How Saudi Arabia's Stock Market Flop May Be Salvaged: QuickTakeBy and
Saudi Arabia’s drive to lure foreigners to invest in its stock market has fallen flat, with some would-be buyers kept on the sidelines by political upheaval within the kingdom. But the campaign may be transformed in the coming months. One of the world’s biggest compilers of stock indexes has lifted the status of Saudi stocks and a still larger rival is about to decide whether to follow suit. And the kingdom will host what may be the biggest initial public offering in history when shares are offered in Saudi Aramco, the world’s largest oil company.
1. Why is Saudi Arabia trying to lure foreigners?
Crown Prince Mohammed bin Salman is spearheading an effort to modernize Saudi society, and that includes turning the kingdom’s $450 billion-plus stock market into a gateway for foreign investment. But the crown prince’s crackdown on corruption, which included the detention of dozens of the country’s rich and famous, shocked prospective investors. Saudi Arabia’s war in Yemen, and tensions involving arch-rival Iran, are other complicating factors.
2. How is that effort going?
Foreigners were first allowed to trade stocks directly in June 2015, but with stringent restrictions. Regulators have since eased those requirements and, among other changes, aligned settlement transaction times with international standards and made life easier for fund managers by allowing them to aggregate orders. Nevertheless, the value of stocks traded in Riyadh is on a downward trajectory, and foreigners own less than 5 percent of the market. That’s why so much is riding on the crown prince’s plan to sell about 5 percent of Saudi Arabian Oil Co., or Aramco.
3. Why is Aramco so important?
Sitting atop one-fifth of global petroleum reserves, the state-owned company is worth more than $2 trillion, according to the crown prince’s estimate. That would make it worth twice the value of Apple. (No one really knows, since so much about Aramco’s books is kept secret.) If the planned IPO of 5 percent of Aramco really does meet estimates of $50 billion to $100 billion, it would dwarf Alibaba Group Holding Ltd.’s world record $25 billion offering.
4. When will the IPO take place?
The timing and venue have yet to be confirmed, with the earliest date being late 2018 on the Saudi exchange, with an additional possible listing (or listings) overseas. Prince Mohammed was quoted as saying the share sale may slip to early 2019.
5. Why would that matter?
Index compiler MSCI is considering whether to upgrade Saudi Arabia’s status to emerging market in June. (It’s currently classified as a “standalone” market). In March, FTSE Russell promoted Saudi Arabia to an emerging market, potentially bringing an estimated $5.5 billion in inflows as fund managers are required to add Saudi stocks to their emerging-market funds. MSCI’s decision will have an even bigger bearing: More than $1.6 trillion in passive and active assets track MSCI’s gauges for developing nations versus approximately $150 billion of passive money following FTSE’s equivalents. If approved by MSCI, Saudi Arabia would join its emerging-market indexes from 2019 and represent about 2.3 percent of its main index, making it the third-largest emerging nation from Europe, Middle East and Africa.
6. How important is MSCI inclusion to the Saudis?
Hugely. EFG-Hermes Holding estimates that the upgrade may trigger as much as $40 billion in passive and active flows into Saudi Arabia from funds tracking MSCI gauges. If Aramco goes ahead with the IPO plan, it would boost the country’s weighting on MSCI’s emerging market index by 0.2 percentage points and spur $1.1 billion in passive inflows for every $10 billion of market value that’s traded on stock markets, according to EFG-Hermes. MSCI said in February the kingdom has done what’s needed to be included.
7. How are Aramco’s IPO and MSCI’s decision connected?
They technically aren’t. But a rejection by MSCI would mean that funds that track emerging market indexes wouldn’t buy Aramco stock if it was listed only in Saudi Arabia. If it’s also listed in London, say, that wouldn’t be a problem.
The Reference Shelf
- The world’s biggest IPO: a QuickTake on Saudi Aramco.
- Saudi exchange courts foreigners.
- FTSE Russell explains why it promoted Saudi stocks.
- QuickTakes on Prince Mohammed and how Saudi society is shifting.
- Aramco’s valuation: Bloomberg Intelligence.
- Bloomberg Markets examines the growing clout of index providers.
— With assistance by Laurence Arnold