As sovereign wealth fundsÆ (SWF) assets under management approach $7 trillion by 2012, their shift into global equities, particularly in emerging markets, should support stock prices, says George Hoguet, managing director and global investment strategist at State Street Global Advisors in a report.

ôAs they diverse their portfolios, SWFs represent a source of incremental demand for risk assets,ö he says.

Current SWF assets are nearing $3 trillion today. It is the fastest-growing group of institutional investors in the world, with assets increasing by 18.3% per annum and 12 new SWFs established since 2005, including the China Investment Corporation, the Australia Government Future Fund, Qatar Investment Authority, Korea Investment Corporation and Timor-Leste Petroleum Fund.

Although the purposes, and therefore the liabilities and investment strategies, vary among these funds, SSgA assumes in aggregate they will gradually adopt an asset allocation of 60% to equities, 30% to bonds and 10% to alternatives. This suggests they will, over time, both reduce incremental exposures to US Treasuries as well as sell Treasuries outright. They will increase their exposure to global bonds and equities.

The total universe of investible stock today is about $33 trillion. If SWFs were, today, to invest 60% of their existing AUM to global equities, theyÆd end up owning on average 5.2-5.5% of each company represented in major indices such as the MSCI All Country World or the FTSE Global All Cap.

ôIf SWFs do indeed allocate some 60% of their assets to equities, there is scope for the global equity risk premium to fall and for real bond yields to rise,ö says Hoguet.

The United States has continued to enjoy low interest rates thanks in part to the Asian bid. Foreign official institutions hold 32% of the $4.5 trillion in marketable US debt held by the public, with 85% of those savings in Treasury notes and bonds, notes the SSgA report. US real yields will likely rise if SWFs stop buying or even sell US Treasuries.

Although this should also contribute to weakening the US dollar, SSgA is reluctant to draw such a straight line. Partly because of the size of the global currency markets (which trade about $3 billion each day), and partly because the US remains an attractive investment destination.

None of these observations are particularly radical, and Hoguet further covers his tracks by noting that given todayÆs fast-paced, technology-driven economy, any impact from SWFs on global equity prices could be moderated by other trends, not least a shift from equities to bonds among the growing ranks of retiring Americans. But by quantifying their potential impact, he puts the importance of these fast-rising institutional investors in perspective.