Al Rajhi Capital's CEO Gaurav Shah explains to Zoya Malik how the organisation has steered through the regional market's trading volatility and is optimistic for market growth in tandem with the KSA government's expansionary fiscal measures and social spending

Trading on the Saudi market has traditionally been dominated by retail investors: are you seeing any signs of a shift to a greater share from institutional investors?

"As we understand, this is one of the priority areas for the regulators. We do not expect any immediate drastic shift; however, we see this shift happening with increased institutional participation. We also need to realise that, by definition, 'individuals' as reported by the exchange also include high-net-worth individuals, and some of them are as sophisticated as institutions. We believe the shift should come from enhanced institutional participation and not by discouraging retail investors, as they provide the much-needed market liquidity, which is one of the major advantages of the Saudi market, as compared to the regional markets."

Foreign investors in the GCC are typically associated with greater volatility: do you agree with that given that the Saudi Tadawul has its share of volatility since 2006, where almost all trading has been done by local investors?

"After the major correction in 2006, I feel that the market has behaved reasonably factoring in the subsequent global events, regional tensions and volatile oil prices, which remains a key element for the regional economies. It goes without saying that investors expect a reasonable volatility in regional markets, as they are considered frontier markets, with the exception of Qatar and the UAE, which are being upgraded to emerging status by MSCI."

What impact on market value and the level of trading activity do you think an eventual opening to full foreign ownership will have? What is your expectation on when this move may happen?

"This will depend on the approach the regulator will adopt as far as the further opening up of the market is concerned. Any positive move in this direction will likely increase trading activities in the short to medium-term, as local and regional investors will rush in to derive advantage from the same. On a broader level, we expect valuation multiples to expand with increased investor participation, enhanced disclosure practices, and a sustained improvement in corporate governance standards."

What do you think are the key differentiators of the Saudi market compared to its regional peers?

"Saudi Arabia has one of the most diverse and broader stock markets in the region, representing almost all the major economic sectors. This is clearly visible, as the top ten companies in the broad market index constitute only around 40 per cent of the total market capitalisation; whereas, in other regional markets such as Dubai, Qatar and Abu Dhabi, top 10 companies represent around 80 per cent of the index.

"Tadawul has about 160 listed companies, spread across fifteen diverse sectors offering investors enough options to benefit from the Kingdom's robust performance. The country's key investment themes are well represented in the market through export-oriented sectors such as petrochemicals, and core domestically-driven sectors such as banking, food, construction, real estate and retail which continue to reap the benefits of the government's expansionary fiscal policies, social spending and young population.

"Moreover, Saudi Arabia has about 35 companies worth more than SAR 10 billion and more than two-thirds of the listed entities have more than SAR 1 billion market capitalisation giving depth for investors. Liquidity has always been a key differentiator for Saudi market resulting in lower trading costs, and its importance has increased even further in today's volatile markets."

Do you think that the investor perception has changed towards the Saudi market post the reclassification of the UAE and Qatar markets by MSCI?

"We believe that the reclassification of UAE and Qatar will enhance the Saudi market's visibility and importance. As investors look for opportunities in the region, they will naturally look towards the Saudi market, which remains the most diverse and broader stock markets in the region. We will not be surprised if investors take more off the index exposures to Saudi Arabia to ensure diversification and to benefit from the region's core fundamentals. Foreign investors have evinced a lot of interest this year, buying a net of SAR 4.5 billion worth of shares as of YTD September through the SWAP route as compared to their aggregate net sell position of around SAR 0.5 billion during the previous two years."

What is your outlook for Saudi stocks and which are your favourite stocks?

"Our research team continues to have a cautiously optimistic view on the Saudi market, considering both the robust domestic economy and regional factors. The market has performed exceedingly well this year, as investors made the most of the attractive valuations and growth prospects of some of the key sectors. Overall, we maintain our optimistic view on the market, although major gains are unlikely in the absence of interest in key sectors. We believe that Saudi Arabia offers a unique opportunity for investors with an economy similar to developing and developed nations in many ways, whereas the equity market is classified as a frontier market. We always prefer companies which will continue to reap the benefits of the Government's expansionary fiscal policies, social spending and the Kingdom's young population."

Gaurav Shah is the CEO of Al Rajhi Capital. He joined the firm in July 2009 and has over 20 years of experience in the asset management and investment banking industry. At Al Rajhi Capital, he has built and led the growth of its investment banking, asset management, private equity and brokerage business which employs approximately 300 employees. Gaurav joined Al Rajhi Capital from Credit Suisse where he was Managing Director and Global Head of Products within their asset management business in London and Zurich. Prior to Credit Suisse, Gaurav worked at Morgan Stanley in London as Head of International Product, having joined from Deutsche Bank where he worked for ten years with his last role being Managing Director within their Private Client and Asset Management business. Gaurav holds an MBA from the Manchester Business School and a Bachelor of Commerce in Accounting and Finance from University of Bombay.

© Banker Middle East 2013