* Oil slump forced exporter countries to raid savings
* Reprieve from rising oil price could be short-lived
* Norway mulls move into more equities, could inspire others
By Claire Milhench
LONDON, Dec 12 Sovereign investors are set to
pull their petrodollars from global stock and bond markets for
the third year running in 2016, a process that is unlikely to be
reversed next year despite the rebound in oil prices.
Sovereign wealth funds (SWFs) redeemed $38 billion from
third-party asset managers in the first three quarters of 2016,
data from research firm eVestment showed, extending their
selling into a ninth consecutive quarter.
This followed redemptions of $44 billion in 2015 and $10.7
billion in 2014, as low oil prices forced countries reliant on
oil exports, such as Russia, Saudi Arabia and Norway, to raid
Years of oil windfalls brought money into financial markets,
boosting asset prices through so-called petrodollar recycling.
But SWF flows turned negative in 2014 for the first time in
18 years after oil prices plunged from around $115 a
barrel in the summer of 2014 to a low of $27 a barrel in January
Oil has now risen to around $57 a barrel thanks to a deal
between producers to cut output.
But Peter Laurelli, global head of research at eVestment,
which collates data from 4,400 firms managing money on behalf of
institutional investors, did not think this would be enough to
trigger an immediate turnaround in flows.
"Oil prices have stabilised at half of what they were, so we
need to see a meaningful rise before that filters back," he
Although total outflows over July-September 2016 were lower
than in the first half of the year, at $5.2 billion, passive
global equity mandates were still bleeding money, with net
outflows of $2.2 billion, eVestment data shows.
Laurelli said the only reason total outflows were not worse
in the third quarter was due to one large allocation to U.S.
short-duration fixed income, which attracted a net $3.9 billion.
This cash alternative was possibly used to park money pulled out
of other mandates.
Outflows could slow in 2017 because of the reprieve from oil
prices but any relief will likely be short-lived, according to
Elliot Hentov, head of policy and research in the official
institutions group at State Street Global Advisors.
Hentov points out that potential de-regulation of the U.S.
energy sector following Donald Trump's election as president
could reduce production costs, putting renewed downward pressure
on global energy prices. That means more strain for oil-based
The sell off remains broad-based, with SWFs redeeming almost
$5 billion from global equity mandates and $6.1 billion from
fixed income strategies in the first three quarters of 2016,
But according to Hentov, there is a structural limit to how
much SWFs can liquidate in publicly listed assets without being
forced to rebalance. This is because sovereign investors have
built exposure to illiquid assets such as real estate,
infrastructure, private equity and private debt.
"If that trend were to continue, they would be overly
invested in illiquids - they would breach their own limits," he
said. "They're at the tail end of how much they can reduce their
Norway's $860 billion SWF for instance is currently
considering whether to increase its equity allocation to 75
percent from 60 percent.
Given the fund's size, this would translate into a flow of
around $130 billion away from government bonds into equities,
albeit over several years.
Nikolaos Panigirtzoglou, a managing director at JP Morgan,
said such a move might inspire other big SWFs with similar
equity allocations, such as China's CIC and the Gulf's Abu Dhabi
Investment Authority (ADIA).
"This is especially true ... where a regime shift could be
taking place following the U.S. election," he said, with
reflationary trends likely to benefit equities.
(Reporting by Claire Milhench; Editing by Alison Williams)