Saudi stock market shows sign of overheating ahead

29/08/2014 02:27 AST

Saudi Arabia’s equity rally is showing signs of overheating as the government moves towards opening the stock market to foreign investors.

The kingdom could experience its own version of the retail investor-led buying frenzy that preceded the admission of the UAE and Qatar into the MSCI Emerging Markets Index, a report warned yesterday.

“Both countries’ stock markets rose before the inclusion of the respective indices, in early June 2014, into the MSCI Emerging Markets Index, and then dipped immediately after,” Jadwa Investments said in the report.

“Qatar’s benchmark QE Index advanced to five-year highs in early June 2014 and then dropped, while shares on the Dubai Financial Market General Index dropped by 22 per cent by the end of June 2014,” the firm said.

Listed companies on the Tadawul All Share Index could move beyond fair value levels, Jadwa said. The index is currently trading at 21.2 times earnings, compared with 14.3 and 20.4 times for Abu Dhabi and Dubai respectively.

Saudi stocks have risen sharply in recent weeks in anticipation of a flood of foreign money entering the market. Riyad Bank has risen 22.5 per cent in the past month, while Emaar Economic City gained more than 8 per cent over the same period.

Analysts expect the kingdom’s stocks to skip frontier markets status and fast-track to emerging markets status by 2017.

Saudi Arabia’s stock market, the region’s most liquid with more than US$1.3 billion traded daily, has been considering opening up to foreign investors for several years.

Last month, the country’s cabinet approved a law to allow foreign investors to directly access the kingdom’s stocks by the first half of next year. At present, foreigners can access equities only indirectly, via swaps and exchange-traded funds.

This week, draft regulations released by the kingdom’s market regulator provided criteria on the eligibility of foreign investors.

According to the draft rules, which are expected to be finalised in three months, a qualified foreign investor must be a bank, brokerage, fund manager or insurance company with at least $5bn in assets under management. Foreign individual investors will be allowed up to a 5 per cent shareholding in any publicly listed company; and collectively, qualified foreign investors may own up to 20 per cent.

The National