Norway’s sovereign wealth fund – the world’s largest – made a £16bn loss in the first half of the year and warned that financial markets could face further volatility as the Covid pandemic was still out of control.
The £895bn fund said it suffered a 3.4% drop in returns in the first six months of 2020, equivalent to a 188bn kroner (£16bn) decline, when its investments were hit by the early-March market sell-off sparked by panic about the coronavirus outbreak.
While investor confidence had been restored by “massive” state support packages, the fund’s deputy chief executive, Trond Grande, said financial markets were not reflecting the real economic impact of the virus, which he said was not under control “in any shape or form”.
He said: “We have already seen some sort of V-shaped recovery in the financial markets. I think there is a slight disconnect between the real economy and the financial markets.”
He also warned that there could be further market volatility, particularly if there was a surge in coronavirus cases later this year.
“We could be in for some turbulence this fall as things unfold and whether or not the coronavirus pandemic recedes, or gains some force,” Grande said, and the full impact on sectors such as travel and leisure was yet to be seen.
The fund’s deputy also noted that state support for national economies may not be sustainable long-term.
A further drop in share prices would cause further pain for the sovereign wealth fund, which was founded in 1996 and invests the country’s oil revenues abroad to shield its economy from market turmoil. The fund owns nearly 1.5% of all globally listed shares, with stakes in over 9,000 companies.
The Norwegian fund’s shareholdings in oil and gas companies suffered the biggest declines in the first six months of 2020. The stocks lost 33.1% of their value as oil prices plunged amid coronavirus travel restrictions, which dramatically reduced demand.
Its bank investments also performed poorly, with financial stocks declining nearly 21% over in first six months of the year. Lender profits were hit by lower interest rates and provisions for future defaults on loans, as a number of countries plunged into economic recessions due to Covid-19. Norway’s returns were also impacted by a drop in shareholder payouts, after regulators pressure banks to either scrap or reduce dividends at the start of the year.
The worst performers in its portfolio included Royal Dutch Shell, HSBC and JP Morgan.
Amazon was one of the strongest performers, alongside Microsoft and Apple. Overall, the tech sector delivered a 14.2% return for the fund thanks to strong demand for online services around remote working, education, shopping and entertainment during the pandemic.
The UK – which accounts for the fund’s largest equity holdings at 6.9% – was the worst regional performers, after the fund’s share of London-listed stocks losing 24.3% of their value over the period.
It comes after the UK reported a 20.4% drop in gross domestic product in the second quarter, which was the worst of any G7 nation in the three months to June. It also marked the deepest recession since records began.