Analysis | Saudi Stock Market Update – Opening the Tadawul

Published: April 19, 2015

Editor’s Note:

On Thursday the Saudi Capital Market Authority announced the opening was set for June 15th and that final rules would be published on May 4th as reported by SUSTG.com. The Jadwa Investment firm in Riyadh provides assessments and updates to Saudi economic conditions. Today they published an update to discuss the opening of the Saudi stock market, the Tawadul, to foreign investment. In describing the update Jadwa noted:

Currently, the Saudi stock market’s capitalization is $528bn, equivalent to two thirds of Saudi GDP, making it larger than the Mexican stock market. When compared regionally it is almost the same size as all the other equity markets in the Gulf combined. Opening up the market is likely to lead to inclusion into the MSCI emerging market index by mid-2017, with as much as $40-50 billion of total foreign inflows. Since the publication of our original report, Opening the Tawadul up to Foreign Investors, back in August 2014, we have seen a number of developments which have impacted the Tadawul All Share Index (TASI). This includes a massive drop in oil prices which negatively impacted investor sentimental and led to panic selling, and the $6 billion initial public offering (IPO) of the National Commercial Bank (NCB), which amounted to the second-biggest IPO of 2014 globally.

We are pleased to provide for your consideration the Jadwa report and links to the original documents (English and Arabic) complete with charts and graphs.

[Complete report in English and Arabic with key charts at this links.]

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April 2015 Saudi Stock Market Update

Update: Opening the Tawadul up to Foreign Investors

Overview

Last week the Capital Markets Authority (CMA) confirmed that the region’s largest, diverse and most mature capital market, the Tadawul, will be open to qualified foreign institutional investors (QFIs). In April 2015 the Saudi stock market’s capitalization stood at $528bn, equivalent to two thirds of Saudi GDP, making it larger than the Mexican stock market. When compared regionally it is almost the same size as all the other equity markets in the Gulf combined. Opening up the market is likely to lead to inclusion into the MSCI emerging market index by mid-2017, with as much as $40-50 billion of total foreign inflows.

Since the publication of our original report back in August 2014, Opening the Tawadul up to Foreign Investors, we have seen a number of developments which have impacted the Tadawul All Share Index (TASI). This includes a massive drop in oil prices which negatively impacted investor sentimental and led to panic selling, and the $6 billion initial public offering (IPO) of the National Commercial Bank (NCB), which amounted to the second-biggest IPO of 2014 globally. Below we discuss some recent developments in more detail.

CMA draft proposals

Back in August 2014 the CMA set out draft rules for the participation of investors in the Tadawul. Included in these draft rules are the limitations for QFI participation in the Saudi stock market. These are outlined below:

  • QFIs wanting to participate in the Saudi stock exchange will have to have at least USD5 billion assets under management (AUM) (possibly reduced to USD3 billion) and have been operational for a minimum of 5 years.
  • Each QFI (including affiliates) can only hold a maximum of 5 percent of issued shares of any one listed company.
  • All foreign investors (including resident and non-resident, swaps and QFIs) have a combined ceiling of 49 percent ownership of issued shares, in any one listed company.
  • QFIs together can only own a maximum of 20 percent of issued shares of any one listed company.
  • Swaps and QFIs can only own up to a maximum of 10 percent of aggregate stock market value of all listed companies.

The CMA has confirmed that the opening of the stock market is to support the increased participation of institutional investors and reduce the role of retail investors. The draft proposals have obviously been carefully considered to reflect this goal. After consultation with various relevant parties, the full rules for participation will be published on 4th May. We believe that one of the results of the consultation will mean that definition of QFIs and QFI Clients will include Sovereign Funds, Public and Private Pension Funds or Endowments, Foundations and sophisticated family offices. We view the inclusion of such entities as an overall positive, since they are major investors in the global marketplace and stable in the nature of their investment patterns.

Furthermore, we believe it is also worth clarifying certain provisions in the draft proposals so to eliminate any unintended ambiguity and potential misunderstanding. In particular, we believe that the role of authorized person’s (AP) relationship with QFIs has not been fully detailed. In specific, some clarification over whether APs are likely to be able to manage QFI clients fund would be welcome. Also, banks, brokerage and securities firms are included as institutions that could be permitted to participate as QFIs in the Saudi stock exchange, but, at the same time, the limit set for QFIs for assets under management (AUMs) is at USD5 billion (SR18.75 billion). Since many banks, brokerage and securities’ firms do not participate in asset management, this could limit their inclusion. Lastly, we believe an elaboration on the exact nature and timing over the proposal to gradually reduce the AUMs requirement from USD5 billion (SR18.75 billion) to USD3 (SR11.25 billion) would be beneficial to both local and QFI participants.

Recent TASI performance

The steep decline in oil prices, by around 50 percent since mid-2014, has negatively impacted oil exporting countries with all GCC countries indices being down in the last six months to April 2015 (Figure 1). In the case of the TASI the losses were not reflective of market fundamentals but caused by panic selling. As oil prices tumbled, many retail investors feared that lower oil prices would prompt the Saudi government to slow, or even worse, cut back on expenditure, which would squeeze corporate profits. The fall in TASI was further exacerbated by investors selling off securities in order to free up cash to deleverage from margin calls, as collateral values declined. Investors’ fears over lower fiscal and business related spending were allayed when the Saudi government pushed through another expansionary fiscal policy at the end of 2014. Since then, the TASI’s recovery has been helped by a smooth Royal succession, two salary bonuses to public sector employees, and a stabilization in global oil prices.

jadwa-stock-market-april-2015-fig1-fig2

Click for Jadwa documents with charts and graphs.

Looking ahead, despite the lower priced oil market (we see full year Brent averaging $61 per barrel for 2015), Saudi Arabia’s huge foreign reserve ($710 billion at the end of February 2015), and low debt-to-GDP levels (1.6 percent of GDP-allowing ample room to issue sovereign debt), all means that the government can remain committed to key large-scale industrial projects and an economic diversification strategy. We see this diversification strategy not only driving private sector activity, which will support the performance of listed companies, but also support strong IPO activity as the private sector is handed a larger role in being the main driver of growth going forward. In 2014, we saw the $6 billion IPO of the NCB, and the IPO pipeline for 2015 is likely to be just as attractive, including a mix of companies from different sectors, including transport, manufacturing, health care, and retail. Furthermore, if you consider that some sectors benefit from subsidies, through capped energy prices or low-priced feedstock, and foreigner’s investing in the Saudi stock market reap the benefits of a zero tax liability on capital gains, plus the withholding tax rate of 5 percent on dividend payments is amongst the lowest globally, it becomes apparent that the Saudi stock market is very attractive for QFIs.

[Complete report in English and Arabic with key charts at this links.]

Source: Jadwa Investment

Fahad M. Alturki
Chief Economist and Head of Research
falturki@jadwa.com

Asad Khan
Senior Economist
rkhan@jadwa.com

Rakan Alsheikh
Research Analyst
ralsheikh@jadwa.com

Head office:
Phone +966 11 279-1111
Fax +966 11 279-1571
P.O. Box 60677, Riyadh 11555 Kingdom of Saudi Arabia

www.jadwa.com

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