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Foreign investors remain bullish on Saudi market despite share dip

Overseas investment firms unperturbed as Tadawul index falls on day Saudi market opened to foreigners

Ben Flanagan

Published: Updated:

Global investors continue to see strong potential in Saudi shares, despite the local stock market falling on the very day it opened to foreigners under long-awaited regulatory changes.

The market, or Tadawul as it is known, on Monday opened its doors to large foreign investors, who previously only had access to shares through complex and pricy swap agreements.

But a lack of foreign money flowing into the market saw the index fall to 9,561.7, almost one percent lower than Sunday’s close, despite some institutions having already applied for licenses to buy Saudi shares.

Large inflows of foreign money will not be seen immediately - but will come eventually, said Charles Robertson, global chief economist at Renaissance Capital in London.

“The interest is there - people are going to want to trade this,” Robertson told Al Arabiya News. “You’ve got a top-20 global economy - and it is a market that has suddenly opened up.”

A ‘trickle,’ not a gold rush

Robertson pointed to Saudi Arabia’s healthy economy, $750 billion in foreign currency reserves, lack of debt and continued spending as reasons for international interest in local shares.

“Saudi [Arabia] has got cash to spend at a time when many other emerging markets can’t or won’t. Saudi Arabia can, and is spending. And that then supports the domestic growth story even when the oil price is in the 60s,” he said.

The Saudi riyal’s peg to the dollar also makes locally listed shares attractive to global investors, he added. “Currency volatility has hurt [investors] when they’ve been exposed to a number of other emerging markets over the last year or two, such as Brazil, South Africa, Russia,” he said.

Yet Robertson sees the inflows of foreign money as more like “a trickle” than a gold rush.

That is because the Saudi stock market is dominated by smaller retail investors, as well as the restrictions in place on how much of an individual stock can be owned by overseas buyers.

The eventual inclusion of Saudi Arabia on the MSCI emerging markets index - which cannot happen before June 2017 - will however give a boost to foreign investment, Robertson said. Such a move would encourage more asset managers to allocate funds to the Saudi market.

“We’re convinced that there’s going to be a lot of client involvement in the Saudi stock market for years to come,” said Robertson. “And that’s going to increase when Saudi Arabia does eventually join a stock-market index.”

Jahangir Aka, managing director for the Middle East and North Africa at Neuberger Berman - a U.S.-headquartered investment firm that manages equities, fixed income, private equity and hedge fund portfolios - also said he did not foresee a rush of foreign money into the Saudi market.

But this is healthy and is how the Capital Market Authority (CMA) of Saudi Arabia would prefer it, he added.

“I don’t think it’s a ‘big bang’ - and that’s not what the CMA wants either. The opening up is gradual,” Aka told Al Arabiya News.

He said that Saudi Arabia remained attractive to global investors and the mood remains positive.

“It’s the biggest market in the MENA region. It’s a huge opportunity, with a diversified economy. So all very very positive,” he said. “A measured opening up is actually close to how we would like to see it, rather than a ‘pop on the way in and a pop on the way out’.”

Market down

Despite this, Robertson sees the Saudi Tadawul share index remaining in negative territory for the next month or so.

Many local investors were expecting a rush of cash from overseas - and might sell off shares given that isn’t happening, said Robertson.

“There won’t be that flood of cash coming in. And local investors who were expecting that to happen would be disappointed,” he said.

“Over the first few weeks of this opening, you would see the market come off a little. And ‘a little’ might be 10 percent or more.”

Aka said it was not a surprise that the Tadawul index closed down on Monday, given the recent rises of share prices on the exchange.

He did not comment on whether Neuberger Berman had or would apply for a license to invest directly in Saudi shares. “Going forward we will continue to do whatever’s right to obtain access in the cheapest and most efficient way possible for our investors, whatever that path may be,” he said.

Pursuing licenses

Overseas investors need $5 billion in assets under management to meet the criteria for a license to buy shares on the Saudi market.

Several institutions are believed to have applied for licenses to buy shares directly in the Saudi market, but few have gone public about their plans.

Known applicants include Ashmore Group and - according to the Wall Street Journal - the London-based Fidelity Investments.

“Saudi is a big deal,” Rebecca McVittie, investment director at Fidelity Investments, told the Journal. “There’s definitely a good deal of momentum.”

Foreign firms currently hold about $9 billion of shares under swap instruments, according to the Financial Times.

But the opening up of the market could see $30 billion to $50 billion of overseas money gradually enter the market over the next three to five years, according to Tariq al-Sudairy, chief executive of Riyadh-based Jadwa Investment, quoted by the newspaper.

Saudi Arabia’s market capitalization, at almost $590 billion, is bigger than all the other Gulf markets put together.

The move to open it gives foreign investors direct access to giant companies such as Saudi Basic Industries Corporation (Sabic) and Saudi Telecom Company.