Deutsche Bank AG, Europe’s biggest bank by assets, expects Saudi Arabia will soon allow foreigners to invest directly in local company shares, joining hedge fund Passport Capital LLC in predicting the market is set to open.
“I am convinced that the market will open up to foreign investors and part of me is very optimistic it’s going to be soon,” Jamal Alkishi, chief executive officer of Deutsche Securities Saudi Arabia, said in an interview in his Riyadh office Feb. 11. “I think the leadership sees the benefits of doing so, but they just want to make sure that every facet is examined and thoroughly understood before plunging into this.”
International banks are boosting their presence in Saudi Arabia as investors seek greater access to the Arab world’s largest bourse and most important economy. The kingdom is the top emerging market and direct foreign investment in equities, which could happen in the next year, may attract as much as $30 billion of inflows, John Burbank, founder of $3.7 billion San Francisco-based hedge fund Passport Capital LLC, said Feb. 7.
Saudi Arabia, which last year said it will open the gauge gradually, only allows non-resident foreigners outside of the six-nation Gulf Cooperation Council to invest through equity swaps and exchange-traded funds. A relaxation of restrictions on foreign investment in the $387 billion stock market may reduce the influence of retail investors, Alkishi said.
Morgan Stanley and Credit Suisse Group AG are shifting their regional equities bases to Riyadh from Dubai, while VTB Capital Plc, the investment banking unit of Russia’s second-largest lender, said last month it may set up an equities business in the Saudi capital. Deutsche Securities is one of 30 brokerages in the kingdom, according to Saudi bourse data.
An opening up of the market to foreigners “will benefit our business a great deal in terms of our custody business, our cash equity business and our equities business in general,” Alkishi said.
Saudi companies are boosting profitability after the kingdom’s $727 billion economy expanded 6.8 percent last year, five times more than developed markets, according to data compiled by Bloomberg. The government is pursuing more than $500 billion of spending to build roads and airports, expand industry and create jobs.
Overseas investors find Saudi petrochemicals, banking and telecommunication stocks attractive, according to Alkishi. The benchmark Saudi Tadawul All Share Index includes Saudi Basic Industries Corp., the world’s largest petrochemicals company, as well as Saudi Telecom Co., the Middle East’s largest phone company by revenue and market value.
“The place that we probably have by far the biggest weight relative to other people would be Saudi Arabia, Burbank said in an interview with Bloomberg Television. The nation is the fund’s “favorite emerging market,” he said. Passport has invested 17 percent of its capital in the bourse and sees a potential opening in the next year, he said.
Deutsche Bank fell 1.2 percent to 36.75 euros as of 10:31 a.m. in Frankfurt and has gained about 12 percent this year.
The Tadawul, which is more than three times the size of gauges in the United Arab Emirates combined, underperformed peers last year with a gain of 6 percent versus a rally of 15 percent for the MSCI Emerging Markets Index of developing nations. The gauge has a dividend yield of 3.5 percent, compared with 2.7 percent for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
“I think moderating the huge influence of retail investors by bringing in institutional fundamental investors into the market will be highly beneficial,” Alkishi said. “I don’t expect a massive avalanche of volume once the market opens up.”
Saudi Arabia this month replaced the head of its Capital Market Authority with Mohammad Al al-Sheikh, who represents Saudi Arabia at the World Bank. Al al-Sheikh holds a Harvard Law degree and specializes in mergers and acquisitions, capital markets and project finance, according to the website of U.S. law company Latham & Watkins, which practices in the kingdom in association with Al-Sheikh’s law office.
“The newly appointed head of CMA knows the market extremely well,” Alkishi said. “He knows the regulations and knows how keen international investors are to be exposed to the Saudi business.”