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What Saudi Arabia's market opening means for foreign investors

What Saudi Arabia's market opening means for foreign investors

Saudi Arabia’s decision to open its stock market to foreign investors has spurred a series of positive reactions among emerging market specialists.

The world’s biggest oil producer will allow international players to buy and sell shares starting from 2015 in order to lure foreign capital into the largest Middle Eastern market.

Currently, the Saudi market is only open to domestic investors. International allocators can invest via participatory notes, commonly known as P notes, which enable them to hold the investment directly.

According to Schroders, opening the market may prompt the MSCI to re-classify Saudi Arabia as an emerging market, which could lead to as much as $40 billion of foreign cash entering the market.

Against this backdrop, Citywire Global canvassed emerging markets specialists on whether this pivotal change is likely to lead to increased interest and if they are upping allocations to Saudi Arabia.

More capital, more choices

Ghadir Abu Leil Cooper, head of EMEA and frontiers equity team at Baring Asset Management, thinks an open market will have a positive impact on Saudi Arabia's corporate governance.
‘In the future, Saudi Arabia will face challenges such as finding jobs for the work force, strengthening and deepening the economy and diversifying away from hydrocarbons and dependence on government funding. To do this successfully will require attracting overseas investment, and having a fully functioning capital market goes hand-in-hand with that,’ she said.
Cooper thinks, 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,' she added.
‘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.’

Saudi’s diversification

BlackRock’s Sam Vecht, who is Citywire + rated and runs the BSF Emerging Markets Absolute Return fund, believes Saudi Arabia is already offering several opportunities but opening up the market will make things easier for international investors.

‘This is another step towards the outside world. Saudi Arabia is moving in the direction of industrialisation and international norms. This is a further step on a path which had already been stared,’ he said.

Vecht said investors still need to figure out whether the country will be included in the emerging markets or the frontier markets MSCI index, and how big its weight would be in the benchmark.

The manager also believes the country offers a diversified and attractive market.  ‘Saudi Arabia is not just about oil. Retailers, car manufacturers and hospitals are all attractive areas,’ he said.

‘We are exposed to some consumer and industrial stocks which are still reasonably priced. We also think the bank sector might do well in the near future,’ he concluded.

Hold the investment

Citywire A-rated Oliver Bell, portfolio manager of the T. Rowe Price Africa and Middle East fund thinks the news is positive and the country also stands to benefit from rise in interest rates by the Federal Reserve.

‘The T. Rowe Price Middle East and Africa fund currently has nearly a quarter of its assets invested in the Saudi Market via participatory notes. This decision will enable investors to hold the investments directly, thus removing a theoretical credit risk with the counterparties,’ he said.

Bell noted that Saudi Arabia is by far the largest Middle Eastern market, having over 165 stocks, a market cap approximately of $530 billion, and trading up to $4 billion per day.

‘It is interesting to note in 2006, at the height of the last Saudi Arabian stock market bubble, this market would have been the largest country weight in the entire MSCI Emerging Markets Index. So clearly this latest development is very significant,’ he added.

The manager also said any move in interest rates by the US Federal Reserve is instantly reflected in Saudi Arabia as the Saudi Riyal is pegged to the US dollar. ‘For the banks this is generally very positive for margins and so this is one of the few markets that rising US interest rates will be taken positively.’

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