Emerging Markets

The world’s biggest sovereign wealth fund is minimizing its position in emerging markets.

According to its finance ministry, Norway’s $1 trillion sovereign wealth fund is set to cut down its $300 billion fixed-income portfolio by pulling emerging market bonds from the benchmark index it tracks.

Bonds from Chile, the Czech Republic, Hungary, Israel, Malaysia, Mexico, Poland, Russia, South Korea, and Thailand will be removed from the index, but the fund will still have room to invest up to 5 percent of its bond portfolio in emerging markets. The choice by the Finance Ministry comes after more than a year of consideration. It currently owns about $28 billion in such investments, with the biggest holdings in South Korean and Mexican bonds.

Initially, the fund aimed to cut its currency holdings down to only three; the euro, the dollar, and the pound, however other major currencies like the yen, the krona and the Australian and Canadian dollars wound up making the cut.

The Norwegian wealth fund, presently worth US$ 1.05 trillion, invests around 30 percent of its assets in fixed-income. The 70 percent invested in equities was not affected by the new strategy.

The position indicates that Singapore, New Zealand, Hong Kong, Danish, Swedish, Swiss, Japanese, Canadian and Australian bonds will remain part of the benchmark.

Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt discussed the matter, “I understand this is a tactical choice,” adding, “They alter the benchmark. It’s not an indication that they get progressively bearish on EM today.”

Emerging markets to recover

A report from the Institute of International Finance released on Friday anticipates that capital flow into emerging markets is likely to recuperate this year.

The IIF predicted non-resident capital flows of $1.26 billion in 2019, up from $1.14 billion in 2018, and another modest improvement in 2020.

Quantitative easing by G3 countries in recent years helped funnel funds to emerging markets, hunting for yield. That led to a “positioning overhang”, with financiers overloaded on emerging market assets.

The report discussed that international development is looking brighter capital flows to non-China emerging markets will recover modestly in 2019 and 2020, while remaining short of the levels observed in 2017,”

China has been a major driver in EM growth, though the report highlighted that capital flows to non-China emerging markets will recover modestly in 2019 and 2020, while remaining short of the levels observed in 2017.”

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