Saudi mar­ket set to turn a new page

Open­ing up of Saudi eq­ui­ties to for­eign­ers from to­mor­row to boost Mena mar­kets

Khaleej Times - - FRONT PAGE - — Muzaf­far Rizvi

dubai — The open­ing up of Saudi eq­ui­ties for for­eign in­vestors from Mon­day is a first step to­wards join­ing the MSCI In­dex by 2017, a move ex­perts be­lieve will raise the pro­file of mar­kets in the Mid­dle East and North Africa (Mena) up to $1 tril­lion.

An­a­lysts said the open­ing up of Saudi stock mar­ket is a ma­jor move in in­ter­na­tional mar­kets since China let in for­eign in­vestors more than a decade ago.

They said the $570 bil­lion mar­ket cap­i­tal­i­sa­tion of the king­dom is more than the com­bined value of the Moscow, Malaysia and Mex­ico mar­kets, and that it would be the sev­enth-largest emerg­ing na­tion in the world if it joins the MSCI In­dex in the next two years.

We be­lieve in­vestors will come in grad­u­ally, af­ter as­sess­ing the mar­ket and val­u­a­tions Saleem Khokar Head of eq­ui­ties, NBAD As­set Man­age­ment Group Mena mar­kets could top $1t and that would place the re­gion in a more prom­i­nent po­si­tion than be­fore Yong-Wei Lee Head of Mena eq­ui­ties, Emi­rates NBD As­set Man­age­ment

THE OPEN­ING OF Saudi eq­ui­ties to for­eign in­vestors from to­mor­row is a first step to­wards join­ing the MSCI In­dex by 2017, which will be rais­ing the pro­file of mar­kets in the Mid­dle East and North Africa (Mena) by up to $1 tril­lion, ex­perts say.

An­a­lysts and ex­perts said the open­ing of the Saudi bourses is a ma­jor move in in­ter­na­tional mar­kets since China al­lowed for­eign in­vest­ment in lo­cal mar­ket more than a decade ago. They said the $570 bil­lion mar­ket cap­i­tal­i­sa­tion of the king­dom is more than the com­bined value of the Moscow, Malaysia and Mex­ico mar­kets, and that it would be the sev­enth-largest emerg­ing na­tion in the world if it joins the MSCI In­dex in next two years.

Ex­perts ex­pect that the Saudi mar­ket will get the high­est weigh­tage be­tween two per cent to four per cent in the MSCI In­dex and may at­tract $10 bil­lion to $15 bil­lion in ad­di­tional for­eign in­flows into the re­gion.

Banks, in­sur­ance, petro­chem­i­cals, health­care and re­tail stocks will be the ma­jor ben­e­fi­cia­ries of the Saudi move that will lead to a gen­eral shift of at­ten­tion to Saudi com­pa­nies and po­ten­tially pave the way for new busi­ness joint ven­tures and fur­ther in­te­gra­tion of Saudi busi­nesses into in­ter­na­tional mar­kets, they added.

Yong-Wei Lee, head of Mena eq­ui­ties at Emi­rates NBD As­set Man­age­ment, said the open­ing of the Saudi mar­ket will cer­tainly raise the pro­file of other mar­kets in the re­gion such as the UAE.

“Three Mena mar­kets — the UAE [$230 bil­lion], Qatar [$180 bil­lion] and Egypt [$70 bil­lion], with a com­bined mar­ket cap of $480 bil­lion — are al­ready in­cluded in the MSCI Emerg­ing Mar­ket In­dex. Adding the $570 bil­lion Saudi mar­ket, the Mena mar­kets could top $1 tril­lion and that would place the re­gion in a more prom­i­nent po­si­tion than be­fore,” Lee told Khaleej Times.

He said in­sti­tu­tional and for­eign in­vestors that are cur­rently in­vested in the UAE are also likely to al­ready own some stocks in Saudi Ara­bia so it’s un­likely that in­vest­ments will be di­verted from the UAE mar­ket.

Lee said the open­ing of the Saudi mar­ket through the Qual­i­fied For­eign In­sti­tu­tional In­vestor pro­gramme will see some ad­di­tional in­flows from for­eign in­vestors, but the sig­nif­i­cant event to look out for would be the MSCI up­grade of the mar­ket to the Emerg­ing Mar­ket In­dex.

“In that sit­u­a­tion, it’s pos­si­ble to see for­eign in­vestor in­flows in the range of $10 bil­lion to $15 bil­lion,” he said, adding that un­der­pen­e­trated sec­tors rel­a­tive to other emerg­ing mar­kets such as banks, con­sumers, health­care and in­sur­ance are likely to be at­trac­tive to for­eign in­vestors.

“The bell­wether petro­chem­i­cal com­pa­nies such as Sabic are also likely to be well-sought af­ter,” he said.

Scott Camp­bell, head for the UAE at global law firm Lin­klaters, said the open­ing of the Saudi mar­ket is one of the most ea­gerly awaited eco­nomic re­forms in the re­gion and could be a real game-changer given how large the eq­uity mar­ket in the king­dom is.

“Whilst there are lim­its as to who can ac­tu­ally in­vest, in­sti­tu­tions have to have more than $5 bil­lion un­der man­age­ment and five years of ex­pe­ri­ence, we’re ex­pect­ing sig­nif­i­cant in­ter­est, es­pe­cially from in­vestors that hadn’t per­haps looked at the re­gion be­fore.”

A great op­por­tu­nity

Saleem Khokar, head of eq­ui­ties at Na­tional Bank of Abu Dhabi’s As­set Man­age­ment Group, said the open­ing of the Saudi mar­ket is a great op­por­tu­nity for for­eign in­vestors to get ex­po­sure to the largest econ­omy in the Mena re­gion. It is also the most liq­uid mar­ket in the re­gion.

“Saudi Ara­bia was the sec­ond-largest mar­ket af­ter China where di­rect ac­cess to for­eign in­vestors was not avail­able. For­eign in­vestors were able to take eco­nomic ex­po­sure to the Saudi mar­ket by us­ing swaps, but this could prove cum­ber­some and ex­pen­sive,” he said.

Re­fer­ring to the re­cent statis­tics re­leased by the Saudi stock ex­change, he said for­eign­ers own only 1.18 per cent of the mar­ket cap (via swaps) com­pared to the al­low­able limit of 10 per cent.

“We be­lieve in­vestors will come in grad­u­ally, af­ter as­sess­ing the mar­ket and val­u­a­tions. We be­lieve that open­ing of the mar­ket to for­eign in­vestors will lead to greater in­sti­tu­tional par­tic­i­pa­tion and the listed com­pa­nies will im­prove on trans­parency and dis­clo­sure,” he said.

UAE not im­pacted

To a ques­tion, Khokhar said Saudi Ara­bia’s move to open up its mar­kets for for­eign in­vestors is un­likely to im­pact the well­diver­si­fied UAE econ­omy.

“The UAE is the sec­ond-largest econ­omy in the GCC and the emi­rate has been fo­cus­ing on grow­ing its non-oil por­tion of

GDP faster, by di­ver­si­fy­ing into sec­tors such as trade, tourism and hos­pi­tal­ity, ser­vices, real es­tate, trans­porta­tion and com­mu­ni­ca­tion.

“The UAE is a well-di­ver­si­fied econ­omy with oil con­tribut­ing less than 33 per cent to GDP. The In­ter­na­tional Mon­e­tary Fund ex­pects the GDP growth of the UAE to be 3.2 per cent for 2015 and 2016. We be­lieve this will be sup­port the in­vest­ment flow in the UAE and the mar­ket will not be sig­nif­i­cantly im­pacted by the open­ing of the Saudi mar­ket. The UAE is part of the MSCI Emerg­ing Mar­ket In­dex and of­fers sig­nif­i­cant in­vest­ment op­por­tu­ni­ties,” he ex­plained.

A step to­wards MSCI In­dex

Khokhar said the open­ing up of the Saudi mar­ket is a step to­wards join­ing the MSCI Emerg­ing Mar­ket In­dex by 2017. “We be­lieve the Saudi mar­ket will be part of the MSCI Emerg­ing Mar­ket In­dex by 2017 with a weight of around two per cent to four per cent,” Khokhar told Khaleej

About the at­trac­tive sec­tors, he said with a low pen­e­tra­tion in bank­ing and high con­tri­bu­tion to low-cost de­posits the bank­ing sec­tor would be at­trac­tive for for­eign in­sti­tu­tional in­vestors.

With the devel­op­ment of in­sur­ance reg­u­la­tions and in­crease in the num­ber of hos­pi­tals, the health­care sec­tor would also be at­trac­tive, he added. “Saudi Ara­bia, hav­ing a pop­u­la­tion of 29 mil­lion and a young de­mo­graphic con­sumer and re­tail sec­tor, would be an­other po­ten­tial choice for for­eign in­vestors. The do­mes­tic con­sump­tion story re­lated to eco­nomic growth will be at­trac­tive,” he said.

To a ques­tion about the tim­ing of the Saudi move due to ten­sions in some parts of the re­gion, he said the mar­ket has ex­pe­ri­enced in­creased volatil­ity due to geopo­lit­i­cal events, but the strength of an un­der­ly­ing econ­omy and strong fun­da­men­tals of listed com­pa­nies pro­vide am­ple sup­port to in­vestors.

“The per­for­mance of the Saudi mar­ket on a year-to-date ba­sis is 16.6 per cent as com­pared to 8.6 per cent of MSCI Ara­bian Mar­kets, 9.1 per cent of MSCI Emerg­ing Mar­ket Asia and four per cent of MSCI World,” he said.

Tara Smyth, head of in­vest­ments for the Mid­dle East at JPMor­gan Pri­vate Bank, said the open­ing of the Saudi mar­ket to for­eign in­vestors will be more than just an inflow of funds.

“It will lead to a gen­eral shift of at­ten­tion to Saudi com­pa­nies and po­ten­tially lead to new busi­ness ven­tures and fur­ther in­te­gra­tion of Saudi busi­nesses into in­ter­na­tional mar­kets. Our clients view this as an op­por­tu­nity for their busi­nesses to ex­pand and form new in­ter­na­tional part­ner­ships.”

She said in­vestors are keen on cap­tur­ing the op­por­tu­nity be­hind the growth in the emerg­ing mar­ket con­sumer and in­vest­ing in Saudi Ara­bia is a prime way to play that op­por­tu­nity with a boom­ing pop­u­la­tion, wealth cre­ation, and the big­gest slice of the pie when it comes to con­sump­tion in the Mid­dle East.

“Fur­ther­more, the added ben­e­fit of the Saudi Riyal be­ing pegged to the US dollar is bring­ing very limited cur­rency risk for dollar-based in­vestors,” Smyth said.

Banks, in­sur­ance, petro­chem­i­cals, health­care and re­tail stocks will be the ma­jor ben­e­fi­cia­ries of the open­ing of saudi mar­ket to for­eign­ers.

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