Kuwait – July 2014 – Global Investment House (Global) issued earlier this week a note on the statement released by the Saudi cabinet authorizing the Capital Market Authority - at a time it sees as appropriate - to allow foreign financial institutions to buy and sell stocks on the Saudi stock market, according to rules to be laid down by the CMA.

This opening has been long awaited by the markets and will further open the market to foreigners who are now able to invest in the market only indirectly through swap transactions, mutual funds and a few ETFs. The Saudi stock market, at over USD500 billion in market capitalization, is the largest equity market in the GCC, with about 50% of the total market capitalization and 70% of trading volumes.

As the release by the cabinet has stated, the CMA still has to publish the timing and ultimate rules by which foreigners will be allowed in the market. The CMA is expected to publish the rules over the coming months and we believe the actual opening of the market will be in the first half of 2015. We expect there will still be restrictions on foreign investors in the markets with foreign ownership limits likely to be placed on companies. Also, we believe foreign investors will need to be approved by the CMA, possibly in schemes similar to those run in China (more restrictive) or India (more open).

In China, Qualified Foreign Institutional Investors (QFII) are approved by the Chinese authorities and given specific quotas for the amount they can invest in the Chinese markets. As of June there were 229 QFII, mainly large institutional investors such as UBS, Morgan Stanley, HSBC, Goldman Sachs, etc. The tight restrictions on approving QFII allows China to exclude hedge funds and other types of investors they deem may cause excessive volatility in the markets. The overall QFII program will increase to USD150 billion, although only USD43 billion has been allocated to specific investment companies so far.

In India, Foreign Institutional Investors (FII) are allowed to invest in the Indian equity and debt markets if they meet requirements to be deemed Qualified Foreign Investors (QFI). As of 2013, there were approximately 1,750 FII with about USD175 billion in investments in the Indian markets. The FII/QFI scheme in India is less restrictive than the Chinese scheme as investors just have to meet KYC requirements and no individual quotas are set on each company.

The news out today on the opening of the Saudi market should be positive for the TASI. At its close yesterday at 9,750, the TASI is up 14.2% YTD and 43% since the end of 2012. While foreign investor flows will likely not start for some time yet, we believe the market will move higher in anticipation of the increased investments. In addition, depending on the level of openness of the market, the Saudi market may be considered for induction into the MSCI Emerging Markets index in the future. If the approval of foreign investors is restrictive as in the Chinese QFII example, this is less likely, however a more open scheme such as in India would mean a greater chance of eventually moving directly into the MSCI EM index, we believe.

Released by Global Investment House.

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