Norway SWF cannot rescue markets a second time, says central bank head

Øystein Olsen, governor of Norges Bank, has said that the country’s sovereign wealth fund, the Government Pension Fund Global, was a key reason global equity markets did not fall further when the financial crisis peaked between 2008-9.

Olsen (pictured) made the comment in a speech in Rome yesterday evening, where he was attending a meeting of central bankers.

The fund’s mandate was altered in 2007 to enable it to increase its equity exposure from 40% to 60%. From then until 2009, the fund acquired some €160bn of equities in international markets.

“For this sum, the fund was able to buy 1% per cent of Europe’s listed equities – and 0.5% of the equities listed on the other continents. The largest volume of transactions was carried out right through the financial crisis of 2008 and 2009. Indeed, there probably were times when the fund was the only sizable buyer in the market, which probably helped to stabilise financial markets in this period,” Olsen said.

However, he went on to suggest that while the equity markets had benefited from this additional buying over the period, it was not something that policy makers in Europe in particular should expect to help a second time round.

The fund is moving to rebalance its exposure towards other regions, such as the US and Asia, as well as less liquid assets in the form of property.

“At the start of this year, more than half of the fund was invested in Europe. As the fund has grown, we have come to realise that a more even distribution between regions will better enable the Fund to take part in global value creation,” Olsen said.

“Recently, a new principle for the regional allocation of the fund’s assets has been approved. A consequence of this principle is that the relative allocation to Europe is reduced. The fund’s relative holdings in the Americas, Asia and emerging economies will increase accordingly. For the fund as a whole, a more even allocation across regions will improve the overall long-term trade-off between risk and expected return.

“In accordance with the new allocation of the fund’s assets, new purchases will primarily be made outside of Europe, until the adjustment process is completed. As the fund receives inflows of fresh capital on month-by-month basis, we are able to undertake the adjustment through new purchases. This will ensure a gradual process, and will not entail a large sell-off on our part. Instead, the effect will be merely a temporary drop in our purchases of European assets. Under the new principle, the fund will still be overweight in European assets, compared to a market neutral position.”

Olsen went on to say that Europe’s political leaders need to make some hard choices if they are to ensure the Continent’s future economic growth.

“European economies need to carry out deeper structural reforms to restore competitiveness and growth. The burden of high and rising debt will otherwise become too heavy to carry over time. Until these issues are clarified in more detail, the uncertainty and its associated risk premiums may persist in the market for some time to come,” Olsen said.


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