Last week, in “Slumping Crude Will Send Norway To ZIRP As Economy Careens Toward Recession [19],” we took a look at the rather vexing situation facing the Scandinavian oil exporter.
Like Sweden and Denmark, Norway is attempting to fight the global currency wars while simultaneously wrestling with a housing bubble.
As documented in these pages extensively, and as mentioned earlier today in the context of the Riksbank’s move to expand QE, those two things aren’t entirely consistent. Cutting rates to stay competitive only serves to inflate the bubble further, but leaning hawkish in a world of DM doves means jeopardizing inflation targets (of course central banks should probably consider soaring housing prices when they talk about inflation, but that’s another issue).
For Norway, the situation is complicated by the deleterious effect that falling crude prices are having on the domestic economy and although the crude slump has contributed to some krone weakness, the current environment means the Norges Bank is, in Bloomberg’s words, dealing with a currency that “just can’t get weak enough.” This means ZIRP is likely just around the corner.
As we also noted last week, “lower for longer” crude is also set to prompt the government to dip into the country’s sovereign wealth fund which, you’re reminded, is the largest in the world. Here’s what we said:
Norway is now set to dip into its sovereign wealth fund for the first time. Earlier this month, budget estimates indicated that inflows from petroleum activities in 2016 will fall short of what the government plans to take out of the fund by nearly NKr4 billion. Here's a graphic from RBS which illustrates the relative size of Norway's SWF:
[20]
And while the asset allocation of SWFs varies meaningfully compared to official FX reserves, it's worth noting that this is but one more example of "Great Accumulation" reversal dynamic outlined [21] in thse pages last November and highlighted by Deutsche Bank [22] in the wake of the China deval. That is, regardless of what's being sold, it still represents a major turning point at which crude producers cease to be net exporters of capital.
Well don't look now, but the fund just suffered its worst quarterly loss in four years, falling nearly 5% thanks in no small part to volatile Chinese equities and the Volkswagen debacle.
[23]
Notably, this was the first negative quarterly return ex-real estate since last year:
[24]
The breakdown by asset class: 59.7% in stocks (-8.6% in Q3), 37.3% in bonds (+0.9% in Q3), and 3% in real estate (+3% in Q3). Here are the fund's largest equity holdings:
[25]
And here's some additional color from Bloomberg [26]:
The $860 billion fund lost 273 billion kroner ($32 billion) in the third quarter, or 4.9 percent, the Oslo-based investor said on Wednesday. Its stock holdings declined 8.6 percent, while it posted a 0.9 percent gain on bonds and a 3 percent return on real estate. It was the first back-to-back quarterly loss in six years.
“We have to expect fluctuations in the value of the fund when there are large movements in the market,” said Yngve Slyngstad, its chief executive officer. “With the fund as big as it is today, this can have a considerable impact in the short term. The fund has a long-term horizon, however, and is in a good position to ride out short-term volatility.”
The period was marked by turbulence as worries of a China slowdown and prospects of a U.S. rate increase wiped trillions of dollars off the value of global markets. The MSCI World Index lost 9 percent while the MSCI Emerging Markets Index plunged 19 percent in the quarter. The selloff was exacerbated by a rout in commodities.
The fund had a loss of 21.3 percent on Chinese stocks in the period and 16.6 percent on its emerging market equities.
The fund, which has grown more than six-fold amid a boom in oil prices over the past decade, is facing a new era as cash injections may come to a halt as soon as next year. Budget documents released this month showed the government will withdraw about $440 million next year as it uses up all its direct oil revenue to cushion the economy from a 50 percent drop in crude prices.
[27]
The shift comes as Slyngstad has warned of diminished returns held down by unprecedented monetary easing in the developed world and as the fund is shifting more of its investments to emerging markets and out of Europe.
A plunge in fresh cash for the fund is making that change harder. Inflows from the government were 12 billion kroner in the quarter, compared with a 60 billion kroner quarterly average over the past 10 years. “That plan needs to be revised based on lower inflows,” Trond Grande, deputy CEO of the fund, said during a press conference. He declined to provide further details about the new plan.
Note what's going on here. Because ZIRP and NIRP are depressing yields on government bonds, Norway is shifting into EM. But the fund's EM bets lost nearly 17% in Q3. Meanwhile, slumping crude prices mean cash injections are about to flatline and indeed, 2016 will actually see the government withdraw some $450 million. Additionally, with US stocks near all-time highs, it wouldn't be entirely unreasonable to say that giant holdings like Apple and Google (pardon: "Alphabet") could suffer heavy losses in the event some exogenous shock (like say a Fed-induced EM meltdown) feeds back into US markets.
It's a veritable perfect storm and it makes us wonder whether, much like Saudi Arabia, Norway could soon see its oil wealth begin to evaporate at a rather alarming rate. One thing is for sure: the days of Norway being a net exporter of capital are officially over which serves to underscore the notion that the "Great Accumulation" - to use Deutsche Bank's terminology - is indeed dead.
Maybe Yngve Slyngstad can double down on Greek debt [28] to make up the difference...
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Full report:
3q_15_eng_web [29]
