Saudi Arabia open to foreign investors? Not really.
The Saudi market finally opened to external investors for the first time; however, we are still a few years away from the market opening up to the average investor. There’s a number of rules regarding foreign investment, we’ve highlighted the major ones below:
- No investors allowed with less than $5bn in AUM and less than 5 years of experience. These investors would be known as ‘qualified foreign investors’ (QFI)
- Foreigners in aggregate cannot own more than 49% of a single stock
- One investor cannot own more than 5% of any single equity name
- QFI in aggregate cannot own more than 20% of a single equity name
- All QFI holdings in aggregate cannot own more than 10% of the whole market
Saudi Arabia is keen to attract external capital and increase the institutional investor base, but as with most things concerning Saudi Arabia, they want it done on their own terms. The shift towards a more open market will be slow and gradual. We do not envision that Saudi Arabia will ever take away rule no. 2 away. All the other rules, we think may gradually be lifted.
We have provided a guide on investing in Saudi Arabia here. It’s dated, from 2012, however, most of it still applies. We foolishly thought the draft legislation concerning the market opening may happen by the end of 2012. Well, three years later we can say it’s finally in effect.
Given all the rules and restrictions on the Saudi market, we cannot see MSCI including Saudi Arabia in the EM index, even by 2017 as the Saudis are targeting. The Frontier Markets’ index would be overwhelmed by Saudi Arabia, so the country is likely to remain ‘off-index’ for the next few years. This is the main reason why Saudi Arabia remains a Frontier Market as far as we are concerned. For more information on our process, see here.
If you don’t manage $5bn or more, the only thing that has changed if you are an investor in Saudi Arabia via certificates or via an institutional investor is there will hopefully be some more liquidity in the market and there will be a higher emphasis on corporate governance. This has been a stated objective of the Saudi government, but we do not expect this to produce any tangible difference to the opaqueness with which Saudis run businesses.
Despite a fall in oil prices, the Saudi market is up over 15% for the year, largely driven we believe by an expectation of demand from foreign investors for Saudi equities. In the approximately 2 weeks that the market has been open, the reception has been lukewarm. The opening was poorly planned, happening 2 days prior to the Muslim holy month of Ramadan. In Ramadan, liquidity in the Tadawul index declines by about 40%. International investors will likely take their time to learn about the market, and then invest as value presents itself.
Saudi Arabia over the last decade has been able to significantly improve its financial situation, and low prices are not, the economy is unlikely to slowdown, given the demographic dividend that Saudi Arabia is currently enjoying with more than 1/3 of its population under 25. The figure below provides an overview of Saudi Arabia’s debt/GDP over the past 16 years.
Saudi inflation is under control, and the government is making significant moves to reduce oil consumption within the country, so there is more oil to sell abroad. Oil in Saudi Arabia is heavily subsidized, so the less oil the country uses, the more money it makes. This article has a great overview of some of the innovative and daring things the Saudi government is undertaking.
All of these factors indicate a fairly bright future for Saudi Arabia absent political or social upheaval. The equity market has responded in-kind with very healthy returns year to date. Over a longer period the market has been far more mixed reflecting a heavy reliance on oil and oil by-products. The table below outlines the returns for the Tadawul Index.
Saudi Tadawul Index Total Return
The market has enjoyed a healthy level of liquidity for quite some time. The table below outlines the average liquidity by month for the Tadawul index. The recent drop-off is an annual event which we have alluded to earlier, the ‘Ramadan drop-off’
The table below provides an update of the investable companies in Saudi Arabia (those with a market cap over $50mm USD). There are 170 of them, indicating the robustness of the market, with an aggregate market cap in excess of $550bn.
The market is not much more concentrated than the Canadian equity market. The notable areas where the market is lacking is healthcare and technology. It is also worth noting that Saudi Arabia’s main energy company (Aramco) is not publicly traded.
We hope you found this helpful. If you have any questions, as always, please let us know.
FYI, if you’re wondering what the photo alongside this article represents, it is the most delicious chicken chain that we have had the privilege to frequent. It is fried chicken paradise with a secret garlic sauce that makes all in the world ‘right.’