Morgan Stanley gets in early over Saudi stock exchange reforms

International investment banks are turning their attention once again to the region.

Morgan Stanley rated Samba Financial Group and Al Rajhi Bank with “equal weight” while Riyad Bank was “underweight”. Victor Blue / Bloomberg News
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Morgan Stanley has become the first international investment bank to initiate coverage on Saudi Arabian equities ahead of an expected opening of the kingdom’s stock exchange to foreign investors.

A report published by the Wall Street firm yesterday follows the publication of draft rules by the country’s Capital Markets Authority on foreign investment in Saudi stocks. That mapped out the criteria for eligible investors using a “qualified foreign investor” model.

Research analysts at Morgan Stanley rated Samba Financial Group and Al Rajhi Bank with “equal weight” while Riyad Bank was “underweight”.

International investment banks are turning their attention once again to the region after the incorporation of stocks of the UAE and Qatar into MSCI’s Emerging Markets Index and after Saudi Arabia indicated it wanted to open up its stock market to foreign investors.

They are focusing on building up their research divisions to capitalise on brokerage income to benefit from a marked increase in liquidity from higher traded volumes.

Saudi Arabia’s stock market, the region’s most liquid with more than US$1.3 billion traded daily, has been considering opening up to foreign investors for several years.

Currently, foreigners have limited opportunities to invest through equity swaps and exchange-traded funds. About 90 per cent of current market activity is dominated by retail investors.

Investment banks were forced to rethink their business presence in Dubai, which served for many as a hub for the region, leading to retrenchments and the closure of their loss-making divisions after the 2008 global financial crisis.

From 2005 to 2011, the emirate’s index lost more than 80 per cent of its value. Traded value on the UAE markets dropped from Dh537bn in 2005 to a trough of Dh57bn.

Indeed, as market liquidity dried up in the UAE, HSBC shut its local brokerage and instead serviced its institutional clients through its global hub.

The decision was regarded as significant as HSBC had been the first international bank to secure a licence to trade on the local bourses.

Last October, Goldman Sachs restarted coverage of Dubai’s publicly listed property firms after a 79 per cent surge in the value of Dubai stocks that year and amid a rapid rebound of the emirate’s property market, triggering the attention of international investors.

“The key driver for those institutions to be feasible to cover such a country is the liquidity in the stock market,” said Tariq Qaqish, the head of asset management at Al Mal Capital, a Dubai-based boutique investment bank. “The MSCI upgrade for the UAE and Qatar was key, and besides that the opening up for Saudi, so it’s more of a regional story than a specific ­country.”

According to Saudi Arabia’s draft rules, which are expected to be finalised in three months, a qualified foreign investor must be a bank, brokerage, fund manager or insurance company with at least $5bn in assets under management.

Foreign individual investors will be allowed up to a 5 per cent shareholding in any publicly listed company; and collectively, qualified foreign investors may own up to 20 per cent.

Last week, Bahrain’s Mubasher Financial Services said Saudi Arabia is likely to fast track to emerging markets status and skip frontier markets status if it opens up stocks to foreign investors. In the report, analysts at the firm said they expect Saudi to shore up $55bn of money from passive and active funds if the two variables occur.

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