Is Saudi’s Stock Market Ready For An Upgrade?

Stock markets in the GCC have had a rough few weeks, following the recent drop in oil prices. Dubai’s index tumbled 9.2 per cent in December, while Saudi Arabia’s Tadawul also saw its year-to-date gains almost wiped out last month.

However, despite the drastic impact that the oil slump had on the region’s bourses, Dubai’s index still ended 2014 12 per cent higher, while Qatar saw a gain of 18.4 per cent.

Excluding December, the year 2014 was a landmark one for the region’s bourses – UAE and Qatar were both upgraded from frontier markets to emerging markets by index compilers MSCI and S&P Dow Jones Indices.

“It is a statement about the way those markets have started to develop,” said Alexander Matturri, CEO of S&P Dow Jones Indices, in an exclusive interview with Gulf Business.

The markets may not have made it across the screening for many fund managers if they were still considered frontier markets.

“They are now at that international standpoint, on par with a lot of markets. It’s a positive trend coming from this region that will open it up to a lot of attention,” he explained.

However, he quickly added that the move would not change the day-to-day fundamentals of these bourses, since liquidity still needs to be built up.

Additional liquidity will come slowly and steadily, and will probably build up particularly due to a recent announcement from Saudi Arabia.

THE TADAWUL TALE

The Kingdom made a groundbreaking announcement last year, revealing plans to open up its mammoth $530 billion stock market to direct foreign investment.

At present, the Tadawul, the most liquid bourse in the region in terms of daily trading volumes, restricts direct investment to Saudi and other GCC investors. Investors from outside the region can participate indirectly, through back-to-back swap arrangements and mutual funds.

However, the new move, expected to take shape this year, is widely regarded as a huge step to boost volumes not just in the Kingdom, but also across the entire region.

“It is positive for the country and the region as whole because it will attract attention as well as flows,” Matturri said.

For international investors, it’s a big step because the Tadawul is the last big market of its size that’s not yet fully open.

“Saudi Arabia is not a market that needs to bring in outside capital. But I think they are looking down the road and at the possibility that if some of these companies want to find value internationally, they will want foreign investors in,” Matturri explained.

Announcing the news in July 2014, the Kingdom said in a one-line statement that the Capital Market Authority (CMA) – at a time it sees as appropriate – was authorised to allow foreign financial institutions to buy and sell stocks on the Saudi stock market.

The CMA later clarified that the move is likely to be implemented in the first half of 2015.

Opening out the stock market slowly is a smart move, opined Matturri. “The problem for the government is that once you open it, you can’t close it – so that’s why they want to do it step by step.”

RETAIL OVER INSTITUTIONAL

But Saudi Arabia is seemingly focusing more on institutional investors, a move that could be destabilising, he warned. The problem with institutional investors, who tend to invest huge sums, is that they can pull out just as quickly as they come in. Whereas retail investors or funds catering to them tend to pull out more slowly, he said.

“The key is not to just get institutional investors coming into Saudi Arabia but to get retail investors or funds catering to them as well. You want the breadth of different types of products and different types of investors.”

Once the market opens up, can it quickly follow its fellow GCC members into the emerging markets club?

That depends on how the governance standards shape up, stated Matturri.

“It depends on making sure that the market properly opens up, that liquidity is there and making sure custody systems are in place. Will the global custodians have access to be able to settle the trades easily? That will form part of the decision.”

He also stressed again that a crucial factor is increased liquidity, especially considering the huge wealth within the region.

Local investors need to understand the importance of diversification, and should avoid concentration of wealth within any specific asset, be it real estate or their own family businesses.

“Overall, the equity market in the region will take time to develop. The population is affluent and educated and people have access to information – all of this will help the market,” added Matturri.