SOVEREIGN WEALTH FUNDS BELIE SELL-OFF HOPES
Holdings in Indian equities now higher than March levels
Sovereign wealth funds (SWFS) have increased their holdings in the Indian stock market since March, contrary to expectations that they would head for the exit amid the pandemic. They have a higher share among foreign investors in Indian equities now than in the first three months of the year, before Covid19 became widespread. SWFS typically look to invest money gained from natural resources to use during periods of downturn.
Sovereign wealth funds (SWFS) have increased their holdings in the Indian stock market since March, contrary to expectations that they would head for the exit amid the Covid-19 pandemic.
They have a higher share among foreign investors in Indian equities now than in the first three months of the year, before Covid-19 became widespread. SWFS typically look to invest money gained from natural resources to use during periods of downturn. Many of the largest funds are from countries which have been rich in crude oil reserves.
Crude oil saw prices crash and demand fall as many economies locked down to stop the spread of the virus. This was expected to result in funds liquidating holdings to meet the parent country’s financial needs which depend on oil sales.
SWFS’ India equity assets under custody were ~1.34 trillion at the end of March. They rose to ~1.88 trillion at the end of August. The August figure is the highest for the year so far, higher even than January (~1.83 trillion) and February (~1.73 trillion). The government instituted a lockdown to rein in the contagion in March. Sovereign funds’ share of total foreign portfolio investments has risen in the months since to 6.4 per cent in August. The January figure was 5.94 per cent.
Some of this may have been aided by large investments in individual companies. For example, Reliance
Industries had announced Saudi Arabia’s Public Investment Fund investing ~11,367 crore in Jio Platforms for a 2.32-per cent stake.
The bounce-back in oil prices and the availability of liquidity globally are some of the factors that may have eased the selling pressure that could have otherwise emerged, suggested U R Bhat, director at Dalton Capital Advisors (India). The immediate outlook does not point towards an exodus, he added.
“Oil prices have recovered dramatically,” he pointed out.
Brent crude oil prices had fallen below $16 per barrel in April. They had been trading around $40 per barrel on Tuesday.
Deven Choksey, managing director of Krchoksey Investment Managers, said central banks and governments have been making available large amounts of money in a bid to stimulate global economy. This makes the prospects for significant outflows from foreign investors unlikely, as easy liquidity conditions are expected to persist for some time.
“They are unlikely to take the money back,” said Choksey.
SWFS may look inwards, even as they capitalise on attractive valuations brought on by the pandemic in foreign markets, according to an August 7 paper titled, ‘Sovereign Wealth Funds and the Covid-19 shock: Economic and Financial Resilience in Resourcerich Countries’ from authors, including Bocconi University’s Bernardo Bortolotti, University at Buffalo’s Veljko Fotak, and Chloé Hogg from the London School of Economics.
“Asset allocations will likely shift... (towards) ...domestic assets, but portfolio rebalancing will also entail that investment opportunities will be seized in global equity markets, especially in the most severely damaged economies where assets can be bought at the most discounted prices,” it said.
“Importantly, the survival and future relevance of SWFS in their domestic economies will depend upon their countries’ resilience in the face of the... (Covid-19 pandemic) ...shock and the extent to which their sovereign assets are used as buffers,” it added.