Muted response as Saudi bourse allows foreign direct trading for first time

The lacklustre trade came as no surprise to market watchers, who have said that the impact on equities is likely to be subdued initially.

Tadawul All Share Index closing down 0.86 per cent at 9,561.7 on Monday. Hasan Jamali / AP Photo

Saudi Arabia’s bourse entered a brave new world yesterday, as foreign investors began trading directly in equities for the first time, although as the performance of the stocks was muted.

Qualified foreign investors (QFIs) could invest directly in Saudi blue chip stocks including Saudi Basic Industries (Sabic) and Almarai, previously only available to foreigners via derivatives and exchange traded funds, as a result of new investment rules that came into effect on June 1.

But the liberalisation of the last G20 stock market to allow foreign investors had little effect on the shares, with the headline Tadawul All Share Index closing down 0.86 per cent at 9,561.7.

The lacklustre trade came as no surprise to market watchers, who have said that the impact on equities was likely to be subdued initially.

“It’s likely to be a gradual and incremental process for a number of reasons,” said Jamal Al Kishi, the chief executive of Deutsche Securities in Riyadh.

“The universe of clients that the regulations permit to come in and invest is finite at the moment. Plus people will need to fully understand the regulations and get themselves set up with their securities and cash accounts, which obviously will take some time.”

QFIs are required to manage a minimum of 18.75 billion riyals (Dh18.36bn) and are prohibited from owning more than 10 per cent of the total market.

Mr Al Kishi also noted that the Saudi market was trading at a premium to other emerging markets, which may lead some investors to delay their entry into the kingdom.

Indeed it remains unknown how many foreign investors have received approval from the regulator to buy equities.

A spokesman for Saudi Arabia’s Capital Market Authority said yesterday that “a number” of QFIs had been licensed, but declined to give further details.

The regulator will publish the number of QFIs on its website on a periodic basis, the spokesman said, with no decision as to when the first disclosure would be made or how often it would be updated. Reuters reported yesterday that HSBC was among the companies licensed.

A senior Dubai-based lawyer who is working with foreign investors in Saudi Arabia said that the push to register as QFIs was less urgent than he had expected.

“A number of institutions are content to wait and deepen their clients’ knowledge about the ins and outs of the Saudi market,” he said.

“As for those who already have exposure via the various swap agreements, they are taking their time to see how they put custody arrangement in place, understand how settlement works, work through the contractual terms and conditions with local brokers and so on.”

Deutsche Securities’ Mr Al Kishi said that international money domiciled in index trackers and exchange traded funds (ETFs) was unlikely to be invested en masse in Saudi Arabia until the country was included in the MSCI Emerging Markets Index.

Saudi Arabia’s opening up to foreign investors is unlikely to lead to a haemorrhaging of foreign investment flows from Qatar and the UAE, according to Rami Sidani, the head of Middle East and North Africa at Schroder Investment Management.

“It’s not an ‘either or’ equation. The emerging markets space is a large one and there is plenty of liquidity there,” he said.

"The UAE and Qatar together represent about 1.5 per cent of the current MSCI Emerging Markets Index. When Saudi Arabia comes in it will be close to 2 per cent. So the GCC will become a market that cannot be disregarded, and one that will become more and more a destination for global fund managers."

Such a situation is unlikely to occur before mid-2017.

Elsewhere, the Dubai Financial Market General Index closed up 0.4 per cent at 4,117.57. Shares in Amlak Finance led gains, closing up 14.8 per cent at Dh2.17, after having lost 18.9 per cent over the previous two days.

The Abu Dhabi Securities Exchange General Index rose a marginal 0.1 per cent at 4,549.03.

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