The exact reason for the massive sell-off in the stocks, in the first couple of months in 2016, may not be known yet but the signs have given enough room to scepticism in the facets of Finance.
To add to this, prominent financial analysts predict that the stock market could plunge as much as 70-75%. This could be worse than during the financial crisis, wherein stocks from their peak to trough dropped a brutal 61.9%. Investors, by and large, are petrified at the current situation of the market and who or what precisely is bringing about a tidal wave of this sell-off is still unknown.
The key reason
Apparently there are distinct market forces that can be blamed, most substantial among the lot being the Oil-Producing countries’ Sovereign Wealth Funds (SWFs). According to “Sovereign Wealth Funds Draining Market Liquidity,” on February 10, 2016, Trefis, the SWF are selling-off profoundly. This is the key reason that most of the big Financial Institutions are also being hit off so hard in the market sell-off.
The quintessential purpose of building a Sovereign Wealth Fund is that the wealth generated through finite resources for any economy can be preserved and be put to use, sustainably, for the generations to come.
Wipe-off in their SWFs
When the price of oil dropped to a 10- year low, the countries that were solely surviving on oil as its source of income were left devastated. Norway, Abu Dhabi, Saudi Arabia and Kuwait have all been subject to an immense wipe-off in their SWFs, respectively, as a consequence of the Oil-Price Crash. Due to the major set-back caused by the plunge in this fuel’s price, the Governments of these countries were compelled to draw out funds from the SWF. The resources to refill the SWFs in turn are missing.
Saudi Arabia and other oil-producing countries for that matter were enjoying a monopoly, and the throne that came with it, over the past few years. However the dramatic crash in the prices of Crude left them shaken. The kingdom had rarely experienced deficits. The unprecedented budget shortfall that followed left the Saudis with no option but to use debt. The result was so dramatic that they even decided to float Saudi Aramco, the largest oil producing company. Saudi reserves of the foreign currency fell by about $73.0 billion in 2015.
Pushing towards recession
With the current state of SWF in oil-producing countries, which by statistical estimate controls a good $7.3 trillion altogether, the effects of the oil crash are magnified. Selling off even 5 percent of this huge portfolio can cause hundreds of billions to flow out. These can most certainly influence the market’s performance. In addition to this, it is perhaps the main reason why lower oil prices, once midwives to economic growth, are now pushing toward recession.
Only a few years ago these state-owned investment funds were all the rage because of their ability to drive the entire economy. Huge sums of capital from mostly the oil-rich countries were being collected. The wealth of a majority of SWFs is based on commodities or energies and so, with oil and commodities prices so low, those countries are now under a huge financial pressure and there is a high probability of a stock market crash among these counties.