5 April 2019

Iain Gibson

5 April 2019

Good morning,

$111bn. Let’s spell that out – one hundred and eleven billion dollars. It could fund the Scottish Government block grant from Westminster for just under three years. It could buy you Neymar, the world’s most expensive footballer, around 500 times over. And it would cover the cost of 50 Shard skyscrapers.
So, I think we are all agreed, it is a pretty chunky sum of cash. It is also the amount that the Saudi Arabian Oil Company, better known as Saudi Aramco, this week revealed that it made as net income – ie. profit – in 2018. This extraordinary sum makes it the most profitable company in the world, dwarfing Apple’s impressive take-home of $60bn over the same period.
The number has come to light because, for the first time ever, Aramco is tapping international debt markets, for a $10bn bond, and this week has published a prospectus to accompany the move. After investors, analysts, financial journalists et al spent recent days pouring over the 470-page document, the consensus is that this new transparency is very welcome, but it raises as many questions as it answers.
Aramco’s cost of producing crude sits at just $3 per barrel, a quarter of its privately run peers. That is good. Less good is the fact that, once Aramco’s enormous contribution to the Saudi economy is accounted for (it was responsible for 63% of government revenue in 2017), the company generated just $26 a barrel in fund flows, compared to the likes of Shell and Total at $38 and $31 respectively. Aramco’s role as a provider of dividends for the Saudi government, including an unspecified $20bn “special dividend” agreed last month, is also likely to warrant further scrutiny. And perhaps most concerningly, as the Wall Street Journal pointed out this week, the company’s bottom line is still too heavily tied to the fluctuating price of oil – it reported a net profit of ‘just’ $13.2bn in 2016, when oil was trading at a much lower value compared to last year.
Regardless, it appears that not many people are deterred. The reason for this bond issuance is for Aramco to raise funds for a down payment on its $69bn purchase of Saudi Basic Industries Corporation (SABIC). It is clear from the numbers in its prospectus that Aramco doesn’t actually need outside money to finance any part of the purchase, let alone the upfront cost. Let’s face it, telling potential investors that you don’t need their money is usually a pretty good way of upping their interest, which is why analysts have predicted that the issuance is likely to be very well-subscribed. According to Reuters, Aramco also added some star firepower by consulting former Pimco chief executive Mohamed E-Erian ahead of the launch of the bond roadshow this week.
This whole process runs deeper than Aramco, however. On the surface, it is about introducing a traditionally secretive behemoth to global financial markets in a relatively controlled setting. The bigger picture is about pressing the reset button after a tough twelve months for Saudi Arabia’s international reputation, which included the apparent shelving of Aramco’s blockbuster IPO and the heinous murder of Jamal Khashoggi in Turkey. The country is now taking slow(er) steps to get its reform programme back on track. Aramco will clearly play a pivotal role in this and, judging from the way investment banks have scrambled to lead the bond sale, there is light at the end of the tunnel. And hey, if it doesn’t all go to plan, then there is still $111bn floating around somewhere.


The latest gender pay gap figures show that a quarter of companies and public sector bodies still have a pay gap of more than 20% in favour of men. Of the 9,961 companies which had filed by 5pm on 4 April, 7,755 paid male employees more than female staff based on median hourly pay. The overall gap shrank slightly from 9.7% to 9.6%. Separate analysis by the BBC found that the gap had actually widened in favour of men at 45% of the UK’s biggest employers.
According to sources, European Council President Donald Tusk is proposing to offer the UK a 12-month "flexible" extension to its Brexit date. The plan would allow for an earlier exit if a deal was ratified by the UK Parliament. Talks between the Conservative and Labour parties are expected to continue later today.
Labour has held the Newport West seat in a by-election prompted by the death earlier this year of MP Paul Flynn. A turnout of just 37% saw a sharply reduced share of the vote for both the Labour and Conservative candidates, with Plaid Cymru and the Lib Dems up slightly. Labour won by 1,951 votes over the Conservatives.

Business & Economy

The FT reports sources confirming that Italian bank UniCredit is preparing a rival multibillion-euro bid for its German counterpart Commerzbank, should the proposed deal between Commerzbank and Deutsche Bank not go through. There are signs that the deal is in trouble, with both senior Deutsche executives and some German politicians having fresh concerns about tax and labour implications.
Jeff and MacKenzie Bezos have agreed a record-breaking divorce settlement worth at least $35bn. Ms. Bezos will retain a 4% stake in Amazon, which her husband founded, and will give up her interests in the Washington Post newspaper and Mr. Bezos' space travel firm Blue Origin.
The board of the World Bank is set to appoint David Malpass as its next President today. A key ally of Donald Trump and a former chief economist at failed investment bank Bear Stearns, Mr. Malpass was initially a controversial choice because of previous critical comments he made about the organisation. However he has run a low-profile campaign and there has ended up being no significant opposition to him.


What happened yesterday?

Some renewed positivity around the US-China trade talks helped push US stock markets higher, with the S&P500 rising 0.2% and the Dow Jones Industrial Average up 0.6%. The Nasdaq Composite traded slightly lower, losing 0.1%. The Chinese CSI 300 also responded well to the developments, adding 1%.
Across the Atlantic, Brexit uncertainty continues to hamper markets, with both the FTSE 100 and Europe-wide Stoxx 600 down, at 0.2% and 0.3% respectively. In commodities news, the price of Brent Crude oil topped $70 for the first time since November 2018, amid a tightening of global supplies. 

Creo Medical Group
Trading Announcements
GVC Holdings
Low & Bonar
UK Economic Announcements
(08:30) Halifax House Price Index

International Economic Announcements
(07:00) Factory Orders (GER)
(07:00) Industrial Production (GER)
(10:00) Retail Sales (EU)
(13:30) Non-Farm Payrolls (US)
(13:30) Unemployment Rate (US)
(21:00) Consumer Credit (US)

Columns of Note

In the Financial Times Philip Stephens looks at how the Brexit debacle is allowing for the decline of ‘Britishness’ and its replacement by an unpleasant form of English nationalism. His argument is that Britishness, a concept that was really pushed in the 19th century with the startling growth of an empire, has always had slightly soft foundations and the fact that Brexit is in reality a concept rooted in English provinces has started to diminish this. He claims that other factors, such as his belief that the UK Government will keep some returning powers at Westminster rather than give them to the devolved administrations, will only further the demise of Britishness as a powerful concept.
In The Times, Philip Collins suggests that Jeremy Corbyn now has a great opportunity to push for a softer Brexit and divide the Conservative Party even further. Given the Prime Minister has already suggested she is moving towards membership of a Customs Union, Mr Corbyn could theoretically try to secure a few more concessions and then say with some justification that he has respected the result of the referendum whilst reducing the harmful impact of Brexit.

Did you know?

Alfred Hitchcock’s horror classic Psycho (1960) was the first US film to feature a toilet flushing.

Parliamentary highlights


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