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First with Financial Comment from Arabia

Why Kuwait is right to sell out of Citigroup

with 2 comments

The Kuwait Investment Authority has dumped all its stock in Citigroup chalking up a $1.1 billion profit from the sale. The investment was originally made in preferred stocks in January 2008 for $4.1 billion.

Kuwait’s sovereign wealth fund has clearly had a rough ride as a shareholder since then. The global financial crisis crunched Citi stock to below $1, and its bounce back since then is clearly a welcome relief to shareholders.

Exit timing

But having stayed this course the obvious question is why cash in your chips now. The KIA is the ultimate in long-term shareholders and can take a view over decades not months or years. No doubt the KIA has done its analysis well.

In the short-term the fear of holding US banking stocks in general ought to be considerable after such a strong rally, and a return to financial health dependent entirely on a government bailout. Citi remains largely a government owned bank.

Translating this into a viable independent business model might not just be challenging, it may be impossible. The break up of the group through more asset sales is one future scenario, and will the parts be worth more than the sum of the parts?

Selling in a sweet spot for bank stock prices looks clever short-term. Longer-term the Citigroup outlook does not look so bright. The recovery that markets are predicting in the US domestic market could well take longer and be weaker than expected. The US consumer remains under pressure as does the housing market.

Diversified trouble

Citigroup’s global diversification is also a possible weakness if emerging markets prove to have major financial headaches of their own and are another illusion of prosperity rather than the future.

Dubai’s well publicized debt problems have shocked the world over the past two weeks but it would be surprising if these are the only debts run up by the rapid expansion of some emerging markets. Indeed, you need only to look at who has grown fastest to see where the next lot of trouble might emerge.

So a long-term player like the KIA is wise to take its money out of Citigroup and think again about how it wants to be positioned for the future. Perhaps financial markets will crash again before long and some new bargains will appear. Better to have cash out of the bank rather than invested in the bank.

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Written by Peter Cooper

December 7, 2009 at 8:06 am

Posted in Banking, Kuwait, US Stocks

2 Responses

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  1. That’s an impressive deal indeed. I thought ADIA’s investment in citi was wiped completely.

    What about Dubai investment in MGM, did they get get such a good deal. I know they have a 50% stake in City centre, but it will be a long while before such a project becomes profitable

    Mo

    December 7, 2009 at 5:59 pm

  2. Peter, I’m just wondering how they made a profit from such an investment. They went in when the stock was in the 25-30$ range in Jan 2008 and they probably sold it now at $4..
    Does this mean that ADIA can sell it’s stake now and make a profit? I think they both invested in Citi around the same time
    As you mentioned selling Citi is a wise decision as the outlook doesn’t seem so bright…especially that the US government will sooner or later sell it’s stake which will always cap any upside potential

    Ed Note: It was preferred stock. Abu Dhabi Investment Authority invested $7.5 billion in Citigroup through bonds that it must start converting in March 2010. In the original deal with ADIA, the Citigroup securities must be converted into common stock at a price between$31.83 and $37.24 a share between March 2010 and September 2011. Sovereign wealth fund managers do earn their keep!

    Mo

    December 7, 2009 at 1:44 pm


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