Open Saudi market to have ‘huge impact’ on investor relations

Foreign investors ‘will simply not buy into a company they do not understand’ says head of UAE-based advisory firm

Ben Flanagan

Published: Updated:

Saudi Arabia’s long-awaited move to open its stock market to foreigners will have a “huge impact” on investor relations (IR), with fund managers likely to shun companies that do not communicate properly, according to the head of a UAE-based advisory firm.

The Saudi market, which has a capitalization of almost $590 billion, on Monday opened its doors to large foreign investors, who previously only had access to shares through complex and pricy swap agreements.

The move will boost the need for good corporate communications, as Saudi Arabia’s listed companies come under the increased scrutiny of large global investors, said Oliver Schutzmann, chief executive of Iridium, which specialises in IR.

“The opening of the largest market in the region will have a huge impact on IR in the medium to long term,” he told Al Arabiya News.

“Global and emerging market investors expect higher levels of interaction with C-level executives and will simply not buy into a company they do not understand, or a company which does not communicate at the same standards that these investors are used to.”

Schutzmann explained the wider impact of the move to open up the market to large foreign investors, whom must apply for a license before being allowed to invest in foreign shares.

Q&A with Oliver Schutzmann, chief executive of Iridium

Q: What implications does the opening of the Saudi market have for investor relations (IR) in the kingdom?
It goes without saying that listed companies should comply with disclosure rules. But companies that leave it there are missing out on a big opportunity to create value. Listed companies should appoint a qualified IR officer to maintain and encourage dialogue with the investment community, set good levels of transparency and corporate governance and of course, ensure timely and adequate disclosure of earnings results, as well holding investor roadshows and conducting perception studies to receive feedback from the investment community. We also urge listed companies to update their website to include an IR section and update it regularly, as this is often the first port of call for investors. Many regional listed companies are now starting to realize the potential of IR with competition for capital becoming intense, a trend also driven by changes to legislative and regulatory environments across Middle Eastern markets.

Q: Will Saudi companies have to be more transparent following this move?
Saudi companies will benefit enormously from increased transparency. The Saudi market is already one of the best regulated markets in the region, but companies will see that with increased competition for capital, every enhancement they make to their investor-relations capability will pay back in terms of value. Whether it is in conducting thorough research into their investor base and perceptions, to identifying new pools of investors or improving their investment case and the way they interact with investors through their website, roadshows or investor days. All of this increased transparency will feed through to higher liquidity and better valuations. The market is only open to large, licensed institutional investors.

Q: How successful do you think the Saudi market will be in pulling in foreign investors? Do you expect a gold rush or a trickle of investment?
There will be a progressive influx of new capital to the Saudi market from qualified international investors, but this will be smaller than the flows from domestic investors in the initial stages. This explains why it may be difficult to discern the effect of foreign money in the early stages, because domestic speculative flows will distort the numbers. One possibility, for example, is that foreign investors move into Saudi, raising valuations, only for domestic shareholders to take profits, resulting in a reversal in prices. It is critical that Saudi companies take advantage of this opportunity by enhancing the quality of information they provide to investors to improve their chances of seeing sustainable gains from the opening to direct foreign investment.

Q: Some say investors will pull money out of other big energy markets – such as Brazil, Mexico, Russia, Indonesia and Malaysia – and put it in Saudi Arabia. What do you think?
In each of these markets, the role of oil-export revenues plays a different role in the economy. In Saudi Arabia, where oil accounts for almost half of GDP, some investors may regard the stock market as a proxy for oil prices. But this ignores many other factors that impact companies there.

Q: Do you see the move to open the market having potential for smaller retail investors?
There will be some impact on retail investors, although not directly. This is the beginning of a longer trend towards openness in Saudi Arabia that will inevitably improve the options for emerging markets investors, and give them exposure to a new benchmark market for the Middle East