Well, watch your oil and gas stocks on Thursday because there is some “big league” news out of Norway this morning.
We’ve spilled all kinds of digital ink this year discussing the country’s mammoth SWF, which manages some $1 trillion and owns 1% of global equities.
As oil prices declined, Norway began to take money out of the fund for the first time ever last year in order to plug budget gaps.
Well, between that and the fact that ZIRP and NIRP make the fixed income side of the portfolio largely useless except as a hedge against the equity holdings, Norway decided to gradually up the stock allocation to 70%.
Basically, Norway’s SWF is a giant, public equity fund that holds bonds as a hedge against the risk asset exposure. Of course that sets the stage for an objectively ridiculous scenario wherein fiscal policy in Norway becomes beholden to the vagaries of the global equity market. But fuck it, right? Stocks never fall.
But see there’s the problem. When you own 1% of global stocks, stocks can fall just because you’re selling them or rise just because you’re buying them. Remember what we said in the now classic piece “Heisenberg’s Wave Paradox“:
For instance, Norway’s $950 billion-ish sovereign wealth fund (the largest on the planet) seems to have lost track of whether they’re riding the wave or creating the wave they’re riding.
“We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap,” Trond Grande, the fund’s deputy chief executive said recently.
Well Trond, that’s interesting considering the fact Norway is getting ready to up the fund’s equity allocation to 70%, a level that’s probably more appropriate for a twenty-something bartender looking to invest his first $10,000 than it is for the world’s largest piggy bank. The one that is supposed to safeguard Norway’s oil wealth for future generations.
If you look at what’s behind the allocation decision it’s clear what Norway is doing: they started making withdrawals from the fund last year to plug budget gaps created by the downturn in crude prices and with returns suppressed by low rates on the fixed income side, they’re simply trying to juice profits by buying more stocks. Then they’re arming ol’ Trond with a bunch of amorphous aphorisms that sound like they walked out of a market-themed Barnes & Noble calendar, and trotting him out to reassure the world that Norway isn’t getting reckless.
Bottom line: clearly Norway “has a view” on where stocks are going and while it’s probably true that they think equities have room to appreciate further based on how expensive bonds are, if you’re managing nearly $1 trillion and your equity allocation is 70%, it would be easy to mistake the impact of your own investment decisions for evidence that those decisions were good ones.
Got that? Ok, great because just a few minutes ago, news that the Finance Ministry is reviewing a proposal to remove oil and gas stocks from the wealth fund’s reference index has oil and gas stocks all to hell. The move would affect something like $35 billion in shares.
Here’s the The Stoxx 600 Oil & Gas Index:
You’ll want to watch Norway’s biggest holdings today, which include Shell, Exxon, Chevron, BP, and of course Statoil.
The move would make sense as the fund is comprised of the country’s oil wealth, so reducing the exposure to oil and gas names makes Norway less vulnerable.
But this is the kind of thing I’m talking about when it comes to markets not appreciating the extent to which everything is now tied up in self-feeding dynamics that no one appreciates.