The opening up of the Saudi stock market to foreign investors is impacting other exchanges in the region, and some of the foreign institutional money may be flowing out of the other markets into the biggest market in the region, experts told Emirates Business. However, even as investors are and will continue to pour money into the Saudi Arabian market, the UAE will continue to offer great value and should not be overlooked, they said.
"Well, this would affect the whole region, not only Dubai as there will be reallocation for the funds coming to the region," Alfred Fayek, Senior Manager, Institutional Sales, EFG-Hermes Brokerage in the UAE, told Emirates Business, when asked if he thought the Dubai bourse would get impacted by the Saudi decision.
"Investors will not overlook Dubai, but the opening of Saudi stocks via swap broadens significantly the investment options for global investors and they will allocate resources accordingly. However, Dubai will remain an important market in the region and will complement rather than be affected by Saudi's continuing liberalisation," Fayek added.
Khaled Kurdieh, CEO of Mashreq Securities, echoed Fayek's views: "This is applicable not just to the Dubai stock market, but to all the regional markets. They are being talked about in this reference and people are saying that Saudi will now attract money from other stock exchanges in the region," he said. There are others who differ and believe that Dubai's business model is still the best. "I doubt the fall in Dubai stockmarket has been triggered by the opening up of the Saudi stockmarket to foreign investors. Here we are talking about large institutional investors who have enough funds to be in the UAE and also invest in Saudi. There is no need for investors to sell in the UAE, swap that money out of the UAE to invest in Saudi," Karim Kamal, Head of MENA Research, NBK Capital explained to Emirates Business.
"Our view is if an investor is looking for things such as ownership and board representation then the UAE is the place for them. The country actually has the legal framework for foreign companies to do business. But a passive investor will surely be attracted to Saudi," says Omar Bassal, Vice President of Asset Management at NBK Capital. Experts argue it is difficult to compare stocks in the UAE with the ones in Saudi. Large stocks in the UAE market are still attractive as they are currently trading at single-digit price-to-earnings [PE] ratios, despite great earnings growth and two to three years of good visibility, says Oliver Bell, Middle East North Africa manager of Pictet Targeted Fund.
Kurdieh, in fact, maintains, on the whole, UAE markets are more attractive than Saudi. "If we compare the data on stocks of both the countries, Saudi shares are a bit more expensive if measured by PE ratios, so stocks in the emirate look better. One can argue, Saudi is a big market with around 160 listed companies and they trade heavily as compared to the UAE. But the market and index in Saudi is largely dominated by five to six companies. So, it is better to examine stocks individually," he explained. While Fayek agreed stocks in the UAE are a good bet at current rates, he was more upbeat about the Saudi market. "There are some very attractive stocks is the UAE, specially at the current prices, but we are talking here about the Saudi market – one of the biggest and the most active markets in the region," he said.
Tadawul, the Saudi Arabian market, is the largest in the Middle East North Africa (MENA) region with a capitalisation of more than $460 billion, which until recently was the most restricted one in the region.
Kamal believes the recent rally in Saudi stockmarket was driven by just a few stocks. "The initial rally that we've seen is limited to a few stocks and has been largely driven by local retail and institutional investors. They are pushing up the prices in anticipation of foreign money. But they should understand that foreign investors will not buy Saudi stocks at any valuations," he says. Saudi Arabia's Capital Market Authority (CMA) recently announced its decision allowing "authorised persons to enter into swap agreements with non-resident foreign investors whether institutions or individuals, to transfer the economic benefits of the Saudi companies' shares listed on the Saudi Stock Exchange (Tadawul) while authorised persons retain the legal ownership of the shares; in accordance with conditions and requirements stated in the said board resolution."
The CMA has close to 100 'authorised persons' (representatives of brokerages, securities firms, and banks/legal entities] listed on its website. Previously foreigners were denied access to the Kingdom's stock market, except through mutual funds.
The Saudi index recorded its strongest rise in 28 months on the first day of trading that followed last week's announcement. While the announcement was welcome by investors, some experts opine that there is still a long way to go.
"Saudi Arabia has taken a step toward opening the country's stock exchange to outsiders by allowing foreign investors to enter into swap agreements for shares. However, outside investors aren't allowed to buy shares listed on Tadawul. They can own shares only through complex and indirect mutual funds. This is different from what we have in Dubai," said one Dubai-based broker, who did not wish to be named.
On the other hand, some say that this is nothing but a minor issue. "Institutional investors know where they are going. We are not talking about retail investors here, so Saudi is bound to see an in-bound flight of capital," said a regular trader.
Earlier this week, Morgan Stanley Saudi Arabia (MSSA) became the first investment bank to enter into a swap agreement with a non-resident foreign investor for a single stock, as authorised by the CMA. Craig Niven, a Managing Director at Morgan Stanley, said: "The CMA's move to enable foreign investors to indirectly access Saudi Arabian stocks is an extremely welcome move. Interest from international investors in the GCC's biggest capital market is very high, and we expect to see a lot more interest in these swap transactions from investors around the world."
By opening up their markets, Saudi is only expected to reap benefits. "The opening up of the Kingdom's markets to international investors will herald a new era for the strongest and largest economy in the Middle East, and we applaud the regulator's vision in allowing international investors a golden opportunity to access a very attractive, well diversified and the largest equity market in the region at a time of turmoil across international exchanges," said Ricardo Honegger, Deutsche Bank's Head of Global Markets for the Middle East and North Africa. "We can see more liquidity, more maturity and more interest from foreign investors," says Fayek. "This is a step towards liberalisation. Saudi tested this in 2006 by opening their stock market to foreign residents in the country and after two years, they have taken another step towards economic liberalisation," added Kurdieh.
"This is a step in the right direction that pushed Saudi Arabia on the radar screen of many foreign investors. Overtime they will allow foreign ownership. It will also add transparency and more research will be available," explains Kamal. The initial impact of liberalisation will lead to a decent rally, maintained Fayek, but the other benefits will also be substantial. Currently, real unemployment rate stands at 20-30 per cent in Saudi but with the opening up of the market, this is bound to decrease as more money flows in the country.
It is noteworthy the Saudi CMA has set no limits on the number of shares foreign investors can access through these agreements. Nevertheless, according to a document circulated by CMA, foreign investors will not have any voting rights attached to the shares held through such swap agreements. Also, under the regulations specified by CMA, the maturity of swap agreements cannot exceed four years and can be terminated by CMA based on its discretion.