Foreigners get Saudi access in swaps


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But exchange still looks like a political tool.

Foreign fund managers can finally access individual Saudi stocks – or at least the economic benefit of the stocks, which is what interests them. What does this show about the Saudi stock exchange? Is the Tadawul about to become a more natural market, moved by investor sentiment related primarily to expectations of corporate earnings growth?

Allowing foreigners access to Saudi shares should lead to a less volatile market, because more of those involved will be primarily institutional investors. Bankers in Saudi Arabia have argued this for years. A greater involvement of institutional investors will demand more, and better, research. Retail investors, which will continue to dominate the market, will also benefit from the move, as they will find a clearer, more rational price guide.

But the timing, in late August, of the announcement that foreign investors could take exposure to individual equities through swaps is slightly worrying. It suggests that the capital markets reform process in Saudi Arabia is more a reaction to events than structured.

Just a week before, the Saudi Capital Markets Authority began revealing the identities of investors with a stake of more than 5% of any company: an important move towards better transparency. But the gates were opened to foreign investors largely because the index has fallen so far in 2008, when many had hoped that it would rise, or at least stay stable – particularly with the oil price so high.

The entry of foreign investors into the Saudi market should cause the index to trend upwards. Some quality stocks are undervalued at the moment, and there is pent-up demand among foreign investors.

But the timing of the opening shows that the Saudi authorities are still setting the highest priority on the interests of small-scale domestic retail investors. The stock market is still at the whim of those who would use it as a political tool, and a means to redistribute wealth. Its performance is still far from being mostly a reflection of corporate earnings growth expectations – as its movements this year might demonstrate.