As investors fret over the growing possibility of a US recession in 2008 and potential earnings downgrades, they should not forget that the allocations of sovereign wealth funds are likely to support equity valuations in the medium term. Many of these funds are in the early phases of their investment programmes. They control about $3,000bn in assets and are projected to invest about $5,000bn in the next five years.

Given that the net supply of global stock has been negative in recent years and that indicators suggest this trend is unlikely to reverse soon, as SWFs diversify into publicly-traded equities, there is scope for the global equity risk premium to fall.