Outlook for the capital markets in Saudi Arabia by Alistithmar Capital

Hesham Abo Jamee, CEO of Alistithmar Capital talks about the outlook for the Saudi capital markets.

Saudi Arabia has the largest stock market in the Middle East. And the value of all companies listed on the exchange — roughly $430 billion 12/9/2015 — makes it bigger than the main markets in Russia and Mexico, according to the latest data from the World Federation of Exchanges. Also, Saudi Arabia’s securities market regulator said that it would permit off-market trading of shares in companies which had been suspended or delisted from the stock exchange.  What is the outlook for the capital markets?

The Saudi stock market today has been negatively affected by many factors particularly the geopolitical issues especially in Yemen and Syria and the sharp decline of the oil price from $120 to $40, which is a decline of some 60 or 70%.

These are the main challenges for the Saudi stock market and the Saudi economy. However we trust that the market will rebound. There are lot of positive developments in the economy and there is now the new generation government with King Salman, Prince Muhammed bin Nayef and Prince Muhammed bin Salman.

They have a lot to do for the Saudi economy and we shall see that next month with the new budget for 2016. The budget proposal will directly impact the Saudi stock market. 2016 will be a challenging year for the stock market. Most of the companies are now below their valuations.

The banks now trade at 8 or 9PE which is very low with high dividend deals in certain sectors such as cement and petrochemicals. There is a high probability of rebound in case there is positive news.

Companies listed on the Saudi stock market have relatively high dividend yields. The cement sector has a dividend of about 8%. STC has about 6% 12/9/2015 and most of the banks have about 4 or 5%. Petrochemicals have had the worst year but they have announced good dividends for 2015. I believe this will continue in the market. The average dividend yield in the market now is about 5% which is very high compared to the emerging and developed markets.

Regarding the challenges, what do you think are the major challenges and perhaps the major reforms that the authorities should consider? Do you see the stock market opening up for foreign retail investors?

The market is not ready to open up for foreign retail investors. Actually, they will not come without considering Saudi as part of the major index in the world. The timeline for opening is the first quarter of 2017 and not before.

Until then, the market is open for prequalified major institutional foreign investor with long term investment strategies. Hot money can do more damage to the capital markets. There is no shortage of liquidity. The market is liquid. The real benefit of the investors is to enhance the performance of the companies and businesses. When the qualified investors enter the companies to Saudi Arabia, they might become part of the board of directors.

That will enhance the performance of the management of the Saudi companies. Improved corporate governance is needed rather than liquidity. We need their experience regarding how to accelerate the positive growth in the companies in the Kingdom.