Norway’s $810-Billion Sovereign Wealth Fund Warns of Stock Market Correction

Norway’s Sovereign Wealth Fund Warns of Stock Market Correction

Norway’s sovereign wealth fund, the world’s largest, warned that stock market gains may reverse as Europe’s biggest equity investor said it won’t use new inflows to buy more shares. “Our share in the stock market has been stable or falling even though markets are rising, and that means in practice that we’re not using inflows to buy stocks,” Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, said at a press conference today in Oslo. The fund is preparing for a “correction” in stock prices, he said.The warning follows a surge in stock values that added 7.6 percent to the fund’s equity portfolio last quarter. The $810 billion Government Pension Fund Global, the official name, returned 5 percent in the third quarter, representing a 228 billion kroner ($39 billion) gain, it said today. Bond investments climbed 0.3 percent and real estate holdings returned 4.1 percent, it said.

“Stock market returns in the third quarter where driven mainly by continued economic recovery in developed markets,” Slyngstad said. “The negative trend in emerging markets continued into the quarter, but high economy activity in China led to a rebound toward the end of the period.”

U.S. Fallout

Stocks rallied in the third quarter as the U.S. Federal Reserve unexpectedly refrained from ending its $85 billion-a-month quantitative-easing program last month. Growth forecasts for China, the world’s second-biggest economy, also improved, propelling equities globally. The MSCI World Index of stocks gained 7.7 percent in the quarter, paring some gains late last month as concern grew over a U.S. government shutdown.

Norway’s wealth fund, which gets its guidelines from the government, held 63.6 percent in stocks at the end of September, up from 63.4 percent in the second quarter. Bond holdings slid to 35.5 percent from 35.7 percent while real estate accounted for 0.9 percent. The fund is mandated to hold 60 percent in stocks, 35 percent in bonds and is building up to 5 percent in real estate, while allowing for fluctuations. It mostly follows global indexes and has some leeway to stray from those benchmarks.

The investor, which posted its second-best year in 2012, is undergoing a shift in strategy to capture more global growth. That’s involved moving investments away from Europe as emerging markets in Asia and South American make up a bigger share of the world economy. The fund has weighted its bond portfolio according to gross domestic product, after shifting away from a market weighting to avoid nations with growing debt burdens.

Largest Holdings

Its largest stock holding at the end of the quarter was Nestle SA (NESN), at a value of 38.5 billion kroner. The biggest bond holding was in U.S. Treasuries, at a value of 344 billion kroner, followed by Japanese and German government bonds.

Mexico rose to fifth place in the fund’s bond holdings, while Brazil and South Korea joined the top 10, at the expense of France and Canada.

Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest energy company. Norway is western Europe’s largest oil and gas producer. The fund, which had an average holding of 1.2 percent of the world’s listed companies at the end of 2012, invests abroad to avoid stoking domestic inflation.

Prime Minister Erna Solberg, whose government took power this month, said before the election she would consider splitting the fund into smaller units.

The government deposited 58 billion kroner of petroleum revenue into the fund in the quarter. The return beat the benchmark set by the Finance Ministry by 0.1 percentage point.

The investor got its first capital infusion in 1996 and has been taking on more risk as it expands globally. It first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth.

To contact the reporter on this story: Mikael Holter in Oslo at mholter2@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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