Saudi Arabia is one of the world’s top 10 emerging and developing countries, and the largest Arab economy, with 10 percent of the total GDP of the Middle East.
It has more than 25 percent of the world’s oil reserves and a current estimated revenue surplus of €34bn. Private investors are developing €54bn of energy sector specific projects. The country’s resources go beyond oil, however – it has known gold deposits totalling 20 million tonnes, and an estimated 60 million tonnes of copper deposits that have not yet been exploited.
It also has one of the world’s fastest growing IPO markets, and the largest equity market in the Middle East, with approximately 120 listed companies, which is also ranked as the 11th largest stock market in the world. However, investors outside the GCC – the Gulf Cooperation Council, covering Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – have been barred until now from participating in the Tadawul, the Saudi stock market, which was founded in the 1930s, although the Tadawul All Share index has a market capitalisation of about €305bn. Indeed, it was only in 1997 that investors from the other GCC states were allowed to participate in the exchange, and even then they were barred from buying shares in banks and insurance companies, a rule that was dropped just a year ago. The result is that around 90 percent of all business on the Tadawul is by individual Saudi investors. The only way Western investors have been able to access the bourse has been through the under-developed mutual funds sector.
Further investment
On August 20, however, the Capital Market Authority of Saudi Arabia (CMA) announced it would be allowing the entry of non-resident foreign investors on the Saudi bourse through a “swap agreement” with what will be termed “authorised persons”.
The “authorised persons” will retain the legal ownership of the shares and agree to transfer the economic benefits of the Saudi companies listed on the Tadawul to non-resident foreigners. Both institutional as well as individual investors from abroad will be allowed to invest, the CMA said.
Bankers operating in Saudi Arabia, which has a population of about 25 million and it is ruled by the Al Saud dynasty, have been pushing for greater liberalisation to allow foreign participation, not only because their overseas customers want to participate in the growth of the Saudi economy, but also, they say, because having foreign retail and institutional investors involved would reduce some of the volatility found in the Saudi stock exchange, which is dominated by retail investors who, it is claimed, buy and sell too much on rumours and emotion rather than market-based analysis.
The Saudi authorities must also be hoping that allowing foreign investors in at last will also help lift the Tadawul, which has been one of the worst-performing markets in the region this year. In 2006, the market fell by more than 50 percent. Although it rose 43 percent in the final quarter of 2007 it has been down about 24 percent this year.
Expanding expertise
However, the CMA is undoubtedly aware that the country’s stock market could be damaged by a flood of fresh liquidity, something that, because of high oil prices, the whole of the GCC area is suffering from an excess of, which threatens to accelerate already rising inflation. For this reason the liberalisation of the Saudi bourse is progressing slowly and cautiously, step by step. One analyst commented after the announcement on August 20: “It is a step towards further liberalisation of the market, but more importantly it shows that the Saudis want to do this very gradually and very slowly for two reasons. One is that opening up the market to foreign investors brings up more liquidity and that’s the last thing they need right now. But what they [the Saudis] are interested in is bringing in expertise, hoping that the presence of foreign investors will slowly force local investors to adopt much more transparent rules of doing business.”
Commentators certainly see big benefits from the liberalisation, however. Another said: “This development will undoubtedly increase foreign capital inflows to the Kingdom’s stock market, promote greater transparency, reduce volatility associated with dominance of the retail investors in the Saudi market, and encourage more comprehensive equity research on listed companies.” The aim, observers believe, is that by gradually opening up the Tadawul, the CMA can encourage Saudi Arabia to become a major competitor with the UAE and Qatar for the title of the region’s financial centre. Just before the announcement that foreigners would finally be allowed to participate in the market, the CMA also issued new regulations saying that investors with stakes of five percent or higher had to disclose their positions, a move intended to increase transparency and reassure other potential investors.
Taking the right steps
One company that has already set up arrangements to act as an “authorised person” for foreign investors, both retail and institutional, looking to take advantage of the new regulations announced by the CMA on August 20 is FALCOM, based in Riyadh, with branches in Jeddah and Khubar. FALCOM, which was established in 2005, provides Islamic investment banking services including asset management, brokerage services, investment advice and treasury products. It now has 150 employees and a capital base of one billion Saudi riyals (€185m), and runs an internet trading service for customers called Tadawuly, and a suite of tools for stock market technical analysis through www.falcomwatch.com. FALCOM Financial Services was recently awarded the “Best New Investment Bank 2008’ award by Global Finance & Arabian Business, and it is about to open its doors to investors in the GCC region with a licence to operate in Oman.
FALCOM’s Chief Executive, Adib Al Suwailim, said the move by the Saudi Capital Markets Authority to allow non-resident foreign investors access to the stock market through “benefits swap agreements” with authorised licensed intermediaries who would legally own the shares is “a clear sign of liberalisation of the equity markets in the near term. With this move, the CMA has taken yet another investor-friendly step.”
The scale of interest “is likely to be tremendous across the board, and the Saudi market is currently performing well below its historic levels,” Mr al Suwailim said. “The initiative comes at the right time, when sentiments in the local market are down and valuations are attractive. This measure will cheer up the investors who witnessed the meltdown of the bull run in 2006 and fluctuating fortunes over the next two years. The Tadawul All Share Index, the market benchmark, has lost 23.3 percent to date in 2008. Over the longer term, the entry of sophisticated and deep-pocketed investors will lead to reduced volatility.”
FALCOM is now inviting institutional and retail investors to open accounts with it through which they can invest in a total benefits swap and thus gain access to the Saudi Arabian stock exchange. “FALCOM, being a member of the exchange, will execute the transactions, and buy and hold shares in the investor’s name, with an undertaking to transfer unconditionally the economic benefits of the holding to the ultimate beneficiary, the foreign investor, through the counter party broker,” the company said.
The company backs up its services with what it describes as “innovative financial products and wealth maximising solutions, ably assisted by a highly tech-savvy and dedicated professional team committed to support our client needs with benchmark standards of integrity, proficiency and commitment.”
It also provides a report service called FALCOM MarketToday, which covers valuable information such as valuation parameters, TASI support/resistance levels, last 10 days coverage, average prices on the day, money movers, 52-week high/lows and so on, much of it information not covered by any other investment banker, it says, and released by 4.30pm every day. Another of the company’s services, FALCOM MarketWeek, covers not just fundamental information but also stock volatility, weekly performance of stocks, company research, stock market research, strategy reports, and economic research are also regular feature.
Overall, FALCOM says, it believes that the announcement by the CMA will attract huge interest from foreign investors looking to diversify their portfolios. The Saudi stock market is “the most lucrative in the region because of its size and liquidity”, the company says, and the IPO market has been “abuzz with activity over the past two years. In 2007, 25 new companies were listed whereas so far in 2008, 15 new companies have been listed.”
Observers say they expect public companies in Saudi Arabia to open up to foreign investors gradually, albeit on a limited basis, over the next few year, probably under a system like the one in operation in Qatar, where foreigners are restricted to 25 percent ownership in all stock, or the UAE, where foreigners cannot own controlling stakes. All the same, the agreement on all sides is that the CMA’s move is good news for everybody, from Saudis to outsiders.
For further information shankar.biswas@falcom.com.sa
