The Saudis are taking another step toward "diversifying" as Crown Prince Mohammed bin Salman tries to make the Saudi economy less dependent on the energy sector. Flush with cash thanks to the ongoing ramp in oil and natural gas prices, Saudi Arabia's massive $500 billion+ sovereign wealth fund has apparently decided to put it to work by buying some $10 billion in publicly traded equities during the coming year.
The decision comes as the Saudi wealth fund has promised to double its assets by 2025. As Bloomberg points out, heavy buying of equities by the kingdom's wealth fund could help buttress global equity valuations at a time when investors fear that the Federal Reserve is about to pull the rug out from underneath US stocks, causing them to sink dramatically after one of the best decades, performance-wise, that anybody can remember.
The Saudi wealth fund has amassed around $500 billion in assets, and it received a $40 billion transfer from the kingdom’s financial reserves in early 2020 as the kingdom sought to 'buy the dip' during the spring of 2020 when the pandemic sent stocks into free fall (the Saudis used the money to buy shares in Citi, Facebook, and Carnival - shares which it sold several months later for a substantial profit).
According to Bloomberg, the Saudi Public Investment Fund, which is chaired by MbS, is looking to buy global stocks based on a "thematic strategy" that focuses on businesses like e-commerce and renewables.
To put the Saudis $10 billion into context: analysts at Bank of America tabulated in their latest "Flow Show" report that US equity markets in 2021 saw a record $949 billion in equity inflows, which was more than the cumulative inflow from the past 2 decades.
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The BofA team (led by chief equity strategist Michael Hartnett) added that the end of the "liquidity supernova" created by the Fed would likely "imminently test" equity valuations. But will the Saudis wait to buy the dip? Or simply average in over the course of the year?
Any spending on global stocks would be in addition to the fund's direct investments in international firms, as well as its local deals. A spokesman for the PIF, as the fund is known, refused to comment.
Pretty much everything the world knows about the PIF's holdings comes from regulatory filings. But as the fund moves away from international investment, it's looking to put more money to work within the Saudi economy.
Fund Governor Yasir Al Rumayyan said over a year ago that he's aiming to allocate about 80% of the fund's investments in the Saudi economy, with the rest to be invested in international markets.
It's still unclear where the Saudis intend to put their money to work. According to Bloomberg, the ballooning world of sovereign wealth funds is starting to shift their preferences away from US markets. As Sovereign Wealth fund assets eclipsed $10 trillion, the focus for some shifted away from the US and toward Asia, according to data provider Global SWF.
Late last year, the PIF applied for a Qualified Foreign Institutional Investor license in China.
To be sure, the fund's biggest publicly traded positions are mostly US-traded, per BBG.
But that might soon change if the fund and its managers take the view that US equity valuations are too "lofty", as Paul Tudor Jones pointed out yesterday.
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And despite media and environmental activists’ hype, oil and gas will continue to drive the global economy throughout the 21st century and probably far beyond. Moreover, the last barrels produced will most probably come from the Arab Gulf region, Venezuela’s Orinoco Belt and Russia’s Arctic.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London