Tadawul, the Riyadh stock exchange, is holding a workshop later this week on the issue of crisis management and its impact on shareholder value.
The session — organized in conjunction with the Middle East Investor Relations Association (MEIRA) Saudi chapter, and in which all listed companies are invited to participate — could not be better timed.
The huge changes underway in the Kingdom do not necessarily bring crisis, but in any great transformation there will come moments of critical vulnerability where share prices can react with extreme volatility. Shareholders — and the professional advisers who are expert on such things — have to know how to react in times of value fluctuation.
There is a bigger point at issue here too. The Kingdom is about to embark on one of the biggest privatization programs in history, as state-owned assets are prepared for transfer to the public sector. The program is valued at around $300 billion, including the $100 billion initial public offering of Saudi Aramco, set to be the biggest IPO ever, which is still on track for the end of next year.
Many of these assets — ranging from power stations to hospitals to football clubs — will end up on the Tadawul, where a new breed of Saudi investor will need to be educated in the benefits of economic participation in the Kingdom’s leading corporates. They too will have to know how to react to extreme events in the investment world.
The past month’s trading on the Tadawul well illustrates the point that external events — economic, financial or geopolitical — can have a significant impact on share values. The index enjoyed a period of s ustained growth for a couple of weeks after the Future Investment Initiative (FII) in Riyadh, which highlighted the investment opportunities in the Kingdom as it pushes through Vision 2030, the strategy to diversify the economy away from oil dependency.
The FII was a shop window for the investment world, and the global investment community liked what it saw.
Then, at the beginning of this month, the launch of the anti-corruption campaign against certain prominent business people in the Kingdom injected exactly the kind of uncertainty that investors hate most. The index began to fall off, despite big buying by domestic Saudi investors.
It should be emphasized that there is nothing intrinsically wrong with the Kingdom’s investment outlook to warrant a fall like this. Just last week, in Dubai, Bank of America Merrill Lynch (BoAML), the big US bank, produced research that was, on the whole, pretty positive about the Tadawul’s future prospects.
The outlook was good, BoAML said, because of attractive valuations, improving fundamentals, accelerating growth in the non-oil sector, a more “pedestrian” pace to austerity, and the potential inclusion of Saudi Arabia in the FTSE Russell and MSCI indices, expected next year.
A new breed of Saudi investor will need to be educated about the benefits of economic participation in the Kingdom’s leading corporates.
Frank Kane
The bank highlighted the attractions of Saudi Arabia Basic Industries Corporation (SABIC), the chemicals group, as well as two banks, NCB and Samba.
But what if you are already an investor in these companies watching the share price slide in wake of the uncertainty created by the anti-corruption drive? How do you respond?
It will be the job of the MEIRA/Tadawul workshop to explain the investor relations (IR) dynamics of such a situation, but the IR experts will surely point to the fact that corruption and graft are long-term negatives for international investors. Any campaign to get rid of these evils will likely increase share values in the medium to long term.
The IR advisers will also surely point out that what international investors want above all is certainty, and confidence in a legal system that can be seen to act effectively against corruption. Foreign capital wants to know that, if it gets into a dispute with Saudi corporates, it will be treated fairly, and with due process of law, in any eventuality of litigation or arbitration.
The IR specialists really have two constituencies to address: The big foreign investors who might potentially provide the capital the Kingdom needs to help it through the diversification away from oil; and the armies of private Saudi retail investors who will comprise the bulk of the share-buying public in the sell-off program ahead.
There is a job still to be done with the latter group. Hard evidence is difficult to come by of the overall public attitude toward privatization in the Kingdom, although some have voiced concern about the process on social and other media.
Why should I buy something I already own? Are we giving away the Kingdom’s wealth to outside buyers who do not care for the long-term interests of the country? These are just two of the issues that have surfaced about the great sell-off.
The good news is that these questions have been posed before, and answered satisfactorily. In the great British privatization campaign of the 1980s, these kind of objections were raised, but IR experts, backed by no small skill in the public relations field, eventually persuaded the British public of the benefits of participatory capitalism.
The IR advisers gathering with representatives of the Tadawul in Riyadh have a similar skilful job of persuasion to finesse.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai