Opening the Saudi Stock Market to Foreign Investors

Published: June 15, 2015

Editor’s Note:

The much anticipated opening of the Saudi stock market to “qualified foreign institutional investors” is set for today. SUSRIS has provided comprehensive reporting on the relevant announcements and assessments (see links below) addressing the opening of the Tadawul to foreign investment. Today we will share key analyses and reports with you as well as this op-ed from Dr. John Sfakianakis, Ashmore Group Middle East Director based in Riyadh.

In January Dr. Sfakianakis talked with FocusKSA — the SUSRIS/SUSTG webcast series — about the Saudi economy. In response to a question from SUSTG President Richard Wilson on the topic of the stock market opening he noted:

It’s very important. It’s the part that was missing when everybody was talking about the financial sector in Saudi Arabia, the opening up of the market to foreigners was very important. It was the bit missing from all those who were saying that within the G20 everybody can invest directly in everybody else except Saudi Arabia. So I think it’s a monumental decision, and they took it.

The issues went exactly, and I think the date will be as we hear and read sometime in the first half of 2015. And why is it important? It’s important because Saudi Arabia’s size. The stock market is very important. And it’s important to be open to foreign investors given that it’s bigger than South Africa, bigger than Turkey, bigger than Indonesia. And if you account for the recent correction that we’ve seen then you will see that the market has potential growth once we get over this correction mode that we have been going through over the last several weeks. And that’s more of a temporary effect due to oil prices.

I think it’s very important because eventually that will open the market for Saudi Arabia to be included in the MSCI index which I don’t expect it will take a very long time for that to happen. Just as you said, Qatar and the UAE back in the spring of 2014 joined the MSCI index. And given its importance they will have to do it once they open up to direct foreign investment. So it’s very important because it brings depth, it brings stability, it adds to transparency. In fact the market is extremely transparent.

Corporate governance is probably the highest in Saudi Arabia than the rest of the GCC. Of course it has faults like all markets – nothing is perfect – but I think that in terms of the regulatory aspect it has done superbly well and it’s one of the best-regulated stock markets in the emerging markets.

So it makes no sense given the size of the stock market, which is more than $500 billion given the size of the economy, which is more than $750 billion, for them not to have access to direct investors. Also, one of the benefits will be to lower transaction costs, and that’s good for the retail investor as well as the institutional investor.

When foreigners come in they will bring a lot of institutional money with them. Concern has always been will they bring hot money, will that be in and out kind of transactions, and we believe that this is not the case. There is a level of maturity that takes place, and as we have seen in China the market there was very much retail dominated, and over time it has phased out its retail side and more institutional players are involved now.

And it’s good for corporates as well when you have direct access. It helps increase governance and that’s always an added bonus.

So it’s very important for Saudi Arabia to be opening its market. It’s going to add to the positiveness in the financial sector, and it will continue to put Saudi Arabia on the map of the global financial players.

For your consideration here is Dr. Sfakianakis’ essay on the eve of the foreign investor opening in the Saudi stock market. It was published in Arab News on June 14, 2015.

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Saudi Arabia: Another $560bn of potential for EM stock markets!
John Sfakianakis

John SfakianakisFollowing on from last year’s declaration of intent, the Saudi capital market regulator is set to open the $560 billion stock exchange to qualified foreign institutions on Monday. Saudi Arabia’s stock market is larger than the stock markets in Mexico, Indonesia, Malaysia and Russia. 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. Fundamentally, the market offers attractive exposure to petro-chemicals and consumer stocks with the latter strongly supported by counter-cyclical policies recently announced by the government.

Saudi Arabia is a very large, liquid market. It will potentially be the seventh largest Emerging Markets (EM) equity market by market capitalization, which places it just behind South Africa ($543 billion), but ahead of Russia, Malaysia, Mexico and Indonesia. The Saudi Tadawul Exchange trades on average $2.4 billion per day across 170 listed companies and offers a rich selection of opportunities ranging from banks to consumer-driven businesses.

The opening of the Saudi market will widen the foreign investor base, which is currently less than 2 percent of total holdings. Given the size and depth of the market, we expect Saudi Arabia to be included in the main EM equity benchmark indices by mid-2017, though this requires the authorities to further lift restrictions on access to the market. Should this happen, billions of dollars will flow into Saudi Arabia over the next few years, in our view.

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FocusKSA Video – Opening Saudi Stock Market with John Sfakianakis (Jan 2015)

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Judging by other precedents in the region, such as Morocco, Egypt, UAE and Qatar, Saudi Arabia’s market is likely to re-rate when it becomes included in EM indices. Indeed, we see analogies to the opening of the Indian market for foreign equity investors and the on-going opening of the onshore Chinese stock markets.

Saudi Arabia’s decision to open its markets now is highly intelligent — global financial conditions are bound to become tighter in the coming years and the winners among EM countries will be those that are able to maintain or increase their share of a shrinking global “financial pie”.

From a fundamental perspective, the opportunity in Saudi Arabia is exciting. Contrary to popular perceptions, Saudi Arabia’s stock market is not just about oil. In fact, not a single oil company is listed on the Tadawul Exchange. Petrochemical businesses have some correlation with oil, but they are exceptionally profitable given their access to low feedstock costs and offer less volatile earnings streams than other chemical businesses in other markets. Banks are also attractive with the country’s peg to the USD making them beneficiaries of rising rates. Large parts of the stock market consist of consumer businesses, whose earnings are determined by domestic conditions.

Custodian of the Two Holy Mosques King Salman’s affirmation of the country’s commitment to domestic spending and development and job creation creates favorable tailwinds for consumer-focused sectors, aided by the announcement recently of two extra months of salaries and bonuses. There are opportunities for consumer stocks similar to those found in some African or Asian markets, but at much more attractive multiples, because of Saudi Arabia’s very favorable demographics. The population distribution has a very low average age, which points to sustained consumer demand for years to come.

— John Sfakianakis is Middle East Director based in Riyadh for the Ashmore Group.

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