Sovereign wealth fund flows likely to rise on oil bounty, shows data

There's correlation between oil prices and sovereign fund flows, but experts say lot depends on trade balance

The recent surge in oil prices, which closed at a seven-year high on Monday, is expected to boost the war chests of sovereign wealth funds (SWFs). 

Countries such as Saudi Arabia, Kuwait, Norway, and Canada invest significantly through SWFs in India and across the globe. The assets under custody of SWFs in Indian equities totalled Rs 3 trillion as of September 30, shows the data from NSDL.

Norway, for instance, reportedly depends on oil and gas for more than a third of its exports. The country’s Government Pension Fund Global, the biggest SWF in the world, had an India allocation of 1.3 per cent or $12.4 billion at the end of 2020, as per annual disclosures.

However, India may not be a significant beneficiary of any incremental flows. This will be especially so if the country’s trade imbalances worsen on any sustained rise in oil prices, reducing its attractiveness as an investment destination in the process.

“We could see some incremental rise in flows from West Asia-based SWFs due to higher crude oil prices, but the quantum and timing of these flows will depend on several factors. The Indian stock markets are trading at high valuations and how much will be the further upside from here? That is one factor to consider,” said Deepak Jasani, head – retail, HDFC Securities.

According to Jasani, a lot will depend on the asset allocation strategy that these funds adopt at this point and how staggered the investments in equity will be. “Not all fresh investment may find its way into equities,” he added.

Foreign portfolio investors (FPIs) have invested $9 billion into Indian equities this year and pulled out $195 million from the Indian debt market, data shows.

“If the trade imbalance worsens and its economy goes into a tailspin, India may no longer remain an attractive investment destination. So the money from SWFs may find its way to other markets that are deemed more attractive,” said UR Bhat, co-founder and director, Alphaniti Fintech.

An analysis of FPI flows and oil price movement shows a correlation between the two. For instance, since January 2010, foreign flows into domestic equities were negative or subdued in quarters during which Brent Crude prices were low. Similarly, during the 2012 period when Brent was above $100 a barrel, FPI flows into domestic markets were strong.

In the early 2000s, high oil prices brought about a massive redistribution of income to oil exporters, resulting in current account surpluses and a rapid build-up of foreign assets. Governments established new SWFs or increased the size of existing ones to help manage the larger pool of financial assets, according to a blog post by the International Monetary Fund.

The total assets of SWFs are concentrated in a few countries. According to data acquired by Finbold from Global SWF, the current global SWF assets under management stand at $10.3 trillion. Asia, West Asia and North Africa regions account for the highest share of $7.8 trillion or 76.1 per cent of the global value. Europe ranks third with AUM at $1.6 trillion, while the Sub-Saharan Africa region accounts for the least share at $15 billion.

Oil prices had been under pressure last year due to demand growth concerns from the outbreak of Covid-19 in Europe and the US.