Bonds, Commodities, Currencies, Emerging Markets, Frontier Markets, Stocks

Market Liquidation: Sovereign Wealth Funds May Double Equity Sales To $404 Billion In 2016

Money GlobeSovereign wealth funds (SWFs) — mostly oil-rich nations such as Norway, Russia, and the Gulf states — have been aggressively selling stocks and other securities amid a plunge in the price of oil, and they are poised to sell significantly more this year if oil doesn’t recover.

SWFs could pull $404.3 billion from global stock markets in 2016 should oil prices stay between $30 to $40 per barrel as these oil-rich economies look to shore up their finances, according to the Sovereign Wealth Fund Institute (SWFI), a Las Vegas-based firm that tracks activity by such funds.

SWFI estimates that $3.043 trillion was allocated to listed equities as of December 2015, down around $213 billion from December 2014. This year withdraws could double as allocations to listed equities are seen falling to $2.64 trillion in 2016, according to a report by SWFI released on Monday.


Graph courtesy of SWFI

The institute says that it based its estimates on “past behavior, government structure, the need for capital to lessen fiscal gaps, and reporting lag times,” as well as a prediction on market performance in 2016. The data is based on the largest funds, which made up 89% of wealth fund assets.

Say Goodbye to the ‘Era of Petrodollar-Filled Wheelbarrows’

“The era of petrodollar-filled wheelbarrows being dumped into giant vats seems to be numbered,” SWFI said.

“Commodity wealth funds have to be concerned about the state of their country’s finances, since many were created to either be stabilization funds, intergenerational savings vehicles or a combination thereof,” it warned.

Sovereign wealth funds have significantly grown over the course of the past two decades, with oil-rich SWFs from Qatar to Russia amassing over $7 trillion in assets today, from less than $1 trillion in 2001, according to SWFI.

SWF stockpiled assets over the years as oil soared over $100 a barrel, bringing booming investment returns and excess current account surpluses, and as global Central Banks implemented easy monetary policies.

But as oil has fallen over 70 percent from their mid-2014 high, the pressure is on to raise cash, and SWFs are now liquidating their investments.

Easily liquidated assets, such as stocks are being sold off, versus non-core assets such as real-estate, which can be expensive and time consuming.

The real money outflows are coming from relatively liquid asset positions. For example, one of the easiest routes for commodity-based wealth funds to shore up cash is to terminate fixed income or equity-focused mandates. This is far less expensive and time consuming than to sell large stakes in noncore holdings such as the QIA’s stake in Miramax Films or its investment in Harrods.

“The commodity-price scenario changed sovereign institutional investor behavior from their heydays starting in 2004, which include investing in the Chrysler Building, Chicago Parking Meters and bailing out banks like Citigroup to make them more focused on where capital is being allocated,” the report said.

Oil-rich Middle East SWFs, such as the Abu Dhabi Investment Authority and Qatar Investment Authority, are facing the most “financial distress”, the report said, while Russia has also “steadily been depleting its sovereign wealth fund to finance large-scale projects, fund parts of government and attract direct investment,” it said.

Bad news for the world’s big fund managers: they are being abandoned by SWFs.

SWFI sees emerging market fund managers getting hit the hardest, then conservative “middle-of-the-road” long-only managers.


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