Last month, JP Morgan predicted that the collapse in the crude oil price would generate $75 billion in sales of global equities in 2016. Why? Because Sovereign Wealth Funds (SWFs) own a lot of stocks and some of these SWFs now have serious cash flow problems.
Here’s why. Many of these SWFs are funded with proceeds from oil sales. For years, producers ran huge profits and funnelled their excess crude revenue into a variety of assets including equities and real estate.
All of that changed late in 2014 when crude’s collapse meant revenues no longer exceeded expenses. Suddenly, producing countries found themselves running deficits. That in turn left two options: tap the debt markets or tap the SWF piggy banks.
We are seeing this play out in Saudi Arabia which is struggling to fund a deficit that amounted to 16% of GDP in 2015 and is set to come in at around 13% this year. And then there’s Norway, whose SWF is the largest in the world at $830 billion. Lower for longer crude has hit the country’s economy hard. To help shield the economy from excessive damage, the country is resorting to fiscal stimulus which officials are paying for by tapping the SWF which is no longer growing thanks to the lower oil price. Investment Corp. of Dubai is another one with $183 billion in total assets.
So, when you start to add it all up, the likely sales are much bigger than last month’s JPM estimate. According to a report from the Sovereign Wealth Fund Institute, SWFs aren’t going to keep their money in this choppy market for much longer. From the report: “If oil prices remain in the US$ 30 to US$ 40 per barrel range, we predict a withdrawal of US$ 404.3 billion … from global listed equities, about twice the amount that left in 2015.”
SWF equity holdings could fall to $2.64 trillion this year, the report goes on to say. That’s down from about $3.04 trillion at the end of 2015. About 89% of this amount is invested in equities.