Back in August we explained why the headline figures for EM FX reserves paint an incomplete picture with regard to the UST liquidation among commodity producers and emerging market reserve managers.
As Credit Suisse wrote last year, “for oil exporting nations, central bank official reserves likely underestimate the full scale of the reversal of oil exporters’ ‘petrodollar’ accumulation because a substantial part of their oil proceeds has previously been placed in sovereign wealth funds (SWFs), which are not reported as FX reserves (with the notable exception of Russia.”
In other words, official data on FX reserves don’t tell the whole story. Not by a long shot. In fact, “oil exporting countries hold about $1.7trn of official reserves but as much as $4.3trn in SWF assets.”
This has very real implications for markets.
As a reminder, SWFs hold a variety of assets including equities. Just as FX reserve drawdowns act like QE in reverse, SWF sales put pressure on markets and drain liquidity from the system. Put simply: when the funds that have for years plowed their commodity proceeds into assets suddenly cease to be net exporters of capital, everyone should pay attention.
Just four days ago we showed you which stocks are most likely to be sold by EM governments and wealth funds. For those who missed it, here’s the list:
Earlier this month, we also discussed how large the equity outflow is likely to be.
According to JP Morgan, SWFs will sell some $75 billion in equities this year. “Assuming selling in accordance to the average allocation of FX Reserve Managers and SWF across asset classes, we estimate that the sales of bonds by oil producing countries will increase from -$45bn in 2015 to -$110bn in 2016 and that the sales of public equities will increase from -$10bn in 2015 to -$75bn in 2016,” the bank’s Nikolaos Panigirtzoglou wrote.
This week, Panigirtzoglou is out with a closer look at exactly what stocks are most vulnerable to SWF selling.
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From JP Morgan
For the oil producers that have SWF assets (other Middle Eastern, Norway, African and Latam countries), we assume a current account deficit for 2015 of around $40bn, again based on previous IMF estimates. This current account deficit was likely funded via depletion of SWF assets.
What does this mean in terms of asset selling by SWFs and reserve managers? For the asset allocation of SWFs into public equities, government bonds, corporate bonds, cash and alternatives, we used information available from Norway, Abu Dhabi, Kuwait and Qatar investment authorities, which should be largely representative of the SWF universe. Using AUM weights results in a weighted asset allocation of 51% to public equities, 18% to government bonds, 7% to corporate bonds, 19% to alternatives such private equity and real estate and 6% to cash. For FX reserve managers, to accommodate the difference in the asset allocation of Saudi Arabia FX reserves (which accounted for the majority of reserve depletion of oil producing countries), we assume a 20% allocation to equities, 67% to government bonds, 3% to corporate bonds and 10% to cash.
Assuming selling in accordance to the average allocation of FX reserve managers and SWFs above, and assuming no selling of alternative assets given their illiquidity, we estimate that in 2015, oil-producing countries sold $90bn of government bonds, $50bn of public equities, $7bn of corporate bonds and $15bn of cash instruments.
What about 2016? For 2016, assuming an average oil price of $35, i.e. close to current prices, we project the current account balance for oil-producing countries to worsen from around $80bn in 2015 to $240bn in 2016. This estimate is based on the same sensitivity of the current account balance to the change in oil prices as last year – i.e. between 2014 and 2015. This dis-saving of $240bn should be mostly met via depletion of official assets, i.e. FX reserve and SWF assets ($220bn) rather than issuance of government debt ($20bn). For 2016, we assume a similar depletion in FX reserves as last year of around $130bn, and the remainder $90bn met from SWF asset depletion.
Again, assuming selling in accordance to the average allocation of FX reserve managers and SWFs above, and assuming no selling of alternative assets, these assumptions would imply selling of $107bn of government bonds, $80bn of public equities, $12bn of corporate bonds and $19bn of cash instruments. Thus, the selling of government bonds by reserve managers and SWFs this year will likely be similar to last year, but worse for equities and corporate bonds.
Within equities which sectors are most vulnerable? We aggregate publically available holdings data to see how overweight these SWFs funds are positioned in terms of sectors and regions relative to the composition of the MSCI AC World index. With the caveat that these publicly available data represent only a portion of their public equity holdings, we find that SWFs are most overweight Financials and Consumer Discretionary, and most underweight Healthcare, Consumer Staples and Technology. In terms of regional allocation, they appear overweight Europe, Middle East and Africa and Developed Asia and underweight North America and Emerging Asia. In terms of absolute holdings, they are more heavily invested in Western European equities as well as Mid East and Africa. Across sectors, they are more heavily invested in Financials and Consumer Discretionary (Figure 3 and Figure 4).
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Bear in mind that these estimates are conservative. The Saudis burned through $19 billion in reserves in December and Norway is tapping its massive rainy day fund as well.
Expect SWF flows to be a major talking point if commodity prices remain in the doldrums.
via Zero Hedge http://ift.tt/1TtXdeX Tyler Durden