* Saudi Arabia as big as other Gulf markets combined
* Could eventually attract over $50 billion of new money
* Other regional markets likely to benefit from halo effect
* Increases vulnerability to global market volatility
* But reform may presage more liberalisation in region
By Olzhas Auyezov
DUBAI, July 23 The opening of Saudi Arabia's
bourse to international investors may double the amount of
foreign money flowing into the Gulf's securities markets, making
it more attractive to invest in the region but also bringing new
Not only Saudi Arabia but other Gulf markets are likely to
lure more foreign funds after Tuesday's announcement that the
Saudi bourse will open to direct investment by foreign
institutions in the first half of 2015. [ID:nL6N0PX0UX}
That is because the size of the Saudi market, the Arab
world's biggest, means the Gulf will at a stroke become a much
bigger and more diverse destination for international funds.
The Saudi bourse has a capitalisation of about $550 billion,
roughly the same as all other Gulf Arab markets combined, and it
accounts for approximately two-thirds of the region's stock
trading turnover. Limited liquidity has long been a complaint of
foreign investors about the region; that will now improve.
Just as important is the fact that Saudi Arabia offers a
range of companies which the rest of the Gulf can't match. They
include giants such as petrochemical conglomerate Saudi Basic
Industries Corp (SABIC) but also firms in fast-growing
sectors such as retailing, health care and food production that
are directly exposed to the region's rapid population growth.
Leading Saudi firms in these fields include retailer Jarir
Marketing, food producer Savola Group and
hospital management firm Dallah Healthcare, all
private firms. Other Gulf markets generally lack such listed
firms and are heavily tilted toward real estate, banking and
There are also risks, which is why the Saudis delayed
implementing their reform for years. The entry of foreign money
could destabilise markets, partly by encouraging local investors
to bid stock prices up to unsustainable levels ahead of time.
It will also expose markets to global instability in a way
that the region has not experienced before. Previously, U.S.
interest rate increases or emerging market crashes meant little
to Gulf investors; now, those events could trigger mass pullouts
of money by foreigners.
Overall, however, the Gulf looks likely to enjoy a "halo
effect" from the opening of Saudi Arabia. As more foreign
institutions find it worthwhile to establish operations in the
region, money will spill over into many of its markets.
"Markets such as the UAE and Qatar will benefit from the
additional investor interest in the region and the spillover
effect from investor flows," said Salah Shamma, co-head of
regional equities at big U.S. asset manager Franklin Templeton.
"We believe the region is taking the right steps in
establishing itself as a single, identifiable subset within the
general emerging-market universe - like Latin America, southeast
Asia or emerging Europe."
Much will depend on decisions by major equity index
providers such as MSCI on whether to include Saudi Arabia in the
benchmarks used by many fund managers.
There is room for disappointment; Riyadh, which has not yet
detailed the rules covering its reform, will have to balance its
desire to keep control of its top firms in local hands with the
need to satisfy MSCI's requirements that minimum amounts of
stock are made available for foreign investment.
In the past, many up-and-coming bourses have started out in
"frontier market" indexes, before being upgraded to "emerging
markets" as they open up further.
That path looks difficult for Saudi Arabia, however, because
it is so big; adding it to MSCI's frontier index would leave it
and Kuwait combined accounting for well over half of the entire
index. For that reason, some fund managers think Saudi Arabia
will move directly to the emerging market index.
About $1.3 trillion of assets under management are
benchmarked to that index globally. Fund managers think Saudi
Arabia might get a weighting of up to 4 percent, which would be
equivalent to $52 billion. There would be additional inflows
from funds using other benchmarks or no fixed benchmarks at all.
There is some concern that in the initial phase, Saudi
Arabia could end up sucking funds from other Gulf markets.
Investors in Qatari petrochemical firm Mesaieed Petrochemical
Holding, for example, may move money to the more
liquid shares of SABIC.
The smallest Gulf stock markets, particularly Bahrain and
Oman, may find it impossible to compete for attention with the
Saudi leviathan. Most fund managers, however, think a majority
of Gulf markets will benefit.
Asha Mehta, lead portfolio manager for frontier market
equity strategy at U.S.-based Acadian Asset Management,
predicted the region would develop a shared pool of foreign
money that dipped into a range of markets.
"Other Gulf countries will benefit from bigger inflows into
Gulf funds," she said, adding that markets in the region had
distinct investment themes so foreigners would want to remain
exposed to a range of them.
MSCI's upgrade of the United Arab Emirates and Qatar to
emerging status in May caused a bubble to form. Local retail
investors frantically bought stocks before the index change took
effect, hoping to sell them to foreigners at huge mark-ups. The
overheated markets crashed days after the upgrade happened,
destroying about $50 billion of value in the UAE.
Mehta said it was "very reasonable to expect" a similar
boom-bust cycle in Saudi Arabia. But there are reasons to think
Riyadh can avoid such extreme volatility as it opens up.
For one thing, the UAE and Qatar markets were recovering
from the global financial crisis and still cheap when MSCI
announced last year that it would upgrade them.
Saudi Arabia is not cheap - after two years of gains, its
index is trading at about 17.5 times last year's
earnings, not far from its long-term average. So investors will
have less temptation to bid up prices before the market opens.
Also, inflows of foreign money will be gradual. Index
compilers will not add Saudi Arabia immediately; MSCI says it
may not make a decision until June 2016, implying actual
inclusion might happen in 2017 at the earliest.
Saudi regulators are likely to grant investment licences
only gradually to avoid destabilising the market. Riyadh is
expected to adopt an investment framework similar to one
introduced a decade ago by China, which has expanded foreign
participation in its market through incremental steps.
Another source of risk is the Gulf markets' growing
sensitivity to movements abroad. Saudi Arabia will be opening
up, for example, around the time that U.S. interest rates are
expected to start rising after years at record low levels.
But Saudi Arabia and the other rich Gulf economies - the
UAE, Qatar and Kuwait - are running big budget and current
account surpluses. Unless oil prices plunge for a sustained
period, these surpluses will probably keep the Gulf more
insulated from global instability than other emerging markets.
Also, many analysts think the Saudi market opening may lead
to additional investor-friendly reforms in the region. The UAE
and Qatar, for example, may compete with Riyadh through steps
such as raising ceilings on foreign ownership of their firms.
In Riyadh, there is speculation that the Capital Market
Authority may soon follow the stock market reform with an
opening of the market in riyal-denominated Islamic bonds to
"The CMA should seek to achieve this and provide the
necessary infrastructure for it," said Ihsan Abu Hulaiga, a
prominent Saudi economist.
(Additional reporting by Nadia Saleem; Editing by Andrew
Torchia and David Stamp)