In the last few weeks, sovereign wealth funds (SWF) have been estimated to be selling heavily in Indian equity markets. Why have these SWFs suddenly become significant to the Indian markets? It is a story that is directly linked to the sharp fall in crude oil prices globally.
What exactly is an SWF?
Globally, sovereign funds were an idea that began with major oil-producing and exporting nations. As a measure of long term economic security, these nations created sovereign funds which would prudently invest the monies earned from oil. This was meant to take care of the state welfare expenses in tough times. The world’s largest SWF in Norway manages in excess of $1.2 trillion. Other oil-rich SWFs include the sovereign funds of Abu Dhabi, Saudi Arabia, Qatar, and Kuwait.
How their clout has grown
In the Indian context, the SWFs account for 6.2% of all FPI flows. This has gone up from around 4.8% in the last 2 years. Some of the largest oil-based SWFs like the Norwegian Pension Fund, Abu Dhabi Investment Fund, Kuwait Fund, and the Qatar Fund are active players in the Indian equity markets. With lower yields globally, most of the sovereign funds are looking at emerging markets like India to help them make up for the gap. That has driven a lot of passive flows from SWFs into Indian equity assets.
Blame it on crude prices
In a way, the SWF selling in the Indian markets, as well as in other global markets, has been driven by the weak oil prices. Between Jan 2020 and March 2020, the price of Brent Crude has fallen from $67/bbl to $22/bbl. Despite the bounce in oil prices, most oil-producing nations are still sitting on huge losses. That is because the current market price is way below their break-even point. Most of the oil producers rely on the oil profits to fund their national welfare plans. For example, between 2015 and 2017, Saudi Arabia had to draw down close to $250 billion from its SWF investments to fund the welfare costs. Such an eventuality can force the selling of stocks, as we are seeing now.
SWFs operate in clusters
The SWFs normally tend to be passive investors and adopt the ETF route. Hence their purchase and sale decisions tend to be bunched. The most common trigger for most of these SWFs to sell is a sharp fall in oil prices. That is exactly what we are seeing now. Such selling happens on index stocks and that impacts the market overall. Above all, these funds have a large exposure to India. For example, Norway SWF has a 1.2% exposure ($15 billion) to India and other SWFs from Abu Dhabi, Kuwait and Qatar are also significant. This could be a new kind of stock market challenge for Indian equities to contend with!
