Norway is getting out of everything but dollars, euros and pounds
Norway's $1-trillion sovereign wealth fund is among the biggest in the world and it's making a monumental shift.
A third of the fund is currently invested in bonds and that's where changes are proposed. The fund has recommended to the government that instead of buying bonds in 23 different countries, it invests in just three -- the dollar, euro and pound.
1) Yen liquidity is a problem
The fund has about $21 billion in yen-denominated bonds but is worried about liquidity and getting out of the yen.
"The Japanese bond market is large but far less liquid than those for the other currencies that currently have a substantial weight in the index," the fund said.
That should be a wake-up call for the Bank of Japan. Their efforts to drive down yields via QE has sapped liquidity.
2) They believe in the pound
It's somewhat surprising that the pound is remaining in play. That's likely less about the large-scale economy than investment decisions.
Simply put: They believe the pound will bounce back.
After the Brexit vote they invested heavily in UK real estate. They own large swaths of central London in a partnership with the UK's Crown Estate.
3) This is about returns
The fund recently moved to a 70% allocation in equities from 60% in order to generate higher returns. They have also steadily entered into more and more risky bonds in order to meet the fund's goals.
4) The market is changing
You don't need foreign currencies anymore to get access to foreign markets. First, corporates and sovereigns are increasingly tapping the euro and US dollar market. In the big picture, that makes those currencies more attractive.
At the same time, the is opportunity here. Even a cursory look at foreign equity and bond markets shows much more compelling valuations.
The risk here is Norway is wrong. Sovereign wealth funds and reserve managers have a habit of screwing every up. So maybe what they should be doing is buying the yen and emerging market debt.
