Traders looking to bet against Aramco will have to get creative about finding shares to short

Participants attend the official ceremony marking the debut of Saudi Aramco’s IPO on the Riyadh’s stock market, in Riyadh Reuters
  • Traders looking to bet against Saudi Aramco after its record-shattering IPO are facing obstacles in short-selling the stock, Bloomberg first reported.
  • Many Saudi investors aren’t familiar with short trades, as religious scholars in Saudi Arabia interpret selling a borrowed asset as going against Shariah, Durham University Islamic Finance professor Muhammed-Shahid Ebrahim said.
  • Borrowing stock for a short trade would involve loaning from shareholders based outside of Saudi Arabia, but only 0.19% of Aramco stock is held by foreign investors, Bloomberg reported.
  • Such a trade could also represent a bet against the Saudi government, as the oil company’s IPO is part of a greater economic plan to diversify away from oil.
  • Watch Saudi Aramco trade live here.

Saudi Aramco became the first public company to reach a $US2 trillion valuation on December 12, but traders betting on a downturn are hitting obstacles in their hunt to short-sell the stock, Bloomberg first reported.

The oil company’s shares are listed on Saudi Arabia’s Tadawul index, and while the market technically allows short-selling, the practice goes against many Saudi investors’ principles.

In most markets, shorting a stock is a relatively easy trade. Traders face few hurdles in borrowing shares, selling them, and buying them back at a lower price to profit from a falling stock. It allows for bearish investors to balance out long-term shareholders, and the healthy liquidity seen on most popular exchanges serves as a crucial foundation for short trades.

The trade is far more complex in Saudi Arabia. Many traders aren’t familiar with the concept, as selling a borrowed asset is perceived by religious scholars in Saudi Arabia as going against Shariah, Durham University Islamic Finance professor Muhammed-Shahid Ebrahim told Bloomberg.

“The basic idea about Islamic finance is that you need to be equitable to people,” he said. “You can’t sell what you don’t own is in the Koran.”

Any traders looking to borrow Aramco shares for a short position would likely have to look abroad, but the task of finding shares outside Saudi Arabia brings a new challenge. Only 0.19% of Aramco shares are held by foreign investors, Bloomberg reported, creating a wide spread between bids and asks for stock sourced abroad.

Taking on additional costs to short the stock could prove disadvantageous for investors, as Aramco would need to drop lower for the trade to be profitable.

Aramco is also a key component of the kingdom’s economy, and its December 5 initial public offering was part of a government plan to diversify away from oil. Growing interest in a short trade against the stock could represent negative sentiment toward the nation and its economic future. The government could even intervene to boost Aramco’s market value if the shares fall too much, Acadian Asset Management senior portfolio manager Asha Mehta said.

“There’s broad awareness that the government is a large investor and that they’re willing to step in during times of market volatility to protect prices,” Mehta told Bloomberg.

While it remains difficult to bet against the oil giant, some analysts expect the shares to fall. The company’s post-IPO surge was “too much, too soon,” according to Bernstein analysts Neil Beveridge and Oswald Clint. They added that any investors who profited from the stock’s early jump should “take profit here,” and those who didn’t should “wait until a better entry point, which will inevitably come.”

The firm initiated coverage of Aramco stock on December 12 with an “underperform” rating and a target price of 25.50 riyals ($US6.80), implying a 27% tumble from its current level.

Saudi Aramco traded at 35.35 riyals ($US9.42) per share as of 9:10 a.m. ET Friday. The company has a market value of roughly $US1.88 trillion, stabilizing after falling from its $US2 trillion record.

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