It’s arguably the largest un-tapped market in the Middle East and beyond, but this summer the international investment community gained access to the bounties of the Saudi Arabian stock exchange, Tadawul, as it invited foreign investors for the very first time. Huge in terms of landmass, wealth and population, it is estimated that Saudi Arabia accounts for about 45 percent of the total market capitalisation in the gulf region—amounting to $600 billion—as well as 67 percent of the trading turnover.
As Arindam Das, regional head of HSBC Securities Services in the Middle East and North Africa, says: “It’s a large market by any standards, but by Middle East standards,
Previously, some foreign investors could enter the market through not-particularly-popular mutual funds, or through swaps with big banks, but they wouldn’t have direct ownership of any stocks listed on the market. As of 15 June, investors can use the new qualified foreign investor (QFI) route to claim ownership of stocks listed on the Saudi market in their own right.
It’s a move that many have been anticipating for decades, but according to Das, the timing partially reflects the desire of the Saudi government to encourage institutional investment, which would in turn lead to higher standards of corporate governance in the Saudi market.
He says: “It’s primarily a retail market and there has been a fear of ‘hot’ foreign money coming in when the times are good and going out when the times are bad, and of retail investors who are not so savvy being caught out. But obviously a lot of research has gone in to it, and the Saudi regulators and policymakers have looked in to it thoroughly, and have gained comfort that with the eligibility criteria they have stipulated for QFIs it is unlikely to lead to ‘hot money’.”
“Currently the market is about 90 percent retail, which means it’s quite volatile. Retail investors don’t tend to invest based on research, they often invest based on tips and rumours. Policymakers want to change the balance to be a healthy mix of retail and institutional, so that the investment climate changes.”
He adds that an influx of institutional investors could lead to greater corporate governance, saying: “Institutional investors, foreign or domestic, do more research. They ask companies the right questions, and automatically the management and the corporate governance of the corporate sector improves.”
Yasser Alharbi, head of asset management at Global Investment House – Saudia, says this has been a long time coming, and the opening to foreign investment is a result of years of planning to perfection, rather than a mere reaction to market trends.
“Tadawul has been working on various projects over the past decade to gear up for direct foreign investment,” he says. “For instance, facilitating and encouraging listing of Saudi corporates to increase the market depth and breadth, making Saudi Arabia the largest and most active initial public offering market in the Middle East and North Africa region, and developing and enhancing regulations in terms of corporate governance and disclosure.”
It’s perhaps no coincidence that this invitation to investment comes at a time when the Saudi economy is healthier than ever. According to Alharbi, the country’s fiscal reserve is around 100 percent of GDP, while debt levels are just 1.6 percent of GDP. The stock exchange is large and diverse, with approximately 170 stocks spanning 15 sectors, and on top of this, the Saudi demographics are compelling—it has a very young population (20 percent is under the age of 10, and only 5 percent is above the age of 60) and the population has quadrupled in one generation, says Das.
He adds: “The oil prices over the last decade have led to significant foreign exchange reserves, and have brought down the debt:GDP ratio, so despite the recent decline in oil prices, the government can continue with the spending programmes it had initiated earlier. The economic fundamentals, coupled with the depth and breadth of the market, makes it a very attractive market for investors to look at.”
Alharbi agrees, calling the stock market a “fair representation the broader economy”. He also insists that the market is still growing and that its “strong fundamentals” will act as an attraction to new foreign investors.
He points out that the opening of such a large market in the Middle East is likely to attract attention to the region as a whole. In 2014, the United Arab Emirates and Qatar were upgraded by MSCI from ‘frontier’ markets to ‘emerging’ markets, and if the Saudi market could eventually graduate to be included on the index, that could be the next step in making the region more accessible.
Alharbi says: “Many listed Saudi companies have exposure to, and investments in, other regional markets, and vice versa. It is expected that this move will bring extensive research coverage on Saudi sectors and companies, which is expected to extend to other regional markets with the same kind of macroeconomic environments, consumer dynamics and market characteristics.”
While Das agrees that “over a period of time this will be a game-changer for the Middle East”, he stresses that this is just the beginning of a long process. As it stands, asset managers have to meet strict eligibility requirements—assets under management must be $5 billion or more, the investor must be a bank, fund manager, pension fund or similar, and it must have at least a five-year track record in the securities business.
He says: “They are very clear about what type of institutions they want to attract, they don’t want short-term money and they don’t want small operators coming in, so they are targeting these large institutional asset managers and asset owners, namely pension funds, insurance companies and sovereign wealth funds. For such institutions, the threshold of assets under management or the track record criteria will not be a restriction.”
He predicts that, while there may be a slow start, international investment will take off before the end of 2015, and that in the long run restrictions will be eased and new asset classes and products will be introduced.
Alharbi says: “We expect the Capital Market Authority to finalise the legal and regulatory framework necessary to enable listing and trading of real estate investment trusts. We also expect more products and initiatives on the debt markets.”
While it’s taken the first big step, the Saudi market has a long road ahead. But, by all accounts, once all the pieces are in place there is little to stop Saudi Arabia from taking the investments world by storm, even if it takes a little patience.
As Das says: “The plumbing takes some time to set up, but once it’s done the water starts flowing.”