Foreigners snap up Saudi swaps

07/05/2009 00:00 AST

After a difficult start, international demand for swaps in Saudi Arabian stocks, first authorised by the country’s Capital Markets Authority last August, is finally starting to pick up – and fast.

According to the Tadawul, the country’s stock exchange, overseas-based investors bought SR1.23bn ($328m) worth of swaps last month, up more than three-fold from March, while only SR269m of them were sold.

Although only a minuscule part of trading on the Saudi stock exchange, this helped it gain nearly 20 per cent last month. Bankers and fund managers expect demand for swaps in Saudi Arabia to continue to grow, boosted by the positive earnings outlook for many Saudi companies.

“There has been a noticeable improvement in sentiment, and April was a very good month, the best since the swaps were introduced,” says Jamal Al Kishi, chief executive of Deutsche Securities Saudi Arabia. “If things continue to go as they have, May will be another good month.”

When the Saudi CMA first introduced the “total return swaps” – which give overseas investors the economic but not the voting rights of a stock – bankers hailed it as a historic step towards opening up the country’s equity market, the largest in the Arab world.

But by the time potential investors had familiarised themselves with the instrument, and local houses or international investment banks in Saudi Arabia had been authorised as dealers, the failure of Lehman Brothers had sent global markets into a tailspin.

As the swaps can only be bought and held through brokers authorised by the CMA, they entailed taking significant third-party risk at a time when previously imperious investment houses were failing and the global financial system buckled.

But a global equity rally has sparked renewed risk appetite and an interest in emerging market stocks.

“We’ve seen a lot more interest from institutional investors that want to get exposure to this market recently, mostly from emerging market fund managers and hedge funds,” says Habib Achkar, chief executive of Morgan Stanley Saudi Arabia.

Bankers say investors have bought swaps in companies across all industries in Saudi Arabia, but some areas have proven particularly popular with overseas institutions. This tends to be where the kingdom has a comparative advantage, such as petrochemicals.

However, Saudi Arabia’s stock market continues to be closely linked to global equity sentiment, and demand could falter if there is a renewed bout of risk aversion and the recent rally is reversed.

Financial Times