Saudi Arabia pumps up stock market after bad news
The government has spent billions to counter sell-offs in recent months
Saudi Arabia’s government has been spending billions of dollars to quietly prop up its stock market and counter selloffs that have followed repeated political crises in recent months.
According to a Wall Street Journal analysis of trading data and interviews with multiple people with direct knowledge of government intervention efforts, the Saudi government has placed huge buy orders, often in the closing minutes of negative trading days, to boost the market.
The Saudi stock market is a pillar of Crown Prince Mohammed bin Salman’s plan to revamp his country’s economy. Since he ascended to a top leadership position three years ago, the de facto Saudi ruler and his deputies have faced a series of foreign-relations predicaments—most recently the October murder of columnist Jamal Khashoggi— that prompted investors to dump Saudi stocks.
The Saudi stock exchange normally discloses how much stock the government buys. The recent purchases after political crises have been concealed from public view.
That is because the government, rather than buying stock directly, has routed its money through asset managers at Saudi financial institutions who run funds that don’t need to reveal their clients, those people say.
The exchange continues to report on government stock buying, selling and ownership. The bulk of recent share purchases by the government aren’t included in those disclosures.
It is a strategy the kingdom used last year after it launched an economic blockade of Qatar, following the arrest and torture of prominent Saudis, a corruption crackdown that some inside the government called a political purge, and after Prince Mohammed detained Lebanon’s prime minister, the Journal found.
Through the upheaval, Prince Mohammed’s government has been keen to show the world that Saudi Arabia remains safe for foreign investors. “We need to highlight to the world that Saudi investment is good,” said a Saudi government official.
China and other developing countries have been intervening for years in their stock markets. The Saudi efforts stand apart because they’re geared to attract foreign investors to a market with little foreign ownership. Foreigners only own about 4% of stock on the Saudi market, where all of the companies are Saudibased and many have some government ownership.
While the PIF’s recent stock purchases aren’t publicly disclosed, they’re openly discussed by Saudi traders. “In the bad days of Saudi Arabia, when there are troubles related to government, you see these flows coming in,” said Abdullah al Marshad, a trader at Saudi Arabia’s Samba Financial Group. “It tells people: Don’t worry.”
Antoine van Agtmael, who coined the term “emerging market” almost 40 years ago, and who now works as an adviser for publisher FP Group, said government intervention makes the Saudi stock exchange “more of a fake market, and that kind of undermines the trust of investors in the long run.” Having a healthy stock market is especially important because the Saudi stock exchange, known as the Tadawul, will be included next year in global emergingmarket indexes. That inclusion will result in billions of dollars of foreign capital entering the exchange, which currently has a market capitalization of around $500 billion (U.S.). Year-to-date, the Tadawul is up 9.67%, while the MSCI All Country World Index has fallen 5.47%.
To prop up the market, the government has bought stocks via its sovereign Public Investment Fund, or PIF, say people familiar with the matter. PIF has been Prince Mohammed’s main investment instrument at home and abroad, taking a high-profile stake in Uber Technologies Inc. and investing billions of dollars with SoftBank Group Corp.
A PIF spokesman declined to comment on the practice of buying stocks to lift the market. In a written statement, he said PIF has multiple funds making domestic and foreign investments, and that “it would be expected that any falls on Tadawul” represent “buying opportunities which would be acted upon by some of the funds.”
Public data show that as of Nov. 1, Saudi government-related entities owned about $200 billion in shares of companies listed on the local exchange, just over 40% of the exchange’s value. The actual value is billions of dollars higher due to the PIF’s undisclosed buying, the Journal’s interviews and data analysis show.
It is difficult to quantify the total precisely because for recent stock purchases the PIF placed money with mutual funds or money managers that don’t report the identities of their investors. Such PIF investments are lumped in with other investments by such fund managers in the Tadawul’s data reporting.
A Saudi royal court representative referred questions about stock purchases to government spokespeople, who wrote that the “PIF is an independent entity with its own governance and mandate.” A Tadawul representative declined to answer questions about government stock purchases.
The stock buying has a potential downside for the PIF, which is supposed to focus on big international projects. Instead, say people familiar with the matter, some fund officials are frustrated that Prince Mohammed’s royal court ordered PIF chief Yasir al Rumayyan to spend money making sure the local index doesn’t plummet.
When local share prices falter, one of these people says, Mr. Rumayyan tells deputies to start buying. They use the messaging program WhatsApp to contact managers at institutions including state-controlled NCB Capital Co. who manage PIF funds, this person says.
Prince Mohammed made millions investing in Saudi stocks when he was young, he has told people interviewed by the Journal. Since 2015, when his father became king, the prince, known widely by his initials “MBS,” has placed the Tadawul at the center of plans to modernize Saudi Arabia’s economy. His government suggested taking the Saudi state oil company public on the exchange in what would be the world’s largest-ever initial public offering, which heightened the importance of making the market seem stable and safe to foreign investors.
Parts of the prince’s plan has created volatility. A 2016 announcement of subsidy cuts sparked the first of the recent big waves of government stock buying.
From Oct. 21 to Dec. 15 that year, Saudi and foreign investors sold nearly $7 billion worth of stock, market data show. Saudi mutual funds and money managers bought more than $8 billion worth of stock in that period, far more than their normal level of buying. The money in those funds came from the PIF, say people familiar with the matter.
The same pattern is visible in June of 2017, after the prince spearheaded an economic blockade of Qatar and forcibly took the title of crown prince from a cousin. Investors pulled $2 billion from the market while mutual funds bought of $2.3 billion in stock.
The pattern repeated four months later, after Prince Mohammed’s corruption crackdown. Some $1.2 billion exited the Tadawul in the week that ended November 9. Each day between Nov. 8 and Nov. 13, the index either fell or remained flat until the last hour of trading, when a surge of buying erased earlier losses. The buying was done by government funds, say people familiar with the matter.
In March, indexing service FTSE Russell said it would include the Tadawul in its emerging-market index next year. That will bring about $5.4 billion from index-tracking funds to the Tadawul, FTSE estimates, along with billions more from active investors. Pumping up share prices ahead of the capital influx could let the PIF unload stock to overseas investors at inflated prices.
The Journal’s analysis, and interviews with people knowledgeable about the matter, show a major intervention in October, after Mr. Khashoggi was killed inside the kingdom’s Istanbul embassy. Saudi authorities initially denied killing him. Days later Turkish authorities revealed evidence that people close to Prince Mohammed were behind the murder. The Tadawul entered its steepest decline of 2018: Share prices sank 5% between Oct. 10 and 11. Money managers and mutual funds were big buyers the following week, as the market clawed its way back. People familiar with the matter say most of the buying came from the PIF.
A selloff sent the market down about 2% on Oct. 22. In the 40 or so minutes before the market closed that day, heavy buying boosted it by more than 3%.
A similar pattern continued through Prince Mohammed’s second-annual Ritz investment conference beginning Oct. 23. Two days later, when the prince called the murder a “heinous crime,” the market closed up. Data and interviews show the government bolstered the market by buying about $2 billion in stock that week. Local media credited the crown prince’s remarks.