There are plans in Riyadh to open up Saudi Arabiaâs capital markets, a move that could transform asset management in the country. George Mitton reports
Saudi Arabia is a whale in a small sea. It is the only Arab country in the G20, has a population of 27 million and is the world’s largest oil exporter with revenues of $1 billion a day.
If Saudi Arabia were to join the MSCI emerging market index, it would have a weighting similar to South Africa – roughly ten times that of the United Arab Emirates.
But this giant remains a formidable market to access. Visa controls mean it is difficult for nationals of non-Gulf Co-operation Council states to visit. The nation’s clerics and religious police enforce an austere brand of Islam that is alien to non-Muslims. Foreign investors cannot directly access the country’s stock exchange, the Tadawul, they must buy swaps instead.
It is expected that this last barrier will be lowered when Saudi Arabia adopts a model pioneered in China and issues licences for large foreign institutional investors to trade on the Tadawul. Will this herald a broader opening up of the Saudi economy, and what will this mean for asset managers?
Regulations
Some fund houses have already tried to access Saudi Arabia, with limited success. BNP Paribas Investment Partners formed a joint venture in 2008 with Saudi Investment Bank, but has since withdrawn from the country. One problem was that the Saudi regulator, the Capital Market Authority (CMA), would only issue one licence to the joint venture.
Sources told Funds Global that BNP Paribas IP invested $14 billion in the project and got back just $2 billion when it pulled out. BNP Paribas IP declined to comment.
Of course, wealthy Saudis are used to investing money offshore with private banks, and asset managers have courted large institutional investors, such as the Saudi Arabian Monetary Agency (Sama), a sovereign wealth fund, since the 1960s, largely by flying in salespeople for meetings.
But as the Saudi economy opens, international firms see new opportunities among retail investors and family offices, and want to establish operations on the ground alongside Saudi players such as Samba Capital and Al Rajhi Capital.
French asset manager, Amundi, has recently signed a distribution deal with a Saudi manager, NCB Capital, to target the market.
Jean-François Pinçon, deputy head of sales, says he believes many Saudis do not want to hold their wealth offshore any more. “There is a new layer of the population that have more recent wealth that want their money to be managed locally,” he says.
Religion
Others share the view that reaching the wholesale Saudi market requires a local presence and preferably local staff.
“You may not need a local to sell in Kuwait, but given the depth and breadth of Saudi, it is helpful to have a local national to sell in Saudi Arabia,” says Graham Elliot, managing director, head of Middle East and Africa, Robeco, who has ambitions to gain new clients in the country.
One aspect that is particularly important is the influence of religion on people’s investment decisions. Pinçon, quoting NCB data, says 80% of Saudi funds are sharia-compliant. The funds market is worth a total of $24 billion, he adds.
There are signs that Saudi Arabia is moving to open its economy. Last year, King Abdullah bin Abdul Aziz appointed a new governor of Sama, Dr Fahd bin Abdullah Al-Mubarak, who is a United States-educated former chairman of Morgan Stanley Saudi Arabia and said to be in favour of opening up the country’s capital markets.
In April, MSCI said it was reintroducing indices that cover the Tadawul having withdrawn Saudi shares from its Gulf and Arabian indices in 2009 after a dispute over licensing. The indices are designed for institutional investors that invest indirectly in the Tadawul.
Delaying tactics
There are also moves within Saudi Arabia to promote the financial industry. The country is building a financial district in Riyadh that will house the headquarters of the stock exchange, CMA, banks and asset managers. The project is under construction.
But when will Saudi issue foreign licences to trade on the Tadawul? Press reports at the beginning of the year said these were imminent, citing unnamed foreign bankers who had helped draft a law for qualified foreign investors.
Yet it is possible these reports actually put back the start date, by giving conservative voices in the Saudi authorities the opportunity to delay the plans.
It is not likely that the Tadawul will open up until after Ramadan, which ends on August 19. But the change could happen soon after.
Senior asset managers in the region say the process is already well advanced, with discussions going back two years or more. All that is required is the sign-off of some key decision makers, they say. One senior investment professional reports a “firm belief in Riyadh” that the opening-up will happen by the end of the year.
Cautious
That said, it would be understandable if the Saudi authorities hesitated. The regulators are keen to prevent an influx of “hot” money that could flow out of the market as fast as it flowed in. The bulk of Saudi investors are not highly sophisticated and the authorities want to protect them.
Another reason to delay is the lack of an urgent need for foreign capital. There is no shortage of liquidity on the Tadawul. The average price-to-earnings ratio is currently more than twelve, higher than on most Middle East stock exchanges (see pages 36-37 for more market information).
The Saudis can afford to be cautious, which is why the only foreign investors they want to invite are institutions with $5 billion or more to spend.
But once the scheme begins, will investors come? If the scheme causes Saudi Arabia to join emerging market indices, this would be a spur to action for those investors that are index-driven.
There are some good reasons to invest, too. Asset managers in the region say the standard of corporate governance is high compared with neighbouring states. Plus, there are huge infrastructure projects underway that will boost the construction and logistics sectors.
Some Saudi companies are expanding overseas. Dairy firm Almarai has a deal with Pepsi to spread to Asia and Africa, while chemicals giant Saudi Basic Industries is enjoying high demand from China and other emerging economies.
There will be challenges. Financial information in Saudi Arabia is mostly issued in Arabic only, rather than in Arabic and English as is common elsewhere in the Gulf.
But senior investment managers say there are rewards for those who can enter the kingdom.
“Saudi is an attractive market in its own right, irrespective of it opening up,” says Mohammed El Hashemi, executive director of asset management at Invest AD.
©2012 funds global