Changes in the stock market increase the risk for SOFAZ’s assets

As of January 1, 2020, SOFAZ's assets were $ 43,323.3 million. 68.7% of assets are placed in bonds and money market instruments, 14.1% in stocks, 5.8% in property, and 11.4% in gold.

In 2020, revenues from the management of resources of the State Oil Fund of the Republic of Azerbaijan (SOFAZ) are projected to be $ 606.6 million, which is 5.7 times more than the corresponding performance figure of 2018 and 59.6 times less than the expected performance figure of 2019. It is projected that the average annual return on the management of resources for 2020 will be 1.45%, which is 0.69% less than the forecast for 2019 (2.14%) and 2.44% less than the 9-month performance figure of the previous year (3.89%). This decrease could be explained by the fact that the US dollar debt on global financial markets and the expected return on the money market portfolio are expected to decline this year.

At the same time, a negative return on the euro and pound portfolio is expected in 2020. In addition, a slowdown in China and Turkey's economy this year and expected lower average yields in other currencies than its current levels will also reduce the revenues from the management of resources.

This year, the assets of SOFAZ, which are placed in stocks, are most at risk from the negative impact of coronavirus on the global financial, currency, and stock markets.

As of January 1, 2020, the Fund's stock portfolio was approximately $ 6.1 billion. This portfolio includes the stocks of companies that are included in the indexes of “MSCI World”, “MSCI Europe ex UK”, and “Standard and Poor's 100”, as well as the stocks of “VTB Bank”, one of the leading banks of the Russian Federation, as well as the investments in private equity funds, “ALAC” (Africa, Latin America, Caribbean), “Catalyst”, and “Global Infrastructure” managed by the “International Finance Corporation”; a private equity fund owned by the “Neuberger Berman” under a different mandate; “EPF” managed by the “European Bank for Reconstruction and Development” (EBRD); “Blackstone Core Equity Partners” managed by the “Blackstone”; “FSI Fund I” managed by the “Fondo Strategico Italiano”; “BC European Capital Partners X” managed by the “BC Partners”; “Carlyle Europe V” and “Carlyle Partners VII” managed by the “Carlyle Group”; “Vista Equity Partners VII” managed by the “Vista”; “Thoma Bravo Fund XIII” managed by the “Thoma Bravo”; “Apollo Fund IX” managed by the “Apollo Global Management”; “Warburg Pincus Global Growth Fund” managed by the “Warburg Pincus LLC”; “Baring Private Equity Asia Fund VII” managed by the “Baring”; “PAG Asia Capital III” managed by the “PAG”; and “Azerbaijan Rigs” Limited Liability Company. As can be seen, the investment portfolio includes the stocks of “Standard and Poor's”, “MSCI Europe ex UK”, “VTB Bank”, the assets of “International Finance Corporation”, “European Bank for Reconstruction and Development”, as well as assets managed by the foreign and local companies.

Currently, processes in the world financial markets also reduce the value of the stocks invested by SOFAZ. So that the index of “Standard and Poor’s 100” lost 18 percent in value from February 19 to March 10 and the stocks of VTB lost 23.19 percent in value on March 9.

For the 9-month period of 2019, the return on the stock portfolio was 15.19%.

Bonds with high investment ratings invested by SOFAZ are characterized by low profitability and low risk. Therefore, unlike other funds, the share of fixed-income securities in the SOFAZ's investment portfolio is 5.2 times higher than the share of stocks. In the activities of other funds, the stocks have a higher share in the total investment portfolio. Of course, this will ultimately affect the average annual rate of return for the past five years. Azerbaijan ranks the lowest (1.38 percent) among the six funds involved in the comparison and the New Zealand Super Fund ranks the highest (10.8 percent).

The total amount of investments of the Oil Fund in the real estate complex is $ 2,512.7 million. The properties that the Fund has purchased and leased right now are in London, Paris, Moscow, Seoul, and Tokyo. The fund has also recently been interested in the US market for investing in property. The current depreciation observed in the property market is reducing the value of the Fund's portfolio too.

For the 9-month period of 2019, the return on the property portfolio was 4.56%.

The Fund's investments in gold are strategic. So that at the beginning of 2020, the total amount of gold owned by the Fund reached 101.2 tons, or $ 4,930.1 million. Recently, the fragility of global financial markets has turned gold into a reliable investment. Even at the time when the coronavirus wreaks havoc on, gold has become more expensive.

56.6% of SOFAZ's investment portfolio is in US dollars, 31.4% in euros, 5.1% in English pounds, 1.5% in Japanese yen, 1.2% in Chinese yuan, 0.8% in Turkish lira, 0.8% in Turkish lira, 0.8% in Russian rubles, 0.6% in Australian dollars, 0.5% in Korean won, and 1.5% in other currencies. 11.4% of the US dollar portfolio are investments in gold. 600,000 manats of assets are held in Azerbaijani manat.

For comparison, I would like to note that 41.4% of the currency composition of the Norwegian Pension Fund's[1] investment portfolio is in US dollars, 20.3% in euros, 8.3% in Japanese yen, 7.6% in pounds, and 22.4% in other currencies; 65.0% of the Canada Alberta Heritage Fund's[2] investment portfolio is in Canadian dollars, 17.1% in US dollars, 5.0% in euros, 2.0% in Japanese yen, 4.2% in pounds, and 6.7% in other currencies.

As can be seen, the profitability index of SOFAZ is much lower compared to the world's leading funds. This may be explained by the poor organization of the Fund's currency management. For this reason, SOFAZ's assets are expected to decline thereafter. Thus, it is projected[3] that the Fund's average weighted funds for the current year will be $ 41,859.8 million, which is $ 1,463.5 million less than the figure[4] for January 1, 2020.

The coronavirus's impact on this forecast before the negative processes in the financial, currency and stock markets, as well as crude, and later oil markets, suggests that oil assets are expected to grow by $ 40 billion by the end of this period. It will fall below the US dollar. Where this decline stops will depend on further processes in the global financial and commodity markets.

Preparation of this forecast before negative processes, which occurred due to the effects of coronavirus in the financial, currency, and stock markets, as well as in the raw materials markets, including oil markets, gives it a reason to say that by the end of this year, oil fund assets will fall below $ 40 billion. Where this decline stops will depend on further processes in the global financial and raw materials markets.