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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The Saudi capital market could attract up to $35 billion if it is opened to foreign direct investments (FDIs). As the largest market in the Middle East and North Africa (MENA) region, investments are likely to cover a wide range of sectors, including the traditional energy and hydrocarbons industries. As the country targets investments to diversify its economic base to meet the demands of a growing population with a young majority, technology, manufacturing, transport, infrastructure, training, education and distribution are likely to feature as attractive investment destinations.
The Saudi Council of Ministers has approved the opening of the capital market, which has been anticipated and hoped for over a long period. Finalization of the new status will follow, once the capital market authority (CMA) has formalized the timing and guidelines, with the latter to be issued within 30 days. This will be followed by a consultation period of 90 days, with the market set to open in the first half of 2015.
Deutsche Bank Research Analyst Aleksandar Stojanovski said: "The opening of the Saudi stock market would be a major positive for the MENA region, with a total market capitalization of $1.2 trillion, where Saudi Arabia alone accounts for 45% and where regional liquidity is around $4 billion of which Saudi Arabia accounts represents 65%. With over 160 listed securities, the kingdom's stock market offers a diversified sector base.
"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 equities are currently accessible only through synthetic products for foreign investors. Estimates show less than 1% foreign ownership of the market versus regional peers, where direct investments are available, with foreign ownership accounting for about 8%.
Saudi Arabia is the most liquid market in MENA, with a six-month average trading volume (ADTV) of $2.5 billion, accounting for 65% of regional liquidity. Foreign investors, via indirect routes, currently trade only 1.1% versus the regional average of 12.2%.
Foreigners currently trade $145 million daily in regional markets. The $300 million in potential foreign incremental liquidity in Saudi Arabia could be a significant boost. Assuming the share of trades by foreign investors reaches the regional average levels, there is potential for a marginal 11% growth in Saudi Arabia's liquidity, said Stojanovski.
"With direct trading restriction by foreign investors removed, we believe that the prospect of Saudi Arabia joining MSCI (New York), emerging markets (MSCI/EM) index becomes a reality, albeit unlikely before 2017," said the Deutsche Bank consultant. "If promoted, we estimate the weight of Saudi Arabia in the MSCI/EM index to be 1.9 %, using GCC (Gulf Cooperative Council) weights in the MSCI GCC index as a proxy. While the incremental fund inflows due to eventual MSCI/EM promotion could reach up to $10 billion."
The combined weight of the MENA region could then rise to about 3%, from its current 1%, putting the region ahead of countries like Indonesia and Thailand. In 2014, the United Arab Emirates and Qatar joined the MSCI/EM index with weights of 0.58% and 0.47%, respectively.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
The Saudi Council of Ministers has approved the opening of the capital market, which has been anticipated and hoped for over a long period. Finalization of the new status will follow, once the capital market authority (CMA) has formalized the timing and guidelines, with the latter to be issued within 30 days. This will be followed by a consultation period of 90 days, with the market set to open in the first half of 2015.
Deutsche Bank Research Analyst Aleksandar Stojanovski said: "The opening of the Saudi stock market would be a major positive for the MENA region, with a total market capitalization of $1.2 trillion, where Saudi Arabia alone accounts for 45% and where regional liquidity is around $4 billion of which Saudi Arabia accounts represents 65%. With over 160 listed securities, the kingdom's stock market offers a diversified sector base.
"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 equities are currently accessible only through synthetic products for foreign investors. Estimates show less than 1% foreign ownership of the market versus regional peers, where direct investments are available, with foreign ownership accounting for about 8%.
Saudi Arabia is the most liquid market in MENA, with a six-month average trading volume (ADTV) of $2.5 billion, accounting for 65% of regional liquidity. Foreign investors, via indirect routes, currently trade only 1.1% versus the regional average of 12.2%.
Foreigners currently trade $145 million daily in regional markets. The $300 million in potential foreign incremental liquidity in Saudi Arabia could be a significant boost. Assuming the share of trades by foreign investors reaches the regional average levels, there is potential for a marginal 11% growth in Saudi Arabia's liquidity, said Stojanovski.
"With direct trading restriction by foreign investors removed, we believe that the prospect of Saudi Arabia joining MSCI (New York), emerging markets (MSCI/EM) index becomes a reality, albeit unlikely before 2017," said the Deutsche Bank consultant. "If promoted, we estimate the weight of Saudi Arabia in the MSCI/EM index to be 1.9 %, using GCC (Gulf Cooperative Council) weights in the MSCI GCC index as a proxy. While the incremental fund inflows due to eventual MSCI/EM promotion could reach up to $10 billion."
The combined weight of the MENA region could then rise to about 3%, from its current 1%, putting the region ahead of countries like Indonesia and Thailand. In 2014, the United Arab Emirates and Qatar joined the MSCI/EM index with weights of 0.58% and 0.47%, respectively.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
