Matthew Winkler, Filipe Pacheco and Shin Pei
Money managers in the Middle East are confident the sale of government-owned Saudi Arabian Oil Co. this year will shake up the global stock market with a record initial public offering that gives the world’s biggest company a valuation of about $1.5 trillion.
“People focus on Aramco as being the key thing,” said Salman Bajwa, chief executive officer of Dubai-based Emirates NBD Asset Management Ltd., which has $4.8 billion of assets. “In our eyes, it is just one of the several major changes taking place. We have landmark reforms going in the social, economic and markets space. The Aramco IPO will be the confirmation that one phase of structural reforms in the markets space has been successfully completed” because “there are going to be other IPOs, many of state-owned entities,” Bajwa said during an interview in his office last week.
The market capitalization of Aramco will be almost twice that of Apple Inc., four times bigger than Exxon Mobil Co. and at least one-fifth of the $5.8 trillion MSCI Emerging Markets Index, the benchmark for emerging markets, according to data compiled by Bloomberg. At the same time, Saudi Arabia plans to create the largest sovereign wealth fund and sell hundreds of state assets, including stakes in the stock exchange, football clubs and flour mills. Aramco is ready for its IPO in the second half, Chief Executive Officer Amin Nasser said last week.
“Saudi Arabia would raise $75 billion with a sale of 5 percent in Aramco with the IPO, assuming a $1.5 trillion valuation, which is earmarked to be used to implement planned reforms and ease the economy’s reliance on oil,“ said Salih Yilmaz, an analyst at Bloomberg Intelligence in London. “This is vital for the kingdom especially amid concerns of declining oil demand in the long term. For the global oil markets, the IPO may provide more transparency, given an independent audit of proven reserves would likely be required.”
Until it recently took steps to make it easier for anyone to buy and sell shares as part of a broader initiative to diversify its economy away from oil, Saudi Arabia was a financial backwater. Foreigners hold less than 5 percent of shares traded in Riyadh, the financial capital for the Mideast’s largest economy.
Questions still surround the likely timing of the sale. Saudi Oil Minister Khalid Al-Falih said Wednesday at the World Economic Forum in Davos, Switzerland, the IPO will take place “when the time is right.”
“We hope that 2018 will be the right time but ultimately we have to make sure the market is ready,“ he said, when asked if he was pointing to a delay.
The Tadawul, the Saudi stock exchange, announced on Jan. 10 a series of amendments to trading rules, including the update of its independent custody model and the implementation of a market-making program. The local regulator also lowered the minimum assets under management required for qualified foreign institutions. Saudi Crown Prince Mohammed bin Salman said in April 2016, when he was the deputy crown prince, he expected the value of Aramco to exceed $2 trillion.
The Tadawul All Share Index lagged behind developing economies last year, climbing 0.2 percent, compared with the MSCI Emerging Market index’s 34 percent rally. The Saudi benchmark gauge is up 3.5 percent in 2018, less than the developing country average of 8.4 percent. Saudi Arabia is likely to be classified as an emerging market by MSCI and FTSE Russell this year, Bajwa said.
“There had to be a relaxation of ownership rules and stock exchange rules” in Saudi Arabia, Bajwa said. “It’s been a closed market for a long time.” Including Tadawul companies in the emerging market benchmarks could bring as much as $45 billion in passive inflows between 2018 and 2019, according to investment bank EFG-Hermes Holding Co.