Unlucky timing marks a false start for Saudi Stock Exchange’s foreign affair
Saudi Arabia’s stock exchange, known as the Tadawul, opened to foreign direct investment on 15 June, exactly 10 weeks before the worst decline of global share prices since the onset of the 2008 financial crisis. The precipitator of that bear run was China and its 75 million mom-and-pop investors, who saw their shareholdings plunge in value more than 40 per cent from their 12 June peak, just a few days before Saudi stocks became available to foreigners. The tremors of that dive, brought on by lacklustre demand reported by China’s manufacturing sector, were felt around the world—and the newly international Tadawul was not immune to the shock. Its TASI, the bourse’s all share index, closed on 7,383 points on 3 September, a touch higher than 24 August low of 7,024, but well off the pace of its 52-week high of 11,149 from 9 September last year.
There are uncomfortable parallels between the two markets. Part of Tadawul’s stated rationale for opening the door to foreign money was to “encourage a rebalancing” of its market’s key players. Individual mom-and-pop investors—mostly pop—owned some 34 per cent of all Saudi shares, matching the holdings of the country’s government related enterprises (GRE). This was soundly ahead of Saudi institutions, which held just 23 per cent of the total market at the end of March. Retail investors also dwarf all others when it comes to monthly trading activity, accounting for 90 per cent of the exchange’s trades, according to Tadawul. The exchange has made it clear it would like to see more institutional participation to counter the perceived volatility these tiny traders bring to the market. It has set the bar for Qualified Foreign Investors (QFI) accordingly high, mandating that any QFI’s must have a “recognised investment track record” and $5 billion worth of assets under management. Adel Al-Ghamdi, CEO of the Saudi Stock Exchange, described it as “an important first step in a longer journey.”
While it’s a start that may align with a traditional slow-and-steady GCC approach to change, more foreign direct investors may have liked to be in the game. Some in the investment community believe that despite the Saudis’ desire to ease into having foreign capital come into their shares, the best way to do this is to enable a truly free market. Without this freedom, investors—even the big ones—may be slow to engage. “A market functions best with participants who are able to do their own due diligence and go about it in a way that is open and fair to everybody,” says Jeff Reeves, executive editor of InvestorPlace.com. “I think that is a big hurdle to overcome.”
Reeves highlights other challenges too. Much like China there is likely to be a significant “intelligence gap” about rules, regulations and reporting. Again, like China, there aren’t only restrictions on who can trade, but also how much and what. The most an approved QFI can own of a single entity is capped at 5 per cent; any entity’s portion of QFI shareholders cannot exceed 20 per cent; and total foreign ownership of any entity has to stay below 49 per cent. In addition, big development firms involved in the remaking of Makkah, home to Islam’s holiest sites, are completely out of bounds and access to initial public offerings will be restricted. “I don’t think its prime time for retail investors to play that kind of market,” says Reeves. “It will be interesting to watch, but it’s spectator sport right now.”
Unlucky debut timing aside, there are other risks to consider. Oil’s price has been bouncing around the bottom of the barrel for months, dipping as low as $37.75. The Saudi economy’s reliance on oil—it accounts for nearly half of the country’s GDP and almost all its export revenues—is likely to push institutions away from the country’s market as traders, hiding out in a bear market, look to reduce risk exposure and bias away from energy. Fund managers may be made more wary by the impact government policy can have on the market. As with China, Saudi Arabia’s government policies drive the entire national economy making it tougher for active fund managers to find opportunities for value based on balance sheets, experience and intuition. “The money managers who rise to the upper echelons of these institutional investors like to believe they’re smarter than the average bear and that their analysis matters,” says Reeves.
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