The recommendation is still subject to parliamentary approval, but it must carry some weight given the country’s central bank is leading the charge. The value of the Norwegian krone is strongly correlated to the Brent crude price, which is obviously beyond the influence of Oslo’s policy makers, but they can do something about the £30bn or so the fund holds in foreign energy companies. Norges Bank rightfully notes that energy stocks tend to underperform the wider market significantly when crude prices are in retreat – a point hammered home to the Norsemen since midway through 2015. The move has been designed to “make the [Norwegian] government’s wealth less vulnerable to a permanent drop in oil and gas prices”, but it will also increase anxieties amongst asset managers and pension fund administrators about the whole issue of “stranded assets”.
We think it will be some time before oil traders are faced with an obsolete or non-performing asset class, but share prices for several oil majors, notably Royal Dutch Shell (RDSB) and Exxon Mobil (US:XOM), had a bit of a wobble following last week’s announcement. But even if the proposal is implemented in full, the impact on valuations is likely to be muted as the fund’s holdings are relatively small in terms of representative market caps and any disposal would almost certainly be phased over an extended timeframe. However, the risk exists that a definitive move on the part of the Norwegians could precipitate a wider sell-off, which is a bit of a worry when you consider that half of the 20 largest sovereign wealth funds are oil & gas based. It’s thought that most of the Europe, Middle East and Africa (EMEA) funds, understandably, are overweight in hydrocarbon-related stocks.
In truth, you can’t blame the Norwegians for trying to shore up what amounts to a rainy-day fund. They have a hard-won reputation for handling their oil wealth prudently (you’re certainly unlikely to see many of them driving up and down the King's Road in canary yellow Lamborghinis). But it’s also true that Norway’s economy is still hamstrung by high labour costs, protectionism, a lack of competitive exposure in certain industries and the over-arching burden of the country’s blue riband welfare state. Although you wouldn’t necessarily draw direct parallels with some of the monoculture economies of the Middle East, Norway will still face the challenge of weening itself off the black stuff in a post-petroleum age (whenever that happens).
It’s too early to say what the proposal could eventually mean for retail investors but, whether intentional or not, it’s conceivable that it could do more than just reduce the fund’s secondary exposure. If the narrative that the oil industry is in terminal decline becomes common currency, it will reduce incentives for explorers, refiners and rig-makers, particularly those that were forced into hefty capital write-downs following the 2015 oil price collapse. Over time, this could restrict the volume of replacement production, thereby underpinning prices.
