As some of the world’s biggest investors, sovereign wealth funds (SWFs) are generally well-armed to ride out the stress of rising interest rates and will continue to bolster government finances, says Moody’s Investors Service.
In a new report, the rating agency said the SWFs that disclose their investment performance reported limited losses due to higher interest rates in the first quarter of 2023.
While these funds are among the largest investors in global equity and fixed-income markets, they can withstand mark-to-market losses more easily than banks, which have been shaken by the evolving rate environment, Moody’s said.
Extrapolating the holdings of major sovereign funds — such as the Abu Dhabi Investment Authority and the wealth funds maintained by Norway, Saudi Arabia and Singapore — Moody’s estimated that SWF portfolios have allocated approximately 50% of assets to public equities, with 25% in fixed income securities and cash, which exposes them to the volatility and performance of global financial markets.
Yet the funds are expected to remain resilient in the face of high volatility and market stress.
“Despite the significant exposure, we expect SWFs to ride out periods of negative returns and market volatility because their mandates and liability profiles allow them to be very long-term investors,” the report said.
“Moreover, many SWFs have very large balance sheets as a share of GDP, which buffer losses. Even sizeable realized investment losses may not be material for a SWF,” it said.
For instance, while the Qatar Investment Authority saw the value of its nearly US$1 billion stake in Credit Suisse drop by 80%, the loss represented less than 0.2% of its assets, the report said.
“SWFs’ balance sheet structure and size makes them much less likely than banks to have to liquidate assets and recognize mark-to-market losses,” it said.
In turn, these vehicles will be able to continue supporting their governments’ fiscal strength and credit quality, it added.
“We expect SWFs to remain resilient during periods of significant market declines, allowing their balance sheets to continue to support their respective governments’ credit profiles and provide significant shock absorption capacity,” it said.