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Stagnant economies, sagging corporate profits, plunging consumer confidence; there are plenty of reasons why stock prices are under pressure.
But the biggest fundamental reason behind the global stock market decline is simple: The world’s biggest investors are selling.
Sovereign-wealth funds (SWFs) worldwide held more than $7 trillion in total assets at the end of 2015, with just under half that amount ($3.04 trillion) invested in listed stocks.
Many of the largest SWFs are based in oil-exporting countries, including Norway’s Government Pension Fund, with assets of $825 billion; Abu Dhabi ($773 billion); and Saudi Arabia ($632 billion). Plus, China’s SWFs own assets of more than $1.2 trillion.
What do these funds all have in common? They’re under financial distress thanks to:
- Plunging oil prices cutting into their incomes, and  …
- In China’s case, a plunging currency.
The result: These funds have turned into massive net sellers of equities, putting added pressure on global stock markets.
In 2015, SWFs sold $213.4 billion in equities, according to a report from the Sovereign Wealth Fund Institute, but SWF stock-selling is expected to nearly double this year, to $404.3 billion.
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For SWFs in oil-rich nations, the reason for the fire-sale of stocks is obvious: Oil prices have plunged 70% since 2014, cutting into government revenues and putting national finances and currencies in distress.
Saudi Arabia’s net foreign assets dropped by more than $19 billion in December 2015 alone, as the kingdom desperately tries to defend its currency amid plunging oil prices.
The Norwegian krone has lost 22% of its value against the buck since mid-2014. Worse, the krone is even dropping in value against the beleaguered euro… down 12% over the same period!
As a result, Norway’s SWF, which hasn’t made a withdrawal since the fund got its start in 1996, plans to sell $9.3 billion worth of assets this year.
But China is the real wild card when it comes to SWF stock sales.
Oil prices aren’t the problem here, but lack of confidence in China’s financial system, and its currency, are the culprits.
China’s Shanghai Composite stock index crashed nearly 44% from the peak in 2015. The reverse-wealth effect of plunging share prices isn’t as great as you might think because there’s not a lot of money (as a percentage of GDP) invested in Chinese stocks compared with, say the U.S. or Europe, but it has triggered a loss of confidence in China’s ability to manage its slowing economy.
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Flows of private-direct investment into China have dried up and its currency, the yuan, is under attack as the People’s Bank tries to pull off the tricky task of a “managed” currency devaluation.
Over the past three months alone, China has burned through $300 billion of its foreign-exchange reserves trying to support the yuan from plunging even more.
Add it all up and you can see the potential for massive “margin calls” on global SWFs worldwide will only add to the selling pressure in global stock markets.
Good investing,
Mike Burnick
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 13 comments }
the good news is, the world may be too bankrupt to afford to fight world war three. we’ll just have to cancel it and move on to better things.
Yep
Regarding your statement “As a result, Norway’s SWF, which hasn’t made a withdrawal since the fund got its start in 1996, plans to sell $9.3 billion worth of assets this year.”, Norway is the richest country per capita in the world. They have a governmental “retirement fund” holding over 600k per citizen. In the USA and in most of the world, that is unheard of even for individuals who aspire to save. … Oil is Norway’s cash crop, therefore it only stands to reason that they too are hurting due to oil’s recent demise. The “other” industry where they stand as #1 internationally is the farm raised salmon industry. My hunch is that Norway is in a much better position to “survive” the SWF and energy market problems. Debt is the prime culprit of the EU and certainly the US, whereby Norway does not have a debt problem at all.
Okay so nobody saw the revival of the US oil industry coming. The oil pumping countries thought sky high prices were here to stay. The drive for fuel efficient anything that burns oil would be so successful, some industries have cut oil use by a third. Planes burn less to fly, the ton miles to fuel rate has dropped for both the railroads and trucks, the new locomotives get almost twice the work out of a gallon of fuel compared to a quarter of a century ago. Then again nobody realized that consumers would suddenly get a bellyache in the wallet. Also interestingly some tings made a year or so ago in China are coming from other places. I bought a Craftsman tool box made in Israel, my hobby shop is getting die cast car models made in India. I even have a years old fleece jacket made in the UAE.
nobody saw horizontal fracking coming. it was a shocking and permanent game changer.
This is only the beginning of the coming slowdown .
Shareholders get slowly awere that whealh is is not a concept of materiality.
What is the highest concept of wealth ?
It’s not possession…. It’s Being. It’s consciousness, higher CONCIOUSNESS…
You don’t understand ?
Sorry, can’t help you…
PLT
Good luck on your highest form of consciousness when you are penniless living on the streets. Without material wealth nothing can flourish. “I pity the fool.”
Nobody in the media or in political circles is talking about the potential black swan called Operation Northern Thunder, the military “exercise” in northern Saudi Arabia where 350,000 Sunni Muslim troops, 20,000 armored personnel carriers and tanks, 2,5460 military aircraft and 486 attack helicopters from 20 countries are poise within 100 miles of the southern border of Syria. They say they are waiting for the United States to take the lead and they will invade Syria, depose Bashar Assad and destroy ISIS. So what does President Obama do? Negotiate a truce with the Russians who are very aware of the Muslim army at its flank. Every politician of both parties say they want the people of the region to take on ISIS on the ground…and they are willing, if the U.S. will lead.
WORLD WAR THREE ,OR WWIII EVERY EMPIRE HAS GONE THIS WAY.AND EVERY EMPIRE IS GONE AS A RESULT
If everyone is selling why is the Dow jones index up about a thousand points this last 8 days ???? Looks to me like huge BUYING has been happening!!!
If Operation Northern Thunder catches fire you better have your spurs strapped on your fire boots.
Mule
WORLD WAR THREE ,OR WWIII EVERY EMPIRE HAS GONE THIS WAY.AND EVERY EMPIRE IS GONE AS A RESULT THEY WILL FIGHT TO THE LAST AMERICAN.
$1,000. Gold
From your lips to God’s ears that war would be cancelled because the world would be too broke to fund it. However man is a war monger and Operation Northern Thunder is more likely to “catch fire” to…for what reason?