Norway and Saudi Sovereign Investors Make Tactical Bets During Coronavirus Crisis

Posted on 05/05/2020


Some of the world’s largest sovereign wealth funds are eager to pile into new opportunities, seizing stakes in listed companies. Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala Investment Company are said to be looking into entertainment, healthcare, logistics, and technology. Norway Government Pension Fund Global bargained for some consumer and energy stocks. PIF has already jumped into Carnival Cruise Line, which sold US$ 4 billion in senior secured notes due in 2023 at 11.5% interest. Convertible notes of US$ 1.75 billion also due in 2023 went for 5.75%. A share dilution brought in another US$ 625 million. Carnival is based out of Doral, Florida. Carnival Cruise Line has plans to resume cruises August 1, 2020. However, there is a “No Sail Order” issued by the U.S Centers for Disease Control and Prevention (CDC) that was extended to July 24, 2020, or when the U.S. Secretary of Health and Human Services declares that the Wuhan coronavirus is no longer a public health emergency. The US$ 320 billion PIF also purchased stakes in oil companies Shell, Equinor, Total S.A., and Eni Spa. Another US$ 500 million went to ticket-seller Live Nation Entertainment.

Mubadala, with US$ 230 billion, expects to unleash capital when the timing is favorable. Mubadala has recently placed a small amount in medical biller WellPay. Mubadala’s investment in Virgin Galactic also appears to be paying off, with the most recent successful test flight of the VSS Unity reported on May 4, 2020. Test flights have been ongoing since 2016. Mubadala also invested in listed company Inseego Corporation, which is a provider of software-as-a-service and solutions for the Internet of Things – attempting to benefit from a possible 5-G future.

Heading north, Norway Government Pension Fund Global made some heavy bets in companies such as Fitbit, Royal Dutch Shell, BHP Billiton, and Grupo Aeroportuario del Centro Norte S.A.B. de C.V.

Long Term Planning

Investments in energy and discretionary spending would seem to indicate a belief in a general rebound in the economy. That is not necessarily the case. Sovereign wealth funds, with their extended horizons, can wait out several years of disappointment in these industries that other institutional investors could not. Even pension funds can’t manage the same waiting game. Public policy magazine City Journal clarifies the situation facing pensions: “Some government pension systems are so poorly funded that they face what’s known as a liquidity crisis—when a system has so little cash on hand that it must sell assets at a loss just to pay current benefits. In a report last September, ratings agency Standard & Poor’s identified eight seriously underfunded state and local pension systems that could soon face such crises—including the New Jersey state teachers’ fund, which has just 25 percent of the money it needs on hand to finance its future obligations, and the Chicago police retirement system, with only one-fifth of the assets it needs.” It can be especially hard to hold on to stagnant bets if client redemptions should interrupt investment plans. Redemptions are of course becoming a daily reality. For example, pension funds in Australia are seeing redemptions that could be worth billions before the crisis fades. Raiding a retirement plan carries with it serious tax penalties, suggesting there is a high level of desperation on the part of members.

American Consumers Out of Ammunition

Betting on an early return to normalcy could be hazardous. Deutsche Bank says consumers in the U.S., Italy, Spain, and the U.K. are reducing spending by 25% to 30%. Most estimates of credit card spending in the U.S. put the coronavirus-related declines at around 30%. The majority of U.S. households do not have a store of savings to fall back on. Credit card balances have already reached US$ 1.1 trillion, causing issuers to increase their buffers for loan losses. Renowned personal finance expert Suzy Orman, who called the 2008 crisis on Oprah’s television show, changed her usual methods and warned her fans on the Tamron Hall show to pay credit cards and other bills as little as possible: “Hold on to as much cash as you possibly can right now.” Orman advised customers to negotiate deals with their financial institutions. Orman’s advice is consistent with an economy that is tapped out. Government intervention and stimulus has helped, she said, but those who have received it and those who refuse it alike have pointed out that the assistance is short-term in nature, much of it in the form of loans. Consumers are also hesitant to be in crowds again, with over two-thirds surveyed indicating a desire to integrate into public life slowly once restrictions are lifted.

The great global lockdown has also impacted ride-share companies like Uber Technologies and Lyft. Both companies have engaged in layoffs. Uber and PIF go way back, in which PIF committed large amounts of capital before Uber went public. Dubai-based Careem, a ride-hailing company that is owned by Uber, is laying off 31% of its employee base, as the company faced massive drops in business. Uber paid US$ 3.1 billion for Careem in 2019.

In the aggregate, sovereign wealth funds continue to hold significant weight and influence in global markets, both listed and unlisted equities.