Norway’s sovereign wealth fund anticipates a dark future for investors in the face of permanent inflation

Nicolai Tangen, executive director of the Norwegian sovereign wealth fund (1.4 trillion dollars under management, the largest in the world) does not hesitate to recognize that inflation is the great threat to investors and markets in general. Real asset returns will suffer with inflation proving stubborn.

In addition, this expert has issued a warning to investors: the margin to dodge a possible inflationary shock is today very limited, since high inflation would damage both stocks and bonds, greatly reducing the ability to maneuver to protect portfolios. Not only Tangen, but also the famous economist Nouriel Roubini claimed exactly the same thing last week and recommended investors a change of strategy in their portfolios.

The world’s largest sovereign wealth fund believes investors face years of poor returns as rising inflation becomes a permanent feature of the global economy.

Consumer price inflation is at its highest level in more than two decades in the world’s large industrial economies, particularly in the US, where the annual pace of price growth reached 7% in December, compared to to just 0.1% in May 2020.

Tangen has explained to Financial Times that the oil fund, which owns the equivalent of 1.5% of all listed companies in the world, believes that inflation “could be stronger than is generally expected” as the world experiences both a high demand as a persistent disruption in supply chains.

“We’re seeing it across the board, in more and more places. You’ve seen Ikea raise prices 9%, you’ve seen food prices go up, ocean freight continues, trucking, metals, commodities , energy, gas… We are also seeing signs in wages,” says this expert.

Bonds and stocks will suffer

This expert explains what will be the movement in the markets to this inflation: “How will it work? It will hit bonds and stocks at the same time … for the next few years, it will affect both.”

Tangen believes that inflation is going to persist longer than central banks say or the consensus of economists because there are other factors that are being overlooked such as the mass retirements of the baby boomer generation or all people who are leaving the labor force indefinitely. All this will strengthen, in his opinion, that the increases in inflation are permanent.

AQR Capital Management, a quantitative investment group, has estimated that a classic balanced portfolio of 60% stocks and 40% bonds will return just 2% a year after inflation for the next five to 10 years. That’s less than half the roughly 5% average enjoyed over the past century.

Alternative investments

Big investors have tried to boost returns with “alternative” investment strategies, including hedge funds, venture capital, and real estate.

The mandate of the oil fund, which is housed within Norway’s central bank, only includes stocks, bonds and real estate. This fund had the fourth strongest year of performance in 2021, registering an increase of 14.5%. It has grown steadily since the 2008 global financial crisis, but Tangen warned that that could be coming to an end.

“We’re going to have much tougher times ahead…with extremely low interest rates and a very high stock market, and with rising and, in some places, accelerating inflation, we could see a long period of very low real yields.” “, he assures.

Historically, the fund has “outperformed in rising markets but outperformed in falling markets,” he says. However, the former founder of London-based hedge fund AKO Capital, who took over the oil fund in September 2020, aims to change that through “lots of smaller tweaks”, including a tool that will help reduce mistakes in moments of panic.