The Norwegian oil fund is not afraid of Brexit

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Brexit is looming around the next corner. The one certain thing seems to be the uncertainty of the whole situation. However, this does not stop the Norwegian oil fund who says “full speed ahead”.

Chaos is the order of the day
At the time being, no one knows how Brexit is going to go down. Will there be a soft Brexit? Or will there be a hard Brexit? Will there be a Brexit at all? While British conservatives like Boris Johnson cries out for British independence, others are demonstrating loudly in the streets that they do not want Brexit to happen. However, they do seem to agree on one point: They all want Theresa May’s head on a silver platter. May faces a lot of pressure from the EU, from the British people and from British politicians in her own party and in the opposition. I for one want to say that I am very impressed by her stamina, her ability to go through it all with her head held (relatively) high. However, while the British society is in what can only be called a state of emergency, the Norwegian oil fund is calm. They see no reason to change course.

The world’s largest stately fund completely withdrawing from the British economy is like someone pulling out your teeth without anaesthesia.

Obstination or tactics?
Why is the Norwegian pension fund following their plan? Surely, they must know what’s going on in the U.K.? On the surface, it might seem like the oil fund is simply refusing to see that this plan is flawed, but it isn’t so. The Norwegian oil fund is not like your average Joe investor. There are two significant things that separates the Norwegian oil fund from most other investors: 1) they are huge and 2) they are very long-term. Those of you who saw the documentary about the fund on NRK will recognize these two aspects. The Norwegian oil fund is the world’s largest stately fund. The Norwegian oil fund owns, on average, 1.4% of all companies registered on stock exhanges all over the world. The Norwegian oil fund is heavily invested in the British economy. Not only do we own very lucrative real estate properties in London (e.g. significant parts of Regent Street), we have also placed 16 billion USD in fixed income and 59 billion USD in equities. Measured in Norwegian kroner, we have placed more than 700 billions in the British markets.

In the early 90s, the Norwegian duo Dollie de Luxe sat up their musical “Which Witch” in London. The show was badly received and some said that the musical was sent from Norway as a punishment to the British people. I have never seen the musical so I do not want to judge whether that is true or not. However, this would be nothing compared to the punishment imposed on the Brits if the Norwegian oil fund pulled out entirely of British markets. Not only is approximately 80 billion USD a lot of money in itself, it will also have profound effects on British markets. It would cause a major rise in unemployment and asset prices would drop. Many people would lose a lot of money. This would further increase the economic downturn. It would send the British economy into a vicious cycle that would be difficult to pull out of considering the whole Brexit shabang. It could also cause other foreign investors to do the same. We would be removing one building block of the British economy and other nations would follow suit. I might exaggerate a bit, but the “Which Witch” musical is comparable to your boss withdrawing a 100 kroner from your salary. The world’s largest stately fund completely withdrawing from the British economy however, is like someone pulling out your teeth without anaesthesia.

…it makes perfect sense for the Norwegian oil fund to stay on track with regards to the British economy.

Each to his own
You might think to yourself: “It is not our job to support the British economy!” And right you are. It is our job to support the Norwegian economy. However, let’s just think about the consequences of pulling out of Britain. Selling 10 or even 100 stocks might be easy. You probably wouldn’t even recognize it on the stock prices, but it is a true thing that many a little makes a mickle. Selling assets for the value of 80 billion USD is a bit different than selling 100 stocks. It is impossible to liquidate 80 billion in assets without lowering the asking price. Especially if people believe that we are selling because we are afraid of Brexit. The Norwegian oil fund could loose a significant amount of money on that. It would take time to recover these losses. Theirs is also an opportunity cost. Even though we might be able to recover the money, we could instead have used the time to increase the fund’s wealth even further. Instead of losing 100 kroner today and having to recover these 100 kroner, you could lose very little today (say 5 kroner) and instead earn 100 kroner above today’s value. In the first case you would have 100 kroner in the end. In the latter case you would have 195 kroner. This is just an example to illustrate the point, but consider how much welfare we might lose out on if we pulled out of the British markets today.

Another point is that the British economy is likely to continue to grow in the long-term. The Norwegian oil fund is a long-term investor. It is quite possible that the effects of Brexit will fade in the very long-term. No one knows what the world is going to look like in 30 years. The best thing to do is to be invested in a broad range of currencies, countries and sectors. Staying away from the British economy might be a very bad decision for an investor who considers the next 30 years instead of the next 2 years. This is why it makes perfect sense for the Norwegian oil fund to stay on track with regards to the British economy.   

Sondre Elstad

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