Aramco Needs More Than Bourse’s Invisible Hand to Buoy Its Stock

(Bloomberg) -- Saudi Aramco’s shares, when they’re finally issued, may just prove to be havens in a volatile region. At least in the beginning.

Given the wide-spread speculation that government-related funds prop up the market when times are bad, some investors assume shares of Saudi Arabian Oil Co. wouldn’t be allowed to perform badly, especially given the hype around the initial public offering.

But even if they do, the support probably won’t be enough to keep global fund managers invested in Aramco’s stock for long, despite the company’s intrinsic ties to the kingdom and its finances.

“Short-term investors will find the downside protection, if there, comforting,” said Thea Jamison, a portfolio manager at Change Global Investment in Camas, Washington. In the long-run, investors would ask “bigger questions” about the company’s “fundamentals, its long-term growth outlook, the country’s macroeconomic environment and political risks.”

The Invisible Hand

Aramco’s offering shines a light on what some investors call “the invisible hand” that shields Saudi Arabia’s stock market during times of crisis. A year ago, there was speculation that funds with links to the government swooped in during the fallout of Jamal Khashoggi’s murder, and in 2017, when local billionaires were imprisoned at the Ritz-Carlton Hotel in Riyadh.

There was also sign of support after last month’s attacks on the kingdom’s oil facilities, with the main stock index recovering about half its losses within the first hour of trading.

Aramco “will be a showcase for the Tadawul,” said Ipek Ozkardeskaya, a senior market analyst at London Capital Group. “Therefore, the Saudis won’t refrain from giving the necessary support to Aramco shares. And they have the means to do so.”

The share sale, which has been in the making for at least three years, is the centerpiece of Crown Prince Mohammed bin Salman’s efforts to modernize the economy and diversify the nation’s revenue from oil. That drive includes turning Riyadh’s bourse into a gateway for foreign investment.

The offering is going ahead even though the strikes risk reducing Aramco’s valuation, which Prince Mohammed has put at over $2 trillion.

Based on his target, a 1% float would be valued at about $20 billion, or about 4% of the Saudi stock market. The state-run company plans to announce its intention to float around Oct. 20, and its listing could take place as early as November, according to people with knowledge of the matter.

No Guarantee

Judging by the performance of equities held by the Public Investment Fund, the biggest investor in the equities market, Saudi Arabia’s reliance on Aramco doesn’t necessarily mean that the so-called invisible hand will buoy the shares indefinitely.

Shares of Saudi Telecom Co., National Commercial Bank, Riyad Bank and Samba Financial Group have outpaced the benchmark index over the past two years, while those of Saudi Basic Industries Corp, Saudi Arabian Mining Co. and Almarai Co. have lagged. PIF’s holdings in these stocks vary from about 15% to 70%, according to data compiled by Bloomberg.

“Over the multi-month and multi-quarter time-frames relevant for institutional investors, government support for a share price cannot fight the prevailing wind,” said Hasnain Malik, the Dubai-based head of equity strategy at Tellimer.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson

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