Increased participation from international financial institutions is primarily designed to help to enhance the sophistication and stability of the market. The additional reforms to open the Exchange to QFIs aim to enhance corporate governance among firms by enabling international institutions to have an active voice as shareholders in listed businesses. These investors are also expected to enhance research coverage and improve local knowledge and expertise, bringing benefits to all market stakeholders – listed companies, investors and financial intermediaries.
Overall stability of the market over the medium term is expected to increase with the introduction, in a measured manner, of direct investment by foreign institutions. This will come alongside moves to encourage a rebalancing of current stock market participants from individual investors – who account for approximately 34% of market ownership and 90% of monthly trading activity – to institutional investors.
Since the introduction of the swap framework in 2008, non-resident foreign investors have been net buyers in the market, providing greater stability to prices at a time when local individual investors have been net sellers. In fact the correlation in investment behaviour between these two investor classes has been negative over the last five years and nearly inverse over the last 3 months as local individual investors sold nearly SAR14bn (net) worth of shares in the market whilst foreign investors did the reverse, buying SAR1.7bn (net) of shares through the swap framework over the same period.
One of the key objectives of the QFI framework is to enhance the impact of this counterbalancing influence by increasing foreign institutional investor participation. Currently, holdings of non-resident foreign investors through the swap framework account for 1.07% of total market capitalisation, while non-resident strategic foreign partners, resident foreign investors, and GCC investors combine to account for a further 6.7% of total market capitalization.
The impact of foreign investors on the diversity and stability of our market is expected to grow as a consequence of the QFI framework, which increases the degree of openness of the Saudi stock market to foreign investors.
The QFI rules ensure that only the largest and most experienced foreign investors are allowed to enter the stock market. Indeed the rules require that foreign institutional investors have a recognized investment track record and assets under management of at least USD5bn, amongst other conditions. This means that institutions deemed to be qualified to invest in the stock market possess the highest international levels of governance, advanced investment practices, and longer term investment horizons; characteristics which are expected to enhance the stability and institutionalisation of the Saudi market.
As the largest market in the GCC with a total market capitalisation of approximately US$550 billion, the Saudi stock market is expected to draw interest from a large number of potential foreign investors.
Adel Al-Ghamdi, CEO of the Saudi Stock Exchange, commented on progress made so far:
“This is an important first step in a longer journey. Over the medium to long term, this journey will benefit all our stakeholders, from investors and listed companies, to authorized persons and qualified foreign investors.
“As the market landscape improves, not only can the Saudi Stock Exchange look to take its rightful position in global markets but also act as a means to develop, promote and fuel the vibrant Saudi economy and its future prospects as a whole.
“Saudi is home to some world-leading businesses and many that have the potential to become world leading – the participation of experienced international investors can play a role in helping these businesses reach their full potential.”
Saudi Arabia represents nearly 50% of the US$1.6 trillion Gulf economy and is the 19th largest economy in the world. For international investors the opening of the Saudi Stock Exchange represents an opportunity to gain access to one of the largest emerging and growing market exchanges in the world.
The Saudi Stock Exchange is also one of the most diversified Exchanges in the region, with its listed companies ranging from petrochemicals and retail through to financial services, construction and telecommunications, providing potential investors with opportunities in a wide variety of sectors.
For Saudi Arabia itself, increased market sophistication will contribute to economic diversification and help to further economic growth. The opening of the Saudi stock market represents a strong opportunity for Saudi businesses looking to gain access to the knowledge and experience of foreign investors and to benefit from the increasing sophistication of the market.
The Exchange will conduct an international roadshow later this year to key world financial centres including Singapore, London and New York in order to showcase the significant opportunities now open to international investors in Saudi Arabia.