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Spillovers

4 November 2015 By Swaha Pattanaik

Turbulent equities have inflicted unusually big losses on nations which invest oil wealth in global markets. Norway’s sovereign wealth fund, the world’s largest, is an example. In a neat circularity, the misery of such energy-dependent funds may find a way of leaking into financial markets.

The Norwegian fund last month reported a loss of 273 billion crowns ($32 billion) between July and September, its third-weakest result ever and equivalent to a return on investment of minus 4.9 percent. A minus 8.6 percent return on equity investments more than offset gains in fixed income and real estate.

Like other oil-dependent wealth funds, Norway’s faces the even bigger challenge of low energy prices. Not only do governments in these countries have less money to stash away, they are increasingly tempted to dip into war chests to cushion the economic and fiscal impact of lower oil revenues.

Norway’s government plans next year to withdraw more money from the fund than it puts in, for the first time. The fund may not need to sell any holdings since dividends, coupons and the like, annually generate about 200 billion crowns. But others are not so lucky. Oil exporters will use all $750 billion of this year’s energy revenue and spend a further $100 billion from their sovereign wealth funds and foreign exchange reserves, JPMorgan analysts estimate. As a result, these countries will sell $50 billion of bonds and $30 billion of equities this year, a big turnaround from net purchases of $40 billion and $170 billion respectively in 2014, the bank predicts.

The other problem plaguing oil funds is the global investment headache of low yields. Like other investors they have sought to diversify into higher-yielding real estate and infrastructure. Norway’s fund has raised its real estate allocation to 3 percent from 2.2 percent at end 2014, and aims for 5 percent. Others are doing something similar. Wealth funds’ real estate allocations rose sevenfold between 2010 and 2014, according to research cited by JPMorgan Asset Management. More money allocated to so-called real assets means less money invested in financial ones.

Oil funds can’t alone decide the fate of large and liquid global markets. But if the price of the black stuff remains low, their misery is likely to leave a stain.

 

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