A stock boom in the Persian Gulf attracts foreign investors

Foreign investors are pouring money into a boom in the Persian Gulf stock market, while energy-rich monarchies are setting up their massive government units for public companies, and a rise in oil prices is arousing interest in the region.

Once home to national oil companies and sleepy family businesses, the region is now the world’s only bright spot for IPOs in an IPO market that is paralyzed elsewhere by the Ukraine war and concerns about global economic growth.

Last time the oil was over $ 100 per barrel. barrel in 2014, Saudi Arabia’s stock market was not open to foreign buyers, few of the largest companies or oil companies were listed, and international investors largely ignored stock exchanges in the region. Now has oil of $ 100 per. barrel helped make the stock markets in Saudi Arabia and Abu Dhabi two of the best results globally this year, both by more than 19% according to FactSet.

More than $ 7 billion in foreign capital flowed into Middle East equities in March, a record month, according to investment firm Franklin Templeton.

“The Middle East is in a sweet spot,” said Dubai-based Rami Sidani, head of border markets at Schroder’s PLC. “We’ve got investors coming to the region looking for one of the best oil exposures in the emerging markets.”

So far this year, the Middle East was the only region in the world to record an increase in the value of public quotations in the first quarter compared to the same period last year, led by stock sales in Saudi Arabia and the United Arab Emirates, according to research firm Dealogic .

Across 15 deals, companies raised nearly $ 10 billion from IPOs in the year to April 19, compared to $ 300 million in the same period last year, driven by governments privatizing state-owned companies. Europe, on the other hand, has raised $ 3.7 billion so far this year.

Dubai, the United Arab Emirates’ commercial hub, raised $ 6.1 billion this month by listing part of the emirate’s water and electricity supply, the region’s largest IPO since oil giant Aramco sold $ 25.6 billion in shares in 2019.

The Emirate’s government had planned to list only 6% of the Dubai Water and Electricity Authority, or DEWA, ​​but tripled the number of available shares after seeing global interest, including from US asset managers BlackRock Inc.

and Vanguard Group, as well as government mutual funds from Norway and Singapore, according to people familiar with the investors.

The boom is not limited to the traditional energy and financial sector. Recent Saudi Arabia lists include a pharmacy company, a food delivery app and a company that runs cold stores. Real estate development companies and water drains are expected to follow soon.

Around the rest of the world, IPO activity has fallen or remained flat in the first three months of the year, according to Dealogic, with bankers citing the fallout from the Ukraine war, rising interest rates and warnings of an impending global recession.

A ticker listing on the Dubai Financial Market Exchange showed values ​​of stocks including the Dubai Electricity and Water Authority this month.


Photo:

giuseppe cacace / Agence France-Presse / Getty Images

Rising inflation, a fall in oil prices or a global economic downturn could dampen the good times in the golf market. National governments will retain control of many of the companies being listed, limiting the influence of new shareholders and increasing the possibility that companies will prioritize state policies over the interests of investors. Some investors are also still wary of a region where high-profile corporate scandals, particularly with private equity firm Abraaj Group and hospital operator NMC Health PLC, burned foreign buyers.

Yet the Petrostates in the Persian Gulf are some of the few short-term recipients of a higher oil price, which combined with regulatory changes designed to encourage companies to list produces an instantly growing age, bankers and investors said.

“There is not much activity happening globally,” said Samer Deghaili, head of capital markets for the region at HSBC PLC. “The Middle East is rising.”

Investors operating funds dedicated to emerging markets are moving capital to the Middle East from countries that were once magnets of investment but now face turmoil, bankers and investors said. Russia’s invasion of Ukraine caused market index compilers like MSCI Inc.

and FTSE Russell about pulling it back from their tracking in new markets. A government intervention against the technology sector has frightened investors in China, and the recent economic crisis in Turkey, another important growth market, has made it a less attractive place to invest.

The Gulf is “increasingly perceived by investors as the only viable emerging markets player,” said Andrée Chakhtoura, head of investment banking in the region of Bank of America..

At the heart of the region’s emergence is government policy designed to strengthen financial exchanges and pay out ownership interests in state-owned enterprises. In particular, the UAE and Saudi governments have announced major economic overhauls and are investing IPO proceeds to kick-start non-oil sectors.

Competition also plays a role: Riyadh, Dubai and Abu Dhabi are all pushing companies to list on stock exchanges in these cities, each fighting for the cash of global investors.

“It’s healthy for investors. It offers a bigger universe, more investment opportunities in the Gulf,” said Fadi Arbid, co-founder and chief investment officer of Riyadh and Dubai-based alternative asset manager Amwal Capital Partners.

Saudi Crown Prince Mohammed bin Salman has said he wants the country’s stock exchange, Tadawul, already the region’s clearly largest with a market value of more than $ 3 trillion, to become one of the world’s largest stock markets. His efforts to attract direct investment from foreign companies, involving more exposure to local policies, have faced major obstacles.

The Saudi government is expected to sell more of Aramco on the local stock exchange, and the country’s sovereign wealth company, the Public Investment Fund, is urging companies in which it owns shares to be listed. The latest example: Digital security firm Elm raised more than $ 800 million for PIF in February.

In all, the Saudi Arabian Stock Exchange has received applications for 50 IPOs this year, though not all of them are likely to be listed, according to Franklin Templeton.

“We’ve seen a bumper quarter in terms of issuance,” said Salah Shamma, Franklin’s chief executive of the region. “It’s going to continue well into the end of the year.”

The seeds of the current IPO boom were sown in 2015 when the Kingdom of Saudi Arabia opened its market to foreign investors, and Prince Mohammed later said he would list part of Aramco.

A stream of money flowed into Saudi Arabia in 2019 when MSCI and FTSE Russell added the country to their emerging-market indices. The government then encouraged families and owners to list companies by offering incentives, such as preferential treatment on public contracts. Abu Dhabi and Dubai followed suit.

The result is that each market now has more listed companies and in a much wider range of industries than before.

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Write to Rory Jones at rory.jones@wsj.com and Stephen Kalin at stephen.kalin@wsj.com

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