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KSA's emerging capital markets [Banker Middle East]
[October 01, 2014]

KSA's emerging capital markets [Banker Middle East]


(Banker Middle East Via Acquire Media NewsEdge) Fully Functioning capital market can deepen and grow kSa'S economy Ghadir Abu Leil Cooper, Head of EMEA and Frontiers Equity Team at Baring Asset Management, London comments, "This is welcome news. 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. It should also allow Saudi Arabian companies better access to capital and more choices too. The ability to list and access to a broader range of funding sources should allow for a more dynamic corporate sector in Saudi Arabia. Finally, as the financial sector continues to grow in Saudi Arabia, we will see increased use of pensions and mutual fund products as individuals save for retirement. A fully functioning equity market would clearly be beneficial for capital allocations and management of liabilities as well as estate planning." per cent foreign ownership of the market versus regional peers, where direct investments are available, with foreign ownership accounting for around eight per cent. After an opening of the Saudi market and assuming foreign ownership reaches a similar level to the regional equity markets, we could see up to around $35 billion of incremental foreign inflow versus the approximately $4 billion that foreigners have accumulated since 2009, when indirect ownership first became available.



"Saudi Arabia is the most liquid market in the region, with a six months average daily trading volume (ADTV) of $2.5 billion, accounting for 65 percent of the regional liquidity. Foreign investors-via indirect routes-currently trade only 1.1 per cent versus the regional average of 12.2 per cent. Assuming the share of trades by foreign investors reach the regional average levels, there is potential for a marginal 11 per cent growth in Saudi Arabia's liquidity, with ADTV levels reaching $2.7 billion. Yet, the $300 million of potential foreign incremental liquidity in Saudi Arabia could be a significant boost to the $145 million that foreigners currently trade in regional markets, on a daily basis." LIBERALISATION DRIVES EXPANSION Stefano Natella, Global Head of Equity Research, Investment Banking at Credit Suisse, New York forecasts in a report titled "Emerging Capital Markets: The Road to 2030", As a market with high retail ownership and a strong equity culture among high net worth individuals, secondary activity in equities should also prove to be a significant source of revenue, with average daily traded value expected to grow from $ 1.8 billion currently to $16.4 billion by 2030." KSA FURTHER BOOST TO MENA Aleksandar Stojanovski, Research Analyst at Deutsche Bank observes, "Saudi equities are currently accessible only via synthetic products for foreign investors and estimates see less than ONE KSA EQUITIES MARKET BOOST FOR GCC IN 2015 Analysts from EmiratesNBD's wealth management CIO team report, "Post the announcement, the Saudi Index went up 4.5 per cent, a six year high, with the large caps SABIC, Mobily, Samba and Savola (all constituents of our GCC Model portfolio) outperforming. We see continued upside on a longer term view, with consensus Saudi corporate earnings growth of 12.5 per cent in 2015. Saudi corporates are increasingly generating free cash flow with dividend yields in excess of six per cent, representing a good alternative to fixed income investments.

"Tadawul has a market capitalisation of $531 billion with 166 listed companies and a trading volume of over $2 billion daily. The Saudi Index is the only GCC Index well diversified in terms of sector representation, with banking, petrochemicals, telecoms and consumer services taking up a large share of the benchmark. Saudi Arabia's GDP grew 4.7 per cent in 2013 led by government stimulus measures amounting to $125 billion. Saudi banks are a good proxy for overall economic expansion.


KSA STOCK MARKET Matthieu Belondrade, Head of Global Emerging Markets Equities at Natixis Asset Management comments, "Currently, Saudi Arabia is covered by MSCI but does not belong to a specific category. This means that, if Saudi Arabia was to join the MSCI Frontier Markets, it would become its first component with a weighting above 60 per cent. If Saudi Arabia was to join the MSCI Emerging Markets, it would get a weighting of between four per cent similar to that of Russia. These announcements have been long-awaited and it is likely that they will trigger a surge of foreign inflows to the Saudi market, particularly in the context of an MSCI inclusion." A POSITIVE STEP Jahangir Aka, SEI Investments Managing Director outlined, "The costs and constraints of equity swaps have limited the number of foreign funds. Therefore, as an immediate effect of the market opening, we should see a reasonable volume of flow, but the Tadawul will be very cautious in ensuring this does not bring short term volatility to the stock market, hence I expect to see the introduction of some caps per stock, controls around which firms can buy, potentially a registration process for those who want to buy etc." SAUDI OPENING FOR FOREIGN INVESTORS Salah Shamma, Head of Investments, MENA Equities at Franklin Templeton Investments, Middle East remarked, "The Tadawul is dominated by local retail investors, who account for over 90 per cent of volumes traded, while foreigners represent just over one per cent of the total. The opening up of the market will likely bring with it a higher degree of institutionalisation that will add sophistication and maturity to the market in time. A more sophisticated investor base would promote the efficient allocation of investment capital within the Saudi Arabian economy. In the medium term, such measures are likely to lead to an increase in initial public offerings (IPOs), thus leading to a much-needed deepening of the equity market in the region and improved sentiment from global investors.

GLOBAL IS POSITIVE ON TADAWUL Global Investment House noted, "This opening has been long awaited and will further open the market to foreigners who are now able to invest in the market only indirectly through swap transactions, mutual funds and a few ETFs. We expect there will still be restrictions on foreign investors in the markets with foreign ownership limits likely to be placed on companies. Also, we believe foreign investors will need to be approved by the CMA, possibly in schemes similar to those run in China (more restrictive) or India (more open)." SAUDI BOURSE BOOSTS MENA MARKETS Anum Saleem, Senior Associate, Corporate and Commercial Group, D&P Dhabaan and Partners in association with Eversheds, Saudi Arabia said, "The Saudi government's decision to allow investors to the stock market directly and exercise voting rights is likely to spur the concept of activist shareholders in the Kingdom, as opposed to a purely monetary participation in the listed companies before. Companies will benefit by receiving management, accounting or legal guidance in keeping with best practices by their foreign shareholders. Companies can also take advantage of the latest technology and innovations in operational practices and new financing tools to enhance their efficiency and benefit corporate governance practices. The influx of foreign investors is also likely to generate more M&A activity in the Kingdom, boding well for the Saudi private sector as their business valuations are likely to increase serving as an impetus to entrepreneurship and employment opportunities for the local population." EXCITING DEVELOPMENTS "This is hugely significant for global capital flows and an exciting development for the world's equity markets. The Tadawul is the largest securities exchange in the region and the draft rules bring the bourse one step closer to global money managers. The opening of the Tadawul is a further important step to diversify the Saudi economy away from oil and it is a historic milestone in the global capital markets." (c) 2014 CPI Financial. All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info).

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