Saudi market bullish on new rules

Saudi Arabia's stock market shoots up more than 5% after foreigners are allowed to invest in Saudi companies through intermediaries.

Saudi Arabia's stock market shot up more than five per cent yesterday, the first trading day after authorities announced they would allow foreigners to invest in Saudi companies through intermediaries. The run-up extended a streak of nine sessions in which the Saudi market, known as the Tadawul, has risen. The Tadawul All Share Index reached 8,901.9 yesterday, up 13 per cent in two weeks. But despite the surge on news of the new foreign investment rules and moves to increase the market's transparency, the Saudi exchange is down 19.4 per cent for the year, the worst performer of the GCC's markets.

Observers say that Saudi's Capital Market Authority (CMA) was hoping to boost the market by opening up trading to foreigners. Starting Thursday, foreign investors could enter into swap contracts on Saudi stocks, granting them the right to profits and losses without a transfer of ownership or voting rights. The swaps, which are being sold by a dozen or so banks, including Goldman Sachs and Deutsche Bank, are viewed as an ideal way for Saudi to bring in new investment while not ceding control over domestic industries.

"The market has performed badly, and regulators have little choice other than to open it up," said Ingmar Burgardt of BHF, a private German bank that has investments in the GCC. "A lot of wealth has been destroyed in this market." Retail investors drive trading on the Tadawul, which has caused volatile swings in the past. Individual Saudi investors were responsible for roughly 90 per cent of market activity last month, according to the exchange. Regulators hope that welcoming large foreign investment pools will both increase trading volume and bring long-term stability to a bourse in which companies make up more than 42 per cent of the GCC's listed market value.

Market observers and participants alike have hailed the decision, saying it would undoubtedly bring in more foreign money. They also pointed to efforts the Saudi regulator has made at increasing transparency - most recently, a new law requiring stockholders with stakes of five per cent or greater to disclose their positions - as positive steps for investor confidence. Yet as Saudi's market embarks on what appears to be a path of liberalisation, economic forces have been drawing foreign investors away from the region. The US dollar has strengthened against major world currencies in the past month, making dollar assets more attractive. Commodity prices, meanwhile, have declined.

Those circumstances have led many investors who moved in on the region as oil prices jumped in May and June to pull out. The Dubai Financial Market, where foreign ownership is allowed under a quota system, reported this week that non-Arab foreigners sold Dh243.6 million (US$66m) more in share value than they bought. This helped send stock in Emaar, the Arab world's largest property developer and a popular stock among foreigners, to a 40-month low. Emaar stock closed at Dh9.39 on Thursday, its lowest level since April 2005.

Overall, foreign investors have withdrawn more than Dh3.1bn from the market since mid-June. The DFM fell 2.5 per cent last week, closing at 4,891.15. The Abu Dhabi Securities Exchange, the UAE's other local stock market, dropped 2.4 per cent from last Tuesday. @email:[e-mail]