Article on Saudi stock market

Falling crude takes shine off Saudi stock market opening (Published by MEOG Newsbase)

Saudi Arabia’s stock market, or Tadawul, has been on a rollercoaster path over recent months, having risen sharply following the July announcement that the exchange would open to overseas institutional investors next year – part of a $130 billion plan to boost non-energy industries in the kingdom – before falling back sharply since September in the face of sliding crude prices and weaker global economic sentiment.

In the decade up to mid-August the region’s biggest and most liquid equity market had shown a return of 120 percent, according to an HSBC report, making it an attractive prospect for overseas investors. However, during that period oil prices more than doubled, and maintained strength apart from a dip in 2008-10, so with prices now falling steadily the outlook for performance of the oil-dominated sector is less certain.

On the other hand, if the country sticks to its plans to open the market, the recent share price falls should mean investors get better value than they would have done before the crude slide. Should confidence return, more competitively priced stocks may eventually attract more foreign capital than might otherwise have been the case. Some local observers blame conservative attitudes, in what is perhaps one of the most conservative states in the world, for delaying liberalisation too long and missing the market peak.

Letting in the infidels

On July 21st Saudi Arabia’s Council of Ministers gave the go-ahead for the Capital Market Authority (CMA) to open the Tadawul to overseas investors, and on August 21 the CMA issued detailed proposals with a consultation period of three months – so only two weeks left if you have a point to make. They will be reviewed by the end of this year, with market opening expected during the first half of 2015 to qualified foreign financial institutions.

The proposals include a ceiling on the level of equity each overseas investors can own at 5 percent per company, along with a 49 percent overall cap on foreign ownership in any company. The CMA has also proposed a limit of 10 percent foreign ownership as a proportion of the Tadawul’s total stock market value, which is currently around $530 billion, according to brokers Jadwa – this figure represents about 45 percent of total equity market capitalisation in the Mideast and North African (MENA) region, illustrating its relative importance.

Opening the market to foreigners means Saudi Arabia can join Emerging Market indexes. This is expected by 2017 at the earliest, according to Sebastien Lieblich of Morgan Stanley Capital Index (MSCI) Research, when its share is likely to be around 4 percent of the MSCI index, he said. Total longer term market inflows are expected to be around $40 billion, according to Shroders, another broker.

At present, trade on Tadawul is dominated by local retail investors, which account for around 90-95 percent of activity, with half the remainder held by Gulf Cooperation Council (GCC) retail investors. Foreign non-GCC investors are currently only allowed to invest indirectly through mutual funds, corporate portfolios and swap arrangements using expensive local brokers, keeping their share of trade to less than five percent, with a total holding currently amounting to around $8 billion, or 1.4 percent of the total, according to Jadwa.

The Saudi stock market index jumped 13 percent between the foreign opening announcement in July and September 1st, hitting a six-year high on August 26th thanks to a surge in the value of shares bought by foreign investors using equity swaps, before retracing its path as oil prices fell. At least three banks, including HSBC and Deutsche Bank, have reportedly executed test trades.

The rise had put the market at a premium to other GCC and emerging markets, and further buying was expected, with a September 1st Reuters survey showing 47 percent of investors expected to raise their equity allocations to Saudi Arabia over the following three months, while only 7 percent expected to reduce them. Mark Mobius, chairman of Templeton Emerging Markets Group, for example, said his firm – which manages investments of $40 billion – could triple its position in Saudi Arabia if direct foreign access went ahead. Now, however, interest has receded somewhat, with the index losing about 12 percent since early September.


Pension funds for petro-chemicals

The Saudis are particularly keen to attract institutional investors, such as pension funds, which they see as having a longer term outlook when compared to the Saudi retail investors that currently dominate the market. It’s believed that attracting these more strategic investors would lead to a decrease in market volatility, stabilising the value of companies like petrochemical giant, Saudi Basic Industries Corp. (SABIC) – the world’s biggest petrochemicals producer – as well as Kingdom Holding Co., the investment vehicle of billionaire Prince Alwaleed bin Talal Al Saud; and Al Rajhi Bank, the largest Islamic lender.

The new regulations require investors to have at least $5bn in funds under management and have been operating for a minimum of five years. This will rule out small-scale overseas investors buying into the market, and are similar to those of other major emerging economies (notably China) aiming to attract long-term investors, rather than speculators. This rule and the proposals for ceilings for foreign ownership of Saudi Arabian companies are expected to be confirmed at the end of the consultation, according to Abdulaziz Al-Bosaily, of Al Bosaily Law Offices in Riyadh.

The market opening has not only come at a bad time for oil prices, it also coincides with a time when more and more western institutional investors are shunning fossil fuel related investments, which makes the Saudi market a minefield. But it is unclear how much of an impact this might have on demand, as much of the interest could end up coming from less fastidious eastern investors rather than western pension funds.

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