| Further reading |
 |
| • Best Managed Companies in the Middle East 2014: By Sector• Saudi’s time to shine?• Understanding Saudi Arabia |
Asked how the opening of his markets to foreign capital will affect the exchange, Al-Ghamdi points out that Saudi is not totally isolated from the rest of the world. “It is worth noting that the Saudi capital markets, to a large degree, are already open to foreign investment flows,” he says. “Indeed, the ETFs [exchange-traded funds] and mutual funds markets have no legal or regulatory restrictions inhibiting direct foreign investor participation.”
Through these methods, foreigners – including those in the GCC, foreign strategic shareholders and resident foreign investors – already held 8.2% of Saudi Arabia’s market cap by June 2014, Al-Ghamdi says.
The new CMA rules, he says, “will simply serve to widen the access channel” so that foreign institutional capital joins those investors who have been using the Saudi Equity Swap Framework, the indirect model that has been available since 2008.
If this sounds like he is making light of the move his exchange is about to take, it is perhaps a pre-amble to demonstrate that the Saudis are not taking a blind step into the unknown, more an extension of something that started some years ago.
Nevertheless, it is clear that this next step will be transformational. “We expect the new rules, once approved by the CMA, to reposition the Saudi Stock Exchange as a more inclusive international exchange, able to compete, as we go forward, with our more developed international peers,” he says.
And this is the point: competition.
“We expect the impact on the capital market as a whole to be more profound,” he says, specifically citing enhanced reporting, investor relations and corporate governance through a higher level of shareholder activism, a more diversified and sophisticated institutional investor base with longer-term investment horizons, and the promotion of more advanced market infrastructure, including broader and more sophisticated research coverage.
That’s the advantage from the local perspective.
Why should foreign investors take part?
“Saudi Arabia benefits from strong demographics, a healthy economic development pipeline, and comprises the largest and most liquid stock market in the Middle East and north Africa,” Al-Ghamdi says.
“Investors naturally gravitate to such markets, particularly sophisticated foreign institutional investors,” he says, citing the flow of foreign capital into emerging markets over the last decade. “As a market that is relatively new to foreign investors, the diversification benefits of investing in the Saudi market will also be quite compelling.”
He speaks of competition on a local level in the Gulf, calling the Riyadh bourse “the exchange of choice in the Middle East and north Africa. We expect regional issuers to be drawn by the comparative advantages our platform provides them versus their local venues,” he says. “Ultimately both issuers and investors are attracted to well-regulated, highly liquid markets.”
When Euromoney asks about the dominance of retail investors in Saudi Arabia, Al-Ghamdi calls this a misconception, pointing out that the ‘individual’ category of investors in Saudi includes sophisticated and institutional-like high net-worth and ultra high net-worth individuals, not just retail.
In any event, foreign investors active in Saudi through the swap framework have historically shown a negative correlation to Saudi individual investors in the way they invest. “If this trend continues, it follows that foreign institutional investment flows, under normal market conditions, will ultimately serve to reduce the level of volatility in the market versus historical measures,” he says.
The IPO pipeline “seems quite healthy”, says Al-Ghamdi, even after the SR90 billion ($24 billion) National Commercial Bank listing. “IPO activity is intimately linked to market valuations, in the sense that issuers become more likely to undergo the transformation process and come to market when valuations are rising, as they have been during the course of 2014.”
The exchange has an outreach programme targeting family-owned businesses, and the feedback from that programme suggests a positive outlook for IPOs, he says, in addition to a number of listings expected from the finance leasing sector in light of requirements in the Finance Companies Control Law, which was issued in 2012.
Al-Ghamdi has been busy ahead of Euromoney’s interview, working with the Capital Markets Authority on initiatives relating to the changes ahead. The initiatives, he says, will give his exchange more of a leadership role in developing listing rules. “We are hopeful that this will set the stage for significant capital market developments over the next five years.”
While the timeframe for opening the markets has been a CMA decision, there’s no question that both exchange and regulator have watched Qatar and the UAE’s upgrades to the MSCI Emerging Markets index.
“The well-deserved upgrades to the UAE and Qatar have improved coverage of the region, enhanced foreign and local investor confidence, and will serve to foster further development of international best practices in surrounding jurisdictions,” says Al-Ghamdi.
He’s keen to point out, too, that the two markets have nothing like the scale of his. “The Saudi stock market, from a GCC context, represents 50% of market capitalization and more than 70% of trading value, where more than 40 of the top-100 listed companies in the region are actively traded, and where the most sophisticated and diverse range of electronic trading and subscription channels are available to access the market. We have our own compelling story to tell.”
