, Taiwan, Thailand, Bolivia, Nigeria and Canada are just some of the places where a public debate has begun on establishing some form of sovereign wealth fund.

Even within the United Kingdom, there is talk that Scotland should look at establishing such a fund to manage oil wealth.