Money Morning

By Jason Simpkins
Associate Editor

The Kuwait Investment Authority (KIA), the oil-rich nation’s sovereign wealth fund, is planning to triple its investment in Japan to $48 billion, highlighting a global investment shift away from U.S. assets.

The Kuwait sovereign wealth fund already has $15 billion to $16 billion invested in Japan, but Kuna, the nation’s state news agency, quoted Finance Minister Mustapha al-Shamali, as saying that the “KIA has an intention to double or triple its investment in the Japanese market.”

That investment boost would follow Japan’s recent agreement with Kuwait to reduce - or end - double taxation on interest, dividends, and capital gains. Japan has similar agreements with about 60 countries, but the deal with Kuwait is the Asian nation’s first with a Middle-Eastern state, according to the Financial Times.

KIA is currently invested in Japanese stocks and bonds, Shamali said, but is looking to expand into the nation’s real estate sector - and may also delve deeper into Japan’s stock market.

As Money Morning has been reporting for some time, Japan is becoming an increasingly alluring investment alternative to the United States - especially because of its growing involvement with China - a reality that global investors are beginning to grasp themselves. But Japan’s growing profit potential isn’t the only reason the KIA is engineering this shift.

An increased level of investment in Japan is part of Kuwait’s plan to diversify away from American assets. The country removed its currency peg to the U.S. dollar in May 2007, and the KIA has been dissatisfied by its investments in Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER). Over the past two years, the KIA has raised the portion of money allocated to Asian investments from 10% to 20%. The fund controlled approximately $270 billion at the end of March.

Kuwait is just one of many Middle Eastern states to benefit from the tidal swell of capital that’s been washed through the region, following the pull of record oil prices. And yet, increasingly cognizant that their oil money will dry up one day, Middle East nations are diversifying their investments for that future time. That’s one reason Dubai is repositioning itself as a gateway point for global trade and tourism, and is constructing the world’s largest airport, a project that’s creating profit plays for investors throughout the world. This realistic view of the future is also the reason that Gulf Arab states and companies spent about $60 billion on foreign assets in 2007, almost double the previous two years combined, according to Reuters.

However, foreign investment that has traditionally been earmarked for the United States is now pouring into developing markets with more growth potential.

Last month, the Financial Times reported that a large, unnamed Gulf fund had cut its dollar-denominated holdings from more than 80% a year ago to less than 60%.

Earlier this year, Qatar Investment Authority bought a 27% stake in Dragon Capital, a Vietnamese property fund. And in February, it bought a 15% stake in an Indian office development being built at the Bandra Kurla complex in Mumbai.

The fund has $60 billion in assets and more emerging market real estate investments are in the works.

"We are focusing on prime cities in India, China, Singapore, Korea, Vietnam and Malaysia, cities around the world where there is strong [gross domestic product] growth and fundamental unmet demand for high quality real estate," Navid Chamdia, head of real estate at Qatar Investment, told Bloomberg at a sovereign-wealth funds conference in Abu Dhabi. "About 40% of our real-estate investments will be in Asia."

Even China - which has strong investment ties with the United States - is diversifying away from the U.S. market. For instance, China’s State Administration of Foreign Exchange (SAFE) has been actively seeking deals with private equity firms in Europe as part of a specific strategy to reduce its dollar-denominated holdings. A shift in policy at China’s SAFE is particularly significant because it holds the vast majority of China’s $1.68 trillion of foreign currency reserves in dollar-denominated assets.