OBG talks to Jamal Al Kishi, CEO, Deutsche Securities Saudi Arabia

MSCI recently upgraded Qatar and the UAE to emerging market status. What effect is this likely to have on Saudi markets?

AL KISHI: There is no doubt that the MSCI upgrade of the UAE and Qatar markets will have a positive effect on the wider region, including Saudi Arabia, as it will increase awareness of regional markets amongst foreign institutional investors. However, the impact on Saudi Arabia will likely not be massive or immediate. Joining the MSCI indices attracts higher foreign investment volumes, improves liquidity and helps achieve more balanced and less volatile performance under normal circumstances. This upgrade reflects recognition of what these markets have accomplished. We are confident in the measures that Saudi Arabia is pursuing to elevate the stock market's performance and profile.

How strong is the demand for more sophisticated investment vehicles among institutional investors?

AL KISHI: We currently see a growing demand for well-structured and diversified investment products from both local and foreign institutional investors. This is, at least in part, a reflection of the abundant liquidity in the Kingdom and abroad. Encouraging institutional investors to take a larger role in the Saudi stock market has been an important goal for years and steps towards acceding to the MSCI Emerging Markets index will help attract more institutional investors – mainly foreign – to take positions in the market.

With significant ongoing regional instability, how much is this impacting investor sentiment?

AL KISHI: Overall sentiment is typically affected by regional geopolitical events. However, Saudi Arabia's well-tested political stability, robust fiscal position and outlook, and prudent monetary policy have kept investors' confidence and interest in the Kingdom intact. The performance of the economy, attractive demographics and the fact that the Saudi riyal is securely pegged to the US dollar have made the Kingdom stand out among other emerging markets of late. Furthermore, the performance of the leading Saudi corporates across all major sectors bolsters the case for investing in the country. That's why we are optimistic about foreign investment flows into the Kingdom.

What needs to be done to encourage a greater number of companies to list?

AL KISHI: Family firms will typically seek to list if they need to realise value, improve governance and accountability, or tackle succession issues, among other reasons. If the market is willing to assign valuations that these firms deem attractive, they will list. We know that policies in the Kingdom encourage listing, and I am not sure that much more can be done. Some issuers are realising that the disclosure elements relating to capital market issuance aren't unreasonably onerous or expensive to comply with. As a result, we have recently seen the volume of issuances in the capital markets begin to rise, especially on the debt side.

How can Saudi Arabia benefit from further opening the stock market to foreign investors?

AL KISHI: The Saudi stock market has been open to foreign investors since 2008, and even before this it was accessible through specialised funds. What we are talking about is allowing greater access beyond the total return swap mechanism and certain funds that have been in use for several years. Allowing foreigners to own shares with full shareholder rights will attract higher volumes of investment from foreign investors, who are precluded from investing in derivatives and are denied voting rights. This will attract institutional investors in particular. A larger role for those investors, in addition to bringing more foreign investment and capital flows to the country, will lessen the impact of retail investors’ behaviour on the market and thus will likely reduce volatility and improve the market's overall ability to value individual stocks properly. It will also improve standards of accountability and transparency.