Norway’s Giant Fund Sounds a Warning on Iran

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1:49Okay, all credit to Carol Masser on this piece because she saw this. Well, actually, all credit to Lionel Laurent. Yeah, let's credit him. Carol saw this piece today on our planning call. She's like, we got to talk to Lionel. We all agreed we got to get him on the program. It's about the warning that the boss of Norway's giant sovereign wealth fund is sounding on Iran. Lionel Laurent joins us from Paris. He's a Bloomberg Opinion columnist. It's close to 10 p.m. there, so we appreciate you.

2:14Carol Massar:Thank you, thank you. Staying up late. First, I just want to start with sort of a, it's an aside, but i can't believe this this was uh nikolai tanjin's first trip to the middle east that's that's the piece is about much more than that but that caught my eye first off how is the the head of this 2.2 trillion dollar fund only been in the middle east this one time in this year thank you yes and not just that but for this first visit to the middle east to happen at the end of February, just hours before war breaks out. It's kind of incredible. I think, honestly, it speaks to the fact that this fund, this huge$2 trillion fund, it's a kind of passive fund.

3:00It's mostly about index tracking. And as a result, it's really skewed to the US. And so without trying to draw a direct link, I would say that maybe it's not so surprising that Tangen would have sort of only followed the path, let's say, to the Middle East that everyone else has taken from hedge funds to others. I mean, he's pretty ensconced in Norway, so maybe has less of a kind of speculative bent when it comes to where he goes or the Middle East. So not that surprising, but clearly what is surprising that he would go just before war breaks out.

3:31Carol Massar:Yeah, talk about timing, right? It means so much. Let's talk about your conversation with him, Lionel, because what's interesting is, as you say, it's an index tracking investor, but it is having to become more attuned to geopolitics. What did you get from him? Walk us through a little bit of what you wrote about that, his thinking about the world and how it may be or is changing as a result of this. So I think that he was thinking a lot about complacency, I think, or about this idea that markets were calm, because markets are calm. And this was on Tuesday. Markets are a little less calm today, but still overall they're taking this in their stride.

4:10And I think he sees his role, he sees his job as also warning the Norwegian public, whose prosperity is tied to this fund, and maybe global markets too, about the worst that could happen or the kind of risks around the corner. That's why there's been a lot of stress testing at his fund, really mapping out the worst case scenarios even before war broke out. And I think he really wanted to touch on those scenarios without predicting what's happening, mapping out potential scenarios. And that's why he talked about inflation, the not unlikely, in his words, return of inflation, and the fact that geopolitical tensions are clearly not going to calm down anytime soon.

4:47Those were his two kind of big scenarios on top of all the existing worries that we might have over AI bubbles and private credit and all that. So I think that's what he sees his role as, scenario planning and being able to say that to the market and to his stakeholders in Norway. And perhaps, maybe ironic isn't the right word, but as you point out in your column, higher energy prices benefit Norway. I mean, that's after all what this$2.2 trillion fund has been built on. So if we do see energy inflation for an extended period of time, the country and its sovereign wealth fund could be a beneficiary of that.

5:24Yeah, absolutely. He's a very careful speaker on this topic. And he did want to make clear that for him and his fund, obviously, higher inflation, higher oil prices is on balance a negative. But as you point out, is obviously a positive for the country. And it's all revenues. I should point out, though, that the fund accounts sometimes for 20 to 25 percent of the state's budget. So there is a kind of feedback loop that's not entirely positive. That's remarkable.

5:51Carol Massar:I mean, what struck you most in your conversation with him? I mean, we every day are having so many conversations that obviously when it comes to the U.S. war in Iran, how long this goes on. We've already talked about the LNG market, the net gas market, that there might be already, you know, it's going to be changed for years to come. Just trying to figure out the timing and overall the longer term impact. But in your conversation with him, and as you say, he's very careful. But I mean, what struck you the most? I think the fact that he sounded a bit different to everybody else in the room. I mean, he goes out of his way to say he's not a prognosticator.

6:32I do find it interesting that so many other fund managers in the room who were more active asset allocators were quick to say that this conflict would be confined to the region, would in the long run be manageable in terms of inflation. and I hear a lot more voices even today saying, well, this war could be over when Donald Trump decides it could be over. It's not going to get out of hand. So I was simply struck by the fact that here was someone who did not pretend to be a geopolitical analyst and did not pretend to be predicting what was going to happen, simply saying, well, okay, but on balance, here are two risks that I'm putting in my scenario bucket and I'm not going to rule out the worst case scenario.

7:14Given that the fund is passive and geared toward U.S. equities, was there any discussion or did it come up at all about changing an investment, changing his investments or changing the investments as a result of geopolitics? yes so uh it's mostly passive but there is an active component so for example the speed at which they deal with certain issues they've raised this in the past on certain banking stocks banking crises as to the overall rules they are up for debate they're up for review actually in in norway right now and i think that while i think for for americans when they when they when they encounter the rule debate when it comes to the norway sovereign wealth fund It's mostly about ethical guidelines and what some people disproportionately call woke investing, disinvesting from or divesting from Israeli stocks, for example, or those exposed to Gaza.

8:10I think what might be interesting, though, is if the rules change and there is more of a geographic diversification along with that, so more investment in Europe, that could be a really huge game changer, especially for Europe, where he was quite keen to publicly say, you know, Europe is a bit of a sleeping beauty, really has to get its act together, unify its capital markets, reform its economy, it could be quite interesting to see this fund that is so exposed to the U.S. become less exposed to the U.S. over time.

8:34Carol Massar:Yeah. And listen, when we talk about, you know, where investment flows go, as you remind us at the fund, about 1.5 percent of all listed shares is in its portfolio. And you're talking about, you know, top holdings like NVIDIA and Apple. So you talk about the major exposure that it ultimately has. You know, thank you so much. I know it's late where you are, but we so wanted to talk about your story and share it with our audience. So thank you. Thank you. Lionel Laurent, he is a columnist for Bloomberg Opinion and highly recommend you read the full story. It is out on the Bloomberg and at Bloomberg.com.

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