Market Turmoil Sinks Norway’s Pension Giant by $173 Billion in First Half

Despite losing 14.4%, the “oil fund” beat its benchmark by 114 basis points thanks to ... oil.



Market turmoil has rattled Norway’s $1.26 trillion sovereign wealth fund, the Government Pension Fund Global, which lost 14.4% during the first half of 2022, or 1.68 trillion kroner ($172.75 billion), according to its half-year report. The results are a significant swing from a year earlier, when the pension fund earned a robust 9.4% return for the first half of 2021.

“The market has been characterized by rising interest rates, high inflation, and war in Europe,” Norges Bank Investment Management CEO Nicolai Tangen said in a statement.

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Despite the steep losses, the fund outperformed its benchmark index by 114 basis points, or $16 billion, thanks in large part to investments in energy, which was the only sector that produced positive returns for portfolio. The half-year report says it is the first time in two decades that the fund has generated an excess return in a sharply falling equity market, and adds that “we do not expect a similarly strong relative return in the future.”

The world’s second largest pension fund is known colloquially as the “oil fund” because it was established after Norway discovered oil in the North Sea, and is intended to shield their economy from the volatility of oil prices. However, it was the portfolio’s investments in oil and other energy sectors that helped it to prevent steeper losses and outperform its benchmark.

“In the first half of the year, the energy sector returned 13%,” Tangen said. “We have seen sharp price increases for oil, gas, and refined products.”

As of June 30, 68.5% of the fund was invested in equities, 28.3% in fixed income, 3.0% in unlisted real estate and 0.1% in unlisted renewable energy infrastructure. The fund’s equity investments lost 17% in the first half, weighed down by the technology, consumer discretionary and industrials sectors, which lost 27.6%, 24.9% and 21.8%, respectively.

“The surge in demand during the pandemic for digital advertising, e-commerce and semiconductors has normalized,” says the report. “Growing fears of recession have also impacted particularly on tech stocks.”

The pension fund lost a combined 132 billion kroner ($13.6 billion) in the first half from its investments in just four tech stocks—Amazon, Apple, Microsoft and Facebook owner Meta Platform.

Fixed-income investments lost 9.3% during the first half, which the pension fund blamed on high interest rates. U.S. Treasurys accounted for 25.9% of the fund’s fixed-income investments and lost 5.1%, while Japanese government bonds, which make up 10.3% of fixed-income investments, lost 14.0%, and euro-denominated government bonds, which account for 8.9% of the asset class’s allotment, lost 15.5%.

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Unexciting Earnings May Be Warning Sign, BlackRock Says

Projected S&P 500 profits rose just 6.7% in the second quarter, and even slower results are ahead. Not good for stocks, the firm contends.



The market’s gradual deceleration in earnings growth has continued in the second quarter. A new BlackRock report warns, though, that this slowing will eventually hurt stocks, which have sprung back from a bear market since mid-June.

 

Expect more “disappointing earnings” ahead, says the report from Wei Li, global chief investment strategist at the BlackRock Investment Institute, and her team. Result: “the restart is slowing.”

 

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The report notes that the recent market improvement is a function of investors’ beliefs that inflation is ebbing and the Federal Reserve will back off its rate hikes. But those hopes will be dashed, it says.

 

A big part of that, it goes on, is “a rotation in consumer spending.” In other words, consumers are shifting back to services in the post-lockdown world. But thus far this year, goods have made up 62% of S&P 500 earnings. Trouble is, services don’t generate as much in earnings as does goods production.

 

Meanwhile, the earnings increases up to now have been concentrated in energy and finance. Remove those profits and there has been no earnings growth at all in the second quarter, the report says. And “analyst earnings expectations are still too optimistic,” it adds.

 

Even a look at past performances and analysts’ future expectations, according to FactSet, does illustrate a slowdown in earnings expansions. In last year’s final quarter, they exploded 29.1%. The first quarter was up 9.1%, and once the last second quarter results are in, it should be 6.7%. And the future? FactSet has projected 5.8% for the current period and 6.1% for the last one this year.

 

So if stocks, which have a strong dependence on earnings, won’t be great, then what should investors do? Investment-grade corporate bonds are positioned to fare better, BlackRock’s report advises.

 

Related Stories:

Q1 Earnings Are Up, But Nothing to Cheer About

 

The First Quarter Was Bad for Asset Managers’ Stock, Even Though Their Fourth Quarter Earnings Ruled

 

Why Not to Worry About Slowing Earnings Growth

 

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