Tadawul opening for direct foreign investments boosts MENA

24/07/2014 02:09 AST

The Saudi Cabinet’s approval on Tuesday to open the Saudi stock market for direct foreign investments after the issuance of guidelines from the country’s Capital Market Authority (CMA) drew positive reactions.

The actual opening of the market is seen during the first half of 2015.

“The opening of the Saudi stock market would be a major positive for the MENA region, with a total market capitalization of $1.2 trillion, where Saudi Arabia alone accounts for 45 percent and where regional liquidity is around $4 billion of which Saudi Arabia represents 65 percent. With over 160 listed securities, the Kingdom’s stock market offers a diversified sector base,” said Aleksandar Stojanovski, research analyst at Deutsche Bank.

Saudi equities are currently accessible only via synthetic products for foreign investors and estimates see less than 1 percent foreign ownership of the market versus regional peers, where direct investments are available, with foreign ownership accounting for around 8 percent. “After an opening of the Saudi market and assuming foreign ownership reaches a similar level to the regional equity markets we could see up to around $35 billion of incremental foreign inflow versus the approximately $4 billion that foreigners have accumulated since 2009, when indirect ownership first became available,” said Stojanovski.

Saudi Arabia is the most liquid market in the region, with a 6 months average daily trading volume (ADTV) of $2.5 billion, accounting for 65 percent of the regional liquidity. Foreign investors – via indirect routes – currently trade only 1.1 percent versus the regional average of 12.2 percent. Assuming the share of trades by foreign investors reach the regional average levels, there is potential for a marginal 11 percent growth in Saudi Arabia’s liquidity, with ADTV levels reaching $2.7 billion. Yet, the $300 million of potential foreign incremental liquidity in Saudi Arabia could be a significant boost to the $145 million that foreigners currently trade in regional markets on a daily basis.

“With the direct trading restriction by foreign investors removed, we believe that the prospect of Saudi Arabia joining MSCI Emerging Markets becomes a reality, albeit unlikely before 2017. If promoted, we estimate the weight of Saudi Arabia in the EM index to be 1.9 percent, 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 “, Stojanovski noted. The combined weight of the MENA region could then rise to around 3 percent, from its current 1 percent, putting the region ahead of countries like Indonesia and Thailand. This year, UAE and Qatar joined the Emerging Markets index with weights of 0.58 percent and 0.47 percent, respectively.

Saudi Gazette