Corporate Financing Analysis - A SWF With Emerging Power 'Down Under' - 11 SEPT 2017


Australia is home to one of the rising stars in the global sovereign wealth fund (SWF) world in the form of the Australian Government Future Fund - an independently managed fund within which the central government deposits its budget surplus for investment. According to the Sovereign Wealth Fund Institute, the Future Fund is currently the world's seventeenth largest by assets under management, and rising. It currently manages USD106.3bn in assets, but after receiving assurances from the Australian government with regards to its growth trajectory (and importantly, no drawdowns) it is set to expand to over AUD200bn (USD158.09bn) over the next decade. Supported by a strong performance which saw the fund post returns of 8.7% for FY17 (and 2.9% for the most recent quarter), ahead of its target of 6.4%, we believe that the fund will continue to attract a growing level of interest from institutional investors and, subsequently, has supported the Australian government's effort to kick-start its economy at a time when growth is slowing. In this regard, we highlight that the strategy of the Australian government and its SWF is far from unique ( see ' SWFs Adapting To Survive ' , April 5 2017), as numerous other funds from across the globe have made similar moves over recent quarters.

Keeping Investors Happy
Fund Fund Returns Over Different Timelines, Correct To June 30 2017, by %
Source: Future Fund

Economic Growth Dragging Its Feet

According to BMI's Australia analyst, the country's real growth momentum slowed substantially in Q117, coming in at only 1.1% q-o-q in seasonally adjusted annualised terms, down significantly from 4.5% in the previous quarter, which partially reflected disruptions from poor weather. Even as this transitory factor wears off, the combination of weakness in residential construction activity and poor external demand due to the slowdown in China will likely keep Australia's growth subdued over the coming quarters. We, therefore, maintain our forecast for real GDP growth to come in at 2.1% in 2017 and 2.2% in 2018 (as opposed to the Bloomberg consensus of 2.5% and 2.8%, and from 2.5% in 2016). Against this backdrop, the government has been putting a growing amount of faith in its SWFs to provide returns, giving the Future Fund license to scout the world in search for investments - albeit at the expense of receiving some criticism for failing to support the continued growth of start-ups at home. In this vein, one investment area which the fund has focused on is Indian infrastructure, which includes interest in sub-sectors such as roads, clean energy, and telecommunications. In BMI's view, it could not have picked a more opportune time to do so, with the country busy launching a range of huge infrastructure programmes which, in turn, would provide ample investment opportunity.

Indian Infrastructure Crying Out For Investment

According to BMI's Asia Team, India continues to suffer from a sizable infrastructure deficit, which will demand substantial investments over the coming years and even decades. As recently as in March, the Asian Development Bank published a report saying that India will require USD5.2trn in infrastructure investments through 2030, equivalent to around 8.8% of current GDP. In order to help facilitate a steady flow of inbound investment, Prime Minister Narendra Modi continues his push to improve the operating environment for infrastructure projects, which include initiatives aimed at shortening approval times, easing land acquisition and facilitating private investment. All of this is good news for overseas investors and, in particular, for Australia's Future Fund, which has plenty of room for growth in investing in the industry sector as it works to diversify its portfolio. After all, as of June 30 2017, infrastructure equated to just 8.0% (worth AUD10,714mn) of the Future Fund's asset portfolio, while emerging markets received just 7.4% of the fund's investment deployment as of the same date. We note that while bilateral trade and investments between the two nations have historically been dominated by commodities and raw materials, but there is welcome audience for further infrastructure investment by Australia in India. Despite the pioneering move by Australia's Future Fund to shift its investment strategy in India to different sectors, and to focus its interest on emerging markets more generally, we highlight that the country's SWF is not the first to make inroads into India. Indeed, the likes of the Investment Corporation of Dubai, Singapore's GIC, the Abu Dhabi Investment Authority (ADIA) and Abu Dhabi's Mubadala Development Fund have all seen the potential of the country and have subsequently moved to seek returns in India over recent years.