Norway Fund Betting on ‘Quite High’ China Growth Rate

The head of the world’s biggest sovereign wealth fund said investing in China hasn’t lost its allure even after economic growth slowed.

“We’ve noticed that there has been a change in perception about Chinese growth in the years coming,” Yngve Slyngstad, chief executive officer of the $760 billion Government Pension Fund Global, said in an Aug. 9 interview in Oslo. “However, the growth that is expected by the authorities is still quite high. We still have confidence that long-term prospects for China are quite good.”

A report last week showed that China’s industrial output rose more than estimated in July, adding to signs that economic growth may start accelerating. Larger-than-forecast rebounds in exports and imports and rising gauges of manufacturing and service industries have also signaled the world’s second-largest economy will meet Premier Li Keqiang’s economic growth target for this year of 7.5 percent.

Norway’s wealth fund, which got its first capital in 1996 to invest the country’s oil wealth outside its borders, lost 5.9 percent on its stock investments in emerging markets in the second quarter, in part because of speculation of weaker growth in China, it said last week. The fund is undergoing a shift in strategy to capture more global growth. It is moving asset allocation away from Europe as emerging markets in Asia and South America gain a bigger share of global output.

China’s benchmark Shanghai Composite Index rose 2.4 percent, the biggest one-day gain since July 11, to 2101.283.

China Investments

Temasek Holdings Pte, Singapore’s wealth fund and the biggest foreign investor in Chinese banks, also said last month that it’s not concerned by a cash crunch that caused Chinese money-market rates to soar and pushed stocks to a four-year low.

Norway held 10 percent of its stocks in emerging market countries at the end of June, up from 9.9 percent in December. Some 2 percent were invested in China, up from 1.7 percent in December. That compares with 31 percent in the U.S. and 14 percent in the U.K. At the end of last year, the last time the fund divulged all its holdings, it had 303 investments in mainland China.

The fund aims to double its investment in emerging markets to 20 percent, Slyngstad said.

Catching Up

“Our ownership in emerging markets is roughly 20 percent lower than our average ownership in developed markets, so you can assume that we have to increase emerging markets proportionally just to catch up,” he said.

Emerging market equities and bonds also slid in the quarter, and about $4.2 trillion was erased from the value of global equities over a month after Federal Reserve Chairman Ben S. Bernanke in May signaled that policy makers could pare stimulus should the world’s largest economy show sustained improvement. The MSCI Emerging Markets Index slumped 9 percent in the second quarter.

In total, the $760 billion fund rose 0.1 percent, or 17 billion kroner ($2.9 billion), in the period, helped by U.S. and Japanese stocks. Stocks rose 0.9 percent, while bond investments dropped 1.4 percent. Real estate investments rose 3.9 percent.

Slyngstad said that the drop in emerging market shares was advantageous for the fund since it’s building up its positions.

Europe’s biggest equity investor, which gets its guidelines from the government, held 63.4 percent in stocks in the period, up from 62.4 percent in the first quarter. Its bond holdings slid to 35.7 percent from 36.7 percent of the fund while real estate comprised 0.9 percent. It’s mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate, while allowing for fluctuations. The fund mostly follows global indexes, with some leeway to stray from those benchmarks.

Biggest Holdings

Slyngstad said the increase in the equity portion was more a reflection of pessimism on bonds than optimism over stocks.

The fund’s largest stock holding at the end of the quarter was in Nestle SA. The largest bond holding was in U.S. Treasuries.

Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest energy company. Norway is western Europe’s largest oil and gas producer. The fund, which has an average holding of about 1.2 percent of the world’s listed companies, invests abroad to avoid stoking domestic inflation.

Limited Spending

The government uses money from the fund to cover budget deficits. Though use is limited to 4 percent, the amount of money that figure represents is growing. The oil fund has quadrupled in size since 2005 and will grow by 50 percent by 2020, the government estimates.

Prime Minister Jens Stoltenberg said today the government should limit spending of the fund to 3 percent to prevent the economy from overheating.

“Significant changes in the oil fund, like the strong growth we are now seeing, shouldn’t feed directly through to domestic use,” Stoltenberg said on state radio NRK.

The government deposited 58 billion kroner of petroleum revenue into the fund in the second quarter. The return exceeded by 0.3 percentage point the benchmark set by the Finance Ministry.

The investor has been taking on more risk as it expands globally. It first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth.

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