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The Saudi Aramco IPO: What Does it Mean for the Markets?

 3 min read / 

In an effort to diversify the Saudi economy and reduce its dependence on oil, the Kingdom is all set to go public with its crown jewel – Saudi Aramco. Although the precise dollar valuation of the world’s largest oil company has been the topic of many debates, with estimates ranging from $400bn to $2trn, this listing will be the largest IPO by a country mile.

With Saudi Arabia looking to sell 5% of Aramco, the share sale would raise $100bn, four times the current world’s largest IPO, Alibaba. As mentioned previously, this would value the company at $2trn, making it larger than Apple and Alphabet, the two biggest listed companies in the world, combined.

AramcoIPOAssuming all goes according to plan, the money raised from the listing will be placed into a public investment fund (PIF). In order to achieve the desired diversification from oil, the funds will drive “Vision 2030”, the Kingdom’s effort to develop non-oil industries.

Despite the heated debate surrounding valuation estimates, it is clear that the listing will be beneficial for Saudi Arabia and its economy. Furthermore, the historic event is also expected to impact major asset classes such as equities, commodities and currencies.

Impact on Equity Markets

Aramco will list on Tadawul, Saudi Arabia’s domestic stock exchange, which has a total market cap of $440bn. As mentioned previously, a sale of just 5% could raise more than $100bn based on some estimates and this would make it almost impossible for the entire listing to take place on the domestic exchange.

To circumvent this, it is expected that the company will be listed on more than one exchange. Based on comments made by those familiar with the matter, it seems that Singapore, the largest oil-trading centre in Asia, is eager to partner up for the listing. Moreover, Aramco Executives have suggested the possibility of a secondary listing in New York, Toronto, Tokyo or London.

Impact on FX

The Saudi riyal (SAR) has been pegged to the dollar for over 30 years now. One of the major downsides of this policy has been that the Kingdom has had to mirror US monetary policy in order to maintain the peg, which has sometimes stifled economic growth in Saudi Arabia. However, the sentiment regarding a possible devaluation in the riyal has been growing, as seen by the trend in SAR 12m forward points.

Furthermore, the fact that Saudi foreign reserves have been depleted by more than $200bn since August 2014 has added further credibility to the possible currency devaluation. However, Saudi Arabia’s first ever sovereign bond sale in Q4 2016 raised $17.5bn and, consequently, led to a fall in 12m SAR forwards to the lowest level in 18 months. Therefore, it is not entirely far-fetched to assume that the influx of funds from the listing will deter further betting against the dollar currency peg.

Impact on Oil Prices

Given that Saudi Aramco is the world’s largest oil company, it is evident that the determining factor for Aramco’s eventual IPO price is the price of crude. The tug of war between OPEC and shale and OPEC’s headstrong commitment to sustaining production levels in order to maintain market share has led to a three-year surplus in crude inventories. Consequently, this has caused oil prices to plummet.

However, last month, Saudi Arabia, the world’s largest oil exporter, reportedly cut production levels by the most in over eight years. This bodes well for the future of oil prices and could lead to a rebound in prices over time. Moreover, with oil expected to provide over 33% of world energy for the next 20 years, one can expect oil prices to reach higher levels in the future, a positive signal for Saudi Aramco.

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Asia

Google to Open Artificial Intelligence Centre in China

 2 min read / 

Google AI China

Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.

Fei-Fei Li, Chief Scientist of Google Cloud, said:

“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”

The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.

Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.

Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.

China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.

Keep reading |  2 min read

Companies

A Deal Looks Likely for Disney’s Fox Takeover

 2 min read / 

Disney's Fox Takeover

The Story

Disney is on the cusp of confirming a deal to buy most of 21st Century Fox in a $60bn deal, reports claim. The sale would see Disney acquire 20th Century Fox film studios as well as Sky and Star satellite broadcasts in the UK, Asia and Europe, according to the BBC.

21st Century Fox would retain broadcasting network Fox News and Fox Sports 1. While both would remain independent initially, they “could consider a merger later with the Murdochs’ publishing company, News Corp.,” reported Bloomberg’s David Hellier and Anousha Sakoui.

Fox CEO James Murdoch could potentially be offered a senior position at Disney once the deal is done.

Why It’s Important

Fox has reassessed its place in the current media landscape and decided that to in order to be successful it would need to scale up. Disney has the scale that Fox lacks. By consolidating their efforts around news and sports, Fox will be able to play an important role in the media industry.

On the other hand, Disney’s acquisition will extend the company’s reach. Plans to roll out a new Disney streaming service could benefit from the increased international exposure, where there appears to be the most growth.

Disney would also acquire Fox’s streaming service Hulu, opening new opportunities for Disney to compete with the likes of Netflix and Amazon Prime Video.

Keep reading |  2 min read

Companies

ExxonMobil under Shareholder Pressure

ExxonMobil Shareholder

The world’s largest oil group has agreed to publish the impact of climate policies on its bottom line.

In recent years, shareholders of the world’s largest oil and gas conglomerates have been pushing companies to publish analysis of the threat they face from climate change and the threat of green policies. In a regulatory filing, Exxon announced that it would change how it reports its results to include a paper on how climate policies are hurting its business. The proposal was backed by around 60% of Exxon’s shareholders back in May, which was led by the New York state employees’ retirement fund. The move follows Exxon’s gradual shift towards addressing climate change; in the 90s, the group campaigned against the Kyoto protocol but has since committed to reducing emissions.

Keep reading |  1 min read

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