North American Sovereign Funds Seen Harder Hit After Oil’s Slump
Sovereign funds in North America are feeling the impact of lower oil prices more than their counterparts in the Middle East, with most expecting a drop in new funding in the coming years, according to Invesco Ltd.
A total of 80 percent of North American sovereigns expect zero or reduced funding, compared with 42 percent of funds in the rest of the world, Invesco said in its Global Sovereign Asset Management Study on Wednesday. About 20 percent of North American funds expect withdrawals because of crude’s drop, it said, compared with 67 percent in the rest of the world.
“The timing of the fall in oil prices has been particularly challenging for state governments in North America and Canada,” Nick Tolchard, head of Invesco Middle East, told reporters at a conference in Dubai. “Reduced revenue from oil producers have driven down state taxation income at the same time as the baby boomer generation has reached retirement.”
Sovereigns in the U.S. and Canada, set up with state surpluses in commodity-rich regions, expect funding shortages after oil’s near 50 percent drop last year. Middle East funds, which include the Abu Dhabi Investment Authority and the Kuwait Investment Authority, are better prepared for the drop after making strategy changes during the Arab Spring, Invesco said.
Some sovereigns expect the fall in oil price to lead to a short-term reversal to more conservative investment strategies and defer long-term allocation towards alternative asset classes, according to Invesco. Still, many are in a stronger position to deal with falling oil prices than they would have been in 2008 with better risk management, Invesco said.
“They are certainly better placed now then pre-financial crisis,” Tolchard said. “Should the oil price continue to remain low, we expect many sovereigns to focus their efforts on ensuring that progress around the implementation of more progressive investment strategies towards alternative investments isn’t deferred.”