Log In

Enter your username and password below

Sovereign Wealth Funds Draining Market Liquidity

Most financial market observers point to liquidity from central banks as a prime reason stock markets have gone up so much in recent years.

True enough… But there’s another huge source of global liquidity that also pushed up markets worldwide. It’s one that’s now reversed, and is draining liquidity from the global markets.

That source?

Sovereign wealth funds (SWFs).

Let me explain…

Sovereign Wealth Funds, Oil, and Markets

The total assets of sovereign wealth funds, as of last March, were estimated at $7.3 trillion by the International Monetary Fund. That figure has doubled just since 2007. The IMF adds that at least $4.2 trillion of this wealth was energy-related.

A nice chunk of this accumulated oil wealth was placed into global financial markets by countries like Saudi Arabia.

But now plunging oil and gas prices have pushed these countries into budget deficits.

For example, Bank of America estimates that $30 per barrel oil will balloon the Saudis’ 2016 budget deficit to $180 billion. Add to that more than $100 billion in reserves spent in trying to defend its currency (riyal) peg to the U.S. dollar.

So it’s no surprise that the Saudi Arabian Monetary Authority (SAMA) says their foreign assets fell by a record $108 billion in 2015. SAMA owned $423 billion in overseas securities as of November.

And the Saudis are still checking under the sofa cushions. They’ve stated their intention to sell a piece of Saudi Aramco in an IPO.

In the Gulf region alone, the IMF estimates the fiscal surplus of $200 billion in the 2015-20 period will now turn into a $145 billion deficit over the same period.

Draining Liquidity

The deficits are pushing the oil-producing countries to liquidate some of their holdings and free up monies. Even Norway was forced to tap into its massive $820 billion sovereign wealth fund – the Government Pension Fund Global – for the very first time last October.

The Deputy Chairman of Rothschild & Sons, Paolo Scaroni, told Bloomberg “They [SWFs] are selling, they are selling a lot.” This is a key reason I believe that the stocks of the big financial institutions have been hit so hard in the market selloff.

The Royal Bank of Scotland’s Head of Credit Macro Research, Alberto Gallo, estimated that the gross flow of petrodollars into the global economy fell to a mere $200 billion last year from $800 billion in 2012.

And my feeling is that the flow is negative so far in 2016.

At least RBS’ Gallo has a sense of humor about the situation. Speaking of all the withdrawals, he said to Bloomberg, “Petrodollars are becoming petropennies.”

That’s not good, especially when stock markets are already under pressure from the Fed raising rates, which also drained liquidity from the global financial system.

Bottom line: For the stock market to get back into a sustained rally mode, we need at least a stabilization in the price of oil.

Good investing,

Tim Maverick

Tim Maverick

, Senior Correspondent

View More By Tim Maverick