Sovereign Investors: Surviving the decline in oil prices

PwC MRC has released a report titled Sovereign Investors 2020, which details the current landscape, including market activity related to SWFs and PPFs. In order to predict future trends in the growth of Sovereign Investors' assets, we ran various discretionary regressions between investor assets and a number of economic factors over the past 10 years, including the recent financial crisis.

We found a positive relationship between asset growth, current account surpluses and hydrocarbon prices. We also included the impact of non-fuel commodity prices and nominal gross domestic product (GDP) as potential drivers of this growth within our model.

Global Sovereign Investors' assets have continued to grow during the past decade reaching USD 10.6tn at year-end 20142 . In fact, although the financial crisis negatively affected these players, their assets rose to an historic high shortly after, and have continued to grow steadily. That said, estimates of future developments actually forecast slower growth in the coming years, due to recent events such as the fall of oil prices and the slowdown of economies like China.

Sovereign Investors have been rapidly accumulating assets since the start of the 21st century, particularly during periods of exceptionally high oil prices. The current slump in oil prices, therefore, could impact funds in oil producing countries over the coming years. These entities, which provide for the decrease in revenues in state budgets, may incur a slowdown in their growth as capital inflows are temporarily reduced. Current account surpluses in general, as well as prices for hydrocarbons, are also projected to slow down in the next few years.

The nominal GDP growth in the countries of major Sovereign Investors will also taper off in the next few years. China, whose economic prosperity has been marked by a compound annual growth rate (CAGR) of 18.2% from 2004 to 2014, is already showing signs of cooling and is projected to grow by around 6% (CAGR) until 2020. The latest figures from the IMF indicate that Norway, home of the world's second largest sovereign wealth fund, will see a severe slowdown in its nominal GDP growth rate in the period from 2014 to 2020 (0.1% CAGR), decreasing from a 6.6% CAGR between 2004 and 2014.

Based on the current trends - including a drop in oil prices - and taking the most recent IMF data on future estimates3, we project Sovereign Investors' assets could reach USD 15.3tn by 2020 (see graph below) showing a CAGR of 6.2% from 2015 to 2020.

Sovereign Investors' Assets in 2020

However, in the event that oil prices drop to USD 24 a barrel this year (a 75% decline compared to 2014) and remain at this level until 2020, we would expect Sovereign Wealth Fund assets to grow by only a 3.3% CAGR and reach USD 7.9tn by 2020.

Regardless of these economic scenarios, the wisdom and benefits of creating Sovereign Funds are becoming clearer to investors, as evidenced by the creation of many new funds, such Fonds Souverain Intergénérationnel du Luxembourg, Hong Kong Future Fund, Saudi Arabian Industrial Investment Company, Ghana Infrastructure Investment Fund and Citizen's Wealth Fund in the UK. This will contribute to the growth of Sovereign Investors' assets in the coming years.

Sovereign Investors' Assets in 2020

1: The estimations have been done by separating oil and non-oil countries. The main drivers of SWF assets are their current account and hydrocarbon prices for oil exporting countries, and current account and non-hydrocarbon commodity prices for non-oil exporting countries.
2: For this report, we have analysed 119 entities representing USD 10.58 tn in assets at year-end 2014. Our analysis was based on several sources such as financial statements, financial reports, Preqin, SWC, IFSWF, the Natural Resource Governance Institute & the Columbia Center on Sustainable Investment.
3: IMF data shows moderately increasing hydrocarbon prices up to 2020 reaching USD 74 per barrel.

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