The opening of the US$500 billion-plus Saudi stock market to foreign investors will help to boost inflows, improve corporate governance and lower volatility, according to a Saudi official and analysts.
The regulator, the Capital Markets Authority (CMA), plans to publish the final rules for foreign investment in Saudi equities on May 4.
The rules will come into effect on June 1, and qualified foreign investors (QFIs) will be able to buy and sell blue-chip stocks from June 15.
The opening will help to reduce high volatility in prices and improve transparency, disclosure and corporate governance, the CMA chairman Mohamed Al Jadaan said yesterday. The Saudi bourse and all other Gulf markets are volatile because they are dominated by retail investors.
“Liberalisation is a natural step forward in this direction and will also likely serve as a catalyst to improve regulation, governance and transparency issues,” said Salah Shamma, head of investment, Middle East and North Africa equity at Franklin Templeton Investments. “Institutional players are an important component of any stock market, not least because they are typically associated with stability and have a longer-term investment horizon that can help to smooth market volatility.”
The opening will also spur more initial public offerings, deepening the market and improving sentiment of global investors, he added.
Investors have been waiting for about a year after the draft law for the opening of the market was published in August. The market, which has a daily trading volume average of around $2.5bn, is bigger than Russia’s and is the last G20 country to open up to foreign investors. It is bigger than all other Gulf markets combined. Currently, foreign investors, who form less than 1 per cent of total investors, have been able to access the market indirectly through swaps since 2008.
“Assuming a 10 per cent foreign ownership limit, we believe that the opening of the Tadawul creates a $60bn opportunity in terms of foreign fund flows,” said Mr Shamma. “However, immediate inflows should be fairly limited given the current restrictions on QFIs able to access the market.”
According to the draft law published last year, a potential investor should have assets under management of 18.75bn Saudi riyals (Dh18.36bn) and can own a maximum of 5 per cent of the issued shares of any listed firm.
But the market has attractive stocks including the petrochemicals firm Sabic and lender NCB, which had the region’s biggest initial public offering last year.
“Assuming that valuation is attractive for the individual stock, of course, then commodity chemicals companies with globally competitive costs, banks geared to rising US interest rates and consumer companies with exposure to domestic welfare spend, job creation and youthful demographics could, in general, appeal to investors,” said Hasnain Malik, head of frontier markets strategy and South Asia research at the investment bank Exotix.
But the market is unlikely to attract significant investment flows until it is included in benchmarks such as MSCI’s, which upgraded the UAE and Qatar from frontier to emerging market status last year. Saudi Arabia is unlikely to be included in MSCI’s Emerging Markets Index until 2017 and is likely to have a 4 per cent weighting, according to the Swiss lender Credit Suisse.
“Technicals are strong and valuations are likely to re-rate higher over several stages, particularly when the market is included in the main benchmark indices” said John Sfakianakis, Middle East director of the emerging markets-focused fund management Ashmore.