As COVID-19 Normalizes, Asset Owners See Stock Market Bubble and Trade Wars as Major Tail Risks
Posted on 09/11/2020
The Sovereign Wealth Fund Institute (SWFI) conducted its third quarter 2020 Global Asset Owner Survey in August (September survey). The survey is sent to sovereign funds, pension funds, endowments, central banks, and asks a series of questions to gauge institutional investor sentiment. The survey demographic is diverse in terms of geographic respondents.
The groundbreaking findings on the biggest tail risk illustrated the slim majority of asset owners at 24% still see the viral outbreak as the greatest tail risk. The next selection was trade wars and increased protectionism at 21% and a stock market bubble at 19%. This compares to the viral outbreak being around 45% of the biggest tail risk from June 2020 and the stock market bubble at just 5.3%. In a number of sovereign wealth fund annual reports, all have warned about the coronavirus outbreak and its impact on investments. However, institutional investors appear to have normalized the current impact of COVID-19, as accommodative monetary policy has somewhat calmed markets from March volatility.
The varied commentaries in these fiscal year-end reports also highlight trade conflict between nations, including the U.S. versus China. This survey reflects the sentiment felt among these mega asset owners. The trade war theme is reflected in the investment decisions of asset owners in recent months. The large Canadian public pension plans continue to allocate capital to mainland China investments, while pairing some public market Chinese and Hong Kong equities, awaiting U.S. action on market regulation of Chinese stocks. For example, the Trump administration is forcing ByteDance to sell off TikTok over national security concerns, while effectively routing out Huawei from the U.S. and its allies. China has retaliated with punishing U.S. agriculture producers and moved to impose its national security law on Hong Kong.
Temasek Holdings has significant exposure to China having it be 29% of Temasek’s net portfolio value based on underlying assets as of March 31, 2020. Temasek acknowledges this is driven by the relatively higher valuation of the China market, and not because of geographical asset allocation shifts. However, Temasek paired its position in listed Chinese equities. For example, according to submitted filings for June 30, 2020 to the SEC, Temasek Holdings had trimmed its large position in Alibaba Group Holding Limited from having 24,122,675 reported shares down to 12,061,337 shares. The position swing is estimated at a sale worth US$ 2,601,630,607. At the same period, Temasek scooped up a massive position in BlackRock, taking a US$ 3.24 billion bet in the world’s largest asset manager. On the other hand, the Saudi Arabian Public Investment Fund (PIF) pivoted toward the U.S. in public markets scooping up shares and then selling off for a fast profit. PIF is also bifurcated into some major investments in China, including being a core investor in Ant Group (formerly known as Ant Financial).