$1t opportunity: Saudi market set to turn a new page

Analysts and experts said the opening of the Saudi bourses is a major move in international markets since China allowed foreign investment in local market more than a decade ago.

The opening of Saudi equities to foreign investors from tomorrow is a first step towards joining the MSCI Index by 2017, which will be raising the profile of markets in the Middle East and North Africa (Mena) by up to $1 trillion, experts say. 

Analysts and experts said the opening of the Saudi bourses is a major move in international markets since China allowed foreign investment in local market more than a decade ago. They said the $570 billion market capitalisation of the kingdom is more than the combined value of the Moscow, Malaysia and Mexico markets, and that it would be the seventh-largest emerging nation in the world if it joins the MSCI Index in next two years.

Experts expect that the Saudi market will get the highest weightage between two per cent to four per cent in the MSCI Index and may attract $10 billion to $15 billion in additional foreign inflows into the region.

Banks, insurance, petrochemicals, healthcare and retail stocks will be the major beneficiaries of the Saudi move that will lead to a general shift of attention to Saudi companies and potentially pave the way for new business joint ventures and further integration of Saudi businesses into international markets, they added.

Yong-Wei Lee, head of Mena equities at Emirates NBD Asset Management, said the opening of the Saudi market will certainly raise the profile of other markets in the region such as the UAE.

“Three Mena markets — the UAE [$230 billion], Qatar [$180 billion] and Egypt [$70 billion], with a combined market cap of $480 billion — are already included in the MSCI Emerging Market Index. Adding the $570 billion Saudi market, the Mena markets could top $1 trillion and that would place the region in a more prominent position than before,” Lee told
Khaleej Times.

He said institutional and foreign investors that are currently invested in the UAE are also likely to already own some stocks in Saudi Arabia so it’s unlikely that investments will be diverted from the UAE market.

Lee said the opening of the Saudi market through the Qualified Foreign Institutional Investor programme will see some additional inflows from foreign investors, but the significant event to look out for would be the MSCI upgrade of the market to the Emerging Market Index.

“In that situation, it’s possible to see foreign investor inflows in the range of $10 billion to $15 billion,” he said, adding that underpenetrated sectors relative to other emerging markets such as banks, consumers, healthcare and insurance are likely to be attractive to foreign investors.

“The bellwether petrochemical companies such as Sabic are also likely to be well-sought after,” he said.

Scott Campbell, head for the UAE at global law firm Linklaters, said the opening of the Saudi market is one of the most eagerly awaited economic reforms in the region and could be a real game-changer given how large the equity market in the kingdom is.

“Whilst there are limits as to who can actually invest, institutions have to have more than $5 billion under management and five years of experience, we’re expecting significant interest, especially from investors that hadn’t perhaps looked at the region before.”

A great opportunity

Saleem Khokar, head of equities at National Bank of Abu Dhabi’s Asset Management Group, said the opening of the Saudi market is a great opportunity for foreign investors to get exposure to the largest economy in the Mena region. It is also the most liquid market in the region.

“Saudi Arabia was the second-largest market after China where direct access to foreign investors was not available. Foreign investors were able to take economic exposure to the Saudi market by using swaps, but this could prove cumbersome and expensive,” he said. 

Referring to the recent statistics released by the Saudi stock exchange, he said foreigners own only 1.18 per cent of the market cap (via swaps) compared to the allowable limit of 10 per cent.

“We believe investors will come in gradually, after assessing the market and valuations. We believe that opening of the market to foreign investors will lead to greater institutional participation and the listed companies will improve on transparency and disclosure,” he said.

UAE not impacted

To a question, Khokhar said Saudi Arabia’s move to open up its markets for foreign investors is unlikely to impact the well-diversified UAE economy.

“The UAE is the second-largest economy in the GCC and the emirate has been focusing on growing its non-oil portion of GDP faster, by diversifying into sectors such as trade, tourism and hospitality, services, real estate, transportation and communication.

“The UAE is a well-diversified economy with oil contributing less than 33 per cent to GDP. The International Monetary Fund expects the GDP growth of the UAE to be 3.2 per cent for 2015 and 2016. We believe this will be support the investment flow in the UAE and the market will not be significantly impacted by the opening of the Saudi market. The UAE is part of the MSCI Emerging Market Index and offers significant investment opportunities,” he explained.

A step towards MSCI Index

Khokhar said the opening up of the Saudi market is a step towards joining the MSCI Emerging Market Index by 2017. “We believe the Saudi market will be part of the MSCI Emerging Market Index by 2017 with a weight of around two per cent to four per cent,” Khokhar told Khaleej Times.

About the attractive sectors, he said with a low penetration in banking and high contribution to low-cost deposits the banking sector would be attractive for foreign institutional investors.

With the development of insurance regulations and increase in the number of hospitals, the healthcare sector would also be attractive, he added. “Saudi Arabia, having a population of 29 million and a young demographic consumer and retail sector, would be another potential choice for foreign investors. The domestic consumption story related to economic growth will be attractive,” he said.

To a question about the timing of the Saudi move due to tensions in some parts of the region, he said the market has experienced increased volatility due to geopolitical events, but the strength of an underlying economy and strong fundamentals of listed companies provide ample support to investors.

“The performance of the Saudi market on a year-to-date basis is 16.6 per cent as compared to 8.6 per cent of MSCI Arabian Markets, 9.1 per cent of MSCI Emerging Market Asia and four per cent of MSCI World,” he said.

Tara Smyth, head of investments for the Middle East at JPMorgan Private Bank, said the opening of the Saudi market to foreign investors will be more than just an inflow of funds.

“It will lead to a general shift of attention to Saudi companies and potentially lead to new business ventures and further integration of Saudi businesses into international markets. Our clients view this as an opportunity for their businesses to expand and form new international partnerships.”

She said investors are keen on capturing the opportunity behind the growth in the emerging market consumer and investing in Saudi Arabia is a prime way to play that opportunity with a booming population, wealth creation, and the biggest slice of the pie when it comes to consumption in the Middle East.

“Furthermore, the added benefit of the Saudi Riyal being pegged to the US dollar is bringing very limited currency risk for dollar-based investors,” Smyth said.

— muzaffarrizvi@khaleejtimes.com