- There has been a rising focus on the hit to markets from lower oil prices
- One channel is declining investment from Sovereign Wealth Funds (SWFs)
- SWF assets rose by USD 50bn per month before the oil price collapse…
- …and have been falling by around USD 5bn per month since
- However, this likely reflects price movements as well as flows
- The SWF taper is less than the Fed’s but is still significant
SWF selling seen as a key transmission channel
In our recent Macro Weekly (see here), my colleague Han de Jong argues that the sharp fall in oil prices is currently proving to be bad news for the global economy and markets. Although low oil prices tend to be good for net importers, the drop to extremely low levels has tended to cause financial stress that is bigger than the benefits. One of the negative transmission channels for financial markets that has been in focus has been declining investment by Sovereign Wealth Funds (SWFs). Selling by these entities – especially of risky assets – seems to have at least aggravated the correction. But how big is this effect?
SWFs assets have declined
Total assets at SWFs were around the 7.2 trillion dollar mark at the end of last year according to the Sovereign Wealth Fund Institute (SWIF). This is down from a peak of around 7.3 trillion dollars at the start of last year. The decline follows a number of years of sharp gains. The recent decline in assets most likely is driven by the fall in oil prices from around the end of last year (see chart), which has limited the inflows into the funds and ultimately has led to some outflows. According to the SWIF, around 56% of the SWF assets are from countries that have built up that wealth from oil and gas. However, non-energy related SWFs may also have suffered because of declining FX reserves for EMs more generally because of capital outflows.
The scale of the SWF taper
In order to get a sense for the impact SWFs may have had on global financial markets we look at the average monthly change in total SWF assets before the oil price correction (which started in the second half of 2014) and after. Between the start of 2010 and the first half of 2014, SWF assets grew on average by USD 50bn per month. Since then they have shrank by around USD 5bn per month (we have made a rough assumption for the first part of this year based on oil price developments). These shifts do not fully reflect flows into and out of financial markets, as they will likely have been also influenced by asset price movements.
Benchmarking with the Fed’s taper
The Fed’s tapering saw its monthly asset purchases go down from USD 85bn per month to zero in just under a year. So the SWF tapering is not of the scale of that of the Fed. However, it is still significant and has likely aggravated the correction we have seen in risky asset prices over recent weeks. Having said that, the shift in SWF assets is a trend that has been underway since the end of 2014, so is not a completely new phenomenon. It has possibly accelerated recently though.
Tailwinds as well as risks
A fresh offsetting impulse for markets is likely to come from a stepping up of asset purchases from the ECB and BoJ. We also expect the Fed to refrain from hiking rates over the next few months. Furthermore, we expect a gradual recovery in oil prices during the course of the year, while modest global growth should also continue. So we see some positive tailwinds ahead, which could start to counteract some of the well-documented negatives related to concerns about emerging markets and commodities.