Saudi Arabia: 'meaningful' foreign interest to come post MSCI inclusion

The Saudi Tadawul index has been the best performer in the region, with gains of more than 18.5 per cent so far this year.

09 May 2015

The Saudi Tadawul index has been the best performer in the region, with gains of more than 18.5 per cent so far this year
Dubai: Equity markets in Saudi Arabia, slated to open for foreigners from June 15, may witness "meaningful interest" in terms of foreign flows only in 2016, when the $550 billion (Dh2.01 trillion) market may be included on the MSCI index, officials at Credit Suisse told Gulf News.

The Capital Markets Authority (CMA) is planning to allow in foreign investors from June 15, a move closely watched by the global fraternity, as the world's biggest exporter of petroleum allows investors to own shares of Saudi Basic Industries and Saudi Telecom.

The Saudi Tadawul index has been the best performer in the region, with gains of more than 18.5 per cent so far this year, compared to the Dubai index, which has gained 11 per cent

"The actual money would be a little bit gradual rather than a little overwhelming surge. People are certainly interested as it is a new market opening up. As far as oil prices are concerned, it is in the process of making a short-term base, but can settle in a range above where we are now. That would help all international investors give confidence in the region, Saudi in particular," Giles Keating, managing director, head of research and deputy chief investment officer at Credit Suisse.

However, the paced interest may gain momentum after the inclusion on the MSCI index.

"The interest in Saudi is definitely there, but it is going to be a well-paced kind of interest. I would expect to see more meaningful interest in Saudi Arabia once we have clarity on it being included in the MSCI Emerging Market index. I'm very confident that this will happen, but it's a question of when rather than if, and it's going to take a few years," Fahd Iqbal, Head of Middle East Research private banking, Credit Suisse told Gulf News.

The minimum time the MSCI upgrade would take is 2 years, because it involves a lengthy review and approval process, Iqbal said.

Although foreign ownership limits have been set at 10 per cent in aggregate for now, "I believe it will eventually be raised to 49 per cent. At these levels, Saudi Arabia could account for 4 per cent of the MSCI Emerging Market index -- that would be bigger than Turkey or Poland and would result in billions of dollars of flows," Iqbal added.

Currently, Iqbal expects limited interest from foreign investors as stocks in Saudi Arabia are not particularly cheap now.

"In our view, Saudi offers a compelling opportunity for institutional investors: it offers excellent depth and breadth; the currency is dollar pegged, eliminating a concern emerging market investors generally have; and the petrochemical listings also set Saudi Arabia apart from rest of the region. Indeed the latter will be a key feature for foreign institutional investors also," Iqbal said. The Saudi market trades about $3 billion of shares daily. Investors from outside the six-nation Gulf Cooperation Council currently gain access to shares listed on the $571 billion market through equity swaps and exchange-traded funds. Non-Saudis currently own 7.74 per cent of the stock market's value.

Limited upside in UAE

"I still see further upside in the UAE. I do not expect to see the highs that we recorded just before the oil price collapse this year; I believe it will take us into 2016 to reach those highs," Iqbal said.

The Dubai index has gained 30 per cent in previous five weeks, on the back of strong results from banks and real estate companies, allaying concerns of an impact from falling oil prices on the real economy.

"In the UAE and GCC, investor sentiment in recent months has been very positive and encouraging. However, if we go back to late 2014, falling crude oil prices had raised significant concerns and raised uncertainty over the level at which oil prices would stabilise. For investors, concerns were concentrated on the impact on growth," Iqbal said.

He expects oil prices to stabilise at the $70 dollar per barrel mark, "and at that level government expenditure should remain pretty elevated. Growth won't be as high as it was in boom years, but that doesn't mean growth would collapse."

Global themes

US along with emerging market equities may face substantial correction after the Federal Reserve starts to hike rates, though smart investors are likely "to take a slightly medium term time frame and not worry about the dip along the way or they are going to hold cash in reserve and would have the discipline to invest at the low point," Keating said.

The Fed was slightly disappointed with the GDP data, but expects to get stronger data in the coming quarters. However, the Fed is still concerned with the rate of wage inflation.

"As wage rise begins to spread more widely, that will give the Fed the confidence to raise rates," Keating said.

Talking about possible bubbles due to loose monetary polices in the United States and the Eurozone, Keating said "We can point real estate markets which has benefited very substantially due to the easy money policy in the US. We could see a significant correction in housing prices as Fed prepares to tighten. We could also say there was something like a bubble in the commodities market like oil and copper."

© Gulf News 2015