Norway Oil Fund Says Europe Bet Pays Off on Strong Bond Outlook
Norway’s $510 billion sovereign wealth fund, the world’s second biggest, says its bet that Europe will emerge from the debt crisis is paying off as the region’s bond markets promise to deliver a “strong” recovery.
“This year, you’re actually getting compensated to a larger extent for the risk that is obviously there, so we’d rather say we’re more comfortable than less comfortable than a year ago,” Yngve Slyngstad, head of the Norges Bank Investment Management that manages the fund, said in an interview yesterday with Bloomberg Television’s Francine Lacqua. “Going forward, I think the European bond market will be strong and healthy.”
The Government Pension Fund Global, which last year cut its holdings of peripheral European bonds, rekindled its interest in Greek, Spanish, Portuguese and Italian government debt going into the third quarter, betting on a rebound following the bailout of Greece in May. At the end of September, Spanish debt was the fund’s seventh-biggest bond holding.
Ireland’s decision last month to resort to European emergency funding revived concerns that Spain and Portugal may struggle to finance their budget deficits. To avoid contagion and calm markets, European Central Bank President Jean-Claude Trichet said Dec. 2 the bank will delay a withdrawal of emergency liquidity as it buys more government bonds from peripheral euro-area members.
Europe remains in a “troubling” situation, said Dominique Strauss-Kahn, the head of the International Monetary Fund, in a speech in Geneva yesterday. The effects of the global financial turmoil “are far from over” and Europe’s future “is more uncertain than ever,” he said.
The Washington-based lender is contributing to Ireland’s 85-billion euro ($113 billion) rescue package, agreed almost seven months after Greece’s 110-billion euro bailout.
“The politicians have been doing quite a good job in 2010 to deal with a very difficult situation,” Slyngstad said. “So we’re confident that the politicians will continue to do the work necessary to stabilize the market.”
The difference in yield, or spread, between 10-year Spanish bonds and German bunds has narrowed to about 228 basis points, or 2.28 percentage points, from a record 283 basis points at the end of November, while the spread between 10-year Irish bonds and the European benchmark narrowed to 500 basis points, from a record 668 basis points on Nov. 30, according to Bloomberg data.
Government debt trading flows show there is some appetite for bonds issued by Ireland, Portugal and Italy, according to ING Groep NV.
“We have seen some reasonable nibbling of peripheral paper from the buyside,” Padhraic Garvey, ING head of developed- market debt strategy in Amsterdam, wrote in a note today.
“The spreads are generally generous enough to compensate for that risk, so some inclusion of the PIIGS in a portfolio is probably prudent,” said Everett Brown, European Bond Strategist at IDEAglobal in London, in an e-mailed reply to questions.
“The short-term is a different story,” he said, referring to bonds issued by Portugal, Ireland, Italy, Greece and Spain. I’m skeptical of the recent calm, and expect tensions to resume soon, at least by January, when trading picks up and the countries resume auction funding.”
Norway’s oil fund manages the country’s oil wealth for future generations, allowing it to adopt a long-term investment horizon and take on more risk, Finance Minister Sigbjoern Johnsen said in August.
Investments in Europe represented 60.4 percent of the fund’s fixed income portfolio as of September, up from 59.6 percent in June. The fund held 1.15 trillion kroner ($190 billion) in fixed-income at the end of the third quarter.
“We have as much as 100 billion euros in the European bond market so we have a huge stake in the market working,” Slyngstad said. “For us, it’s more about how the situation between the sovereign debt and the banks is going to work out.”
The fund, which got its first capital infusion in 1996, has been taking on more risk as it expands globally, adding stocks in 1998, emerging markets in 2000 and this year real estate to bolster returns and safeguard the wealth of the world’s seventh- largest oil exporter.
It this year petitioned Norway’s Finance Ministry, which oversees the fund’s investments, to allow it to move into infrastructure and private equity. The proposal was last month backed by the ministry’s Strategy Council, an independent adviser, which said the fund needs to take on more risk to achieve a real return of 4 percent.
The fund’s real annualized return since 1998 is 2.85 percent. It lost 23 percent in 2008. Most of the losses were recouped the following year and the fund gained 5.4 percent through the first nine months of this year.
Slyngstad said the fund, which invests Norway’s oil wealth outside its borders to avoid overheating the economy, expects to add more fixed-income investments in China, the world’s fastest growing major economy, and India to capture more “world growth.”
At the end of last year, the fund held 381 million kroner in Chinese fixed-income assets, of which 240 million kroner were in China Government International Bond. The fund’s benchmarks limit it to holding about 5 percent in bonds from Asia and Oceania, 60 percent in Europe and 35 percent in the Americas. At the end of the third quarter, it held 5.5 percent of its fixed income portfolio in Asia and Oceania.
‘Sooner or Later’
China’s gross domestic product will expand about 10 percent this year and next, the Paris-based Organization for Economic Cooperation and Development said on Nov. 18. India’s economy will grow about 8 percent, the OECD estimates. Global output will expand 4.2 percent next year, the organization forecasts.
“We don’t have a currency exposure to the Chinese renminbi or the Indian rupee because we’re not allowed as a bond investor to invest a significant amount,” Slyngstad said. “Sooner or later we think this will change.”
Only Abu Dhabi has a larger wealth fund, according to the Sovereign Wealth Fund Institute in California.
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