Home / Analysis / NBIM: Stratospheric returns ‘won’t last forever’

The world’s largest sovereign wealth fund just made its largest return ever. But the probability of extreme market events has “arguably risen”, and it’s carrying out stress tests for a more uncertain future.

Norway’s Government Pension Fund Global made around 13 per cent over 2024 (2,511 billion kroner/A$357,460,938) – a “very strong year”, and in terms of absolute increase in value, the largest on record, according to Norges Bank Investment Management (NBIM) CEO Nicolai Tangen.

But while things might be pretty good right now, they probably won’t stay that way.

“We just want to warn again that this will not last forever… We have different scenarios, and laid out the assumptions behind these tests, and we think in several of the scenarios we’ll have a very significant decline in the value of the fund,” Tangen told media on Wednesday, while deputy CEO Trond Grande emphasised the 400 billion kroner the fund had made in actual cash returns from dividends, bond coupons and rents.

NBIM’s stress tests are designed to capture “extreme market outcomes over a horizon of up to five years”, with the fund considering a potential AI correction, debt crisis and a more fragmented world in its 2025 shakedown. Of the three, a debt crisis is the most damaging, resulting in projected a 40 per cent drawdown for the fund.

“Ageing populations, climate change, international conflicts, and less fiscally responsible governments put a strain on already elevated debt levels,” the report says. “A lack of funding and political uncertainty trigger a bond sell-off as investor confidence evaporates.

“This shifts up the yield curve, with term and liquidity premium increasing across the maturity spectrum. It will also have negative spillovers to the corporate bond market and financial intermediaries. In turn, higher mortgage rates and tightened lending standards dampen consumption and investment, resulting in lower economic growth and lower expected cash flows. Political uncertainty will also result in an increase in the equity risk premium.”

An AI correction – where AI investments fail to generate profits due to regulatory interventions, technological setbacks or supply scarcity –  resulted in an -18 per cent drawdown, while a world with higher tariffs, more restrictions on foreign environment and less fiscal discipline would see a fall of -35 per cent.

“It should be noted that these scenarios may also materialise simultaneously, potentially leading to more severe drawdowns than modelled individually. For example, while we model “AI correction” in isolation, such a correction could also be triggered by a geopolitical conflict or a “fragmented” world. In such a case, the total fund drawdown would likely exceed the impacts shown here for each separate scenario.”

Separately, NBIM talked up its “very, very profitable” external funds management program, which has seen about 5 per cent of the fund outsourced to 114 external managers in 50 cities around the world.

“I do think that there are several reasons as to why they keep on outperforming,” said Isabelle Molander, NBIM associate portfolio manager. “First of all, through deep company analysis, local expertise and extensive on-the-ground research capabilities, they have been able to select the right investments. But also kind of being close to companies and their supply chains has enabled them to generate exceptional returns by identifying trends early and often before these opportunities become widely recognised by the rest of the market.

“One of the markets we’re most excited about is India. We now have a total of seven managers based locally here, both in Mumbai and Delhi, and they’ve been able to generate excess returns in a very challenging market. They’ve steered clear of these very expensive smaller companies that we saw a lot of in 2024 and focussed on larger, quality companies, which has been very beneficial for our portfolio.”