Aramco’s Inclusion in Indexes Seen Underpinning Stock
Aramco’s Inclusion in Indexes Seen Underpinning Stock This Week
(Bloomberg) -- Saudi Aramco’s stock should get further support this week from global index compilers, potentially inflating a valuation that’s already seen by many investors as too high.
MSCI Inc., FTSE Russell and S&P Dow Jones Indices will begin to add Aramco to their benchmarks in an accelerated process due to the size of the offering, which could draw more than $1 billion to the Saudi stock market, according to analysts. The oil giant will also become part of the main Saudi gauge, the Tadawul All Share Index.
Buying from index-tracking funds could consolidate Aramco’s market value above $2 trillion, the level sought by Crown Prince Mohammed bin Salman. The stock briefly traded above that mark on its debut last week, and closed above it for the first time Monday.
International investors balked at the stock during the initial public offering. They pointed to, among other things, Aramco’s dividend yield, which now is just 3.75%, based on the $75 billion a year the company has promised to pay shareholders. That’s lower than peers such as Exxon Mobil Corp.’s 5% and Royal Dutch Shell Plc’s at 6.9%.
Now, though, passive funds will buy the stock without taking price and fundamentals into consideration. Index inclusion also could encourage active stock pickers to consider the stock, since avoiding will be a bet against the benchmark.
Aramco’s stock “is not a yield story,” Marwan Shurrab, head of high-net-worth and retail equities brokerage at Al Ramz Capital in Dubai, said in an interview with Bloomberg Television. “It is more of a passive flow story from the inclusions in international indices.”
Aramco advanced 1.6% to close at 38 riyals in Riyadh on Monday. The shares are now less attractive than at the IPO, said Shurrab.
Billionaire Inflows
Passive money managers tend to be buyers the session before the actual inclusion, lifting price and volume during those sessions. Dubai-based Arqaam Capital expects about $1.16 billion of flows this month from investors following MSCI and FTSE gauges, while EFG-Hermes forecasts inflows of as much as $1.24 billion.
Index compilers didn’t consider, or gave a reduced weight to, the tranche of shares that was sold to retail investors in the IPO, because individuals have the incentive to hold them for 180 days in order to get bonus shares. More passive inflows could arrive next year once the period expires and Aramco’s weight is adjusted up, analysts said.
Arqaam and EFG-Hermes analysts expect Aramco’s weight within the MSCI Emerging Markets Index, the most popular gauge for investors looking at equities from developing nations, to be between 16 basis points to 17 basis points. That’s less than the representation of other Saudi stocks such as Al Rajhi Bank (35 basis points), Saudi Basic Industries Co. (31 basis points) and National Commercial Bank (25 basis points).
| Check below the detailed schedule for Aramco’s addition: |
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| NOTE: MSCI said that if Aramco trades at 10% limit up at 12 p.m. on Dec. 17, it will postpone inclusion until after Jan 5. If reaches the same limit on Dec. 18, FTSE will postpone the addition until after Jan. 6 |
--With assistance from Manus Cranny.
To contact the reporter on this story: Filipe Pacheco in Dubai at fpacheco4@bloomberg.net
To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Phil Serafino, Blaise Robinson
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