Norway will withdraw $37 billion from the Government Pension Fund , the largest sovereign wealth fund in the world, and begin selling bonds to create a large cash reserve. Fund managers warn it may precede a stock market downturn.
The dire economic consequences of the coronavirus pandemic made asset liquidations a possibility for even large funds and investment firms.
The unprecedented move by Norway to cash out more than the fund generates is a hint of what is to come in the stock market.
Many of the world’s billionaires and leading funds are implementing a similar strategy heading into the second half of 2020.
At the annual Berkshire Hathaway meeting, Warren Buffett dismissed any plans to use the firm’s $137 billion cash pile to invest in the stock market.
Buffett said that in this environment, even such a big cash reserve is not enough.
Norway and its sovereign fund are seemingly on the same page as Buffett and other cash-favoring billionaires like Mark Cuban.
As the U.S. stock market plunged in late March, the value of equities owned by Norway’s wealth fund dropped. The fund’s policy is to maintain a 70-30 ratio of stocks to other assets in the portfolio.
If stocks fall further, the fund will need additional cash to maintain a balanced portfolio. The $37 billion withdrawal sends a strong signal that another stock-market pullback is imminent.
Norway also predicts a 62% drop in oil-related activities in the near-term after crude prices plunged globally .
Initially, the oil war between Saudi Arabia and Russian led the commodity’s price to drop sub-zero. As CCN.com reported, Mizuho Bank analyst Paul Sankey predicted the oil price to drop by an additional 150% in May.
The oil slump continued as demand for energy continued to fall in light of government lockdown orders. Fewer people have driven cars since March, causing oil ships to line up near the coast of California.
Falling oil demand, uncertainty around stocks, and a volatile bond market are what led Norway’s fund to withdraw a record amount of cash.
Portfolio manager Michael Gayed, who predicted an overreaction in the stock market by as early as February, said that the bond market would correct first in the near-term.
In times of wild volatility and uncertainty, bonds typically serve as a safe investment vehicle to store value.
But, when the yield of government bonds yields continue to fall toward zero, it indicates investors are concerned about the short-term outlook of stocks and the economy.