In June last year, the Saudi Capital Market Authority allowed direct foreign investment into Saudi public stocks for the first time. Market participants welcomed the move, which looked set to bring a large injection of capital into the exchange, and to introduce more sophistication into a market that remained largely local and retail-oriented.
The then head of the Saudi Exchange went on an international tour, meeting investors and journalists to promote the market’s increased openness.
Seven months on, there is little progress to brag about. There has been no big rush to invest in Saudi stocks, and observers are keenly aware that the much-hyped opening up was limited in scope and appeal.
Only certain foreign investors can buy into the market, they are still forbidden from placing orders in new issues of stock, and the stakes they can build are capped. Besides, with the price of oil, and the Tadawul All Share Index, falling ever lower, few now see that market as an attractive investment opportunity.
A Saudi Aramco IPO could change all that.
For one, regional observers have been speculating that Saudi authorities may open the market up more fully to foreign investors ahead of Aramco’s float.
If the IPO were to take place on the Saudi Exchange, and if a significant chunk of the firm’s capital was offered, the Kingdom might actually need foreign participation to get the IPO covered. Aramco is, after all, potentially the biggest company in the world.
But even if Tadawul does not open up fully before the Aramco IPO, that deal could still cause a rush of foreign investors to buy into the market.
Indeed, a number of foreign funds would no doubt be keen to invest in Aramco in the secondary market, to get a piece of the world’s biggest oil producer before oil becomes obsolete.
And foreign funds may take advantage of the listing to buy into other Saudi names as well. That is because large listings on Tadawul are typically accompanied by a drop in the exchange’s other stocks, as the country’s huge retail investor base shifts its money away from old investments into the latest IPO.
Retail investors have limited cash to put to work, and Saudi IPOs are priced at massive discounts, giving buyers the near-certainty of quick returns.
The depreciation resulting from a deal the size of Aramco’s potential listing would render other Saudi stocks attractive to foreign investors and could finally trigger the foreign inflows the country longs for.