Saudi stock exchange opens for foreign investors
London - Despite a lukewarm start, analysts say they are optimistic about the long-term prospects of Saudi Arabia allowing direct foreign investment in the Middle East’s biggest stock exchange, Tadawul.
The June 15th opening comes when the kingdom is seeking an economic boost amid low oil prices and a war in neighbouring Yemen.
At the end of the first day of trading, however, the capital expected to be generated had not materialised, with foreign investors purchasing shares in just five of the kingdom’s publicly traded firms. Analysts attributed the slow start to numerous restrictions, designed to keep out small-time investors, set by Saudi Arabia’s Capital Market Authority (CMA).
The kingdom’s regulator limited access to institutional investors with minimum assets of $5 billion. Qualified Foreign Investors (QFI) must be approved and licensed by the CMA.
Additional restrictions include a 5% cap on ownership of any company’s stock by a foreign investor and a maximum of 20% ownership by all QFIs and their clients, who also have to be approved by the CMA, while foreign ownership of any company cannot exceed 49%.
These conditions were met with a wait-and-see approach by some, while other potential investors were simply locked out administratively, with the Wall Street Journal reporting: “Some institutions that applied for a license from the Saudi market regulator to buy shares have yet to get one, while many others just stayed away on valuation concerns. A lack of clarity over some of the new rules was also a hindrance.”
However, analysts told The Arab Weekly the restrictions should not be viewed as a long-term problem for the Saudi stock market and potential investors.
“If you look at the overall ownership in the Saudi market, the amount or the percentages owned by foreign investors is low; even within these limits, there is a lot of room available before it really becomes an issue,” said Sachin Mohindra, a portfolio manager at Abu Dhabi-based Invest AD.
“This is like a work in progress for Saudi regulators, and probably we will see some gradual liberalisation. But for now, even in the medium term, yes, there are limits, but the overall foreign ownership in the Saudi market is so low that it should not be a matter of concern, as of now.”
Mohindra went on to say that most emerging markets would have limits on foreign ownership, however, Saudi regulators included a 10% cap on total foreign ownership of its market.
“I can only presume that this is a part of the gradual process, and they (CMA) are probably trying to prevent volatile money from coming into the market,” he said.
Saudi market watchers see the move as a step in establishing the kingdom as a major global capital market with some estimating that foreign investment in Tadawul could reach $40 billion-$50 billion, while also improving transparency and accountability of publicly traded Saudi firms.
“One of the biggest benefits of this move is that Saudi companies on the Tadawul Index will get a monetary boost from foreign investors,” said Saad al-Zahrani, a Jeddah-based stockbroker. “This would particularly help non-energy firms to grow if they are seen as an attractive investment and in the long run could help diversify the economy.”
Al-Zahrani added that tying the opening of Tadawul to foreign investment to falling oil prices would be inaccurate because this step was years in the making, adding, “However, you can say that the timing is economically beneficial.” Chief Executive Officer of the Saudi Stock Exchange Adel al-Ghamdi on the first day of trading said he expected the first Qualified Investor Licence to be awarded straight away and that rules on who could get them would evolve regularly.
“We have six applications under process from very large institutions.
The first transaction from a qualified foreign investor will actually take place today,” he said on June 15th.
“As we evolve, there might be a spike of involvement from foreign investors over the next two or three months, but that will stabilise as we go forward.”
Valued at more than $585 billion, Tadawul has the largest market capitalisation in the Gulf region, comfortably ahead of the UAE’s, which is valued at $245 billion and Qatar’s market capitalisation of $200 billion. Global index provider MSCI said in June it would seek feedback on the market’s accessibility before considering Tadawul for inclusion in the MSCI Emerging Markets Index.