Investing in Pharmaceuticals and the Chinese Coronavirus
A deadly coronavirus in central China has made the jump from animals to humans and threatens to spread throughout the world. Health authorities in China race to contain the infection as the virus has the ability to jump from human to human. It is already in Japan and Thailand and major US entry points are taking precautions by screening new arrivals for fever. For the investor, there are two issues involved. One is how badly the spreading virus could affect the economies of countries where it lands and the other is opportunities in the pharmaceutical sector as companies strive to find efficient screening and diagnostic tools as well as vaccines and anti-viral antibiotics.
What Is a Coronavirus?
The coronavirus is an infectious agent commonly found in animals. Strains of the virus that are sometimes found in humans cause “usually cause mild to moderate upper-respiratory tract illnesses, like the common cold” according to the CDC. But, “human coronaviruses can sometimes cause lower-respiratory tract illnesses, such as pneumonia or bronchitis. This is more common in people with cardiopulmonary disease, people with weakened immune systems, infants, and older adults.”
And, there are more aggressive strains such as MERS-CoV and SARS-CoV according to the CDC. “About 3 or 4 out of every 10 patients reported with MERS have died.” And the SARS virus that jumped from birds to humans was commonly fatal but no cases in humans have been reported since 2004.
The 2019-nCoV Strain of Coronavirus
This is the name of the new coronavirus strain that emerged in the 11 million-person city of Wuhan in East-Central China. It is of concern because the first cases seem to have been associated with a huge seafood and meat market and were probably animal to human transmissions. But, now there is strong evidence that human to human transmission has occurred as more than a dozen hospital staff came down with the disease after caring for an infected patient. Of the 200 confirmed cases in Wuhan, four patients have died. And, of the 169 persons still undergoing treatment, 35 are said to be in “serious condition.” As with previous human versions of this virus, older adults, infants, and people with weakened immune systems are at greater risk of serious complications and death.
What Is Being Done about the Chinese Coronavirus?
The first line of defense for this virus is to contain the disease and prevent its spread across the world. Thus organizations like the CDC are setting up screening at the main entry points into the USA for folks from China and especially from Wuhan. The CDC has developed an in-house test the works to identify the virus and is working to get testing materials to other national and international agencies.
There is no antibiotic for this disease and no vaccine at this time. Patients receive supportive care and attempts are made to keep the infection from spreading.
What Pharmaceutical Investments Benefits from the Chinese Coronavirus?
Stocks in several Chinese pharmaceutical companies went up on hopes that diagnostic and therapeutic products can be invented and sold. Is this a reasonable investment approach?
Pharmaceutical Companies Doing Coronavirus Vaccine Development
Johnson & Johnson announced recently collaboration aimed at a vaccine for preventing the MERS coronavirus.
Janssen Vaccines & Prevention B.V., part of the Janssen Pharmaceutical Companies of Johnson & Johnson, the Coalition for Epidemic Preparedness Innovations (CEPI) and The Jenner Institute at the University of Oxford, United Kingdom, are working together to not only enhance novel vaccine development against MERS-CoV, but are also striving towards developing advance novel vaccines against the Lassa and Nipah viruses.
From an investor’s point of view, is this a good reason to invest in Johnson & Johnson? Johnson & Johnson is a huge company and the potential profit from preventing a few hundred cases of MERS virus deaths a year is tiny in comparison to their total cash flow. However, the research required to develop such a vaccine will make the next coronavirus vaccine easier to develop. The company that eventually has the wherewithal to create on demand a vaccine for a disease like the new Chinese coronavirus will be a moneymaker in our interconnected world where a virus develops in one place and ends up infecting the whole world within a year. As such, investing in Johnson & Johnson or anyone else doing research for vaccines or treatment of such viruses is for the long term and the province of intrinsic stock analysis.
Whose Purchases Are Driving Stock Prices Higher?
The stock market keeps going up. The top tech picks have been especially impressive. Strong corporate earnings, a pause in the intensity of the trade war, and low unemployment have been positive factors. But, just exactly whose purchases are driving stock prices higher? And, why is it important to know that?
Who Is Buying Stocks?
CNBC published a useful article about who is doing all the buying that is driving the market up.
Given a series of new highs for the S&P 500, the Dow Jones Industrial Average and the NASDAQ, the obvious question is who is doing all this buying?
The author goes through the list of investor categories and come up with conclusions that should be of concern to regular investors.
The large investor groups for stocks include retail investors who own about 20% of US stocks. However, this group now has holding comparable to 2007 and is likely not the main culprit in driving up prices. Public corporations themselves are larger factors with money coming from the Trump tax cuts going to share buybacks. The same amount of investment capital (or more) is going to purchase fewer equities. That fact greatly skews the supply and demand curve!
And, hedge funds have become a huge factor in the markets. Money invested in hedge funds comes to a third to a half of that held by retail investors. But, the holdings in these funds are by definition more labile. Unfortunately for many hedge fund investors, the S&P 500 went up 31% last year while the average US hedge fund dealing in equities did about half that. The result is that the “rebalancing” of portfolios is impressive, especially as fund managers have attempted to make things look better at year’s end.
Quant funds, multi-strategy funds, and high-frequency traders add to the mix on the hedge fund side of things.
Why Does It Matter Who Is Buying Stocks?
It matters whose purchase are driving stock prices higher because it tells you a bit about their intentions. Success long term retail investors tend to follow an intrinsic stock value approach when investing in stocks. Hedge funds and short term traders are looking to time the market. If you are following the example of those who are looking for long term value, you want to emulate long term retail investors. If you are buying stocks because the hedge funds are driving up prices (temporarily) you may be in trouble as you prepare to stay the course and they are ready to bail out at a moment’s notice.
A common theme for folks promoting long term investing is to emulate Warren Buffet who only invests in companies that he understands and only buys when the intrinsic value is greater than the current stock price. That approach and following the purchases of hedge fund managers may make you money in the short term if you can respond fast enough but it does not put you in a position to sleep well at night with solid and dependable investments!
Investments for New Investors
Everybody who invests has a starting point. They hope to experience profitable investing over the years. But, they may fall prey to bad stock tips, pump and dump schemes, or other investing pitfalls. On the other hand, they may choose solid dividend stocks or investments where they will not lose any money but will forego huge profits. Choosing the best investments of new investors depends on their risk appetite, risk tolerance, investment timeline, and the time and energy they have available for managing their investment portfolio.
Best Investments for New Investors Today
Over the long run, the US stock market is the best money-making vehicle available to the majority of investors. However, the entire market, whole investment sectors, and individual investments all have good and not-so-good periods. That being the case, what are the best investments for new investors today?
The Motley Fool has a good article about stocks to choose if you start investing in 2020.
One of the best ways to [make money in stocks] is to start with the stocks of strong, easy-to-understand businesses. This will make it easier for you to track the progress of your companies, which, in turn, will help you better determine when to buy and sell their stocks. Additionally, strong businesses tend to perform well over the long-term, even if you don’t buy them at the most opportune time.
Their five choices are Apple, Chipotle, Netflix, Planet Fitness, and Grocery Outlet. Despite their suggestion to choose easy-to-understand businesses, only the first three fit that recipe. Planet Fitness and Grocery Outlet use new approaches in old and established business sectors. Our take on their list is that Apple, Chipotle, and Netflix are good choices and Planet Fitness and Grocery Outlet are a bit more speculative.
Although Netflix is on a roll, it will have increasing competition from the likes of Disney, which is a stock that goes on our own list of safe investments for beginners. Apple became a holding of Berkshire Hathaway when Warren Buffet decided that its strong brand name and dedicated customer base differentiated it from other tech stocks. Chipotle has a well-run business and is growing, but like McDonald’s, it will need to constantly make adjustments to its menu and operations to stay ahead of competitors. Nevertheless, any or all of these three stocks would be good investments for new investors.
Choosing Investments for New Investors
When a new investor starts out with “household name” stocks, they still need to do a bit of homework to make sure that they are good investments. Companies that have been paying dividends and increasing their dividends over the decades are usually safe choices. Companies that have strong cash flow attract investors but tend to be overpriced. The key to investing in stocks is the ability to analyze intrinsic stock value. With this approach, an investor looks at the potential of a company to keep making money with its business plan into the distant future. He or she compares the stock price that this sort of fundamental analysis would predict with the current stock price. When the intrinsic value thus derived exceeds the current price of the stock, those are sound long term investments for new investors.
Good News for Investors
We view it as our job to keep tabs on investment opportunities and risks. As the stock market rally has extended itself well beyond what many expected, there are been numerous points of concern. But, (like Mark Twain’s mistakenly reported death) reports of an eminent stock market crash have been greatly exaggerated! There is good news from investors and it arrives on many fronts.
Why Stocks Won’t Stop Rallying
Forbes looks at why stocks won’t stop rallying.
Economic data in the U.S., China and Eurozone are beating expectations by the biggest gap since early 2018 and on the longest win-streak since mid-2017, according to the sum of Citi’s economic surprise indices I compiled using Bloomberg.
Geopolitical risk between the U.S. and China is fading, Brexit is on some path toward completion, a dropping dollar is providing relief to emerging economies, and the global banking system is still intact despite an unnerving foray into the land of negative interest rates.
So stocks are rallying as things improve. It’s as simple as that.
None of this is to say that the world of investing is perfect. There are still valid concerns about the permanency of the trade war, the possibility of a global debt crisis, and trouble in hotspots like Iran. But, as Forbes notes, the situation with Iran is not getting any worse, the trade war has reduced to a slow simmer, and the major economies in the USA, Europe, and China are all doing a bit better than expected. The Brexit mess may even get cleared up!
What Investments Will Prosper as the Market Rally Continues?
Investors seem to be flocking back to Tesla and Apple. The question, of course, is how fast can these companies grow their income to support ever-higher stock prices. Then, the question is which investments will endure over the longer term. The Treasury long is still low-priced is bond investors are skeptical about the sustainability of the world economy in light of climate change issues, skyrocketing debt, and multiple societal pressures. This brings us back to investing in the USA, looking at investments that having nothing to do with China, and investments where you will not lose any money.
How Long Will the Good Investment News Last?
The obvious answer is that the good news lasts as long as it lasts. Current optimism about stocks is partly a result of recent pessimism. The constant drumbeat of doom and gloom predictions by bears dampens market sentiment until another round of strong earnings, or earnings that beat expectations, comes in. This is a bit like the boy who cried “wolf” so often that no one paid attention the time that a wolf really showed up! Which brings us back to how an individual investor should deal with good and bad news. Do you fundamental analysis and use intrinsic stock value as a guide when investing in stocks.
How Will a Global Debt Crisis Affect Your Investing?
The World Bank warns that the current wave of borrowing is the greatest since the 1970s. And, it brings with it the possibility of a financial meltdown and that risk is only partially mitigated by persistently low interest rates. As always, our concern is with the individual investor. How will a global debt crisis affect your investing?
Will There Be a Debt Crisis?
CNBC reports on the warnings of the World Bank of a global debt crisis.
The World Bank has warned of the risk of a fresh global debt crisis, urging governments and central banks to recognize that historically low interest rates may not be enough to offset another widespread financial meltdown.
In its biannual Global Economic Prospects (GEP) report, published late Wednesday, the Washington D.C.-based group said there have been four waves of debt accumulation over the last 50 years.
The current wave – which started in 2010 – is thought to be “the largest, fastest and most broad-based increase” in global borrowing since the 1970s.
Global debt stands at 230% of the sum of all gross national products. China, specially, has been adding to this picture as its managed economy tries to cope with a slowdown. The three waves of debt growth that they refer to in their study all ended with a financial slowdown. The Financial Crisis of 2008 to 2009 was the worst.
Evaluating Investment Risk
Investment always carries a risk, even when you try to invest without losing any money. As noted by Investopedia, risk management is the process of identifying and analyzing risk. That risk can be accepted or the investor can take steps to mitigate the risk. On an individual basis, an investor cannot change how much debt China, Japan, or Germany take on. But, they can modify their investment portfolios to avoid areas of high risk and put more money where it might be safer.
In our article about the best investments for the next decade, we noted that South Asia and particularly India, Vietnam, and Indonesia are attracting foreign direct investment capital at a time when investments are falling off elsewhere. Although these economies make money from exports, their growth opportunities are bases on the growth of their middle class and the expectation of strong consumer spending. If the combination of the permanent trade war, trouble with Iran, and high debt hurt the global economy, these countries will remain as attractive investment opportunities.
How Will a Global Debt Crisis Affect Your Investing?
The last debt and financial crisis was devastating for the majority of investors. But, those who had portfolios characterized by high intrinsic stock value and who stayed the course have done exceptionally well in the decade since. Those who had been staying in the market in search of one more surge of profit tended to bail out as the market fell and many have never returned to the stock market.
Well-chosen stocks in companies that will keep making money even during a financial downturn will be good choices. And, companies with low debt burdens will also do well as they will not be caught in a bind when credit tightens!
How Will Iran Tensions Affect Your Investing?
Pundits are debating whether Trump simply did what was necessary in killing the top Iranian general or if the action was rash and will drag the US into an open war with Iran. While the politicos debate the merits of the President’s actions, we are wondering this. How will Iran tensions affect your investing?
Middle East Tension and Investments
Crude oil futures are generally the first thing to go up when tensions rise in the Middle East and especially around the Persian Gulf. If you were looking into how to invest in Saudi Aramco, you may wish to take the possibility of increased hostilities into consideration. While oil stocks are up, European stocks are off, according to The New York Times.
European shares extended losses on Monday as tensions following the killing of a top Iranian general by the United States kept buying restricted to safe havens, while energy stocks benefited from higher oil prices.
The pan-European STOXX 600 equity index was down 1.2% by 0914 GMT and was set for its worst day in a month. German stocks were the worst performers in the region, dropping about 1.9%.
Higher energy costs tend to drag down the US economy and the combination of threats to world trade from the ongoing trade war as well as the strong US dollar are hurting US manufacturing.
American manufacturing activity contracted last month more than it had in a decade, data released Friday showed, a sign that economic damage from President Trump’s trade war could linger even after the United States and China sign an initial trade deal.
An index published by the Institute for Supply Management dropped to 47.2 in December, the lowest reading since June 2009 and the fifth straight month of contraction. A reading below 50 indicates the manufacturing sector is contracting.
No one in the Middle East really wants a face-to-face shooting war between Iran and the USA as it would likely spill over into the entire area. But, the sort of brinksmanship that could evolve has diplomats worried. As Iran tensions affect your investing, you ought to pay attention as well!
Short and Long Term Investing and Iran Tensions
Tensions are always high in the Middle East. And, generally, cooler heads prevail to prevent damaging escalations. That having been said, nobody was able to rein in Saddam Hussein or the second President Bush. Or, for that matter, nobody was able to stop Osama bin Laden and al Qaida from destroying the World Trade Center and provoking the US invasion of Afghanistan and Iraq. The nearly 20-year US military presence in the area dates back to the inability of locals to forestall these events.
So, every time there is a threat to stability in the region, oil prices go up, European and world stocks go down, and, usually, things simmer down. But, what if they do not? How will Iran tensions affect your investing if the US and Iran do not back off but rather increase military attacks?
Investing in US Energy Production
With the advent of fracking, the USA has hugely increased oil and natural gas production. With 61% of US energy coming from oil and natural gas, US producers will benefit from higher prices. Coal will also benefit if problems in the Middle East continue. Producers who still export oil and natural gas to the USA, like Colombia, will benefit as well. Europe, Japan, and everyone who relies heavily on Middle Eastern oil will hurt.
With a mix of issues affecting investments today, a useful thought is to look for investments that do not lose money no matter what is going on in the Middle East or with the trade war or the highly-priced dollar.
Investments for the Next Decade
As we enter 2020, long term investors are thinking of investments for the next decade rather than just for the next year. In that regard, we noticed an interesting snippet in Market Watch. They believe that some of the best investments for 2020 and beyond are offshore and in India in particular. Their rationale includes the fact that two-thirds of their 1.2 billion person population is 35-years-old or younger. The point is that anyone who finds ways to sell to this growing pool of consumers will do well into the distant future. This will be happening as the US-China trade war enters a more-permanent phase.
Will Last Decade’s Winners Continue Be Good Investments?
The sort of reasoning needed for picking long-term winners is not the sort of thinking that investors use for predicting quarterly swings in stock prices. Besides thinking about the global struggle between the USA and China for hegemony and growth in countries like India, what are some other things to take into consideration for picking decade-long winners?
CNBC notes that last year the two tech titans, Apple and Microsoft, outpaced everyone else in contributing to the growth of the S&P 500.
Apple and Microsoft, which surged 85% and 55% this year respectively, together accounted for nearly 15% of the S&P 500′s advance in 2019, according to S&P Dow Jones Indices. Their influence on the cap-weighted index this year is greater than the next 8 biggest contributors combined. Through Monday, the S&P 500 was up 28%.
Apple sold for $30 a share in January of 2020 and starts 2021 at close to $300. It offers a 1% dividend which, if you had purchased your shares in 2010, would be a 10% dividend on those shares. Microsoft passed into 2010 at $28 a share and sells for nearly $160 a share as we begin 2020. Its dividend yield is 1.3% making that a 7.5% dividend on share value when purchased a decade ago.
Both of these companies are technology leaders and have broadened their products and services in efficient and profitable ways that are likely to remain profitable going forward. As such, they both have strong intrinsic stock value despite years of impressive gains. If you are looking for stocks to invest in for the next decade, or longer, these are both solid choices.
Where Is the Smart Investment Money Going?
We periodically look at the World Bank’s information on foreign direct investment. This information does not tell you which individual stocks to pick but rather which countries are attracting investment capital. What stands out in the most recent report is that direct foreign investment is down almost everywhere with the notable exceptions of South Asia and Vietnam as well as Indonesia in particular (as the anywhere but China movement takes hold). And, India is up as well as foreign investors appear to be looking at the demographics of India and potential profits.
Investing Offshore with ADRs
If you want to put part of your investment portfolio to work outside of the USA, the best approach (since you probably don’t speak a lot of foreign languages) is to use American Depositary Receipts. You can find a list of Indian ARDs on Top Foreign Stocks. Likewise, a list of Indonesian ARDs is available as well. When you pick the top-level ADRs, these companies abide by the same reporting requirements as stocks on the NYSE and NASDAQ which makes fundamental analysis possible.
Best Investments on a Budget
The stock market keeps going up and widening the wealth gap in America. So many people are living paycheck to paycheck that finding money to invest can be difficult. But, it is not impossible in this day and age to put something aside on a regular basis. With this thought in mind, what are the best investments on a budget?
The Problem with Investments in America
Both home ownership and ownership of stocks have declined since the Great Recession and have not recovered as expected. Financial Samurai looks at the percentages of Americans who own stocks or real estate.
Now that the economy is on fire, all Americans should be rejoicing in their wealth, right? Wrong! Only 52% of Americans own any stocks according to a 2019 Gallup poll and only about 63% of Americans own real estate according to the Census Bureau, down from a high of about 69% in 2004. Given these figures, the bull market has left a lot of people behind.
Back in 2007, 65 percent of adults owned stocks and today that number is 52 percent. Part of the reason is that many who got burned in the 2008 market crash have never re-entered the market. But, a greater factor is that small investors have been unable to take part in the steady appreciation of stocks over the last dozen years because they are just making ends meet. Our concern in this article is not the folks who have money and choose not to buy stocks (or real estate) but rather those who are living on a budget and are not investing.
While the stock market is an excellent place to grow wealth, the first place that Americans should and do invest is in their home. Unfortunately, home ownership took a hit with the Financial Collapse as well. More than 69 percent of Americans owned their home in 2007 and that number is below 64 percent today.
Investing in Your Home
Whenever we have written about starting to invest in the stock market, we have always mentioned home ownership as a greater priority. The Federal tax deduction for mortgage interest still makes home ownership a great investment. And, unlike trying to find money to invest in stocks, Americans are already paying for places to live. Getting out of the rental market and into home ownership is still one of the best investments on a budget.
Investing in Stocks
The point of investing in stocks is that over the years and decades the US stock market outperforms other investments. The key for most people to take advantage of this fact is to choose investments for the long term and not to try to time the market. Dividend stocks that have been paying dividends for decades or even more than a century are good choices. And using dividend reinvestment plans allows you to reinvest dividends without paying commissions and let your money grow even when you cannot purchase more shares. The key to making the best investments on a budget is to use dollar cost averaging to put a set amount into investments every year, quarter, month, or paycheck.
What Investments Will Benefit from the Phase One Trade Deal?
With much hullabaloo the White House announced the completion of a Phase One trade deal with China. The Chinese negotiators in Beijing are said to be ecstatic and even incredulous at how they believe the Americans caved in on previous “rock solid” negotiating positions. But, stocks rallied a bit and many investors are happy. The question now is what investments will benefit from the phase one trade deal, how secure these benefits will be, and how long they will last. The Chinese have a long history of promising things in regard to world trade and a long history of now following through. That is our first concern. The second is that this deal does not seem to move toward freer trade but toward increasingly managed trade! Again, what investments will benefit?
Trade Deal Increases Rather Than Removes Barriers to Investment and Trade
The New York Times notes that Trump’s trade deals tend to increase rather than remove trade barriers.
Mr. Trump’s new trade deal with China promises to lower some of the walls Beijing has erected for foreign companies – including opening its financial markets, streamlining imports of American agriculture and offering greater protection for intellectual property.
But it leaves in place tariffs on the bulk of Chinese imports – more than $360 billion worth of goods. And it requires voluminous Chinese purchases of American products – $200 billion of additional sales over the next two years, according to the Trump administration – a significant shift that experts say moves trade policy away from promoting free markets and back toward an earlier era of managed trade.
It turns out that Trump does not trust free trade. He trusts when he can make deals on and believes he has the leverage to control. This is the same approach as the Chinese Communist Party takes on managing their economy from the top down and dispensing favors to those well-placed by politics or family. That approach is causing problems for China and goes against the long term efforts of the US and EU to get China to open up and quit controlling all aspects of their economy to the exclusion of foreigners.
How to Benefit from the Phase One Trade Deal
Because this is a “controlled” deal, you need to look at who is specifically favored and if those “favors” are likely to come to be and likely to last.
Will Chinese Tech Stocks Benefit from a Trade Deal?
Interestingly, there are a number of Chinese stocks that will benefit, according to Morgan Stanley!
Morgan Stanley has flagged 29 Chinese stocks that are most likely to benefit from the completion of a phase one deal between the U.S. and China.
Nearly half of them are from the information technology sector, which has been hit by the trade war as those companies have been on tariff lists. Eight are from the consumer sector.
“These two sectors saw the biggest scale of valuation re-rating based on their previous reaction to de-escalation events,” Morgan Stanley said in a report last week.
So, one way to benefit from the phase one trade deal may be to buy Chinese tech stocks.
Does US Agriculture Benefit from the Phase One Trade Deal?
According to reports, the phase one trade deal includes billions of dollars in agricultural purchases. We wrote a year ago how the trade war damaged investments in US agriculture. In that article, we noted how farmers in the state of North Dakota planted soybeans instead of wheat and other crops and how the support system of rail links, grain elevators, and other facilities were upgraded to sell massive amounts of soybeans to China. Then the Chinese cut off purchases in retaliation in the trade war and the strong dollar further hurt US agricultural exports.
The problem for US farmers and agricultural businesses is that they need foreign markets and they need reliable foreign markets. If the current deal becomes “re-negotiable” as they move into the next phase, this simply undercuts the farmers and the farm businesses again.
Trump’s Rationale for Investment and Trade Negotiations
The president does not believe in free trade. His rationale is that the Chinese will never abide by any deal that does not benefit them or which they need to follow to avoid economic pain. As such, the US is giving up efforts of US administrations going back to Nixon to get China to open up and join the rest of the world on a fair basis. Every trade deal going forward will be tit for tat and controlled by what the Chinese are willing to do in return for what they want.
So, what investments will benefit from the phase one trade deal? You will need to pay attention as the ongoing trade war saga plays out to be able to benefit by picking the right investments but don’t plan on any of these being investments that let you sleep soundly at night!
Is Saudi Aramco a Good Investment?
The largest oil company in the world is going public with an IPO valued at about $2 Trillion. Saudi Aramco is the state-owned Saudi Arabian oil company that out-produces any other single oil company and appears to have lots of reserves still under the desert and the Persian Gulf. We wrote recently how it might be a good idea this next year to invest outside of the USA. Is Saudi Aramco a good investment offshore or a better pick than other oil companies? For that matter, how do you invest in the Saudi oil company?
What Is Saudi Aramco?
Oil was first discovered on the Saudi Arabian Peninsula in Bahrain in 1932 and in Saudi Arabia in 1938. A succession of US oil companies explored and found oil, sold parts of their interests and found oil in Dubai as well. In 1949, the Saudi king threatened to nationalize oil facilities and gained a 50-50 share of profits. The company continued to find more oil and grow over the years.
In 1973 the USA supported Israel in the Yom Kippur War and Saudi Arabian government retaliated by “acquiring” a 25% “participation interest” in Aramco followed by 60% in 1974 and all of the rest in 1976. Aramco managed operations until the late 1980s at which time the entire operation became the Saudi Arabian Oil Company. This is the real name of the company today despite the IPO being referred to as Saudi Aramco.
This company became the world’s largest in 2005 when its estimated market value approached $800 billion. This month as the shares have risen in value to about $2 Trillion, the company is again the largest in the world, surpassing Apple by a factor of two.
How Can You Invest in Saudi Aramco?
Saudi Aramco trades on the Saudi Arabian stock exchange, the Tadawul. Unfortunately, to invest directly in Saudi Aramco, you need to buy it on the Tadawul exchange. And, according to U.S. News, individual foreign (non-Saudi) investors will not find Saudi Aramco available outside of that exchange.
Aramco decided in November that it would not list its IPO shares on a major U.S. exchange, making it difficult for the average U.S. investor to gain access to the stock. Tadawul has strict rules about foreign investment. Qualified institutional foreign investors must have at least $5 billion in assets and at least five years of investing experience to be eligible to trade on the Saudi exchange. Prior to 2015, foreign investors were prohibited from trading on the Tadawul exchange entirely.
For the time being, the only alternative for the normal investor is to buy shares of an ETF that tracks a basket of Saudi stocks (which will soon include Saudi Aramco). One example is the iShares MSCI Saudi Arabia ETF but there are others as well. This approach dilutes your exposure to Saudi Aramco but, for now, is the best alternative for most investors.
Is Saudi Aramco a Good Investment?
The Saudi Arabian Oil Company makes lots of money as the country sits on a vast pool of oil and natural gas. However, there is a long history dating back to 1949 of the Saudi government (king) finding reasons to increase the government’s share until foreigners are excluded.
Market Watch looks at investing in Saudi Aramco and mentions the ETF approach. They also note the risk of investing in Saudi Arabia by quoting from the IPO prospectus.
The interests of the Government, the Company’s controlling shareholder, may differ from the interests of the Company or the Company’s minority shareholders. The Government will continue to own a controlling interest in the Company after the Offering and will be able to control matters requiring shareholder approval. The Government will have veto power with respect to any shareholder action or approval requiring a majority vote, except where it is required by relevant rules for the government.
And, because Saudi Arabia is a monarchy, the rules for the government can be changed at any moment by the king.
This having been said, Saudi Aramco makes a lot of money and buying shares of an ETF that tracks the company as part of a basket of Saudi stocks is a reasonable way to diversify your portfolio. Just don’t put everything that you have into this investment and wake up some morning to find out that the Saudi Royal Family needed more money and “acquired” your investment!