Singapore's Temasek, Asia's pioneer sovereign wealth fund with stakes in Barclays and Standard Chartered, looks to be calling the top of the China stock boom and is scouting for cheaper targets in the West.
The state fund has offloaded some shares in Bank of China, China Construction Bank O939.HK and shipper COSCO, a fraction of its China holdings, but enough to raise $1.1 billion, around five times what it paid for the shares.
They have large profits on their Chinese stocks; selling is the correct course of action, said Marc Faber, managing director of Asia-based investment advisory firm Marc Faber Ltd.
The view of Temasek that Chinese stocks are expensive is obvious.
Analysts expect Temasek [TEM.UL] to use some of its cash pile to buy stakes in financial companies such as Barclays , in which it already owns 2.1 percent, and U.S. banks such as Merrill Lynch.
Banking sources said Temasek, which has no direct stakes in U.S. banks, may team up with China's state funds.
Temasek declined to comment.
Temasek will be very opportunistic, said a financial source who has dealt with the fund. Banking and financial is their core focus. What they would look at is an institution that has some focus on emerging markets or Asia.
ASIAN SHOPPING TRIPS
Shopping trips for Asian funds have been made cheaper by a slide in the U.S. dollar, which has this year lost more than 11 percent against the euro and 7 percent against the yen.
Colin Banfield, head of mergers and acquisitions Asia ex-Japan for Lehman Brothers, said the dollar weakness is one reason why Asian corporates and funds are looking to buy stakes in the financial services industry.
If you're going to hold dollars you might as well invest in an actual operating entity given what's happened to relative valuations on assets and the weakness of the dollar, he said.
One such deal was Bear Stearns' $1 billion equity swap with China's CITIC Securities in October.
Industry sources said China Jianyin Investment Securities, controlled by an arm of the central bank, was also eyeing a tie-up with a global brokerage.
Late last month, Abu Dhabi invested $7.5 billion in Citigroup, a sign of how sovereign funds from the Middle East and China are muscling in to the West to profit from credit turmoil.
Investors believe the entry of such funds may help stabilize volatile markets.
It provides more liquidity to markets and represents the entry of long-term investors since sovereign funds tend to be long-term in their approach, said Mark Mobius, who oversees $45 billion at Templeton Asset Management Ltd.
Lehman's Banfield said Temasek should have no problem buying assets in the United States, where financial companies are offering hefty discounts.
Merrill Lynch trades at 7.8 times forecast 2008 earnings and a price-to-book ratio of 1.4, while China Construction Bank trades at 16.5 times 2008 earnings and 5 times book. Citigroup still trades at 7.9 times 2008 earnings despite the cash infusion.
Illustrating how expensive Chinese banks have become versus Western lenders, a Credit Suisse report on Tuesday showed U.S. banks have lost about a quarter of their market value so far this year, British banks about a fifth and European banks about a tenth, while Asia ex-Japan banks have gained 16 percent.
The report said Asian banks are now at 2.2 times book, U.S. banks at 1.4 times and European banks at 1.6 times.
Temasek, headed by the wife of Singapore's prime minister, has a medium-term strategy to keep a third of its investment at home, a third elsewhere in Asia and the rest in developed economies.
This means Temasek could potentially pump another $10 billion into Western markets, which at the moment represent just a fifth of its S$164 billion ($113 billion) portfolio.
The rest of its assets, as of March, were 38 percent invested in Singapore and 40 percent in Asia excluding Japan, though it has come under political pressure over its holdings in Indonesia and Thailand.
Politicians in Western countries have also expressed concern that foreign governments could use their sovereign funds to buy into strategic industries, but Temasek has said it will allay concerns by avoiding controlling stakes in iconic firms.
Temasek bought into Barclays in July and was keen to buy more if the British bank had won the bid for Dutch ABN AMRO.
Bankers say Barclays could look for Temasek's support as it plans its next big move which, markets sources say, may be a bid for Asia-focused Standard Chartered.
Temasek will be in a very good position to facilitate that transaction. They have a stake in each and they also have the capital, said one London-based consultant.
(Additional reporting by Tony Munroe in Hong Kong; Editing by Neil Chatterjee & Ian Geoghegan)