Investors such as Randall Coleman, co-portfolio manager of Forward Management’s $160 million Forward Select Emerging Markets Dividend Funds, who had been waiting for a long time for the June 15 opening of Saudi Arabia’s stock market to foreign investors, are not likely to rush in, because of the rather onerous set of eligibility conditions that qualified investors have to meet.
It was a given that direct access to one of the most coveted bourses in the world would be gradual. Until now, foreign investors have only been able to invest in Saudi names through ADRs, listings on exchanges in the United Arab Emirates or via synthetic SPVs, but the list of limitations that the Saudi regulator has imposed are “complicated and disappointing,” Coleman said, “and though I think that there will be investors going in, if ever there was a hope for a giant rush in the early phases, that is not going to happen.”
Investors are hoping for greater clarity on the list of regulations on what constitutes a Qualified Foreign Investor (QFI). The process entails a registration process, Coleman said, and investors need to have at least $5 billion under management, “which would weed out a lot of the smaller guys.” Also, the total QFI ownership for a single stock is limited to 20% and there is a 49% cap on the total number of foreign investors in a particular stock, and that includes resident foreign investors. A single QFI can only own 5% of an individual name and for the market as a whole, QFI ownership is capped at 10%, Coleman said.
“You put all of that together, you look at all the restrictions, and it’s not that exciting,” he said. “This is a very big and very liquid market, but we are pretty underwhelmed by the rules right now and we’ll wait till they ease up.”
Which should be the case going forward, since Saudi Arabia is very keen on inviting foreign investors into its stock market and the plans to open it up have been in the works for a long time. Investors have also been excited to get into the large and highly liquid market, which has been largely driven by retail investors.
The market is also very well diversified, Coleman said. It features a large number of oil and gas companies, of course, but it also includes a decent portion of industrials and consumer companies of different kinds, including companies in the healthcare and real estate sectors.
“We’ve seen some IPOs this year from a number of consumer companies, including a large hardware store that is sort of like the Home Depot of Saudi Arabia,” he said. Coleman expects that those investors who already own swaps (he does not) will be the first to enter the market, as they will unwind those notes and replace the holdings with direct share ownership.
Saudi Arabia has been looking to liberalize its economy for the past decade, and has been prioritizing both diversification (to decrease the economy’s vulnerability to swings in oil price dynamics) as well as privatization. In 2014, the country attracted around $9 billion in foreign direct investment. The opening of the Saudi bourse is an essential step in the liberalization process.
Saudi Arabia, though, has taken a hit because of the lower oil prices, and it is also contending with political instability in the Middle East, including the problems in Syria, Iraq and Yemen. The Kingdom also has a very low human rights record with respect to women, minorities and migrant workers.
Nevertheless, it is a wealthy economy and one that is definitely attractive to investors. Saudi Arabia also has a very young population (more than half of its nationals are under the age of 30), which means that consumption should be able to drive the economy more as it becomes more diversified, Coleman said.
Ultimately, the country would like for its stock market to be included in the MSCI Indices. Just how that will pan out and when it will happen, though, are yet to be seen, Coleman said.