Why the US proved fertile ground for Gulf sovereign wealth investment in 2020

Investment from Gulf sovereign wealth funds reached record levels in 2020 as a result of low oil prices and a need to diversify economies with non-oil assets, according to analysts.

According to statistics released by the US-based Sovereign Wealth Fund Institute (SWFI), Middle Eastern sovereign wealth funds directly invested $14.7 billion in the US in 2020, compared to $6.5 billion in 2019 and $6.2 billion in 2018.

The bulk of the investment, the SWFI noted, came from Saudi Arabia’s Public Investment Fund, which invested in discounted US blue chip equities.

The Abu Dhabi Investment Authority and the Kuwait Investment Authority, for their part, allocated “significant” amounts of capital to third-party investors, opting for direct investments in real estate, infrastructure and select private equity opportunities.

In an interview with Arabian Business, Mohamed Soliman, a senior associate at McLarty Associates’ Middle East and North Africa practice, said that “since the 2014 oil price crash, the oil-exporting nations in the Arabian Gulf understood that the low oil prices might become the new norm.”

“As a result, pivoting away from the oil-empowered economies to more diversified ones became a priority for the region,” he added. “Unsurprisingly, the sovereign wealth funds have been building a robust portfolio of strategic investments in international markets as well as in regional and local markets, aiming at generating significant returns and driving their economies’ non-oil growth.”

In 2020, Soliman added, the weakening of international markets encouraged sovereign wealth funds to buy minority stakes in companies around the world, including the US.

Mohamed Soliman, senior associate at McLarty Associates’ Middle East and North Africa practice

Liam Hunt, a financial writer and analyst at GoldIRAGuide.com, noted that ADIA and KIA acquired $225 billion in distressed and discounted US equities available following the market crash of March 2020.

“For at least the past two years, oil-rich sovereign wealth funds have been improving their liquidity ratios since the price of oil started gradually decreasing from its autumn 2018 peak,” he said. “Last year, during the coronavirus crash, sovereign wealth caught a falling knife and picked up stocks in the struggling US market.”

In Hunt’s opinion, the strategy of many sovereign wealth funds in the US “isn’t sustainable” going forward.

“Now we have sovereign wealth funds with more liquidity than central banks, which leaves monetary authorities with little leeway to support their currency during an inflation event,” Hunt added.

In the case of Saudi Arabia’s PIF, Hunt said, $10 billion of at least $300 billion under management was held in US stocks by Q2 2020.

“Saudi leadership took note in Q3 of last year when they offloaded about $3 billion in US equities, bringing their total exposure down to $7 billion,” he noted.

“I believe this points to a wider trend across sovereign wealth funds invested in US stocks in the year ahead. As the price of oil stabilises, international business picks up, and the stock market recovers, expect to see sovereign wealth funds increasingly move more of their wealth from direct US direct investment into fixed-income asset, treasuries, precious metals and other diverse asset classes non-correlated to the equities market.”

Sarah Elzeini, founder and CEO of DC-based global advisory firm SMZ International Group

Future forecast

Sarah Elzeini, the founder and CEO of DC-based global advisory firm SMZ International Group, said that strong levels of investment – albeit in slightly different sectors – are expected as the United States begins the new administration of President Joe Biden.

“In 2021, we are likely to see climate change as a driver of new investment trends, particularly investments in companies that favor the environment,” she said. “There is no doubt in my mind that the cross-sector of climate and investment will be an incredibly strong focus.”

“Let’s not forget former Secretary of State [John] Kerry will be leading the climate change file for the United States,” Elzeini added. “He is a powerful internationally recognised statesmen that sovereign states and their wealth funds will surely desire to invest in what crosses his desk.”