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The opening and eventual inclusion of the Tadawul (Saudi stock exchange) into MSCI (Morgan Stanley Capital International Global Equity Indexes (MSCI) raises the risks of overpricing of stocks in the short to medium term, Riyadh-based Jadwa Investment said in its comments on the opening of Tadawul to foreign investors over the weekend.
“With the greater dominance of retail investors and their higher risk appetite, there is a strong possibility that the Tadawul could move beyond fair value levels,” it noted.
It suggested a “cautious and considered path to reform as the best way forward, much like the Chinese example,” though Jadwa viewed the opening up of Tadawul as “overall positive”.
With the Saudi stock exchange expected to be included into the MSCI Emerging Markets Index by 2017, a similar pattern of events could occur to what was seen in Qatar and the UAE. 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. Qatar’s benchmark QE Index advanced to five-year highs in early June 2014 and then dropped, whilst shares on the Dubai Financial Market General Index dropped by 22 percent by the end of June 2014.
There are already signs that the Tadawul All Share Index (TASI) is moving toward being over heated, having risen over 10 percent since the announcement on July 21. Furthermore, current price/earnings (PE) valuations are trending above the long-term average, with PE at 20.4 in early August, although it still below previous peaks of 27.4, in mid 2006.
It is important to highlight, however, that the surge in optimism fuelling the current TASI rise is not based wholly on speculative gain or positive sentiment, it is also a due to a flourishing Saudi economy, which is underpinned by strong economic fundamentals.
“We see governmental spending plus stable international oil prices maintaining elevated levels of business and investor confidence, going forward. Sectors with strong linkages to the domestic economy, such as construction, transportation, retail and manufacturing, will continue to perform well, but so will the two largest sectors, banking and petrochemicals. The banking sector is riding high from soaring consumer lending and a widely anticipated rise in US interest rates will add to future profitability. The petrochemicals sector continues to benefit from low feedstock prices, which means it is well placed to benefit from an upturn in demand as the global economy picks up.”
According to the draft proposals released by the Capital Markets Authority (CMA) any qualified foreign investor (QFI) wanting to participate in the Saudi stock exchange will have to have at least $5 billion assets under management (AUM) (possibly reduced to $3 billion) and have been operational for a minimum of 5 years. Other limitations apply, including:
Each QFI (including affiliates) can only hold a maximum of 5 percent of issued shares of any one listed company.
All foreign investors (including resident and non-resident, swaps and QFI’s) have a combined ceiling of 49 percent ownership of issued shares, in any one listed company.
QFI’s together can only own a maximum of 20 percent of issued shares of any one listed company.
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