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World's biggest wealth fund struggles under weight of trade war
NORWAY'S US$1 trillion wealth fund managed to make US$20 billion last quarter thanks to the oil and gas stocks that it ultimately wants to exit.
But the Government Pension Fund Global's longer-term prospects suffered a blow as a deepening global trade war threatens its return model.
The world's biggest wealth fund benefited in the months through June from a rally in US markets, fuelled by tax cuts. Like many global investors, however, it's warning about the impact on the world economy of rising protectionism after US President Donald Trump imposed tariffs on key trading partners.
"The prospect of increased trade barriers is something that is high on everybody's agenda," Trond Grande, the fund's deputy chief executive officer, said on Tuesday. "It's fair to say that increased trade barriers, or even trade wars, will not be beneficial for the fund as a long-term global investor."
The fund delivered a return of 1.8 per cent in the second quarter, or 167 billion kroner (S$27 billion), after a loss in the first quarter.
Its total stock holdings rose 2.7 per cent, while bonds were unchanged and real estate provided a 1.9 per cent return.
Investing Norway's oil wealth abroad, the fund has been set up to capture the fruits of globalisation and the growth it drives, a philosophy that's now being challenged.
The investor, which owns about 1.4 per cent of global stocks, also sticks closely to indexes, making it hard to navigate around global turmoil.
The fund lost 5.7 per cent in emerging market stocks and 4 per cent on Chinese equities.
The biggest sector driver for its returns were oil and gas stocks, which it has proposed divesting. Financial stocks were the weakest performers, led by Banco Santander SA.
"In the second half of the period, the prospect of increased trade barriers and a weaker growth outlook in Europe, China and emerging markets had an adverse effect," the fund said. "Political uncertainty in Italy impacted negatively on European financial markets."
At the end of the quarter, the fund held 66.8 per cent in stocks, 30.6 per cent in bonds and 2.6 per cent in real estate. The return missed the benchmark index by 0.2 percentage point.
Equity markets regained some momentum in the quarter after tumbling at the start of the year amid a spike in volatility.
The fund is also skewed more toward Europe, missing out on some of the bigger tax-cut fuelled gains in the US market.
Even so, it's a major shareholder in the US tech giants. Its largest stock holdings at the end of the quarter were Apple Inc, Amazon.com Inc and Microsoft Corp.
Its largest bond holdings were in US Treasuries, followed by Japanese and German government debt.
The fund is also in the midst of increasing the portion of stocks in its portfolio to 70 per cent after a go-ahead last year. The remainder is held in bonds. It can also hold a maximum of 7 per cent of its investments in real estate.
Weighed down by negative interest rates over the past few years, the government recently lowered its expected real return target to 3 per cent from 4 per cent.
A slump in crude prices also forced the government to make its first-ever withdrawals in 2016, but that has now ended. Stoked by a recovery in oil prices and rising petroleum income, the government in June made its first deposit to the fund in almost three years.
Outflows from the fund slowed to two billion kroner in Q2. BLOOMBERG