‘Why Saudi stocks will be your best investment this year’ ran the breathless headline in a prominent British broadsheet last week. Last week’s announcement that the kingdom will finally open up the Tadawul All Share Index to foreign investors is a rare piece of good news in a difficult couple of months for Gulf stocks, but there’s no need to get carried away just yet.
For starters, the timing is still uncertain. Government approval — the biggest obstacle to the move — may have been giving, but the Capital Markets Authority (CMA) will still need to put in place rules, and there is little inkling that this will be signed off this year. Only a few large asset managers will initially be allowed to take part, and there is, of course, no timeline as to how quickly the bourse will open up even further.
What does this mean for stock exchanges in the UAE and Qatar? Anything that brings a wider focus on the Gulf on the part of major institutional investors has to be good news. However, there is also a concern that such investors might be more attracted to a far larger and more diversified market — particularly given the recent travails on the Dubai Financial Market. The market cap of the Tadawul is larger than that of the UAE, Qatari and Egyptian bourses combined. While the Dubai, Abu Dhabi and Qatari bourses were all in top ten of the most volatile stock exchanges in the world during the first half, the sheer size of the Tadawul makes it more stable.
Its regulator also has a much better reputation. The CMA, expressly backed by King Abdullah, has been working hard for some years to counteract speculation, although the threat is still there. Back in 2009, the CMA handed one of the Tadawul’s most powerful retail investors, Mohammed Bin Ibrahim Bin Mohammed Al Issa, a fine for insider trading, a rare instance of a prominent individual being ‘named and shamed’ in the Gulf. A board member for Saudi Telecoms Company (STC), Saleh Al Hajjaj, was similarly fined in 2010. Then, in 2012, local media reported that King Abdullah had asked the CMA specifically to investigate trading violations even if they involved members of the royal family.
There are a few words of warning, though. The index as a whole may be largely stable, but some individual stocks — particularly those with free floats of 10 percent or less — are still exceptionally vulnerable to manipulation. Another cautionary tale comes in the form of Saudi Integrated Telecom Co (SITC), which floated in 2011, and quickly saw stock values rise from an initial public offering (IPO) price of SR10 to SR50, driven by frenzied retail investors. However, the CMA halted trading in February last year, with the stock price at SR24, without the company even having started operations. SITC was liquidated by royal decree only three months later, leaving many investors out of pocket.
But there’s no doubt that many of Saudi Arabia’s blue chips will be attractive to international investors. As most analysts have already pointed out, SABIC — the Gulf’s largest listed firm and now one of the world’s biggest corporates — will garner huge attention. The company is the lynchpin of Saudi Arabia’s strategy to extract more value from its crude by processing it into chemicals rather than just exporting it. Given the kingdom’s heavy budgetary spending on housing and infrastructure, developers like Dar Al Arkan may come under the microscope. The decision by National Commercial Bank, the kingdom’s largest lender, to list 15 percent of its shares in the third quarter looks like good timing. And then there is Ma’aden, the government-backed miner which is responsible for developing all of Saudi Arabia’s vast — but relatively unpublicised — mineral deposits.
So while global asset managers will no doubt be licking their lips at the prospects of taking a slice of the Tadawul, they may still have some time to wait. But at least the wheels are finally, officially, in motion.