The initial public offering for Saudi Aramco, Saudi Arabia’s state-owned oil company, has shattered the global record for an IPO and the company has overtaken Apple as the world’s most valuable company.
The float, which was only available to domestic investors, raised more than $25 billion, valuing the company at $1.7 trillion. On the first day of trading of the Riyadh stock exchange on December, the shares surged 10%, pushing Saudi Aramco’s value briefly above $2 trillion.
With a stock offering this significant, there is a knock-on effect for open-end index funds and exchange-traded funds, which will need to buy shares as it is included in underlying benchmarks. The kingdom was upgraded from “standalone” market by MSCI in May 2019 to “emerging market” status, but it is still held by a number of frontiers-focused funds and trusts. 4-star rated BlackRock Frontiers investment trust (BRFI), for example, has a 6% weighting to Saudi Arabia in its portfolio.
A number of index providers have indicated they will fast-track inclusion of Aramco into their benchmarks, possibly by year end, meaning a scramble could soon be on for the shares.
Despite the size of the offering, most index fund owners won’t notice much of a difference outside of indices that focus solely on Saudi Arabia.
“While the headline figure is big, it’s not going to move the needle much in the broad indices,” says Ben Johnson, Morningstar’s director of global ETF research.
The reason, notes Alex Bryan, direct of passive strategies at Morningstar, is that most broad indices that are affected are float-adjusted and market-cap-weighted, and only a small fraction of Aramco’s market cap is publicly floated. If the firm makes additional equity offerings, its weightings could climb further, but for the time being the impact should be small.
Johnson crunches the numbers, taking the $29.4 billion in IPO proceeds and adding that to the MSCI Emerging Markets Index's November 29 market cap of $6.478 trillion and then dividing the firm’s IPO proceeds by that sum.
MSCI Emerging Market Index
The result would be that Aramco would account for roughly 0.5% of the weighting of the MSCI Emerging Markets Index, leaving it as the index’s 25th largest holding as of November 30. The stock's relative weightings has risen after the shares rallied on the first day of trading.
Nevertheless, there would be a discernable impact on sector allocations within the MSCI Emerging Markets Index.
The emerging-markets benchmark’s energy sector allocation stood at 7.4% as of the end of November. Based on Aramco’s IPO valuation, that weighting would rise to 7.8% after inclusion.
A more visible change will occur in the country weightings. Saudi Arabia will become the eighth largest country represented in the index up from ninth, moving ahead of Thailand.
Within the MSCI All Country World Index, the impact will be even smaller because of that benchmark’s 2,700 constituents. Aramco will have a 0.06% weighting in the MSCI ACWI, ranking as the 353rd largest holding based on the IPO valuation. As a result, there will only be a fractional change in sector weightings.
The IPO will have a major impact, not surprisingly, in Saudi Arabia-tracking indices. The stock will be the largest holding in the MSCI Saudi Arabia Index, with a 17.09% weighting. The top 10 of this index had been dominated by financials, but in the wake of the IPO energy will become the third largest category. For UK investors, this will affect the Invesco MSCI Saudi Arabia ETF (MSAU), for example.
Morningstar Indices has yet to make formal decisions on Aramco’s inclusions, but based on the IPO valuation, it would likely be less than a 0.4% weighting in the Morningstar Emerging Markets Index, less than 0.04% in the Morningstar Global Markets Index, and less than 0.09% in the Morningstar Global Markets ex-US Index.
