Norway’s new move — what does it mean?

| April 3, 2012 | 3 Comments

Scandinavian countries are always good at keeping one eye on the future. And while Sweden may be the most stylish of the Scandies, Norway is really the one to watch when it comes to investments. It has two sovereign wealth funds that, combined, rank among the world’s biggest. The money comes from oil — taxes, licenses, dividends, a direct shareholding — this all adds up to a $610 billion war chest. Or, as Reuters reports, over $120,000 for every man, woman and child in the country.

Source: The Sovereign Wealth Fund Institute

This makes Norway’s investment strategy hugely influential and, whether they explicitly follow its lead or not, investors of all stripes might be at least marginally influenced by what Norway chooses to buy and to sell. And now Norway has announced that it will be buying more investments from Asia, and less from Europe.

This is no surprise — as a friend of mine would say, the eurozone’s got more issues than Time Magazine. Norway will therefore lower its European bond allocation from 60% to 40% over a period of time that its spokeswoman, Hilde Singsaas, reportedly declined to specify. And despite some arguments to the contrary, Norway also does not see very exciting prospects for European stocks. It will offload enough European shares to reduce its portfolio allocation from 50% to 40%.

While many view this as a diss for Europe — which it is — it’s much more interesting to look at who’s benefitting from the change. Emerging market countries win again.

Norway is already buying stocks from emerging markets, but not bonds. However its new plans call for it to devote 7%, $43 billion dollars, to the asset class. This might lead to a drastic change in global bond markets over all as promising countries in Asia, Latin America, Eastern Europe and Africa eye the wall of money potentially headed their way.

Right now they don’t issue that much debt. MarketWatch reminds us that more than 70% of the $100 trillion in debt issued in the world comes from the G7 countries. In contrast the total amount of debt issued by emerging market entities constitutes less than 6% of Barclays Global Aggregate Bond Index. But when these countries start to see demand for their debt from buyers with deep pockets they will be very tempted to jump at the opportunity.

Who will benefit?

The BRICs, aka, the usual suspects will be represented to the extent possible. Or, shall we say BRICS – South Africa is working hard at joining the acronym and looks to be succeeding. China and India are in every investor’s wet dream but have restrictions to protect themselves from foreigners’ full embrace. The Next 11 are younger and racier than their more established cousins. If they spend the money wisely then their economies will be even more appealing in the future. If they don’t, or if they allow the new inflows to destabilize their currencies or their politics, then all bets are off.

Who else, besides Europe, might lose?

If EM countries start to see more demand for their debt then safe-haven bonds like US treasuries might get “crowded out”. US treasury yields could go up (in fact, they already seem to be headed that way.) If the government has to pay investors more to buy its bonds, then this will feed through to higher interest being charged on new mortgages. Which would be a bit of unneeded bad news for US housing. On the other hand, if Europe takes a turn for the worse (Spain, we’re looking at you) then investors will run into Uncle Sam’s arms again, pushing yields and interest rates down.

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Category: Market Moving

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  • guest

    Isn’t the SS Trust Fund (measured in the several of trillions USDs) the Largest SWF as well as being the most transparent? Of course it is the least adventuresome (owns just USTBs) but in comparison to Germany which runs on a pay-as-a-you-go, it warrants inclusion. Also surprised not to see France’s CDC…

    • Finance Addict

      Great question re the SS Trust Fund. I’m guessing its exclusion comes from its very lack of adventuresomeness, as you put it. The others in the list have quite a bit more latitude in what / where they can invest whereas, as you rightly mention, the SS Trust Fund is restricted to old US government issued & g’teed securities. Where’s the fun in that? (Although, I’m not terribly keen on SS getting all Norwegian with my old age money.)

      The Sovereign Wealth Fund Institute includes France’s “Strategic Investment Fund” on its list, which they say is managed by the CDC. At $28 billion it comes in at #25. The list is pretty interesting, have a look!