An uncertain outlook for oil prices and a need to increase domestic spending could make the Gulf's sovereign wealth funds more selective when they invest abroad, even as Europe's debt crisis pushes down asset prices in the West. These constraints, lessons learned during the global credit crisis of 2007-2008, and a lower tolerance of risk are likely to reduce the probability of the funds sailing to the rescue of Western banks as they did in the last crisis, analysts said. So as global economic growth slows and domestic factors increasingly constrain the Gulf funds, they are likely to opt for prudence, analysts said. “There seems to be this new realization that you can't outsource investment decision-making to a spreadsheet. That maybe you have to go and kick the tires of the asset you're thinking of buying,” said Ashby Monk, co-director of Oxford University's Sovereign Wealth Fund Project. “That's pretty significant. And positive.” “Our central case for the US oil price next year is $85-90 a barrel. But the downside risks are increasing. And if oil goes below $80 there will be very little investable capital for the Gulf funds internationally, particularly in the case of Saudi Arabia and the UAE,” said Rachel Ziemba, director of global macro research at Roubini Global Economics. “The funds are likely to become more selective in their investments.” As the euro zone debt crisis drags on, it promises to create opportunities to buy European companies on the cheap. This would normally appeal to Gulf investors, who have historically preferred Europe to Asia. “Many Middle Eastern investors still prefer Europe, and periodically North America, as these regions are more likely to offer opportunities to acquire trophy assets, especially during distressed periods, as well as providing a more transparent pricing environment,” said Khodor Mattar, an energy sector banker at Rothschild. But with their new, more conservative approach, the funds may hesitate - particularly since the euro zone crisis now threatens the viability of the currency bloc, which was not seriously threatened in 2007-2008. “There's a lot of uncertainty in the European situation currently so despite valuations looking relatively cheap, you may not see a lot of sovereign funds jump in to make investments in these institutions,” said Waleed El-Amir, investment banking head for the Middle East and North Africa at Bank of America-Merrill Lynch. Even Qatar's fund - widely seen as the most aggressive - is staying away from European banks and will probably wait at least until the first round of bank capitalizations in the euro zone is over, a banking source who advises the fund said. The experience of getting burnt during the last downturn is also likely to make for caution. “The sovereign wealth funds have had a steep learning curve since the last financial crisis, when they lost around 25 percent of their wealth,” said Victoria Barbary, who runs independent sovereign fund research firm Dhana Advisory. Sovereign funds in the region invested in Western banks during the crisis of 2007-08, buying stakes in Credit Suisse , Barclays and Merrill Lynch and Citigroup . Many of those investments are still struggling. There is talk in financial markets that Gulf sovereign wealth funds are exploring Asian investments, mindful of strong economic growth in the region. But Asia is largely unfamiliar terrain for them and brings them into direct competition with strong local players such as Singaporean and Chinese funds.
