The sovereign wealth exodus

The crash in oil prices has claimed several obvious victims, from resources companies to Middle Eastern economies. But one not-quite-so-obvious victim has been the asset-management sector. With prices plunging from $115 per barrel in June 2014 to around $40 today, oil exporters are struggling to keep their public accounts in order. To bring down their deficits they are having to dig into the savings they made in the good times.

These massive piggy banks – sovereign wealth funds (SWFs) – grew to control $7trn in assets over the commodities boom, around a third of which is handled by asset managers such as Aberdeen Asset Management and Ashmore. But now they’re pulling their cash out of the markets, meaning less money for the world’s massive wealth managers to handle. For example, the Saudi Arabian Monetary Agency (Sama), the world’s third-largest SWF with $661bn, has already withdrawn $70bn from asset managers during 2015 to prop up falling currency reserves.

Meanwhile, Norway’s colossal SWF has sold at least $1.1bn-worth of European shares since May, reports IR Magazine. Data research group Preqin notes in its 2015 SWF review that many of these funds are also likely to shift the money they keep invested into less volatile sectors to reduce their overall exposure to commodities. Already, between 2013 and 2014, SWFs have been increasing their bets on real estate and infrastructure and reducing holdings in private equity.

As Teresa Tritch points out in The New York Times, the opacity of many of these funds – particularly those operating out of the Gulf – means it’s hard to be sure of exactly how their changing investment plans might hit markets. But “a lesson in the financial crisis is that interconnections among financial players that are stable in one context can become unstable as circumstances change”.

Could it happen again? It’s certainly something to watch closely. Given that they were frequently described as a “wall of money” waiting to flood the market during the boom years, the risk now is that SWFs turn into a vortex, sucking money back out, even as the falling oil price leaves the corporate debt market looking vulnerable.

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