Tuesday 22 May 2018

Saudi opening will put Mideast on global investor map

Hong Kong, July 23, 2014

By Una Galani

The opening of Saudi Arabia's $530 billion stock market to foreigners will finally put the Middle East on the investor map.

Foreigners will be allowed direct access to the stock market from next year under reforms announced on July 22. This gives investors good reason to pay attention to the region beyond oil and war. For an emerging market, Saudi Arabia is well regulated, growing fast, and is more stable than most.

The Capital Market Authority said it would publish draft regulations for the reform next month and then hold a 90-day consultation period.

Foreigners have been able to buy into Saudi since 2008 through swap agreements, but these are expensive and lack the voting rights that would come from owning shares outright. As such, foreign participation in the market has languished below 5 percent.

What happens next may look like China's domestic stock market, which grants licences to "qualified foreign institutional investors", subject to an investment ceiling. It would also allow Saudi to limit foreign investment in sensitive areas, like real estate in the holy cities of Makkah and Madinah.

Saudi easily outshines the stock markets in Middle East already afforded emerging market status by influential index compiler MSCI. It is bigger by market capitalization than Egypt, Qatar and the UAE combined. Although recent scandals have dragged down the region's reputation for corporate governance, Saudi's capital market regulator is regarded as the best of the bunch.

Yet investors eyeing Saudi's diversified blue-chip companies like Saudi Basic Industries Corp (Sabic), one of the world's largest petrochemical companies; Saudi Telecom; and food groups Savola and Almarai, will have to contend with remarkable volatility.

At 17 times price to earnings for this year, the benchmark Tadawul index is also more expensive than global peers such as Brazil, China, India and Russia.

Despite the risks, Saudi Arabia's big draw is its stability. King Abdullah pledged $130 billion of extra spending to limit the Arab Spring contagion - which has, in turn, helped to boost share prices.

With GDP growth at 4 percent, a dividend yield of 3 percent, and no sign that oil prices will fall any time soon, Saudi's opening looks compelling.

Meanwhile, index compiler MSCI said it will consult with investors about adding Saudi Arabia to its broader stock indices and could place it on review for classification as an emerging market in June 2015.

If Saudi Arabia only partially opens up in the same way as the Chinese domestic "A" share market, which sets a quota for foreign investors, it would likely be a standalone index, MSCI executive director Sebastien Lieblich said. - Reuters

* The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Tags: Saudi | CMA | stock market | foreign investment |

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