If you’re in the camp that’s concerned about where the marginal bid for U.S. equities will come from going forward once the buyback bonanza runs its course or if you’re just concerned that nobody will want to buy global stocks next year once the U.S. drags the world kicking and screaming into protectionist hell, it’s worth mentioning that Norway is all set to deposit billions into its massive piggy bank.
As a reminder, Norway’s sovereign wealth fund has some $1 trillion in AUM and owns something on the order of 1.5% of global stocks, on average.
We’ve spent a ton of time in these pages talking about the fund, especially in the context of Norway’s ongoing effort to increase its allocation to equities. That, I continue to insist, is not the best idea.
The government tapped the fund (to plug fiscal gaps) for the first time in history back in 2016, and while it’s certainly fine to make withdrawals from your rainy day savings in the event oil prices plunge and the economy needs a boost, the read-through is that the higher the fund’s stock allocation, the more implicitly beholden fiscal policy is to the vagaries of the global equity market.
Clearly that’s dangerous and if you doubt that assessment, just look at what happened in Q1 2018, when equity volatility spiked. Here are some excerpts from a piece I did for Dealbreaker back in April:
What happens to a portfolio that’s 66% in equities during a tumultuous quarter for global stocks? I’ll tell you what happens. What happens is that you lose $21 billion in three months, which is what Norway’s SWF did in Q1. And guess which assets performed the worst? Well, stocks, naturally, as the fund’s equity portfolio fell 2.2% (the overall quarterly return for the fund was -1.5%, with gains in real estate offsetting loses in stocks and bonds).
Here’s Yngve Slyngstad, CEO of Norges Bank Investment Management stating the obvious:
The most important expression of the risk in the fund is that the strategic equity share is set to 70 percent. This means that fluctuations in the fund’s value are predominantly determined by the development in global stock markets.
Right. And that’s fine as long as you assume that stocks only go up (which has generally been a safe assumption for the better part of a decade), but once you take into account the fact that stocks can also fall, you run into a problem. That problem is exacerbated when the money you’re managing is not “investor money” in the traditional sense, but rather, “the people’s money”.
Mercifully, U.S. stocks recovered and thanks to rising crude prices, Norway made the first deposit into the SWF since 2015 in June.
Now, amid the ongoing surge in crude prices and a recovery in the economy, Norway is set to inject 24 billion kroner this year and 53 billion kroner in 2019. As Bloomberg writes in a piece documenting the country’s budget plans, “the monthly cash infusions will free up the fund to make more real estate investments and allow it make new investments without having to pare its portfolio in other places.”
To the extent you think the SWF bid matters (and it does), this is notable.
“Risky investments by some sovereign wealth funds are likely to rise with resource-related revenues increasing”, Nomura wrote, in a note dated October 2, adding that “oil money such as in Norway or the Middle East tends to encourage these countries to take risk-seeking stances, along with steadily increasing crude oil prices.”
In the same note, the bank said they expect “oil money investors” to deploy cash in global equities “towards the end of the year”.
For what it’s worth, JPMorgan’s assessment is a bit less enthusiastic. “The rise in oil prices should in principle create a positive flow into equity markets this year via increased SWF accumulation and increased share buybacks by oil companies, but this additional equity flow is likely to be negligible”, the bank wrote, in a recent note, on the way to explaining that “close to 95% of this year’s oil revenue by oil-producing countries is going to imports” and of the <$100 billion that’s being saved, “almost all of it appears to be taking the form of FX reserve rather than SWF asset accumulation implying no more than $15bn of equity buying this year, down from $30bn last year.”
Draw your own conclusions.