Norway fund chief warns at Davos of ‘very, very low’ returns for stocks

The stress for investors is not yet over after stock markets cleared out the “crap” that built up after the outbreak of Covid-19, with a long period of drab returns still lying ahead, the chief executive of Norway’s sovereign wealth fund has warned.

US inflation could be poised to reaccelerate before this summer, in part because of the reopening of China, Nicolai Tangen said in an interview with the Financial Times.

A new cycle of US interest rate rises is “not that unlikely”, Tangen said, and “not in anybody’s estimates”. Investors are expecting that the Federal Reserve will raise its main interest rate to 4.9 per cent this spring, from a range of 4.25 to 4.5 per cent currently, according to trading in federal funds futures.

Aside from inflation, further pressure on markets could come from the damaging impact of the market declines of 2022. “We have not seen the secondary effects of the $30tn in wealth destruction we saw last year,” he said. “We haven’t seen it popping up anywhere. We haven’t seen any Japanese insurance companies going bust.”

Taken together, that means that last year’s tough environment for investors, with simultaneous declines for stocks and bonds, is not over, Tangen warned. “I think we will see a long period of time with very, very low returns,” he said. “I think it takes a long time to sweat it out.”

Norges Bank Investment Management ended 2022 with a loss of 14 per cent, according to Tangen. Behind 2008, that marked the fund’s second-poorest run in its 25-year existence.

Tangen said the fund avoided the steeper 20 per cent in global stocks last year in part because it tilted towards energy stocks and away from companies listing on equities markets for the first time.

“We thought back in 2021 that the quality of [initial public offerings] was very, very poor,” Tangen said on the sidelines of the World Economic Forum in Davos. “When times are really frothy you get a lot of crap coming to market.”

The oil fund — one of the biggest sovereign wealth funds in the world — has not had direct exposure to crypto assets, whose valuations collapsed last spring. But, Tangen said, the crypto phenomenon served as a useful warning sign of market excesses. “You could read froth in crypto markets,” he said. “When you see [digital artworks] changing hands for $69mn, that sends a flashing light that money is too easy and there’s something strange going on. You have to wake up and see what’s going on.”

Tangen took his role at the oil fund in September 2020, at a time of substantial market volatility. “I kind of knew it would happen when I took the job. The likelihood of me ending up as the biggest loser ever was very high, and that’s how it turns out, but somebody has to do it,” the former hedge fund manager said. “I’m used to stress.” The country’s finance ministry, which sets the fund’s mandate and scrutinises its performance, has been supportive and provided a “clever” risk framework, he added.

The oil fund is now in the early stages of examining whether it should put money to work in private equity — an asset class it has avoided so far due to high fees and sometimes poor transparency. Some mainstream asset managers are now shying away from private equity now that core bond markets are offering higher returns and more liquid assets are in higher demand.

Tangen said that was one reason why he thought the space was “potentially interesting”. Valuations in private equity were likely to reset lower as public markets have done, he said. “We must expect writedowns,” he added. No decision on the matter has yet been taken by the government, but allocations to the asset class may make sense in the coming years, Tangen said.

The generally upbeat tone among delegates to the World Economic Forum in Davos makes Tangen somewhat more nervous. “I’m not particularly optimistic, but unfortunately that seems to be the consensus, and I don’t like that,” he said.

Additional reporting by Stephen Morris

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