Interpreting Middle East Economic News and Analyzing Market Trends

Saudi stock market welcomes foreigners, with conditions

Saudi Tadawul launch of NCB

Source: CNN Money

The Saudi Stock Exchange (Tadawul) opened up this week to foreigners investors.  There are, however, conditions foreigners must meet before they are allowed to invest and there are questions on the timing of the move.  Is it too little too late or is Tadawul too early?

 

CNN Money published a good article on the topic.  Here are the highlights:

 

Here are five key things you should know about the market:

1. It’s big: Saudi Arabia has the largest stock market in the Middle East. And the value of all companies listed on the exchange — roughly $570 billion — makes it bigger than the main markets in Russia and Mexico, according to the latest data from the World Federation of Exchanges.

It’s also one of the last major global stock markets to open up to foreign investors.

2. It’s outperforming others: Saudi Arabia’s All-Share index — dubbed TASI — has risen by 15% since the start of 2015, outperforming all the main U.S. indexes. The MSCI emerging markets index is up a paltry 2.4% so far this year.

3. There are loads of rules: Even though the market officially opened Monday, investors aren’t expected to flood in right away because of a range of restrictions that will keep out the small fry.

Saudi Arabia requires that foreign investors register with its Capital Market Authority before they can begin investing. Only financial institutions such as banks, brokerage houses and fund managers will be considered, and they need to have over $5 billion in assets and over five years of investment experience.

On top of that, approved investors won’t be allowed to own more than 49% of any traded company.

4. The little guys can still invest, kinda: Those who can’t register as “Qualified Foreign Investors” can still invest through a swap agreement program, but they won’t have regular shareholder rights and won’t be granted voting rights.

Peter Kohli, chief investment officer at DMS Funds, said he won’t be investing in Saudi Arabia because of the restrictions on smaller fund managers.

“When I was told I was locked out of the market, I really didn’t look [to invest] because, what’s the point?” he said.

5. Why now?: The Capital Market Authority, which oversees the stock market, says it wants to grow its institutional investor base in order to promote market stability and reduce volatility.

Read the full article from CNN Money.

 

Bloomberg also has a good video interview with Swicorp Saudi Director of Private Equity Naif Al-Rasheed:  

   

Both reports in CNN Money and Bloomberg are valid, but none address some of the other issues, namely the fact that the stock market has been the highest performer this year in the region in anticipation of foreigners coming in.  The Saudi market is up almost 15% year to date while other markets in the region are flat (Abu Dhabi) or down (Bahrain, Kuwait, Qatar).  Returns for the year might already be priced in.  With oil prices trending lower with no end in sight, it’s hard to imagine where investors expect to see returns.

 

On top of this you have two restrictions that turn away foreign investors; limitations on ownership and qualifications to invest (such as having at least $5 billion under management).  It’s a half-assed attempt at attracting investors to the market to create more liquidity and transparency, but I guess it’s a move in the right direction.  Don’t forget that it took Saudi Arabia nearly a decade of talk and discussion to get to this stage so don’t hope for any quick decisions going forward, which is another turnoff to foreign investors.