Norway’s $713 billion sovereign wealth fund is turning away from the world’s biggest currencies and their debt-laden governments as policy makers undermine their exchange rates through unprecedented stimulus measures.
The Government Pension Fund Global, the world’s largest wealth fund, cut its holdings in French and U.K. government bonds by almost half last year as it raised its share of government bonds in emerging-market currencies to 10% of its fixed-income holdings by adding investments in Turkey, Russia and Taiwan.
“It’s what we perceive as a risk-reducing investment strategy,” Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, said in a March 8 interview in Oslo. Cutting dollar, yen, euro and pound investments is a “prudent” move, he said. “These four major currencies all have structural issues, with regards to government debt, to private sector debt, to unconventional monetary policy, and to growth and the demographic profile of the countries.”
At issue is how central bankers across the globe will eventually unwind the uncharted stimulus measures enacted to prop up global growth since the onset of the financial crisis in 2008. Debt levels have soared for governments across much of the developed world. In Europe, political leaders are trying to save the region from a fiscal crisis now in its fourth year.
Federal Reserve Chairman Ben S. Bernanke and other policy makers have signaled they will continue to act to boost sluggish economic growth, potentially setting the stage for another round of “Great Monetary Easing” according to Morgan Stanley. The International Monetary Fund predicts the world’s developed economies will grow 1.4 percent this year, half the average pace of 1994 to 2003.
Calls for greater stimulus in the U.S., Japan and Europe have also intensified concern over a so-called global currency war that risks debasing exchange rates. Even Norway’s central bank, which oversees the country’s wealth fund, has joined the push to cool the krone’s appreciation. The bank in 2011 and 2012 cut interest rates twice, in part to weaken the krone. Governor Oeystein Olsen said last month the bank was prepared to cut its benchmark again to counter further strength.
Norway, which emerged as a haven from Europe’s debt crisis, has seen its currency rise about 22% against the euro since early 2009.
Japan’s currency has fallen to its lowest level against the dollar in 3 1/2 years in anticipation of greater stimulus from Prime Minister Shinzo Abe and his preferred candidate to lead the bank of Japan, Haruhiko Kuroda. In France, Industry Minister Arnaud Montebourg said last month the European Central Bank should “confront a new currency war” as the euro strengthened. Analysts surveyed by Bloomberg are also betting the pound will weaken on increased stimulus in Europe’s third-largest economy.
Norway’s oil fund responded by investing about 150 billion kroner in emerging market sovereign debt last year, boosting the share of emerging market government bonds to 10.2% of fixed-income holdings from 0.4% a year earlier. Holdings in Mexican government debt grew by 14% to 22.6 billion kroner in the fourth quarter to become the fund’s ninth-biggest bond holding. It also made its first purchases of government bonds from Turkey, Russia and Taiwan.
The fund’s holdings in French government debt slumped 25%, while its investments in U.K. sovereign debt fell 13%. The fund is also underweight its benchmark index in yen-denominated securities, Bunny Nooryani, a spokeswoman for the investor, said by phone.
Slyngstad said last week the change in strategy in 2012 was “the most substantial” since the increase in the fund’s equity allocation to 60% from 2007 to 2009.
The fund is undergoing a shift in strategy to capture more global growth to safeguard the nation’s oil wealth. It said last week it posted a return of 13.4% in 2012, its second-best year ever.
The fund in 2012 cut its European holdings to 48% of total investments from 53% a year earlier, and has come “halfway” to its 40% target, Slyngstad said.
“The big shift in the strategy probably paid off so 2012 became a good year,” Olav Chen, a senior portfolio manager at Storebrand Asset Management in Oslo, who oversees about $8 billion, said in an e-mailed reply to questions.