24/07/2014 01:31 AST
The opening up of Saudi equity markets could rapidly boost the ranking of Saudi Arabia among global emerging markets according to Credit Suisse.
The bank forecasts Saudi Arabia to emerge as the seventh largest emerging capital market by the year 2030 with the equity market growing to be the sixth largest emerging market from the current tenth position.
Saudi Arabia on Tuesday authorised the market regulator, the Capital Markets Authority (CMA), to grant foreigners the right to buy and sell shares “at a time it sees as appropriate”.
The Saudi stock market currently has a capitalisation of around $530 billion (Dh1.9 trillion) with much greater liquidity and a much larger number of listings in the offing analysts the market has huge potential for growth among emerging market space.
The opening up of the equity markets to Qualified Foreign Institutional Investors (QFIIs) is expected to result in Saudi Arabia’s inclusion in widely followed indices — most notably the MSCI Emerging Markets (EM) index.
“Indeed, we suspect that the UAE and Qatar’s recent inclusion is likely to encourage Saudi Arabia to move further ahead with its plans to open the market to foreign investors. That said, MSCI inclusion is still a medium-term event at best. The process and requirements involved means that an upgrade would be 2-3 years away at best,” said Fahd Iqbal, Head of Middle East Research Credit Suisse.
“With the direct trading restriction by foreign investors removed, Deutsche Bank believe that the prospect of Saudi Arabia joining MSCI Emerging Markets becomes a reality, albeit unlikely before 2017. “ If promoted [to emerging market], we estimate the weight of Saudi Arabia in the EM index to be 1.9 per cent, using GCC country weights in the MSCI GCC index as a proxy. While the incremental fund inflows due to eventual MSCI EM promotion could reach up to $10 billion “, Aleksandar Stojanovski, research analyst at Deutsche Bank.
Meaningful weight
Credit Suisse’s estimates which assume that Saudi Arabia allows for a 25 per cent foreign ownership limit, the Saudi market could account for 1.9 per cent of the MSCI EM index, putting it above Turkey and Poland. “The market’s potential to have a meaningful weight in the benchmark index, coupled with its negligible foreign investor penetration, means that EM inclusion is an important factor to monitor, despite it still being some time away,” said Iqbal
According to Credit Suisse estimates, Saudi Arabia would account for the second largest share of emerging equity capital market (ECM) deal fees ($5.5 billion) over the next 17 years. As a market with high retail ownership and a strong equity culture among high net worth individuals, secondary activity in equities should also prove to be a significant source of revenue, with average daily traded value expected to grow from $1.8 billion currently to $16.4 billion by 2030.
Analysts said the opening up of the market will add to the depth of Saudi market “If the market is fully opened up, it should have a positive impact on corporate governance, which would, in turn, allow valuation multiples to expand. It should also allow Saudi Arabian companies better access to capital and more choices too. The ability to list and access to a broader range of funding sources should allow for a more dynamic corporate sector in Saudi Arabia,” said Ghadir Abu Leil Cooper, London based Head of EMEA and Frontiers Equity Team, Baring Asset Management.
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