Saudi equity market opens to foreigners: all you need to know
Saudi Arabia’s $570 billion stock market opened to foreign investors this Monday. Here’s a quick Saudi equities primer from Standard & Poor’s (S&P) if you are an investor looking to park your money there.
1. The highly diversified market has 169 listed companies across 15 different sectors. It is the largest stock market in the MENA region.
2. It has an average daily liquidity of more than $2.3bn, making it the seventh largest and the fourth most liquid market among the GEMs (global emerging markets).
3. The opening of the market paves the way for Saudi Arabia to be included in the MSCI emerging markets index by 2017. This should help it attract $13.7bn in flows. Currently, the market is considered a frontier market (i.e., too small to be in the emerging category).
4. Approximately 90 percent of the market is dominated by Saudi retail investors right now. Only three percent of daily trading volumes are accounted for by FIIs who currently own less than two percent of the market via swaps and P-notes. S&P sees their heightened involvement potentially reducing the volatility at Tadawul.
5. Only experienced and well-capitalized financial institutions – qualified foreign intermediates (QFI) with $5bn of assets under management (AUM) to be reduced to $3bn at the Capital Markets Authority’s (CMA) discretion – have direct access to the market. The investor must also have five years of investment experience and must be a brokerage, fund managing or bank insurance company. Non-Saudi or GCC entities are prevented from taking majority stakes in listed companies.
6. Other regulations stipulate that QFI clients only use one QFI at a time; institutions are not hold positions via swaps and there are also restrictions with respect to ownership limits that seek to keep majority ownership in regional hands.
7. Foreign investors will be allowed to participate in initial public offerings (IPO) and the CMA has stated that it would like the majority of IPOs to be pipelined to institutional investors.
8. Four companies are not eligible for foreign investment. These include real estate companies that have a stake in the development of the holy cities of Makkah and Madina. S&P says this list has a risk of expanding in the future if new laws to protect strategic industries/companies are introduced.
9. HSBC Holdings has received a QFI license and six other applications from large institutions were under process as per press reports.
10. Speaking to Reuters, Franklin Templeton’s Mark Mobius, a veteran emerging market equities investor, said that the rules were too restrictive and that he would continue to invest in Saudi Arabia through exchange-traded funds, swaps and participatory notes.