Norway's Government Pension Fund Global Loses 14% in 2022

Rachel Fixsen of IPE reports Norway SWF loses 14% on assets in 2022, stages rebound in January:

Norway’s sovereign wealth fund (SWF) released headline annual results this morning showing the previous year’s high profits to have been wiped out by 2022’s investment losses – but its manager also declared record profits had been generated from outperformance.

The Government Pension Fund Global’s (GPFG) total assets actually increased to NOK12.4trn (€1.14trn) by the end of 2022 from NOK12.3trn a year before, despite a negative annual investment return of 14.1% or NOK1.64trn in 2022, according to the summary of annual figures published today.

That 14.1% investment loss comes directly after a year when the GPFG made a NOK1.58tn or 14.5% gain.

Losses for both fixed income and equities – the main components of the index-based GPFG – were both wide in 2022 at 12.1% and 15.3%, respectively, while unlisted real estate generated a slim 0.1% return, and unlisted renewable energy infrastructure ended the year with a 5.1% positive return, according to Norges Bank Investment Management (NBIM), which runs the SWF.

Regarding 2022 results, Nicolai Tangen, NBIM’s chief executive officer, told an Oslo press conference this morning that in a year of the biggest losses on financial markets since the global financial crisis, there had been “no place to hide” for the SWF, which is invested in 9,000 companies around the globe.

“But who would have thought in a year like last year the value of the fund would stay unchanged, because that is what happened,” he said.

Trond Grande, deputy CEO at NBIM, explained that the fund’s value had been lifted by a weaker Norwegian krone and record inflows from the state’s petroleum revenue – which alone amounted to nearly NOK1.1trn.

Since the end of last year, however, the fund’s overall value has grown to NOK13.3trn today, according to the rolling figure displayed on NBIM’s home page.

Tangen told IPE the GPFG’s year-to-date returns were now more than 5%, with January’s investment gains coming from assets across the board, due to “a bounce in the US and Europe”.

PE asked Tangen if NBIM was now potentially repeating its success following the global financial crisis, when it quickly recouped enormous losses by buying securities cheaply on a grand scale.

“We did have recovery in the second half [of 2022], and in the year to date the fund is up by more than 5%,” he said.

“We did deploy a lot of capital. We deployed all the inflows we had, so given that markets have recovered, it’s potentially one of those moments – but I just think it’s early days,” the CEO said.

Grande and Tangen told journalists that though the bank stayed close to the fund’s 70/30 equity/bond allocation mandated by the government, it also took a lot of active decisions generating excess returns.

Last year, the fund’s excess return reached a record of NOK118bn in absolute terms, though in percentage terms, at 0.88 percentage points, it was only ranked as the NBIM’s sixth best.

However, Grande said 2022 had been the first time ever that NBIM had outperformed at all in a loss-making year.

Regarding the overall investment environment, the deputy CEO said inflation affected all of NBIM’s investments, adding that US inflation had been higher in 2022 than for four decades.

Tangen added: “One of the issues we have a laser focus on is what could happen to global inflation when China is back on stream after the pandemic and the closedown they have had.”

Kari Lundgren of Bloomberg also reports Norway’s wealth fund loses 14% as inflation, war hit markets:

Norway’s $1.3 trillion sovereign wealth fund reported its biggest loss since the 2008 financial crisis after markets were pummeled by faster inflation, higher credit costs and the fallout from the war in Ukraine.

The fund that manages Norway’s fossil wealth lost 14.1% in 2022, equivalent to about $164 billion, according to a statement on Tuesday. It’s the world’s biggest single owner of equities, and its returns are highly dependent on market movements.

Chief Executive Officer Nicolai Tangen has spent the past year warning that the fund’s growth over the last 25 years isn’t likely to continue in an environment of rising borrowing costs and soaring inflation that have brought equities down from all-time highs.

“We are now in a very different situation,” Tangen said in a Bloomberg TV interview. “You are seeing a reversal of globalization, you’re seeing rates having moved up and it’s of course very unclear where they’re going from here. So returns going forward will be different.”

Established in the 1990s to invest Norway’s oil riches, the fund has a long-term investment horizon and has achieved an average return of 6% over the quarter of a century during which it’s existed.

Generating excess return in falling markets is key, Tangen has said. The fund managed that last year, outperforming the benchmark against which it measures itself.

Last year, Norges Bank Investment Management lost 15.3% on stocks, with all the sectors declining except energy, and shed 12.1% on its fixed-income investments. Its unlisted real estate holdings edged up 0.1%, while the return on unlisted renewable-energy infrastructure was 5.1%.

The fund is largely an index-tracker, investing according to a strict mandate from the Finance Ministry. It seeks to make the most of its limited leeway to try to beat the benchmark it is measured against, something it has managed in eight of the last 10 years.

After forecasting in 2021 that inflation would become the biggest threat to capital markets, NBIM deployed under-weighting equities, bond duration and credit, and overweighting of integrated energy and mining companies in its stock portfolio. That bet helped it beat its benchmark by 0.74 percentage points in 2021 and by 0.88 percentage points in 2022.

“It’s very, very important for a very large fund like this to be quite index-near because the thing is, if you are too far away from the index and you make big mistakes, the losses are going to be so big that nobody’s ever going to keep their job,” Tangen said in the TV interview. “It needs to be anchored with politicians and in the parliament.”

Tangen has beefed up the fund’s stocks team in preparation for a prolonged downturn and in December unveiled a three-year plan to stem its losses. The key to beating the benchmark will be to “drive the fund to become more long-term, more contrarian and more active on the negative selection,” he said then.

Looking to spend Norway’s oil and gas proceeds to fuel a green transition, the fund is considering investments in renewable energy storage and transmission going forward, expanding the range of renewable infrastructure it is willing to hold. It has acknowledged that’s a competitive space.

Last year, NBIM cut its holdings in the world’s biggest oil and gas companies, taking profits after a run up in energy prices in 2022. It bought big technology companies and pharmaceuticals, and added to the stakes in the four property companies where it has the biggest absolute positions among real estate stocks as the markets fell.

The fund has also recommended looking at adding unlisted equities in the longer term to boost returns. While the fund isn’t currently permitted to make such investments, “we’re seeing more and more indications that a larger share of value creation is taking place in the unlisted market,” it said in a letter to the Finance Ministry that was made public earlier this year.

The government deposited 1.1 trillion kroner ($110 billion) into the fund last year.

You can also read NBIM's press release on its 2022 returns below:

In 2022, the Government Pension Fund Global returned -14.1 percent, equivalent to -1,637 billion kroner.

31 January 2023

The return on the fund’s equity investments was -15.3 percent, the return on the fixed income investments was -12.1 percent, whereas investments in unlisted real estate returned 0.1 percent. The return on unlisted renewable energy infrastructure was 5.1 percent.

The fund’s return was 0.88 percentage points better than the return on the benchmark index, equivalent to 118 billion kroner.

“The market was impacted by war in Europe, high inflation, and rising interest rates. This negatively impacted both the equity market and bond market at the same time, which is very unusual. All the sectors in the equity market had negative returns, with the exception of energy”, says CEO Nicolai Tangen of Norges Bank Investment Management.

The krone depreciated against several of the main currencies during the year. The currency movements contributed to an increase in the fund’s value of 642 billion kroner. Inflow into the fund amounted to 1,085 billion kroner.

The fund had a value of 12,429 billion kroner as of 31 December 2022. 69.8 percent of the fund was invested in equities, 27.5 percent in fixed income, 2.7 percent in unlisted real estate, and 0.1 percent in unlisted renewable energy infrastructure.

Alright, I haven't gone over Norway's Government Pension Fund Global’s (GPFG) in a while because for me, it's basically a giant beta fund that tracks a 70/30 portfolio of global stocks and bonds.

The Bloomberg article even states the fund is largely an index-tracker, investing according to a strict mandate from the Finance Ministry. It seeks to make the most of its limited leeway to try to beat the benchmark it is measured against, something it has managed in eight of the last 10 years.

They do make some active bets, underweighting and overweighting certain sectors and industries within sectors to generate some excess return, but given its massive size, it's basically tracking a portfolio of global bonds and stocks.

And given the historic high inflation of last year where both global stocks and bonds got hit, especially in the first half of the year, GPFG returned a negative 14% last year.

Still, the government deposited 1.1 trillion kroner ($110 billion) into the fund last year, allowing it to maintain the same assets.

The more interesting thing to understand is their private markets -- unlisted real estate (+0.1%) and unlisted renewable energy infrastructure (+5.1%) performed well and the Fund is currently looking to start investing in unlisted equities - ie. Private Equity.

Nicolai Tangen, NBIM's CEO, is a former well-known hedge fund manager and he understands alpha.

He's been on a mission to increase communications and take targeted steps to incrementally move more assets into private markets.

But again, given its mammoth size, GPFG has to move slowly into unlisted real estate, unlisted renewable energy infrastructure and private equity if it chooses to invest there and gets approval from the Ministry to do so.

It can also explore some highly liquid hedge fund strategies but I doubt it's worth its effort as it will not move the needle enough.

It's worth looking at how Norway's wealth fund performs to understand the index approach and the returns it delivers at very low cost.

Keep in mind however allocations to private markets are very low compared to its large Canadian peers.

Real estate, both listed and unlisted, makes up just 2.7% of total assets which is huge on an absolute basis but a small relative weighting to Canada's large pensions which invest 12-15% of their total assets there.

Interestingly, listed real estate was down 31% so unlisted real estate performed well for the Fund to deliver 0.1% last year. 

Still, Norway's GPFG has a long way to go if it wants to invest a sizable portion of its assets in private markets.

I do not see this happening fast, rather incrementally every year.

The one good thing Norway's wealth fund has is its transparency and governance.

Nicolai Tangen is very transparent and he posts quite a bit on LinkedIn here (and not just boring stuff,a lot of variety and some humor too). 

The only thing I'd recommend to him is to pay the price and subscribe to Trahan Macro Research (top down research which is well worth the cost) and not to get too carried away with the China reopening and inflation coming from there.

I know, Bloomberg just reported the world’s next big inflation surprise is looming in China:

China’s reopening is set to provide a welcome boost to global growth, offsetting weakness in Europe and a looming recession in the US. But unlike in 2009, when China’s four-trillion-yuan stimulus helped kickstart a recovery from the Lehman slump, in 2023 there’s a catch — a boost to inflation at exactly the moment the Federal Reserve and other central banks race to bring it back under control.

That’s why Kristalina Georgieva, the head of the International Monetary Fund, said this month that China’s pivot from Covid Zero is probably the single most important factor for global growth in 2023, but cautioned on what it might mean for inflation.

“What if the good news of China growing faster translates into oil and gas prices jumping up, putting pressure on inflation?” she said at the World Economic Forum in Davos.

Bloomberg Economics forecasts an acceleration in China’s GDP from 3% in 2022 to 5.8% in 2023. Modeling the relation between China’s growth, energy prices and global inflation suggests that could lift consumer prices by close to a full percentage point in the final quarter of 2023. If China outperforms, with growth surging to 6.7%, the boost would be closer to two percentage points.

Against a backdrop of consumer price inflation that recently touched 9.1% in the US and 10.6% in the euro area, that might not seem like much. In the context of central banks laser-focused on getting price gains back to their 2% target, it matters a lot. If China’s rebound keeps US inflation stuck around 5% in the second quarter — which our model suggests is possible — that might frustrate expectations for the Fed to halt hikes at its May meeting. 

For the rest of the world, the difference between China in a lockdown slump and China in a reopening boom is an additional $500 billion in demand — the equivalent of adding the spending power of another Nigeria to the global economy. 

Already, anticipation of that extra demand is lifting commodity markets, while service industries and retail prepare for the return of Chinese consumers.

Copper prices have raced above $9,000 a ton and Chinese oil consumption is forecast to hit a record this year. Air New Zealand is adding flights to Shanghai. Shares in luxury retailer LVMH Moet Hennessy Louis Vuitton SE have rallied, and Swatch Group said it could hit record sales as China rebounds. China’s reopening is even tipped to shorten the  UK’s recession as high-spending tourists return.

For sure, China’s rebound won’t be linear. The sudden exit from Covid Zero in the final weeks of 2022 triggered an immediate slump in activity. Lack of transparency over infection and fatality rates adds uncertainty to public health costs and the economic outlook. Neither is it clear that China has the pent-up demand seen in other major economies, given Beijing’s relatively restrained stimulus through the pandemic.

Other variables from price caps on Russian oil to weather in Europe, OPEC supply decisions and goods inventory at retailers could all offset or exacerbate the impact of China’s reopening on global prices.

Yet data show China’s slump already coming to an end as the Covid wave eases. Factory and services activity both expanded for the first time in four months in January as the economy reopened. The number of patients in hospital emergency rooms is down. Metros in major cities are filling up. And early signs from the Lunar New Year holiday show travel and box-office spending significantly stronger than a year ago. On the first four days of the festivities there were some 95.9 million trips by planes, trains and automobiles.  

Pan Mei, from Liuzhou, a southwestern city in the autonomous region of Guangxi, was one of those travelers. She visited Macau during the holidays with her husband, son and five other family members to reunite with her eldest daughter who is studying for a masters degree there. Celebrating their newfound freedom to travel, the family tried their luck at casinos and spent time in shopping malls.

“The pandemic has kept us within China’s borders for so long. It’s great we can take family members outside the borders again. For many of them, this is the first time in many years,” she said. “Now that travel normalizes, we can travel more.”

Another wave of Covid — the consequence of holiday travel and celebrations — appears inevitable. By the end of the first quarter, though, with rising vaccination rates and natural immunity, China’s 1.4 billion population are expected to have built up their resilience and adjusted to living with the virus. Pandemic lockdowns and infection-dodging caution will no longer be a constraint on the economy. Pro-growth policies for the all-important property and technology sectors add to the reasons for optimism.Since August 2020, when controls on property developers showed Beijing getting serious about squeezing the air out of the housing bubble, real estate has turned from the biggest contributor to China’s growth to a significant drag. In 2022, real estate sales fell 24%, investment shrank 10% and prices stagnated. Now, with Beijing again focused on restoring growth, the financing taps for developers and homebuyers have been turned back on. Though the longer term outlook for China’s overbuilt and overleveraged property sector remains bleak, at least for 2023 the prospects are a little brighter. Bloomberg Economics projects a 3% drop in investment, a much smaller drag on the economy than in 2022.Embattled entrepreneurs are also breathing a sigh of relief. Since November 2020, when the initial public offering of fintech giant Ant Group Co. was canceled, China’s flagship tech firms have been slammed with massive fines and stringent regulations. That crackdown has come at a price as confidence slumped. In October 2022, the Nasdaq Golden Dragon Index was down almost 80% from its peak.As with property, though, Beijing has decided the short-term imperative of restoring growth trumps the longer-term objective of curbing the power of giant corporations.

“If wealth doesn’t grow, common prosperity will become a river without source or a tree without roots,” said Vice Premier Liu He, using his appearance at Davos to pledge renewed support for entrepreneurs. Reflecting the shift, tech stocks have regained some lost ground.

Those shifts are why China’s growth prospects are suddenly looking up, and why policy makers are asking what it means for inflation.

Bank of Korea Governor Rhee Chang-yong said on Jan. 13 China’s reopening could push up oil prices. Fed Vice Chair Lael Brainard used a Jan. 19 speech to flag uncertainty about the implications for inflation, especially in commodities. European Central Bank President Christine Lagarde echoed those concerns at Davos.

Price pressures from China will likely transmit through two channels.First, there’s the risk of a negative supply shock as the initial wave of Covid infections trigger a flurry of absenteeism and factories struggle to maintain operations. The purchasing managers’ index — a monthly survey of China’s manufacturing — shows that at the end of 2022 delivery times blew out. The risk here is a repeat, albeit on a significantly smaller scale, of the supply snarls that drove the first surge of pandemic inflation.The second channel will be a positive demand shock as normal life resumes and purchases are amped up. China’s oil imports flatlined over the pandemic. Hopes for stronger demand as highways, train stations and airport terminals fill up have already helped lift oil prices from a trough of $76 a barrel in early December to around $86 in late January. Goldman Sachs’s veteran commodity analyst Jeff Currie said they could go all the way to $105 or higher. Taken together, those shocks could add close to one percentage point to global inflation at the end of 2023, relative to a scenario where China stayed locked down. For the US, euro area and UK, Bloomberg Economics analysis points to a boost of around 0.7 ppt — smaller than the global impact but still enough to keep the Fed, ECB and Bank of England in tightening mode for longer than the market expected.Uncertainties on both the trajectory for China’s recovery and other forces moving global prices remain significant. But the direction of travel is clear. Back in the dark days of the 2008 global financial crisis, China’s stimulus was an unalloyed positive for the rest of the world. In 2023, China’s reopening promises to be a mixed blessing.

I'll be honest, when I look at the weekly chart of large cap Chinese equities, I see potential but they're not out of the woods by any stretch of the imagination:

 In fact, they still look very weak so I'm not buying the optimism on China's great reopening.

I'd rather buy the dip in India's stock market after the whole Adani/ short-seller fiasco this week but even that market isn't too convincing here:

Let me reiterate one more time, the big inflation risks that will impact markets this year aren't exogenous (like China reopening), they're endogenous as wage inflation picks up all over the developed world.

The Fed doesn't care about China reopening, it cares about wage inflation being sticky and picking up steam. That will make its job of bringing inflation under control a lot harder this year and it will mean higher for longer and more rate hikes are in the cards.

Tomorrow we will find out what the Fed decides. I'd expect them to raise by 25 bps but given how easy financial conditions are, I agree with Mohamed El-Erian, the Fed should hike by 50 basis points at its next two meetings:

El-Erian pointed out that U.S. economic data has been optimistic in recent months and financial conditions are now akin to the first few months of 2022, when the markets were performing relatively well despite downbeat data on the economy. In such a robust environment, he thinks, the economy can tolerate tighter interest rates.

“I’d rather they get the hikes out of the way now than wait for later on when the economy is weaker,” El-Erian said.

In recent weeks, the inflation has shown signs of moderating.

In December, the year-over-year inflation rate fell to 6.5%, a notable decline from a 40-year high in June of 9.1%. Fed Chair Jerome Powell has hoped for a “soft landing” for the economy, or an exit from high inflation without a recession, amid the interest rate increases.

But experts have differed widely on the impact of inflation and how it can be controlled.

Larry Summers, former Treasury Secretary, has remained bearish about the Fed’s actions and has predicted a recession. Rising wages and prices have persisted even though they cooled in December, Summers said earlier in January. 

Walmart’s former CEO Billy Simon thinks a higher unemployment rate may be the cure-all for inflation. Mass layoffs that have recently uprooted jobs in the tech industry and others must continue to break the wage-price spiral, which occurs when prices go up concurrently with  wages.

El-Erian wrote in an op-ed this month that the inflation rate could get “sticky” at 4%, which is above the Fed’s target rate of 2%. Even if inflation rates do fall in the coming months, he says, the factors influencing it in the U.S. are shifting, causing an upward pressure on prices.

What else? If higher for longer persists, Norway's GPFG should underweight growth stocks and overweight value stocks.

For the last 20 years, the Nasdaq handily outperformed the S&P 500 but that may be coming to an abrupt end as higher rates will clobber long duration equities (growth stocks).

Lots to mull over, I need to get on it and interview NBIM's CEO Nicolai Tangen one day soon.

Below, CEO Nicolai Tangen and Deputy CEO Trond Grande presented the fund's key figures for 2022. Some of our expert provided a deeper insight into specific areas and sectors of relevance in the year that has passed. The press conference was in English. The fund's annual report will be published on 7 March (you can download presentation slides here and stress test here).

Mr. Tangen also spoke about results with Bloomberg Surveillance earlier today.

Third, Norges Bank Investment Management CEO Nicolai Tangen has a strong message for companies: sharpen up, stop the greed and improve diversity. The head of Norway's $1.3 trillion sovereign wealth fund spoke to Bloomberg at the World Economic Forum in Davos.

Again, be careful about being contrarian, we are headed toward a very nasty and prolonged global recession and my fear is many big funds aren't properly positioned for what lies ahead. 

Yes, you can make a lot of money being contrarian but you can also get your head handed to you in these markets. Tread carefully and manage your risk accordingly.

Lastly, Marko Papic, chief strategist at Clocktower Group, joins 'Squawk Box' to discuss the takeaways from accusations against Asia's richest person, Gautam Adani, and what it means for the Indian market.