Sovereign funds peg back investments in India

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BL RESEARCH BUREAU:The fall in crude oil prices is affecting Indian stock markets in more ways than one.

Sovereign Wealth Funds (SWF) that were built with the surpluses of oil-producing nations have been reducing their investments in India as their assets decline in tandem with the fall in crude oil prices.

SWFs have been one of the most important foreign investor classes investing in Indian markets in recent times.

Some of the largest funds have been set up by oil-producing nations; among these are the Abu Dhabi Investment Authority (ADIA), which managed $773 billion in June 2015; the SAMA Foreign Holdings of Saudi Arabia (assets of $686 billion); the Kuwait Investment Authority ($592 billion); and the Qatar Investment Authority ($256 billion).

These funds held ₹1,74,828 crore of Indian listed stocks towards the end of December 2015, accounting for 8.8 per cent of the foreign investor holding of Indian stocks.

While the assets held are up more than three-fold since the end of 2012, the incremental growth in sovereign wealth assets is slowing down.

For instance, while the increase in the value of stocks held by SWFs was ₹41,741 crore in 2014, the increase in 2015 almost halved to ₹21,277 crore.

The stress is evident in other data points too. Indian stocks held by investors from the United Arab Emirates were slightly down to ₹61,026 crore in December 2015 from ₹62,016 crore in December 2014. The increase in the value of stocks held by other oil-producing countries such as Norway and Canada was negligible.

The SWFs that invest directly in India were seen reducing their holdings in many companies.

The ADIA, for instance, brought down its stake in Dr Reddy’s Lab and HDFC in 2015. Norway’s Government Pension Fund Global has pruned its holdings in a number of stocks, including Arvind and Indian Hotels.

More pain to come
The plunge in crude oil prices from more than $100 a barrel to around $30 has resulted in severe fiscal stress to many of these nations.

Revenue earned by the UAE government declined from 41 per cent in 2013 to 30 per cent in 2015.

Similarly, Saudi Arabia saw its revenue as a proportion of GDP dip from 41 to 28 per cent and Qatar from 52.5 per cent to 40.1 per cent.

According to the IMF, the fall in commodity prices has led to a significant upward revision in the projected fiscal deficits of these countries to close to 9 per cent of nominal GDP.

These nations will now dip into the surpluses they created in better times, saved in SWFs. According to rating agency Fitch, ADIA’s assets are expected to fall 5 per cent this year.

Silver lining
The sale of Indian stocks by these funds has, however, not accelerated too much.

There could be two reasons for this.

One, as a net oil importer, India offers a hedge against other commodity-exporting nations.

Second, since the currencies of Saudi Arabia and the UAE are pegged to the dollar, they have appreciated against the rupee. The rupee has lost more than 20 per cent against currencies such as the UAE Dirham, Saudi Riyal and Qatari Riyal since 2013.

Investors from these countries will now have to bear foreign exchange losses if they pull funds out of India.