JEDDAH — The process of opening up the stock market should also be accompanied by increased transparency from administrative bodies, through the availability of consistent macro-level information, Riyadh-based Jadwa Investment said Sunday in its “Update on Opening Tadawul Up to Foreign Investors”. It said countries that have some of the most sophisticated and advanced stock markets also have a body of pre-defined periodic statistical publications made available by public bodies. In specific, the availability of timely and consistent macro-level data, such as economic and demographic statistics, contribute to private information gathering and dissemination, all of which, in turn, contributes to developing well-functioning stock markets. “Specifically, we see the lack of consistent macro-level economic information partly leading to a disconnect between the performance of the Saudi stock market and macro-economic fundamentals of the Kingdom,” it said. Therefore looking ahead into 2015, although “we see the TASI improving, the increase in prices and values of stocks will not necessarily reflect the Kingdom's strong macro fundamentals, but perhaps will be reflective of short sharp movements dictated by oil prices, regional geopolitical developments and international economic performance. In the long-haul we expect to see more of a connect between the Saudi stock market and the domestic economy,” Jadwa pointed out. The CMA has confirmed that the opening of the stock market is to support institutional investors and reduce the role of retail investors. The draft proposals have obviously been carefully considered to reflect this goal. After consultation with various relevant parties, the full rules for participation will be published on 4th May. “We believe that one of the results of the consultation will mean that definition of QFIs and QFI Clients will include sovereign funds, public and private pension funds or endowments, foundations and family offices. We view the inclusion of such entities as an overall positive, since they are major investors in the global marketplace and stable in the nature of their investment patterns. Furthermore, Jadwa said it is also worth clarifying certain provisions in the draft proposals so to eliminate any unintended ambiguity and potential misunderstanding. In particular, we believe that the role of authorized person's (AP) relationship with QFIs has not been fully detailed. In specific, some clarification over whether APs are likely to be able to manage QFI clients fund would be welcome. Also, banks, brokerage and securities firms are included as institutions that could be permitted to participate as QFIs in the Saudi stock exchange, but, at the same time, the limit set for QFIs for assets under management (AUMs) is at $5 billion (SR18.75 billion). Since many banks, brokerage and securities' firms do not participate in asset management, this could limit their inclusion. Lastly, we believe an elaboration on the exact nature and timing over the proposal to gradually reduce the AUMs requirement from $5 billion (SR18.75 billion) to $3 (SR11.25 billion) would be beneficial to both local and QFI participants. Back in August 2014 the CMA set out draft rules for the participation of investors in the Tadawul. Included in these draft rules are the limitations for QFI participation in the Saudi stock market. These are: • QFIs wanting to participate in the Saudi stock exchange will have to have at least $5 billion assets under management (AUM) (possibly reduced to $3 billion) and have been operational for a minimum of 5 years. • Each QFI (including affiliates) can only hold a maximum of 5 percent of issued shares of any one listed company. • All foreign investors (including resident and non-resident, swaps and QFIs) have a combined ceiling of 49 percent ownership of issued shares, in any one listed company. • QFIs together can only own a maximum of 20 percent of issued shares of any one listed company. • Swaps and QFIs can only own up to a maximum of 10 percent of aggregate stock market value of all listed companies. Last week the Capital Markets Authority (CMA) confirmed that the region's largest, diverse and most mature capital market, the Tadawul, will be open to qualified foreign institutional investors (QFIs). In April 2015 the Saudi stock market's capitalization stood at $528bn, equivalent to two thirds of Saudi GDP, making it larger than the Mexican stock market. When compared regionally it is almost the same size as all the other equity markets in the Gulf combined. Opening up the market is likely to lead to inclusion into the MSCI emerging market index by mid-2017, with as much as $40-50 billion of total foreign inflows. The Saudi stock exchange's trading activity is dominated by local retail investors. According to the CMA, at the end of 2014 around 2.4 million retail investors had invested in listed companies, holding just over a third of total listed Tadawul shares by value. Currently, retail investors in Saudi Arabia account for a higher proportion of traded volumes, at 90 percent, when compared to other large market indices. In India, retail trade volumes account for around 34 percent, with retail investor volumes much smaller in the US, where they account for less than 2 percent. Retail investors, in general, tend to have larger risk appetites and shorter investment horizons compared to their institutional counterparts. As a result, the TASI exhibits higher levels of volatility over a shorter time period. For example, 10-trading day volatility at 2.3 times the volatility of the S&P 500 Index and 1.7 times the volatility of the Bombay Stock Exchange (BSE). Over a longer period volatility in TASI falls in line with major emerging market indices (Figure 5). The CMA's draft proposals have only approved institutional investors and not individual investors. Institutional investors, in general, play an important role in developing financial markets since they act as conduit to channel individual savings into capital markets through longer term investment horizons. The opening up of the Saudi stock market, we believe, is therefore an initial step in the longer term objective of gradually moving towards more developed stock markets, where institutional investors are more prevalent over their retail counterparts. Tadawul surges Saudi Arabia's bourse surged on Sunday after the kingdom's securities regulator said it would open the market to direct foreign investment from June 15, while many other markets in the Middle East were weak. The main Saudi index rose 4.0 percent, its biggest gain this year, to 9,620 points on its highest volume in 11 months. It broke minor technical resistance at the late March high of 9,377 points and stood above the 200-day average, now at 9,572 points. — SG
