Sovereign fund hype subsides as new cash ebbs

By Natsuko Waki - Analysis

LONDON (Reuters) - Billed a year ago as saviours of Western capitalism, sovereign wealth funds now look as vulnerable to the credit crunch as anyone else and are witnessing a rapid downgrade to their growth outlook.

Less than a year ago these state-owned funds from countries ranging from the United Arab Emirates to Singapore were pouring some $80 billion (53 billion pounds) into major banks crippled by the fallout of a collapsing U.S. housing sector.

Their sometimes flashy style of investment, at a time when hedge funds and other major players licked wounds from the credit crisis, prompted speculation that they could effectively underwrite malfunctioning global markets.

Now their future is looking less rosy as the value of their investments sinks, tumbling oil prices reduce future income and governments eye the extra capital to reflate local economies.

As the pace of wealth generation slows, these funds may not only row back from buying riskier assets but some may even be forced to cut investments to fund domestic fiscal needs, potentially adding stress to already frail world asset markets.

Many people are convinced of their increasing role in the global economy, but experts are slashing their forecast on how rapidly assets managed by sovereign wealth funds -- currently around $3 trillion -- will grow over the next several years.

Morgan Stanley, for example, now expects global SWF assets will grow to $10 trillion by 2015, down from their previous projection of $12 trillion.

Merrill Lynch, taking into account slower rates of transfer of funds from central banks to SWFs, expects total assets to hit $5 trillion by 2012, instead of by 2011 previously forecast.