The Capital Market Authority is finalizing a regulatory framework which will allow foreigners to directly own stocks in Saudi Arabia, though the market has no need for liquidity from international investors, says its Chairman Mohammed bin Abdulmalik Al-Sheikh.
"We are attracting foreign investment to come to the market for the technical expertise and human capacity," he was quoted as saying by Reuters on the sidelines of the Euromoney conference in Riyadh.
"There are a number of government entities, including CMA, that are looking at that (direct foreign investment). We're finalizing a regulatory framework with certain parameters," Al-Sheikh said.
Reacting to the CMA's latest initiatives, John Sfakianakis, chief investment strategist at Masic in Saudi Arabia, said: "Opening the market to direct foreign ownership will only help deepen the stock market and make it more transparent. The benefits of opening the market outweigh any costs."
Asim Bukhtiar, head of research at Riyad Capital, told Arab News: "Direct foreign ownership in Saudi equities would be the next evolutionary step. Indications are that foreign appetite is strong to invest in the largest regional exchange, which could add greater depth and breadth to the market and ultimately benefit all participants."
Further, he said large institutional investors could push for greater disclosures and transparency which will pave the way for Saudi equities to be included in widely followed emerging markets indices. Following this, the next steps would be the introduction of new instruments such as REITs, options and warrants, and covered shorts. An efficient and well-regulated market should be the eventual goal.
"Speculation will always exist however a greater composition of long-term investors will provide the stability that the regulator desires," Bukhtiar said.
Commenting on the same issue, Sfakianakis said the CMA could increase its monitoring by using different strategies and punishing those that are found breaking the market rules.
Currently, foreign investors can only buy shares in Saudi Arabia through swap deals involving international investment banks, and via a small number of exchange-traded funds.
The regulator is also trying to limit "high levels of speculation" in the stock market, said the CMA chairman.
"The CMA should put a limit on this manipulation to safeguard investors. We are currently trying to address this issue."
Al-Sheikh also said the CMA and other government bodies intended to encourage institutional investment in the market by diversifying investment instruments and funds, including sukuk and other debt tools.
"CMA is developing a strategy to promote institutional trading on the Tadawul," he said, adding: "While out of the total 47 billion stocks listed 45 percent are held by individuals, nearly 93 percent of daily trading is done by retailers."
On year-to-date basis, the Tadawul All-Share Index has so far showed a collection of 381 points or 5.6 percent.
The index dropped 0.09 percent yesterday despite slight gains made by petrochemical stocks. Referring to Saudi petrochemical stocks, Sfakianakis said: "Many investors, both foreign and local, are on a wait-and-see mode on most petchems given that Q1 results were mixed."
According to Bloomberg, Deutsche Bank AG and HSBC Holdings Plc are among banks that have predicted Saudi Arabia's market may open to foreigners as early as next year amid rising demand for assets in the Kingdom. Saudi Arabia may attract as much as $ 30 billion of inflows, John Burbank, founder of $ 3.7 billion San Francisco-based hedge fund Passport Capital LLC, said in February.
In a separate development, the CMA said the license of Saudi Integrated Telecommunications Co. had been canceled and a committee had been formed to dissolve the financially troubled telco.
"The priority in the repayments of the company's obligations is to its non-founder subscribers and shareholders. The commission should finish this very urgently in a period not exceeding six months," the CMA said in a statement posted on the Tadawul website.