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Saudi Arabia’s Investment

“The time to buy is when the blood runs in the streets.”
This phrase by Nathan Mayer Rothschild, a historic English banker at the turn of the 18th and 19th centuries, always comes to mind whenever a moment of serious economic crisis has to be faced.
In this terrible phase for the economy and the financial markets, the Sovereign Fund of the Kingdom of Saudi Arabia has not just been watching.
The Sovereign Fund of the Kingdom of Saudi Arabia decided to buy cheap shares of the world’s most promising companies operating in various sectors. The aim is to release the Saudis from oil dependency by building an international investment portfolio.

The figure, which in the midst of the crisis caused by COVID-19 the sovereign fund of Saudi Arabia has invested in the giants of the world economy, is 8 billion $.

The giant companies in question operate in sectors as far apart as Boeing and Facebook, for example. A frenzy of purchases that is a counterbalance to the austerity measures adopted by the Kingdom and which are totally unprecedented.

In fact, the double shock caused by the coronavirus pandemic and the consequent collapse in oil prices has led the Saudi Arabian government to triple value-added tax (VAT), cut spending and suspend social benefits in order to stem the growth of the budget deficit.

These drastic measures are therefore putting a strain on the social contract of a country accustomed to living on an income.

For decades, Saudi Arabia has in fact used the wealth derived from oil to offer its citizens generous subsidies, jobs and a comfortable standard of living. Without making them pay taxes.

In contrast to these measures, recently the Public Investment Fund or PIF (set up in 1971 to finance projects in the kingdom and acquire shares in local companies, in 2008 a $5 billion sovereign fund was created to invest abroad) is becoming one of the most important business hunters in the world, spending billions of dollars to buy shares in the most important foreign companies.

Yassir Al-Rumayyan, the director of the Public Investment Fund, said:

“We don’t want to waste the opportunities offered by the crisis,” and confirmed that the $325 billion fund is taking advantage of the slowdown in the world economy to secure stock at rock-bottom prices.

The companies in object, as I wrote before, operate in very distant sectors: telecommunications, entertainment, hospitality, banking, food & beverage and aeronautics.

Among those to be mentioned therefore we find: Boeing, Facebook, Total, Walt Disney, Starbucks, Marriott, Citigroup.

To be more specific, according to data provided by the SEC (the Securities and Exchange Commission, i. e. the U.S. federal agency responsible for the supervision of the stock exchange), among the almost 8 billion dollars invested in American giants, we find:

  • $2 billion in Uber Technologies Inc. and Lucid Motors
  • $713.7 million in Boeing
  • $522 million in Citigroup
  • $522 million in Facebook
  • $495.8 million in Disney
  • $487.6 million in Bank of America
  • $514 million in Marriot
  • $500 million in Live Nation

The Fund has also become a small shareholder in Berkshire Hathaway (one of the world’s largest U.S. holding companies and its CEO and Chairman Warren Buffett) by purchasing shares for $78 million.

The firepower of the Saudi Fund at the moment is not destined to run out, as it still has a reservoir of $300 billion that could be used in strategic activities with great potential for long-term returns.

At the moment the energy sector is obviously maintaining priority, according to Yasir al-Rumayyan, Governor of the Public Investment Fund, who recently said that “the Fund is assessing opportunities in the oil, gas and air transport sectors”.

It is no coincidence that since the beginning of 2020 PIF has purchased shares in various energy companies such as Equinor ASA, Royal Dutch Shell Plc, Total SA, Suncor Energy Inc., Canadian Natural Resources Ltd and ENI SpA for a total of $1 billion.

The central role of this policy of investment and diversification is surely Crown Prince Mohammed bin Salman, the strong man of the Kingdom.

Mohammed bin Salman transformed the Public Investment Fund into a power with the task of diversifying an economy entirely dependent on oil, after taking over in 2015. In fact, the Fund’s objective is to “actively find strategic opportunities in Saudi Arabia and the rest of the world that can generate significant returns in the long term”.

The Fund, therefore, makes big bets on some shares, hoping that over time a good profit will be made from them. Among these “tactical” investments, we can find, for example, those made in the US cruise group Carnival.

In April 2020, in fact, the Saudi Arabian Fund bought 8.2% of the shares of the tourism company, after the share prices on an annual basis had plunged by 80% for the obvious reasons related to the limitation of travel.

The transaction, for a total of $430 million, aims to economically and financially strengthen a marine fleet which, according to analysts’ calculations, costs around one billion per month between the maintenance of ships at berth, the payment of employees and the cancellation of bookings. However, this salacious account must be balanced with record revenue growth in 2019 of $20.8 billion and net income of $3 billion.

The reasoning behind this operation is long term, that is, when the Coronavirus will end and people will travel again the company will come back to make profits.

The investment has not been made in the opportunistic sense of climbing a group in financial and liquidity crisis, but in the sense of exploiting an important potential that has generated profits over the years and that can count on solid fundamentals.

Since the Saudi Fund bought Carnival shares at the NYSE, they have grown by over 40%. This could be a signal to other companies that have suffered the effects of lockdown and falling demand and have now ended up in the Saudi Fund’s portfolio.

Many other acquisitions, however, are not likely to generate a significant return on investment in the short term.

However, this is not a problem for the PIF, which “is a patient investor with a long-term horizon”, according to one statement from the fund.

The Fund is actively seeking strategic opportunities both in Saudi Arabia and globally that have strong potential to generate significant long-term returns.

The PIF is, therefore, looking at “any opportunities” arising from the economic disaster of the crisis, as the Fund’s Governor, Yasir Al-Rumayyan, said.

In fact, when the coronavirus outbreak stopped trading and brought stock prices to their lowest levels over the years, the fund redeployed staff to find opportunities to expand its global portfolio.

The sums invested are therefore very large, and the companies in question are particularly pleased to see that demand for their shares is increasing and that their price is also rising.

What is worrying at the same time, however, is the interference of Saudi power in strategic companies, the resulting participation in boards of directors and all that this entails.

Another issue of concern linked to these investments is the economic condition of the Saudi people.

In fact, considering the increase in VAT, which has gone from 5% to 15% since 1 July, we will have to wait and see how the Saudis will react when they see that their savings and the country’s resources are being spent on international markets.

In Riyadh, as in many other cities in the country, shopkeepers are wondering why these sums are not being used to support small and medium-sized enterprises that are in economic distress as a result of the pandemic.

The central bank’s currency reserves fell sharply between March and April and the government stated that $40 billion had been transferred to the Public Investment Fund to finance its purchases. According to some analysts, the reserves, which were reduced to about $450 billion in April to their lowest level in years, will be further reduced to finance the budget deficit.

By Michele Brunori

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