Featured # Editorials | 3 years ago

What’s Moving The Market?

Traders have been thinking for quite some time that a part of the global selling in stocks that began back in December may be due to oil-related sovereign wealth funds selling assets so they are able to make up for the shortfall in revenues due to the decease in oil. We are beginning to get some information that tells us that at least a piece of the selling may indeed be due to this type of selling, particularly regarding the weakness we have seen in financials. Oil-related Sovereign Wealth Funds have major assets. The SWF Institute believes that the assets under management of the largest oil-producing SWFs (Norway, Abu Dhabi, United Arab Emirates, Saudi Arabia, Kuwait and Qatar) amounts to over $3trillion.

On Friday, JPMorgan released information on global flows, which concluded that oil-producing countries were indeed net sellers of assets last year.
2015: Oil producing country sales

Government bonds $90B
Equities $50B
Corporate bonds $7B
Cash $15B
Total $162B

This is a large — but not a major — part of their available assets. It would signify roughly 5 percent of their $3.2 trillion in assets, still a plentiful sum. Although, if you remove the largest SWF — Norway, at $825 billion in assets, and include only Middle East SWFs, it would make up roughly 7 percent of assets. That’s sizeable. What’s interesting is that the holdings are not evenly divvied.

For equities, SWFs have the largest percentage of their assets in Western Europe (roughly 55 percent), followed by the Middle East and Africa (approximately 28 percent), developed Asia-Pacific (roughly 12 percent), and emerging Asia-Pacific (roughly 8 percent). Only about 4 percent of the equity assets are in North America.

In terms of sectors, SWFs are most overweight financials and consumer discretionary.

This parallels a similar conclusion by research firm Strategas, which in a recent report to its clients concluded that financials were far and away the most at risk from SWF selling.

Largest equity sector holdings of oil-related SWFs

Financials 45.9 percent
Consumer Durables 16.3 percent
Utilities 8.3 percent
Communications 4.2 percent
Technology 3.7 percent
Energy/minerals 3.5 percent
Other 15 percent

Source: Strategas

Bottom line: If SWFs were selling equities, banks — particularly European banks — would be a good place to start searching. This makes some sense, as it positions the facts we have.

We know that:
European equities are the largest holdings of oil-related SWFs, and financials are the largest equity sector holding.European banks notably underperformed the markets in December and January, the months with the strongest selling.

For example, in December big European banks like BNP Paribas were down 7 percent, Deutsche Bank down 7 percent, Banco Santander down 12 percent, while the STOXX Europe 600, a broad measure of the overall European market, was down 5 percent.

In January, BNP Paribas dropped down to 16 percent, Deutsche Bank down 27 percent, Banco Santander down 14 percent, while the STOXX Europe 600 was down just 6 percent.

In other words, someone was selling European banks like a mad man back in December and January. What about 2016? Assuming an average oil price of $35, JPMorgan estimates that the current account deficit will worsen, resulting in even more selling from oil-related SWFs:
2016: Oil producing country sales (est.)

Government bonds $107B
Equities $80B
Corporate bonds $12B
Cash $19B
Total $218B

By the way, just because SWFs have considerably small holdings in the U.S., this does not mean there are not knock-on effects from heavy selling in Europe. Holders of U.S. bank stocks were definitely shook by the major drop of their European counterparts in December and January, and they certainly sold in sympathy. Whether the holders were hedge funds, pension funds, or Middle Eastern sovereign wealth funds were of no concern.

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