For Biggest Wealth Fund Only Two Countries Drive Global Risks

(Bloomberg) -- Bothered about Brexit? Fretting over Frexit? Don't worry.

Norway's $900 billion wealth fund, which owns 1.3 percent of global stocks, says politics in only two countries constitute a global financial risk: China and the U.S.

“If you look back at 2016 and further back, it's clearly two countries that are so large and so important for the world economy that political developments there actually influence the full global financial markets, and that's the U.S. and China,” Yngve Slyngstad, chief executive officer at Norway's $900 billion sovereign wealth fund, said in an interview after presenting annual results in Oslo. “It's not obviously clear that political events and developments in other countries will influence the global markets to that extent.”

Geopolitical risk was placed firmly on the radar of investors in 2016, the year electoral results stunned observers with the U.K.'s vote to exit the European Union and the U.S. election of Donald Trump. Now, investors are bracing for more potential turmoil as voters head to the ballot boxes in key elections in Europe, including in France, where National Front leader Marine Le Pen is emerging as a stronger contender.

The Norwegian fund's strategy is to ride such turmoil out since it has an investment perspective that ranges decades.

Brexit Pounce

Its actions post-Brexit serve as an illustration. The fund immediately after the vote in June went in to snap up a retail and office property for 124 million pounds ($154 million) in London, to capitalize on a slump in prices.

Read more on fund's real estate deal

Slyngstad reiterated on Tuesday that it has no intentions of leaving Europe no matter what political risks are on the horizon.

“We're a long term investor in Europe,” he said. “We will remain a long term investor in Europe, it's a large part of our investments.”

Political events outside the U.S. and China impact to a “much lesser degree” because financial markets are much more interwoven, the CEO also said at a briefing. “So even significant events in Europe during last year have had less impact than one might have expected,” he said.

The fund reported a gain of 6.9 percent in 2016, or 447 billion kroner ($53 billion), after stocks rallied following the election of Trump and as the investor plowed deeper into emerging and frontier markets. Its stocks gained 8.7 percent, its bonds rose 4.3 percent and real estate investment grew 0.8 percent.

Higher Growth

The fund rose for a fifth straight year, benefiting from a rally in equities. Stocks gained after the surprise election of Trump amid optimism tax cuts and deregulation will spur corporate earnings.

“After the presidential election in the U.S., markets priced in higher growth and inflation in the global economy,” Slyngstad said.

Its holdings in North America rose last year to 42.3 percent of its portfolio from 40.0 percent, while its holdings in Europe fell to 36 percent from 38.1 percent a year earlier. The share held in Asia and Oceania slid to 17.9 percent from 18.1 percent. Emerging markets accounted for 10 percent of the investments at the end of the year, up from 9.8 percent.

The fund had investments in 77 countries at the end of 2016 after Argentina was added during the year. The U.S. was its largest country holdings at 37.2 percent, while China was at 2 percent. Investments in U.K. and France made up 9.1 percent and 5.2 percent, respectively.

Read more on the fund and China

Nonetheless, rising trade protectionism, advocated by Trump, could pose a challenge for the fund. Central bank Governor Oystein Olsen on Tuesday reiterated a warning over potential ramifications.

“But as an investor, we have to live with the uncertainties of different kinds in the short run but also in the longer run, and react to what we're seeing happening in the markets,” Olsen said.

To contact the reporter on this story: Mikael Holter in Oslo at mholter2@bloomberg.net.

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Stephen Treloar