A move to open Saudi Arabia’s bourse to foreigners is likely to benefit financial markets across Mena in the form of billions of dollars of extra inflows, say analysts.
The kingdom’s Capital Market Authority (CMA) said on Tuesday that it would allow foreign financial institutions to directly buy stocks listed on the Tadawul, a move likely to happen in the first half of next year.
“The opening of the Saudi stock market would be a major positive for the Mena region, with a total market capitalisation of US$1.2 trillion, where Saudi Arabia alone accounts for 45 per cent and where regional liquidity is around $4 billion, of which Saudi Arabia represents 65 per cent. With over 160 listed securities, the kingdom’s stock market offers a diversified sector base,” said Aleksandar Stojanovski, a research analyst at Deutsche Bank.
The move is expected to lead to Saudi Arabia joining MSCI’s Emerging Markets Index, which is tracked by US$1.3tn of managed assets and already features the UAE, Qatar and Egypt from the region. The kingdom’s inclusion in the index would likely help to suck in between $13.3bn and $26.6bn of net inflows to the bourse in the form of potential passive and active inflows, estimated Bank of America Merrill Lynch (Baml) in a research note. But the move would also tempt foreign institutional investors who have until now avoided the region because of a lack of scale.
Estimates vary, however, about what proportion of the index Saudi Arabia would account for, as well as how much weight it will add to the region’s presence as a whole. Assuming that Saudi Arabia allowed for a 25 per cent foreign ownership limit, the kingdom could account for 1.9 per cent of the index, putting it above Turkey and Poland, estimated Credit Suisse. But Baml said Saudi Arabia could eventually make up 4 per cent of the index, helping the wider region’s weighting to rise to 5.2 per cent, up from 1.2 per cent.
Although the opening up of the Saudi market is likely to be positive for the market and the wider economy in the longer-term, it could also raise risks in the near-term. Analysts worry it could lead to a run up in valuations in the short-term as local retail investors move to bid stocks up. Stocks in the UAE and Qatar surged ahead of their inclusion in the emerging markets index from June 1, before dipping in the days afterwards. Shares on the Dubai Financial Market General Index, for example, are trading 21 per cent lower than their June 1 level.
“Given the dominance of retail investors and the past track record of margin trading in the market, we think the announcement could well lead to the index overshooting fair value levels in the short term,” said Fahd Iqbal, the head of Middle East research at Credit Suisse. Valuations are already trading at 19.3 times earnings, above the metric’s long-run average, according to Capital Economics.
Still, investors are likely to be keen to gain exposure to large blue-chip Saudi companies, which have a healthy track-record of profitability as well as global standards of transparency. Saudi Arabia Basic Industries, Samba Financial Group, Saudi Industrial Investment Group and Yansab were highlighted as potential stock picks by Baml.
“Saudi’s market benefits from positive macro catalysts accelerating domestic oil production, improving Chinese activity data and slowing domestic inflation,” wrote analysts at the bank.
tarnold@thenational.ae
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