UBS sees sovereign assets shrinking by US$1.2t

[DUBAI] Central bank and sovereign wealth fund assets will shrink by US$1.2 trillion, or almost 7 per cent, by the end of the year as China and petrostates including Russia and Saudi Arabia dip into their savings amid slower growth and lower crude revenues, according to UBS Group AG.

The decline will be driven by China withdrawing its foreign exchange reserves, while oil-producing countries tap foreign assets to support government spending, Massimiliano Castelli, head of global strategy at UBS Asset Management, said in a phone interview from Zurich on Tuesday. The fall in sovereign assets will likely continue into next year and also be driven by an expected drop in investment returns, he said. Assets held by central banks and sovereign wealth funds amounted to more than US$18 trillion at the end of 2014, according to UBS.

Sovereign wealth funds from Oslo to Riyadh and Doha to Moscow are preparing to withdraw savings built up during periods of high oil prices to compensate for a more than 50 per cent slump in the price of crude since August last year. These countries led a surge in state investments in the US and Europe that now totals about US$7.3 trillion globally, according to the Sovereign Wealth Fund Institute, and includes stakes in Barclays Plc, EMI Music Publishing, plus swathes of London property and Manhattan hotels.

"This is the beginning of a reversal in the trend we have seen of sovereign wealth funds and central banks accumulating assets," Castelli said. "We will see more outflows from central banks and sovereign wealth funds over the next few quarters." Norway's sovereign fund said it expects to tap its US$820 billion stockpile for the first time next year to balance its budget, while Saudi Arabia's central bank has withdrawn US$72 billion from its foreign assets. Russia expects to spend as much as 4.7 trillion rubles (S$97 billion) of the Reserve Fund, one of its two oil funds, this year and next to weather its first recession in six years.

High oil prices helped drive an expansion in sovereign wealth fund assets, which rose by an average of 12 per cent a year over the five years to 2014, according to TheCityUK, a lobby group for the financial services industry in London. The process of government surpluses being reinvested in trophy assets in advanced economies may now come to an end, forcing sovereign funds to reconsider some of their investments.

"Oil is unlikely to go back up a level that generates fiscal surpluses in the producing countries, so they will have to start adjusting their spending to the new reality and avoid running down their savings," said Castelli. "Sovereign wealth funds' appetite for high-yielding, direct investments won't dry up, but some of them will need to behave less like private equity investors and change the mix of their investments towards more liquid assets." Abu Dhabi, home to the US$773 billion Abu Dhabi Investment Authority, is reassessing its largest state companies with an eye toward selling assets, four people with knowledge of the matter said. Qatar Investment Authority sold its 10 per cent stake in Hochtief AG this week, marking its third publicly announced disposal in three months.

BLOOMBERG