Tadawul to benefit from foreign ownership

05 January 2012

Stock exchange to open up to direct foreign owners

As Saudi Arabia’s Capital Markets Authority (CMA) moves to enable direct foreign ownership on the Saudi Stock Exchange (Tadawul), interest has grown among investors eager to tap into the kingdom’s largest companies.

Currently, foreign investors can only buy into Saudi Arabian companies by share swap transactions through international investment banks.

While the CMA has yet to formally announce the latest proposals, it is believed by analysts that each qualified foreign investor can own up to 5 per cent of a listed Saudi company. The maximum foreign investors can own in a Saudi Arabian company will be 49 per cent. The minimum assets under management by institutions will be set at $5bn.

“The CMA has shared the rules with key market parties and, now with the feedback, they are trying to see whether they need to change draft regulations, which is why it is taking longer,” says Arindam Das, head of HSBC securities services of the Middle East and North Africa.

The Kingdom plans to formalise the new rules by 15 January according to Reuters, but Das is uncertain it will be so soon.

“From the indications it is imminent, but there is no date set. I would be surprised if the market is opened [to foreign investors] on 15 January, but there will be a lease time to prepare themselves with the rules before they can start investing in the market,” says Das.

This is a significant development for the Tadawul, which lost more than $25bn in 2011 following the effects of the Arab uprisings.

“It all depends on the final rulebook, who can or cannot invest, what the limits are but otherwise it is the most significant development. Saudi Arabia has half of the region’s market capitalisation,” says Das.

Many investors have shied away from the Middle East, seeing little point in investing in a region where they do not have access to the largest market. With access to the Tadawul, it will enhance the liquidity in the market and the market depth as well.

“Many of the stocks are undervalued, there are many opportunities in the blue chips, in the banking, energy and retail sectors and this will have a positive effect on them,” says Majdi Gharzeddeene, head of investment research at Kipco Asset Management Company (Kamco).

The problem in Saudi Arabia is that most of the heavyweight stocks are controlled by the government and it is unclear what the rules will be regarding those stocks. So while companies such as Sabic and Samba will be most attractive to foreign investors, their access to its stocks may be limited.  

“The majority of investors in Saudi Arabia are retail. This will open up to institutional foreign investors, which will be good for the market. Many of them are attracted to stocks that are liquid and profitable. Companies, such as Sabic and Samba, are key players in the world, so it will be positive for the market,” says Gharzeddeene.

The move also opens the Tadawul up to an MSCI classification. Currently it is not classified due to the barriers on foreign ownership. It could potentially become the region’s third-emerging market along with Morocco and Egypt.

As for the outlook for Saudi Arabia for the year ahead, there is a sense of optimism, but opening up to foreign investors will further correlate the Tadawul with the foreign markets, which will leave it more exposed to the ongoing problems in the Eurozone.

“The correlation is about 80 per cent. This will increase the volatility of the market, foreign investors might react to market events and may be aggressive because they do not know the market,” says Majdi.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications