Monday, Feb 27, 2012
By Summer Said
Saudi Arabia - the largest, most liquid and yet least accessible market in the Arab world - is considering opening its stock market to foreign investors in a move that could help erode the dominance of local retail investors and turn the local market into a regional trading hub
But when the kingdom will make its final decision on this bold proposal, which could earn Saudi Arabia much-coveted MSCI frontier market status, remains uncertain.
The Capital Market Authority, or CMA, has already taken small steps to partially open up the market. After allowing access indirectly through the use of swaps in August 2008, the CMA decided to open its bourse to cross-listing by qualified foreign firms in January this year. Under this arrangement, the firms must already be listed on exchanges with rules equivalent to those in Saudi. Analysts say the move is aimed at companies listed in the Gulf but other firms could be allowed to dual list on the $340bn market at a later stage.
LIMITED FOREIGN OWNERSHIP
The world's top oil exporter, which has been considering a wider opening of its market for several years, plans to offer a limited direct ownership for foreign investors, which are currently allowed to invest in Saudi companies only by share swap transactions handled by international investment banks that deal with local partners.
According to the proposal circulated to international banks, only international funds that have at least $5bn in assets under management are eligible to invest in Saudi companies, which include blue-chip firms like Saudi Basic Industries, or Sabic, the world's largest petrochemical company by market value.
Saudi officials have set the bar high in order to limit the direct foreign investment in the market and therefore avoid an influx of so-called "hot money" - money that is liable to be pulled out suddenly - which, according to experts, would be prone to increase volatility in the market.
Yasser El Mallawany, the chief executive of EFG-Hermes, Egypt's largest publicly traded investment bank, said: "It does make sense to start first with big international investors. It is a big step for the Saudi market to be hasty with. It will be very core for us and we are 100% interested as it is a transformation for the market."
HSBC seems to agree. In a note to its clients, the bank said that the market opening may earn the Saudis frontier market status at MSCI "quite quickly", as it should allow the kingdom to tap a wide international pool of money and could make local equities behave more efficiently and better reflect market fundamentals. Seven Middle East countries are included in the MSCI frontier index, including Saudi's neighbours Jordan, Oman and United Arab Emirates. Under the proposal, foreign investors may not own more than 49% of the share capital of any listed company or more than 10% of all share capital by all listed companies.
A DARING STEP
A Saudi official familiar with the matter said: "There are other points that we are still fine-tuning but we are keen to get this done as soon as possible. You have to remember that this is a major daring step for us and that ordinary Saudis care a lot about the stock market."
The Saudi stock market, or Tadawul, has suffered from relatively low trading volumes after local retail investors were hit first by a 2006 market crash and then the financial crisis. Almost $500bn evaporated from the market's capitalisation, causing uproar among thousands of Saudis who lost their life savings and blamed rich investors.
Since then, the kingdom's market regulator has asserted more control over the stock market in an attempt to eradicate manipulative and speculative trading, and attract more stable institutional and foreign investors. The official said: "So we are walking in a road we don't want to change. We don't want to have the same scenario of a crash again, particularly with the world economy on the verge of another crisis."
Despite the scepticism of several banks and executives that CMA will indeed open the market this year, many believe the move could emerge as a key catalyst to reinvigorate investor interest not only in the Saudi bourse but also in other regional stock markets.
POOR 2011 PERFORMANCE
According to Zawya.com data, stock markets in the Middle East and North Africa lost more than $100bn, or 10% in value, last year, as popular uprisings across the region, Europe's debt crisis and a fragile US recovery spooked investors. Egypt, once a regional favourite for foreign investors, was the worst hit, losing more than 40% of its market value on worries about political turbulence and economic disruption following the toppling of former President Hosni Mubarak.
Volumes contracted sharply last year as Qatar and the United Arab Emirates - two of the more active regional markets - failed to win an upgrade to emerging market status. Many believe the Gulf markets need the Saudi trigger to generate renewed investor interest in the region, despite attractive valuations and good prospects for earnings growth at many regional companies.
A Saudi trader said: "We are willing to wait as long as it is going to happen. Be it next month or the end of this year, it is something that everyone wants."
Copyright (c) 2012 Dow Jones & Co.
(END) Dow Jones Newswires
27-02-12 0828GMT
