Sovereign fund holdings face test of oil price crash
The share of sovereign wealth funds (SWFS) in foreign holdings had seen a steady rise of late, in the Indian markets.
Such funds, instituted by many — including oil-producing countries — to meet future needs, were largely seen as a stable source of capital. Ironically, the crash in oil prices has raised fears of liquidation, which could add to market volatility.
The share of such funds among overall foreign holdings had risen over the last 18 months, shows the depository data. They accounted for 6.01 per cent of the total foreign portfolio investor (FPI) holdings in February — the last month for which the data is available. This translates into ~1.99 trillion in assets. Equity holdings account for ~1.73 trillion. The rest are spread across debt and hybrid segments.
Since then, crude oil prices have headed south as a result of price wars. They fell more than 60 per cent since the beginning of the year, to below $30 a barrel. Norway’s SWF is said to have been under heavy pressure in generating cash from declining oil revenues.
Independent market analyst Anand Tandon said oilproducing countries are likely to continue seeing significant pressure as revenues dry up. It is likely they would tap their SWFS to tide over the crisis.
“They may need some money,” said Tandon. Some of the market fall is already being attributed to such selling, according to him.
FPIS have been net sellers to the tune of ~61,973 crore in the equity markets. Consequently, the Sensex has plunged from its January high of 42,273.87 to 28,265.31. They sold a further ~60,376 crore in the debt market.
Norway’s Government Pension Fund Global had also been raising its India bets. Its India assets had grown 27.2 per cent to $9.4 billion, according to annual disclosures. Examples of other oil-producing nations with SWFS are Qatar, Oman, Kuwait, and Iran.
Vinay Paharia, chief investment officer (CIO) of Union Asset Management Company, said the low interest rates put in place by countries could help valuations revive.
Earnings could see a recovery in a relatively short time. Consequently, the current bout
of liquidation by large institutions is unlikely to weigh on markets for long, said Paharia.
Threats to global growth have prompted governments to act quickly and decisively, according to a Morgan Stanley research report A Full-court Policy Press, authored by chief economist and global head of economics Chetan Ahya.
“Since mid-january, 23 of the 30 central banks we cover
have eased their monetary policy. The global weighted-average policy rate has declined to below the post- GFC (global financial crisis) lows. All the G4 central banks have announced aggressive quantitative easing measures. We estimate these central banks to make asset purchases of $6.5 trillion in this easing cycle, with cumulative asset purchases of $4-5 trillion by the US Fed alone,” it said.