As regular readers may recall, one of the alleged reasons for the market swoon at the end of 2015 and early 2016 was what Deutsche Bank first dubbed "quantitative tightening" but not by central banks (that would come later), but by sovereign wealth funds in general - with an emphasis on petrodollar nations who were struggling to balance their budgets at a time of plunging oil prices and were forced to sell assets - and China in particular, which faced with a tumbling Yuan was forced to sell billions in US-denominated securities to halt the sharp devaluation of the Yuan.
Now, after a period of relative stability for sovereign wealth funds, in which the indiscriminate SWF/China selling of 2015 faded into a distant memory, one of the world’s biggest buyers of trophy assets is about to become a seller again. According to Bloomberg, following the ongoing isolation by its powerful Arab neighbors, Qatar’s sovereign wealth fund is reversing a decade-long run in high-profile foreign investments to buttress its own economy.
The Qatar Investment Authority, or QIA, which has already reduced its holdings in Credit Suisse, Rosneft and Tiffany in recent months, is considering unleashing what could be a liquidation tsunami in this illiquid market, selling more of its $320 billion of assets, which includes stakes in Glencore and Barclays, and using the proceeds to bolster the domestic economy, according to Bloomberg sources.
The selling, which we previewed back in June amid an overview of Qatar's deteriorating financial system, will probably not come as a surprise: "Sovereign wealth funds, such as the Qatar Investment Authority, are always national buffers against adverse risk events, ” said Sven Behrendt, managing director of GeoEconomica in Geneva. “Since the boycott is such a risk event for Qatar, the assets stored within QIA will need to serve as such a buffer.”
Created over a decade ago, in 2005, to handle Qatar’s vast windfall from sales of LNG of which it is the world’s biggest exporter, the QIA and other Qatari investors have amassed holdings in Hollywood, New York office space, London residential property, luxury Italian fashion and even a soccer team. The QIA ranks as the ninth largest globally, according to the Sovereign Wealth Fund Institute.
Meanwhile, Qatar's banks have already sensed the change in the wind direction, and having pitched acquisition targets to the QIA for years "are now proposing asset sales, and have been told not to expect any major investments by the fund in the near term." The fund hasn’t formally hired financial advisers to dispose of any assets but is considering which stakes are best positioned to be offloaded, they said. The QIA declined to comment.
Quoted by Bloomberg, Rachel Pether, a senior adviser at the Sovereign Wealth Fund Institute said that "the QIA is being fiscally prudent by not actively pursuing new investments." She added that “the QIA has approximately 57 percent of its portfolio in publicly listed securities, which means there is reasonable liquidity in its portfolio if further support is required."
The QIA last year saw its biggest overhaul since 2014, grouping $100 billion of investments in local companies into a new unit and abandoning the Qatar Holding name synonymous with its highest-profile deals, people with knowledge of the matter said at the time.
After a dip in transactions in 2015 and 2016 as oil prices slumped, the fund regained its appetite for deals late last year, investing in Turkey’s biggest poultry producer, Rosneft, and U.K. gas company National Grid Plc, all within a couple of months.
All that, however ended after a Saudi-led standoff that started in June has put the small but rich (with the world's highest GDP/capita ratio in the world) in a vice.
Confirming the start of the upcoming liquidation phase, CEO Sheikh Abdullah Bin Mohammed Bin Saud Al Thani said last month that the QIA plans to spend most of what remains of its $45 billion investment target on U.S. assets as it seeks diversification. As Bloomberg adds, the fund is also considering selling some of its extensive property portfolio, especially in the U.K. where it owns stakes in London’s Savoy Hotel, the Shard skyscraper and the Olympic Village. The QIA also wants to sell an office building in London’s Canary Wharf financial district that is leased to Credit Suisse, people familiar with the matter said last month.
In other words, already reeling from the withdrawal of Ultra high net worth buyers, the London real estate market is about to get hit by a double whammy of selling from the very top.
The QIA has injected billions of dollars into local banks to shore up liquidity after Saudi Arabia, the United Arab Emirates and Bahrain cut diplomatic ties on June 5 amid accusations of funding terrorism, prompting their lenders to withdraw funds from Qatar, people familiar with the matter said at the time. Qatar has repeatedly denied the charges.
Qatar should also look at other assets that could be used as alternative buffers to reduce some of the heat on QIA, said GeoEconomica’s Behrendt.
“The diplomatic boycott and economic blockade of Qatar sees basically two strategies employed by the parties: the Saudi-led coalition employs a ‘wearing down’ approach, Qatar a ‘holding out’ strategy,” he said. “In the end it will be about who will have the longer staying power.”
And while the QIA liquidation was telegraphed months in advance, a bigger question is if now that SWFs are once again selling assets to shore up the domestic economy, will others follow, and specifically, will Saudi Arabia be next. As Bloomberg's Javier Blas showed this morning, Saudi FX reserves tumbled $6.9 billion in August, and are down a whopping $48bn YTD, effectively in line with the drop over the same period in 2016, when Saudi Arabia saw $54bn in reserves flow out, on lower oil output and prices.
#SaudiArabia FX reserves fell $6.9 billion in August (Jan-Aug 2017: -$48bn, same period 2016: -$54bn) on lower #oil output #OOTT #OPEC pic.twitter.com/z50TYnQdK0
— Javier Blas (@JavierBlas2) October 3, 2017
If and when Saudi Arabia joins the QIA as a motivated seller (at any price), and as central banks withdraw as buyers of first, last or any resort, the sudden risk asset air pocket of 2015/2016 may seem like a walk in the park in retrospect.