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The world's largest sovereign wealth fund warns of a long period of high inflation and lower returns. In an interview with the Financial Times The fund's chief executive, Nicolai Tangen, said that high inflation will have an effect on the prices of both stocks and bonds. He expects interest rates to rise further, partly due to demographic factors. This will put further pressure on the prices of stocks and bonds. After the good returns of recent years, investors now have to take into account a number of lean years, according to Tangen.
In December, inflation in the US rose to 7%, while inflation in the Netherlands was as high as 7.6% in January. These price increases are caused by high energy prices, scarcity of goods and higher transport costs. Central banks thought this would be a temporary phenomenon, caused by global disruptions in production and logistics caused by the coronavirus pandemic. But now central banks are also starting to see that inflation is persistent.
Norway's sovereign wealth fund manages $1.3 trillion in assets from oil and gas proceeds. This makes it the equivalent of owning about 1.5% of all listed companies in the world. Last year, the fund achieved a return of 14.5% on its portfolio of bonds, equities and real estate. A return that will not be matched in the coming years, according to Tangen.
"There are much tougher times ahead of us... with extremely low interest rates and very high stock prices. Combined with rising – and in some places accelerating – inflation, we could see a long period of lower returns."
The stock market got off to a rocky start this year. Popular growth stocks in the technology sector in particular came under pressure due to rising interest rates. These growth stocks are valued on the basis of future earnings, which are worth less when interest rates rise. The NASDAQ index of tech companies fell more than ten percent in a short period of time, while other stock markets also showed more volatility. The prospect of further rising interest rates could put even more pressure on stock prices. Combined with higher production costs and labour costs, this can put pressure on companies' profits. Pliers: "How will that end? It hits stocks and bonds at the same time... In the coming years, it will affect both."
Another factor that investors may be overlooking is the aging population. According to the CEO of the Norwegian sovereign wealth fund, more people will retire in the coming years, which means that pension funds will receive proportionally less deposits and will have to pay out more. That means they have to sell more stocks and bonds to pay out pensions. As a result, savings will decrease, resulting in an increase in interest rates.
Due to extremely low interest rates and high share prices, more investors have been looking for alternatives in recent years. For example, we have seen strong growth in real estate funds, venture capital and hedge funds in recent years. According to data provider Preqin, there is currently $13.3 trillion in assets in these types of alternative investments, an amount that will grow to $23.2 trillion over the next four years.
Gold is also gaining popularity as an alternative investment. The precious metal does not generate any income, but it has proven to be a safe haven in uncertain times. Historically, the precious metal performs well in times of negative real interest rates, when inflation is higher than interest rates. Under these circumstances, savers are better off parking their assets in precious metals than in government bonds. Despite the decline in gold prices since last year, stocks in gold ETFs have increased barely down. Private individuals are also buying more and more gold, as the demand for coins and bars rose last year to the highest level in eight years.
This contribution comes from Geotrendlines
