Open sesame for Saudi stocks
Foreigners are expected to rush in after regulator opens Riyadh stock market to non-GCC nationals. Will they buy?
August 25, 2008 1:47 by kippreport
Are Saudi stocks attractive enough to warrant a flood of incoming foreign buyers? The country’s local investors certainly seem to think so. Saudis and other GCC nationals have been buying like mad lately with the expectation that new rules giving foreigners access to Saudi equities will lead to a surge in share prices.
Investors welcomed a recent decision by Saudi Arabia’s Capital Markets Authority to open the Saudi stock markets to foreigners via local intermediaries. The CMA move gave the Saudi bourse, which is currently reliant on local retail trading, a much-needed boost in a country where a majority of the citizens owns shares on the Tadawul, as the Riyadh stock exchange is known: The main Tadawul index jumped over 5 percent on the heels of last Wednesday’s announcement.
The new rules will give non-Saudis access to Saudi stocks via so-called equity swap agreements. In a nutshell, foreigners will be allowed to buy and sell shares without really owning them; actual ownership (and voting rights) will still rest with licensed local go-betweens.
The Saudi stock market has long been the most closed in the region. Previously, the only access non-GCC nationals had to Saudi equities was via a select group of mutual funds, and according to Bloomberg, it was only last September that other GCC nationals were given the right to trade shares on the Tadawul All Share Index.
This has hardly prevented a flood of new listings in recent years. With much of the local citizenry flush with cash on account of the oil boom, an initial public offering (IPO) has become a preferred way for Saudi companies to raise money. Many firms in the kingdom – insurance providers, for instance – are required (or at least strongly encouraged) by the government to list shares. You might call it an attempt to democratize capital on the part of the Riyadh government.
It’s unclear when the new rules for foreigners will come into effect, but several institutions – including Deutsche Bank and HSBC – have already announced they’ll be offering Saudi shares. The likes of Morgan Stanley and Goldman Sachs are likely to follow.
Maybe foreigners really are itching to buy Saudi stocks. After all, the world’s financial cognoscenti in New York and London rightly view the Gulf is as a haven of liquidity: In a global financial market still reeling from the fallout of the US subprime crisis, the Gulf is seen as one of the few places in the world right now where bankers feel there’s big money to be made. And despite being closed to foreigners, the Tadawul’s market capitalisation of $500 million still represents 1 percent of the total global equities market – nothing to sneeze at.
But in all the excitement, it’s easy to lose sight of one pressing question: With Gulf economies booming, why have the region’s equity markets fared so poorly this year? Following a fourth-quarter surge in 2007, markets in Saudi Arabia and the UAE have stagnated or fallen for much of the year despite optimistic New Year’s pronouncements from analysts seemingly besotted by the boom. The Tadawul All Share Index is down roughly 20 percent since the start of the year. Are foreign institutional buyers really going to be impressed by charts like this one?
One suggestion: Stocks are already overvalued, and some companies have bitten off more than they can chew. Take Saudi industrial giant SABIC, Saudi Arabian Basic Industries Corporation, which accounts for 17% of the Tadawul index. Despite a massive expansion program – including a $11 billion purchase of GE Plastics in the US last year – SABIC’s share price has fallen 37 percent since January on the back of slowing orders from the US, Europe and China. While some analysts are issuing “buy” recommendations, the market hasn’t paid much attention, and a pessimistic note from Business Intelligence Middle East warns the stock may fall further due to a “petrochemicals glut in the years ahead.”
That’s one assessment among many, but the point is this: As the Saudi economy gradually opens up, it’s easy to buy into a gold-rush mentality. It may even be lucrative. But smart foreign investors will be taking a sober look at individual companies’ balance sheets, comparing their price-earnings ratios to international benchmarks. Depending on whom you ask, Saudi shares may yet have room to disappoint.