RPT-ANALYSIS-Oil-rich wealth funds seen shedding upto $225 bln in stocks

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By Tom Arnold
LONDON, March 29 (Reuters) - Sovereign wealth funds from
oil-producing countries mainly in the Middle East and Africa are
on course to dump up to $225 billion in equities, a senior
banker estimates, as plummeting oil prices and the coronavirus
pandemic hit state finances.
The rapid spread of the virus has ravaged the global
economy, sending markets into a tailspin and costing both oil
and non-oil based sovereign wealth funds around $1 trillion in
equity losses, according to JPMorgan strategist Nikolaos
Panigirtzoglou.
His estimates are based on data from sovereign wealth funds
and figures from the Sovereign Wealth Fund Institute, a research
group.
Sticking with equity investments and risking more losses is
not an option for some funds from oil producing nations. Their
governments are facing a financial double-whammy – falling
revenues due to the spiralling oil price and rocketing spending
as administrations rush out emergency budgets.
Around $100-$150 billion in stocks have likely been
offloaded by oil-producer sovereign wealth funds, excluding
Norway's fund, in recent weeks, Panigirtzoglou said, and a
further $50-$75 billion will likely be sold in the coming
months.
"It makes sense for sovereign funds to frontload their
selling, as you don't want to be selling your assets at a later
stage when it is more likely to have distressed valuations," he
said.
Most oil-based funds are required to keep substantial
cash-buffers in place in case a collapse in oil prices triggers
a request from the government for funding.
A source at an oil-based sovereign fund said it had been
gradually raising its liquidity position since oil prices began
drifting lower from their most recent peak above $70 a barrel in
October 2018.
In addition to the cash reserves, additional liquidity was
typically drawn firstly from short-term money market instruments
like treasury bills and then from passively invested equity as a
last resort, the source said.
It's generally a similar trend for other funds.
"Our investor flows broadly show more resilience than market
pricing would suggest," said Elliot Hentov, head of policy
research at State Street Global Advisors. "There has been a
shift toward cash since the crisis started, but it's not a panic
move but rather gradual."
The sovereign fund source said the fund had made adjustments
to its actively-managed equity investments due to the market
rout, both to stem losses and position for the recovery, when it
comes.
Exactly how much sovereign wealth funds invest and with whom
remain undisclosed. Many don't even report the value of the
assets they manage.
On Thursday, the Norwegian sovereign wealth fund said it had
lost $124 billion so far this year as equity markets sunk but
its outgoing CEO Yngve Slyngstad said it would, at some point,
start buying stocks to get its portfolio back to its target
equity allocation of 70% from 65% currently. Slyngstad also said that any fiscal spending by the
government this year would be financed by selling bonds in its
portfolio. THE CURRENCY
State-backed, energy-rich funds account for a significant
chunk of the roughly $8.40 trillion in total sovereign wealth
assets, funds they've built up as a bulwark for when oil
revenues dry up.
Sovereign funds have become major players on global stock
markets, accounting for roughly 5-10% of total holdings, and an
important source of income for Wall Street asset managers.
While they have been hit hard by the approximate 20% slide
in global equity prices, the oil-based funds' governments in Abu
Dhabi, Kuwait, Qatar, Bahrain, Saudi Arabia, Nigeria and Angola
have also seen their finances strained by a nearly two thirds
drop in oil prices this year.
Gulf sovereign wealth funds could see their assets decline
by $296 billion by the end of this year, according to Garbis
Iradian, chief Middle East and North Africa economist at the
Institute of International Finance (IIF).
Around $216 billion of that fall would be from stock market
losses and a further $80 billion from drawdowns taken by
cash-squeezed governments.
The central banks of Saudi Arabia, the United Arab Emirates
and Qatar have offered a total $60 billion in stimulus, although
expectations of tighter liquidity have already pressured Gulf
currencies, pegged for decades to the U.S. dollar.
"There's a question of whether some of these funds are going
to be used to support currencies, as some legal frameworks allow
this," said Danae Kyriakopoulou, chief economist of the Official
Monetary and Financial Institutions Forum (OMFIF), a think tank.
"In the previous 10 years some countries moved reserves from
their central banks to sovereign funds, allowing them to invest
in more risky assets as they have greater flexibility."
"Now, that may be a problem, because you have more reserves
in the sovereign fund than the central bank when you may need
the reserves to defend the currency."
Saudi Arabia is among countries that have in recent years
moved reserves from its central bank to beef up its sovereign
investment vehicle, Public Investment Fund, which holds stakes
in Uber and electric car firm Lucid Motors, and had around $300
billion in assets under management in 2019.
In 2015, the last time crude prices collapsed, Saudi
Arabia's central bank, which then oversaw a larger chunk of the
kingdom's investments, mainly in securities such as U.S.
Treasury bonds, ran down its foreign assets by over $100 billion
to cover a huge state budget deficit.
This month, Saudi Arabia's Finance Minister Mohammed
al-Jadaan said the country would look to borrow to finance its
deficit after announcing an economic support package worth more
than $32 billion. (Editing by Carmel Crimmins)