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Aramco IPO Faces Huge Saudi Underweight; McDonalds and Walmart out of ESG Favour

Europe ex-UK in resurgence as record 4 in 5 fund managers overweight continent. Trade war and protests take toll as China and Hong Kong banks sell off

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Saudi Aramco, IPO

Emerging market investors are avoiding Saudi Arabian equities ahead of the world’s biggest IPO by Saudi Aramco, according to analysis by Copley Fund Research.

Saudi Arabia has the third lowest investment allocation worldwide relative to the country’s weighting in the benchmark MSCI Emerging Markets index, with 87% of emerging market funds having no exposure whatsoever, according to Copley Fund Research, which surveys 767 funds managing a total $1.2 trillion of assets.

“Investors have been staying out of Saudi Arabia because of the reputation risk since the Khashoggi debacle as well as concern that Aramco will swamp the market,” said Steven Holden, CEO of Copley Fund Research. “The massive underweight does imply there is plenty of dry powder in emerging market portfolios to deploy on Aramco."

The only markets with a lower relative weighting than Saudi Arabia are China and Taiwan.

China and Hong Kong saw the biggest investor outflows from banking stocks among emerging markets in the last six months, with average allocations dropping to 2.28% of global emerging market funds from 2.82% six months earlier. 

"A trifecta of slowing GDP growth, the still unresolved trade tensions with the US and the risk of prolonged Hong Kong protests have taken their toll on investors' sentiment," said Holden.

Bank of China, China Construction Bank and ICBC were among the biggest stock reductions.

By contrast, global equity fund managers show signs of betting on a European resurgence.

A record 80.5% of funds are now overweight Europe ex-UK equities, the highest proportion since Copley started gathering the data in 2011. Funds increased allocations to 20.7% for developed European countries, from 20% in late 2018. Their weighting is 6.45% above the benchmark MSCI All Country World Index.

“Expansionary policy from the European Central Bank and some improved economic indicators are signposting investors towards expectations of growth in Europe,” said Holden. “Against a backdrop of the long-running high performance for US equities, cheaper European stocks are suddenly winning attention again."

France is benefiting most from the newfound appetite for European equities, led by Danone, Sanofi and Total among the top overweight holdings.

“This is a clear signal that managers are positioned for a European rebound, with all major continental countries now held overweight by global equity managers,” said Holden.

While holdings of UK stocks are also above the benchmark weighting, investors continue to trim allocations to near a record low amidst the uncertainty of Brexit and a general election.

One group of investors that France's Total, or for that matter Saudi Aramco, will struggle to win over is the growing mass of funds applying environmental, social and corporate governance, or ESG standards to their portfolio.

Along with oil and tobacco producers, some consumer staples are also out of favour with the ESG crowd. McDonalds shares, which are held by nearly one in five global equity funds, along with Walmart attract zero allocation from those ESG funds included in Copley’s database.

“While ESG funds are less exposed to sectors with obvious social and sustainability challenges — notably tobacco and oil and gas — the food and staples sector is also vulnerable to being shunned by the growing mass of environmental and socially minded investors,” said Holden.

These stocks are losing out on a growing investment base. Assets in dedicated Global ESG strategies in Copley’s survey have doubled since 2017.

The performance of ESG funds has improved too. While 10-year performance for ESG funds lags those unconstrained by such filters, it’s the opposite picture for the last five years, with ESG returning an extra 3.2%.

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