Central bank and sovereign wealth fund assets will shrink by 7% by end of 2015 - UBS

Central bank and sovereign wealth fund assets will decline by $1.2 trillion, or nearly 7%, by the end of 2015 as China and oil dependent states including Russia and Saudi Arabia dip into their savings amid slower growth and lower crude revenues, says UBS Group AG.

China will drive the decline, as it will withdraw its forex reserves, while oil-producing states extract foreign assets to buoy government spending, said Massimiliano Castelli, head of global strategy at UBS Asset Management. The drop in sovereign assets will likely step into 2016 and also be driven by an expected drop in investment returns, he said. Assets held by central banks and sovereign wealth funds accounted to more than $18 trillion at the end of 2014, according to UBS.

Global sovereign wealth funds are bracing to withdraw savings grown during the time of high oil prices to counterbalance a more than 50% tumble in the price of crude since August last year. These countries led a surge in state investments in the U.S. and Europe that now totals about $7.3 trillion globally, according to the Sovereign Wealth Fund Institute, and includes stakes in Barclays Plc, EMI Music Publishing, plus swathes of London property and Manhattan hotels.

Saudi Arabia’s central bank has taken $72 billion out of its foreign assets.

Russia is planning to spend as much as 4.7 trillion rubles ($70 billion) of the Reserve Fund, one of its two oil funds, in 2015 and next to weather its first recession in six years.

Norway’s sovereign fund said it expects to tap its $820 billion stockpile for the first time in 2016 to balance its budget.

Sovereign wealth fund assets were increased by an average of 12% a year over the five years to 2014, driven by high oil prices, says TheCityUK, a lobby group for the financial services industry in London. The process of government surpluses being reinvested in trophy assets in developed economies may now approach an end, driving sovereign funds to reconsider some of their investments.

“Oil is unlikely to go back up a level that generates fiscal surpluses in the producing countries, so they will have to start adjusting their spending to the new reality and avoid running down their savings,” said Castelli.

“Sovereign wealth funds’ appetite for high-yielding, direct investments won’t dry up, but some of them will need to behave less like private equity investors and change the mix of their investments towards more liquid assets.”