Trading on Tadawul: Foreign investors get ready

Published May 6th, 2015 - 06:07 GMT
Saudi stock market’s capitalization stood at $528 billion. (File photo)
Saudi stock market’s capitalization stood at $528 billion. (File photo)

With Saudi Arabia to open up its $575 billion stock market to direct foreign participation for the first time on June 15, both local and international investors are positioning themselves to trade the largest Arab bourse. This follows the regulator, Capital Market Authority's confirmation that Tadawul — the region’s largest, diverse and most mature capital market — will be open to qualified foreign institutional investors (QFIs).

The regulator clarifies that foreign investors can own no more than 10 percent of Saudi Arabia's stock market by value. A single foreign investor will be able to own no more than 5 percent of any listed firm, while all foreign institutions combined can own no more than 20 percent.

Foreign institutions, including central banks, will be required to apply for permission to invest. They must have at least $5 billion of assets under management, although the CMA has the discretion to reduce this to $3 billion when it wishes.

Predicting price movements after a step like this is always difficult. One risk is that the effects of such a move are already "priced in," in which case the experience may prove rather anti-climactic.

Whatever the price dynamics, this represents an important milestone in integrating Saudi Arabia in the global capital markets and continuing the process of modernizing the market through improved governance, transparency and technology.

Not only will the arrival of foreign investors hopefully reduce the dominance of local retail investors in trading, but it may also be expected to create a more fundamentals-based trading pattern as foreign institutions base their decisions on research rather than short-term speculation.

The impact of such moves is seldom transformative in the short term, but it is a step in the right direction and highlights the progress made by Tadawul in establishing itself as the region's premier exchange.

In April 2015 the Saudi stock market’s capitalization stood at $528 billion, equivalent to two-third of Saudi GDP, making it larger than the Mexican stock market.

When the Saudi stock exchange opens to foreign investors by mid-2015, a similar pattern of events occurring to what we saw in Qatar and the UAE is still likely.

Stock markets of both Qatar and the UAE rose before the inclusion of the respective indices, in early June 2014, into the MSCI Emerging Markets Index, and then dipped immediately after.

In the case of the TASI, the losses were not reflective of market fundamentals but caused by panic selling.

So, let’s wait for Tadawul opening up to overseas participation and watch its likely impact.

By Khalil Hanware

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