Saudi Arabia heads towards emerging market status

Saudi Arabia’s stock market has been considering opening up to foreign investors for several years.

Saudi Arabia’s stock market is the region’s most liquid with more than $1.3 billion traded daily. Faisal Al Nasser / Reuters

Saudi Arabia is on a fast track route to emerging market status amid rising appetite for blue chips in the kingdom from foreign investors.

MSCI, whose indexes are tracked by investors managing US$9 trillion worth of assets, last month said it would review the inclusion of Saudi Arabia as a candidate to either of its emerging or frontier market indexes only after the reforms are officially approved.

“We rule out the likelihood of Tadawul’s addition to MSCI Frontier Markets,” said analysts at the equity research team at Bahrain’s Mubasher Financial Services in a strategy note to clients. “Rather, an inclusion in MSCI Emerging Markets is more likely given its relatively large market size and abundant liquidity.”

The kingdom’s regulator is expected to publish draft rules governing the trade of local stocks by foreigners imminently. The development comes after Saudi Arabia’s cabinet last month approved a law that enables direct access for foreigners by the first half of next year.

Stocks from Qatar and the UAE were incorporated into MSCI’s Emerging Markets Index in June. Abu Dhabi, Dubai and Doha’s benchmarks have risen 17.7 per cent, 43.2 per cent, and 33.3 per cent respectively this year.

“They’ll be looking at emerging markets status, ultimately looking at what UAE and Qatar have done, and how to implement that,” said Saleem Khokhar, the head of equities at National Bank of Abu Dhabi. “That’s what their target would be and they will be prime candidates for that.”

Saudi Arabia’s stock market, the region’s most liquid with more than $1.3 billion traded daily, has been considering opening up to foreign investors for several years. Currently, foreigners have limited opportunities to invest there through equity swaps and exchange-traded funds. About 90 per cent of current market activity is dominated by retail investors.

Mubasher Financial Services identified 16 “favourite” stocks they believe could outperform in the coming months and provide exposure to five sectors: consumer, financials, industrials, materials and telecoms. They are: Jarir and Shaker, Al Rajhi, Riyad, Samba and Saudi Hollandi Bank, Bahrai, Saudi Ceramics and Saudi Steel Pipes, Hail Cement, Sabic, Sahara, Sipchem, Tasnee, Yansab and Mobily.

“The most important bluechip companies have international business models, the likes of Almarai and Sabic,” said Tariq Qaqish, the head of asset management at Dubai-based Al Mal Capital. “Those are some examples of companies that foreigners would like to invest in. Sabic is the world’s biggest petrochemicals maker, everyone wants to buy its shares.”

Despite the recent surge, Sabic is still attractive, Mr Qaqish said. The Saudi-listed heavyweight is trading at 16 times earnings. That compares with Dow Chemicals and Du Pont trading at 18 and 19 times earnings respectively.

Saudi is expected to shore up $55bn of money from passive and active funds if the kingdom’s shares are open to foreign investors and achieve MSCI Emerging Markets status.

Saudi brokers have been briefing fund managers that there is a chance that regulators will not allow foreigners to acquire shareholdings in companies investing in the country’s holy cities of Mecca and Medina, and that state-controlled entities may have lower foreign ownership thresholds over private companies.

“Sentiment will depend on how far they’ll go and how easy it is for foreigners to get access,” Mr Khokhar said. “But for me, even if the regulations are slightly disappointing, for example limiting to certain types of investors, net, they’re still moving in the right direction.”

Trading was muted yesterday. The Tadawul All-Share Index inched upwards to close at 10,650.09 points after the benchmark touched a six-year high the day before. The index is up 0.1 per cent year to date.

“Everyone is excited about this development and a lot of people have been looking forward to this for quite some time, but we need to see something concrete to think about next steps,” said Oliver Schutzmann, the head of investor relations at Dubai-based Shuaa Capital.

Follow The National's Business section on Twitter