The Kingdom’s stock exchange made a promising start to 2012, raising further the anticipation that international investors might soon have direct entry to this $337bn market.
On March 25, the Tadawul All Share Index (TASI) – the biggest bourse in the GCC – closed above 7700 for the first time since Lehman Brothers defaulted on its obligations in 2008, precipitating the global financial crisis. The exchange is up 20% since January, rising for an unprecedented 14 consecutive days at the beginning of March. The greatest trading volumes during this rally were in real estate, insurance and petrochemicals companies.
A handful of local, regional and international factors have contributed to the Tadawul’s recently bullish performance. First and foremost, Saudi investor confidence is high, a sentiment that is echoed by local banks’ decision to return to margin lending, a market-stimulating mechanism that allows investors to borrow against future gains in their share portfolio.
Furthermore, concerns about regional instability that blunted sentiment in 2011 have decreased, and the Kingdom has a robust economic outlook for 2012, buoyed by high oil prices and a $130bn government housing and infrastructure spending programme. GDP is expected to grow 4.7% this year, according to a recent report from Standard Chartered Bank, while stronger than expected performance on global stock markets elsewhere, stimulated by better than expected data from the US and Japan, have also had an impact.
According to Paul Gamble, the head of research at Jadwa Investments, “With very low interest rates, investment alternatives are scarce. Local investors tend to focus on the stock market and real estate, and in the last couple of years real estate was preferred to capital markets. Recently, however, investors have started viewing land as over-valued, meaning a lot of investment that would have been in land has been put into the market.”
There has also been an increase in interest from foreign investors. Gamble told OBG that in February, indirect foreign net inflow into the Tadawul reached $399.92m, a record high for the market. Foreign indirect investments averaged 0.8% of market activity in the first two months of 2012.
This reflects a growing regional trend, according to Asim Bukhtiar, the head of research at Riyadh Capital. “GCC equities have emerged as an attractive investment option, which would explain rising volumes and sustained strength, particularly on the Saudi market,” he told local media in March, adding that “High net-worth individuals may be repatriating funds back to regional markets as attractive investment opportunities dry up in developed markets.”
Current regulation prevents non-residents of the GCC from directly trading stocks on the Saudi market. The reasons for keeping out foreigners are threefold: fear of hot money, or the flow of funds from one country to another to earn a short-term profit on interest rate or exchange rate shifts; the fact that the market did not yet have the proper regulations and, thirdly, timing.
However, there has been a gradual easing of restrictions in recent years. In 2008, foreigners were allowed entry through swap agreements with local brokerages. This was extended in 2010 with the introduction of exchange-traded funds.
Further liberalisation may be forthcoming. Regulators at the Kingdom’s Capital Market Authority (CMA) are now drafting rules to permit investors entry to the market on a qualified basis. The system, expected to be similar to the Chinese model, will set careful criteria for foreigners wishing to trade directly.
The market has already tested trades under a new system, and a recent agreement between the CMA and the central bank will ensure greater cooperation in supervision of the sector, a good indication that the TASI is being primed for further opening.
While this deregulation will stimulate more international participation, analysts doubt it will bring a glut of foreign funds. “I am anticipating some interest,” Jarmo Kotilaine, the chief economist at National Commercial Bank, told OBG. “Saudi is a big, liquid market and an unparalleled way for investors to gain exposure to this part of the world. But many indices-based investors will still stay away. This ought to be seen as just a step in the process of getting included on the international benchmark indices. For many investors, these are the deciding factor and it will take several years for the Kingdom to achieve this.”
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