Foreign funds keen to enter Saudi exchange

08/05/2015 11:02 AST

A trickle, not a flood of foreign money is likely to enter Saudi Arabia’s stock market in coming months as the $575 billion bourse, the Arab world’s biggest, opens to direct foreign investment.

Saudi Arabia is one of the world’s last major markets to open up, and nobody doubts the latent interest among foreign funds.

The plunge of oil prices has slashed the Kingdom’s export revenues but it has not dimmed the long-term attractions of its rapidly growing population or wide range of companies.

If the market-opening causes Saudi Arabia to enter equity benchmarks such as MSCI’s emerging market index, it will attract tens of billions of dollars of new foreign money.

The trouble is, inclusion in the MSCI index is at least two years away.

Moreover, the valuations of many Saudi stocks don’t look particularly attractive to foreign funds at present.

Operational issues such as the rules for settling trades are another obstacle. And by imposing strict foreign ownership limits, Saudi regulators have made clear they don’t want any sudden deluge of international money.

The result is likely to be a cautious trickle of additional foreign funds into Saudi Arabia — perhaps tens of millions or a few hundred million dollars a month, accelerating as MSCI inclusion nears — rather than any sudden surge.

“As they transition from a retail-dominated market to one with more institutions, they want to do it in a way that won’t hurt anybody,” Sanyalak Manibhandu, manager of research at NBAD Securities in Abu Dhabi, said of Saudi regulators’ approach.

“They want to make sure that retail investors don’t get hurt with too much money coming in at the same time.”



INDEXES

At present, non-resident foreigners are limited to indirect investment in Saudi stocks through instruments such as swaps and exchange-traded funds, which can be inconvenient and expensive.

They are estimated to own about 3 percent of the market.

From June 15, they will be allowed to buy stocks directly through licensed institutions. The Capital Market Authority announced rules governing the reform recently.

Saudi Arabia’s entry into global equity indexes is not certain; it would need to satisfy the index compilers in areas such as market liquidity, investor access and transparency.

But expectations for entry are strong enough that MSCI has compiled a provisional list of 18 Saudi stocks for inclusion.

Petrochemicals giant Saudi Basic Industries, National Commercial Bank and Saudi Telecom account for 45 percent of the group.

EFG Hermes estimates the provisional list would give Saudi Arabia a weight of 1.66 percent in MSCI’s emerging market index.

“Assuming allocation by passive and active global emerging market funds at weight, this should translate into $4.2 billion of passive inflows and $16.4 billion of active inflows,” EFG Hermes analyst Mohamad Al-Haj said.

MSCI itself has estimated total inflows due to index entry at $27 billion.

But passive funds would only enter when the inclusion actually took effect; MSCI says the earliest time for this would be June 2017.

Active funds have more flexibility, and in the glow of Saudi Arabia’s market-opening, they may take a fresh look at the country. US asset manager BlackRock announced in October that it would establish a US-listed, exchange-traded fund to invest in Saudi stocks.

But it is not yet clear how much money the fund will raise.

“Active money will probably flow in increments, and will depend on market valuations among other factors,” Haj said.

Valuations are not great at present.

With a forward price-to-earnings ratio of 17.2, Saudi Arabia is pricier than even developed market benchmarks such as the Dow Jones Industrial Average at 16.0 and Britain’s FTSE 100 at 16.5.

Reuters