An era of very low returns is here. Markets riskier than before: Nicolai Tangen

A former hedge fund manager with degrees in art history, psychology and economics, Nicolai Tangen, 58, oversees $1.7 trillion in investments as CEO of Norges Bank Investment Management, the world's largest sovereign wealth fund. In India, it has over $30 billion parked in companies ranging from HDFC Bank, Reliance, ICICI Bank, Airtel, Infosys and TCS to Zomato, Nykaa and DMart. The CEO of the largest single investor in the world also hosts the popular In Good Company podcast with global industry leaders. A former chef, Russian translator and intelligence man, Tangen told Arijit Barman in an interview in Davos that the world is in the grip of unprecedented volatility. Edited excerpts:

Nearly a third of your assets are in Europe. With Europe slowing and generating poor returns, are you looking to diversify even more in the US, Asia, maybe India, a lot more than before?
We are linked to indices. So when the value of a market increases, we typically park more money there. We now have more than 50% of our $1.7 trillion in the US. With India becoming more important, the value of our Indian investments has also gone up. We have roughly 1.8% of our fund now in India. With more than $30 billion invested in India-double of what we did five-eight years ago-both China and India exposure is not too dissimilar. Our portfolio is predominantly public markets but we have some fixed-income assets too. Our biggest holding in India is HDFC Bank, number 2 is Reliance.

After that, it’s ICICI Bank, Airtel and Infosys. We also have TCS and some of the new tech companies. So, our portfolio is very diversified.

How does India look from your vantage point?

We are seeing a lot of great companies in India. There's been a big IPO market. A lot of positive things are happening in India. There is a thriving democracy, billion-plus population. And you've got a lot of very clever and entrepreneurial people who are producing some great companies and great business leaders. Many super smart Indians are running some of the greatest companies around the world as their CEOs. I have interviewed them myself in my podcast and I hope to invite more such leaders in future.

Do you see a common thread?

I do. They are all highly educated people. Very hardworking. There is an element of humbleness with Indian companies and Indian leaders. There is this notion of working for something which is bigger than yourself and that makes them very disciplined. These are features that have led to Indian leadership becoming so prevalent in Silicon Valley and elsewhere.

Do you feel the trend of supply chain diversifications out of China will continue?
We are generally seeing companies trying to diversify their supply chains. And that makes sense as you need to derisk. This is a global phenomenon. A lot of companies in the US and Europe who talk about diversifying the supply chain outside of China also have more activities in India. So, it's clearly been a trend and it is likely to continue.

Is there something about India that worries you?
We always have to look at valuations and how overheated the equity markets are. We need to watch out for that. The stock market has been particularly strong in India more than in most other places.

What or who according to you is set to dominate the world?
Last year, it was all about AI. This year, it's all about Trump. And the effects of what's going on in America and the rest of the world. The indications are that people are very uncertain about this kind of social politics and the geopolitical implications. But US CEOs are quite positive when it comes to their own business in the short term.

But the bigger question is, it may be great for the US but what's going to be its effect on society and those societal effects longer term and for inflation?

Norges Bank on average owns 1.5% of all listed companies in the world. But right now, walls are going up that restrict free movement of goods, talent and capital. Is this the end of globalisation?
Globalisation is reversing. As we speak, we are seeing some of the global trade organisations becoming less influential. We are seeing more trade barriers. We're also seeing more export restrictions and we are seeing the world getting divided into two blocs. All of this is negative when it comes to economic growth and world trade.

What we're also seeing now is a closer link between technology and geopolitics, a closer link between climate and finance. And so, this is totally interlinked in a different way than what we have seen before.

But since you do feel energy prices will remain high, will the link between climate and capital break down?
I would say that the link between climate and finance is stronger than it has been ever before. You see the forest fires of Los Angeles. Other than the humanitarian implications, it has massive financial implications too. We are seeing the impact on the harvests, cocoa beans, olive oil, even chocolate. We are seeing it in productivity as well. The ability to work during the day in places which are extremely hot is progressively going down. Climate also effects immigration, military conflicts. So to me, it's just more tightly integrated into the world right now. But we have seen risky assets outperform. Equity markets in the US and India have been on a tear.

PE returns have overall been impressive. Do you think we are getting into an era of super returns?
Quite the contrary. Starting 2023, we have entered into an era of very, very low returns. It’s going to be a long period. We are in an environment where we have higher rates over a longer period, which has implications for return streams from private equity. We are at higher valuation levels in the stock markets. We have more concentration risk among corporates worldwide than ever before. So, the markets are riskier than before.

What do you mean by concentration risk?
The big are getting bigger. We are seeing some of the very, very large tech companies becoming a disproportionate part of the index.

And at its core you think this is because of AI and chips?
There are several factors at play. It’s a winner takes all in everything you see. You see it in music. More people listen to Taylor Swift than jazz and classical music combined. You see it in sports. If you're a good football player, you make a lot more money than everybody else. It’s the same in stock markets. It's more pronounced in technology because of the platform structure. You are on Facebook because everybody else is on Facebook, right? That way, you manage to increase critical mass like an Uber, Airbnb and the FAANG companies. Finally, in AI, it's even more extreme because it's so expensive to develop these models.

With strong, alpha leaders, is the geopolitical risk getting heightened?
It certainly has implications. As I said, it seems like the world is increasingly forming two blocs: the US and China. It can in turn have implications for world trade. But I'm observing it more than having a view.