Tumbling oil prices are affecting more than just energy firms. The ripple effect has now hit global asset managers, as governments in the Gulf and beyond – short on cash – are withdrawing billions of dollars, the Financial Times recently reported.
State institutions withdrew at least $19 billion in the third quarter, mostly to close the gaps in national budgets and reduce borrowing, the piece stated – with more money is expected to be withdrawn in the coming months.
Moreover, the Wall Street Journal reported that sovereign-wealth funds yanked roughly $100 billion from asset managers in the six months to Sept. 30.
Among the big name funds affected, the FT reported, included assets managed by BlackRock, the world’s biggest fund house; as well as Aberdeen Asset Management, Northern Trust, Franklin Resources and Old Mutual Asset Management:
“If the oil price remains low, we will see more redemptions from sovereign wealth funds,” Martin Gilbert, chief executive of Aberdeen, was quoted by FT.
The piece continued: Morgan Stanley estimates that listed asset managers can see their earnings per share shrink by as much 4.1% if sovereign fund redemptions continue at the same pace that it did in 2015.
A separate Financial Times pieces wrote that Morgan Stanley predicts emerging market specialists such as Aberdeen, Ashmore and Franklin Resources are most at risk of redemptions from sovereign funds.
Many analysts believe the trend will continue in 2016. Saudi Arabia, the world’s largest petroleum exporter, for instance, is expected to “overshoot” the kingdom’s estimates of improving on its record deficit in 2015; as reported by The National, based in the United Arab Emirates.
Alp Eke, an economist in Abu Dhabi, told The National that Saudi Arabia depleted approximately $150 billion of assets during the past year.
Beyond the Gulf, it was widely reported that Norway plans to tap its fund for the first time in 2016. Sovereign wealth funds grew incredibly as oil prices continued to rise. Not only did existing funds become an extension of the newfound financial prowess of their governments, but also new ones entered the foray. In “The Trouble With Sovereign-Wealth Funds,” The Wall Street Journal listed Angola, Ghana, and Malaysia as new entries.
Since 2007, the size of the funds has doubled to $7.2 trillion, which is larger than the total size of world’s hedge and equity funds combined, the Journal said. Now, since nearly 60% of sovereign wealth funds are dependent on energy prices, the environment is changing, and it can rattle the global economy.
“A withdrawal of assets by sovereign-wealth funds against the background of liquidity concerns could lead to large price movements,” Adnan Mazarei, deputy director of the International Monetary Fund’s Middle East and Central Asia Department, told the Journal. “Nobody knows how much or when but the concern is there.”
Since most funds do not disclose their size and investment strategies, the uncertainty is amplified.
But the International Monetary Fund, examining the fallout of low oil prices, said in October that a large-scale liquidation of government funds’ extensive bond holdings could drive up interest rates, according to the Journal. “A substantial change in the path of asset accumulation by sovereign wealth funds,” the IMF noted, “will likely have a direct effect on financial markets.”
It also reported that Federal Reserve economists have estimated that five-year Treasury rates would rise by about 0.40 to 0.60 percentage points if foreign official inflows into U.S. Treasuries were to decrease by $100 billion in any given month.
The Journal article also reported on other troubled spots for sovereign funds: lack of assets, and allegations of mishandling and corruption. Just a few yeas ago, Kazakhstan’s Samruk-Kazyna JSC helped the country win the bid to host the 2022 Winter Olympics, and weather the global financial crisis. Now, the fund turned to a $1.5 billion syndicated loan to stay afloat as it coped with troubled oil field investments.
Elsewhere in Asia, Malaysia’s 1MDB, which amassed $11 billion in debt, is under investigation at home and abroad; and the head of South Korea’s fund was forced to step down as a result of controversy around the plans to invest in Los Angeles Dodgers.
Yet, while the old prices have resulted in losses for asset managers, there are signs of opportunities for private equities.
Reuters reported that Chinese government’s sovereign wealth fund, China Investment Corp (CIC), is courting buyout firms as a partner. After a 4-year stint in Toronto, CIC will move its only overseas office to New York in March, as it shifts investments away from energy and mining. The move to New York signals CIC’s appetite for greater investments in the US and broader global markets, and partnership with the largest private equity firms, Reuters said.