UAE taking a long-term view of US assets

When George W. Bush steps out of Air Force One on January 13 in the UAE, cash, and lots of it, may be high in his thinking.

For, regardless of the political storm that followed DP World's acquisition of P&O assets in the US, the administration was clearly a strong supporter of the deal.

Moreover, the UAE has allocated substantial funds for investment in US assets in the aftermath of the subprime mortgage and credit crunch crisis, including a hefty $7.5 billion, or a 4.9 per cent stake, to rescue Citigroup from the write-offs related to the crisis.

The Abu Dhabi Investment Authority's (ADIA) move in November came in the form of convertible securities purchases generating an annual interest return of 11 per cent up to 2010 and 2011 when they are converted to shares. Ironically, this move was preceded in October by the visit of a senior official from the US Treasury Department, with sovereign wealth funds at the top of his agenda.

By way of context, there is no question that Saudi Prince Al Waleed Bin Talal's decision to rescue Citicorp in 1991 from a crisis related, among other things, to a property market downtrend in the US at the time has generated handsome returns.

On another front, Mubadala Development, another sovereign UAE investor, paid $622 million for an 8.1 per cent stake in US chipmaker Advanced Micro Devices (AMD), Intel's less well-renowned competitor.

From an American perspective, the cash-thirsty corporations will surely benefit from the flow of funds to adjust their positions amid the bleak econ-omic conditions currently in play in the US.

But does this trend serve the UAE's best interests, with many economists warning that a recession looms in the world's largest economy?

Diversified portfolio

According to Mubadala, US assets are not the only target, as the company carefully diversifies its investment portfolio.

"To the contrary, we are not focusing on US assets in particular, as we have substantial investments elsewhere, including Europe and Asia," Waleed Al Muqarrab, Mubadala's chief operating officer, told Gulf News.

Nevertheless, the weight of US assets in the portfolio of funds invested abroad has increased remarkably since the outbreak of the credit crisis there. "For any investment firm, portfolio diversification is a priority, and the UAE's sovereign wealth funds are no exception," said Dr. Giyas Gokkent, head of research at the National Bank of Abu Dhabi.

"But as far as US assets are concerned there are two elements at play. First is the foreign exchange regime in the UAE, where the currency is pegged to the US dollar, hence falling with the dollar in value not only against major currencies, but against currencies like the Indian rupee which appreciated 16 per cent against the dirham last year," he said.

More attractive

"Accordingly, investments in Europe or Asia can be costlier, while the cost of investing in US denominated assets seems more attractive," he added.

"Beyond that, the credit crisis resulted in the decline of various US assets in value, adding to the incentives for foreign investors, as the UAE finds an opportunity in these prices," Gokkent said.

But there are risks to take if the UAE is betting on the US economy, where financial institutions are threatened by the downward spiral taking hold. For although writing off bad debts is meant to maintain the credibility of any bank, this carries the risk of weakening the capital base, while assets can still fall further in value.

No wonder that central banks of Europe and the US moved collectively to address the liquidity crunch in international markets last month.

"The question whether this is the right timing or not relies on whether this is the bottom line for US assets, or further declines are to come. Nevertheless, for the long-term investor, an opportunity to invest in institutions like Merrill Lynch or Citigroup does not come that frequent," Gokkent said.