Alkhabeer release report on where Tadawul stands globally

27/10/2014 12:48 AST

Alkhabeer Capital has published an in-depth analysis today on the Saudi Capital Market Authority’s (CMA) recent decision to open up to Foreign Institutional Investors (FII).

Regional markets, especially the Saudi Arabian market witnessed an increased level of excitement in July 2014 following the CMA’s announcement on opening up the Saudi market for direct access to FIIs. The new development is likely to have a major impact on the region’s largest market in MENA by market capitalization and has the potential to propel the country onto the new stage of frontier markets, globally. Besides improved liquidity, the move is expected to promote best governance practices and pave the way for the market’s inclusion in the MSCI emerging market index by 2017. This could see the Saudi market accounting for a weighing of almost four per cent of the index; which is in the league of Malaysia, Indonesia and Thailand.

The CMA’s efforts in liberalizing the Saudi market have been admirable since its inception in the early 1980’s. Before 2008, mutual funds were the only way non-resident foreign investors were permitted to invest in Saudi stocks leading the market to be classified as the least open amongst the GCC countries. But in 2008, the regulator opened a small window that permitted the entry of non-resident and non-Arab foreigners into the market through swap arrangements with local CMA-approved and licensed intermediaries.

In 2010 and 2011, this was extended further with the introduction of Exchange Traded Funds. The CMA and Tadawul proposed a draft law on Qualified Foreign Investors (QFIs) specifying the framework of foreign ownership. According to the latest draft only those QFIs which have at least $5 billion of Assets Under Management (AUM) and a 5 year operating history would become eligible to directly invest into the market.

Finally, on 21 July 2014, the Saudi Council of Ministers authorized overseas direct trading in stocks listed on Tadawul. Subsequently, on 21 August 2014, the CMA published the draft rules for FII’s participation.

The end of 2014 will bring a finalization of the rules which will lead to the effective opening of the market in the first half of 2015.

In August 2014, the CMA set out the first draft rules on foreign-ownership limits. The rules propose a 10 per cent cap on foreign institutional ownership of the market capitalization including the value of swaps. Other proposed rules include limiting the holding of a single QFI to no more than 5 per cent of any listed firm, with all QFIs combined owning no more than 20 per cent of a company. In other regional markets, the Foreign Ownership Limit is set at 49 per cent, therefore, it is clear that the rules are conservative and were proposed to control the inflow of foreign funds into the market when it opens up next year.

Alkhabeer Capital believes that the market regulator could have been more flexible in terms of foreign ownership rules and instead should have imposed tougher restrictions on foreign investments in strategic sectors that are of national interest; similar to most of the emerging markets that have opened up to foreign investors.

While there are wealthy families that participate in the Saudi market, the presence of private institutional investors such as mutual funds, insurance companies and private pension funds has been historically small in Saudi Arabia’s market and they do not play any meaningful role. As at July 2014, the retail investor base made up a disproportionate majority of Tadawul’s volume at 85 per cent for Buyers and 90 per cent for Sellers. The CMA has exerted conscious efforts to attract institutional investors since the stock market crash in 2006, especially as institutional investors act as important support in times of crisis and volatility.

CPI Financial