Investing is and will always be a learning curve for even the most accomplished investors. For instance, Warren Buffett (Trades, Portfolio) claimed last year that he learned some valuable lessons by paying too much for Kraft Heinz (KHC). There are many ways for an investor to gain insight into the expected market performance, and analyzing the investment trends of billion-dollar investment funds is certainly one.
Saudi Arabia’s sovereign wealth fund, which is commonly known as the Public Investment Fund, is one of the largest collective investment schemes in the world with over $320 billion of investable assets. The money managers running this fund have made some bold moves in the last week, and these actions can be used to forecast the pathway of global equity markets in the next couple of years.
The recent investments
Within the first 10 days of April, the Saudi fund has executed two noteworthy investments.
- On April 6, the fund revealed the purchase of 43.51 million shares of Carnival Corp. CCL, worth $540 million at Thursday’s market price of around $12.40.
- On April 8, The Wall Street Journal reported that the fund has invested approximately $1 billion in four European oil giants; Equinor ASA EQNR, Royal Dutch Shell PLC RDS.A, Total SA TOT and Eni S.p.A E.
Both the cruise and energy sectors have been hit hard over the last couple of months as a result of the Covid-19 pandemic.
| Company | Share price performance in 2020 |
| Carnival Corp. | -75% |
| Royal Dutch Shell | -36% |
| Total | -34% |
| Equinor | -35% |
| Eni S.p.A | -36% |
Source: Bloomberg.
The significant decline in the share price of these companies and the volatility associated with these stocks has resulted in many investors wanting to remain on the sidelines until the macroeconomic outlook improves. However, the Saudis have done the opposite. In this analysis, the outlook for these two industries will be evaluated in a bid to decide whether investors should follow suit or continue waiting for a better opportunity.
Energy markets are finally set to stabilize
The demand for energy commodities took a massive hit from the coronavirus outbreak. As many countries went into lockdown, including industrial giants such as China, the United Kingdom, Germany and the United States, manufacturing activities came to a standstill. Amid this chaos, Saudi Arabia and Russia failed to come to an agreement to reduce the supply of oil to global markets, triggering an oil price war. This led to supply-side pressure for crude oil prices as well. However, on April 9, Saudi Arabia and Russia agreed in principle to cut the supply by 10 million barrels per day. This news should have ideally sent oil prices higher, but officials from Mexico refused to join the cuts, suggesting oil giants should cut more than the proposed number of barrels. This unexpected occurrence led to a 9% decline in commodity prices on April 9.
Things, however, look much better than they were a few weeks ago. In the virtual G20 energy summit scheduled for April 10, Saudi officials plan to bring an end to this discrepancy with Mexico and proceed with the planned reduction in oil production. In other news, the Wall Street Journal reported that Mexican President Andres Manual Lopez has agreed to cut the oil supply by 100,000 barrels per day as a result of its successful discussions with the U.S., who has agreed to reduce output by an additional 250,000 barrels a day to compensate for Mexico’s losses.
As a result, the supply-side pressure is finally coming to an end.
While this is exciting news, it will likely take at least a couple of quarters for energy companies to realize the true benefits. This is because of the reduced demand for energy on a global scale. Some analysts believe the proposed cuts will do little to help oil companies in the short term, which is a certainty given the outlook from the demand side. In an interview with the Wall Street Journal on April 9, OPEC Secretary General Mohammed Barkindo said:
“The supply and demand fundamentals are horrifying. The decline (of demand) in the second quarter alone would be close to 12 million barrels a day and expanding, which is unprecedented in modern times.”
For things to return to normal, the spread of Covid-19 needs to be contained. But judging by how China curbed the spread of the virus, it’s reasonable to assume that at least another month will pass before the U.S. can put an end to the increasing number of new cases reported daily.
Source: Bloomberg.
Even though the share prices of oil companies will most likely remain volatile over the next couple of months, things look better in the long term. When Western countries and India come out of the lockdown period, industrial output will be revived, leading to a surge in demand for energy commodities. This makes now a good time to invest in beaten-down oil companies, the same way the Saudi fund has done.
Carnival’s recovery will take longer, but the outlook is positive
The global leader of the cruise industry, Carnival, is reeling as a result of the worldwide lockdown. There’s no question the company's earnings will take a massive hit due to mobility restrictions. Therefore, an investment decision should be made based on whether Carnival can remain solvent until coronavirus fears subside. If the company survives to see light at the end of the tunnel, itl will be in a great position to unlock growth opportunities.
The only obstacle that would impair the company's ability to continue operating is its debt burden. According to company filings, Carnival had $9.7 billion in long-term debt at the end of November 2019. The company incurred an interest expense of $171 million for the full fiscal year. Management has been quick to react to the coronavirus outbreak by suspending both the dividend and buybacks to preserve much-needed cash. Also, Carnival recently raised $5.75 billion in the bond market and $500 million by issuing common stock at $8 per share. Its liquidity has improved significantly over the last couple of months as a result of these actions.
Even though Carnival will disappoint investors when the company reports interim financial results, there’s reason to believe the cruise line operator has what it takes to weather the storm and come out stronger. This will take some time, but there is potential to earn double-digit returns in the long term by betting on Carnival at these depressed prices.
Takeaway: Saudi investment managers seem to be on the right track
The Public Investment Fund of Saudi Arabia has invested billions of dollars in two sectors that are currently unloved by the majority of investors. The long-term prospects of both these industries, however, are positive. Pandemic-induced fears are likely to be short-lived, and a revival in economic growth will equally benefit both cruise lines and oil companies. Investors who go against the grain and are greedy when others are fearful will generate attractive returns in the long term.
Disclosure: I own shares of Carnival.
Read more here:
- Why Lazard Asset Management Is an Attractive Contrarian Play
- The Suspension of Buybacks Will Reveal Who Was Swimming Naked
- Warren Buffett Unloads Delta Air Lines Shares
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