News that Saudia Arabia is set to open up its stockmarket to overseas investors has failed to excite the UK’s emerging market fund managers, amid concern about the regulatory detail.
Saudi Arabia announced it would open its $530bn (£311bn) stockmarket to foreigners during the first half of 2015, putting it on the radar of more international funds.
The country is also likely to be included in either the MSCI Emerging Markets index or MSCI Frontier Markets index, given it is the largest Middle Eastern market with more than 165 stocks, and the fact it trades up to $4bn per day. The inclusion in an index will also make it popular with managers.
However, some managers say it is important to understand any regulatory restrictions when it opens to investors globally.
Oliver Bell, who runs T Rowe Price’s Middle East and Africa fund, said restrictions could include managers having to qualify to invest directly, only allowing groups with at least $5bn assets under management to invest, and only allowing each company to own a maximum of 5 per cent of a stock’s issued share capital.
Another restriction might be not allowing direct ownership by foreigners of any stock to exceed 20 per cent. Mr Bell said various options were still being decided by the Saudis.
“A lot will depend on how the market is opened up and what restrictions are placed on foreigners,” he said.
The manager said the Saudi market had previously had a large market cap compared with its regional peers.
“In 2006, at the height of the last Saudi Arabian stockmarket bubble, this market would have been the largest country weight in the entire MSCI Emerging Markets index,” Mr Bell said.
Claire Peck, a member of the emerging market equities team at JPMorgan Asset Management (JPMAM), said the country was likely to be included in a major index but warned “the devil is in the detail”.
She added: “The market currently trades and settles on the same day, which is unlike most other equity markets – making it potentially challenging for foreign investors.”
Some funds, including Mr Bell’s and JPMAM’s Middle East Equity and Emerging Markets Income funds, already invest in the Saudi market through other tools, and are eager to expand their coverage.
The T Rowe Price fund already has nearly a quarter of its assets in the Saudi market through participatory notes, known as P notes, the only way foreign funds can currently access the market.
In its Middle East Equity portfolio, JPMorgan Asset Management (JPMAM) holds 10 per cent in Saudi Arabia, with 3 per cent in its Emerging Markets Income fund. JPMAM has investments in the key consumer names, along with petro-chemical companies and some of the larger banks.
Baring Asset Management’s head of Europe, Middle East and Africa equities team Ghadir Abu Leil-Cooper said she had been waiting for the development for some time.
“If the market is fully opened up, it should have a positive impact on corporate governance, which would in turn allow valuation multiples to expand,” Ms Leil-Cooper said.
“It should also allow Saudi Arabian companies better access to capital and more choices, too. The ability to list and access a broader range of funding sources should allow for a more dynamic corporate sector in Saudi Arabia.”
Oil-rich kingdom looks to boost foreign investment
The move by Saudi Arabia to open up its stockmarket to foreign investors is a significant step.
The stockmarket is said to be more liquid than its peers in the region and so is likely to be of interest to international managers but there will be key issues to consider.
Large companies, in particular, benefit from the public spending the country carries out, so this will need to be understood. Corporate governance is an issue investors will need to be mindful of, too.
The United Arab Emirates and Qatar were both upgraded this year from frontier markets to emerging markets by MSCI, but as reported in the Financial Times, some investors have been hit by the volatility in Dubai’s market.
This has been ratcheted up recently, the paper said, amid concerns over corporate governance at construction company Arabtec. Earlier in July, trading in the company’s shares was suspended.
While some investors have been able to access the market through participatory notes, having a completely open stockmarket will change the dynamics.
Similarly to China, investors can acquire licences that give them a quota of listed shares, but if the market fully opens up to international investors, one would expect big changes in how the market functions.
While being able to access Saudi stocks may open up new opportunities, it won’t be without its risks.
To read more on the Mena region, check out the Guide to Investing in Mena.
