Saudi Stock Opening Shut to Some as Hot Money Unwanted

Saudi Arabia is keeping as much as $40 billion of foreign investor capital waiting as it decides which institutions can participate in the Arab world’s biggest stock exchange.

The regulator will publish rules next month allowing participation for the first time by qualified foreign financial institutions starting in the first half of 2015, the Capital Market Authority said on its website yesterday. The announcement sent the benchmark Tadawul All Share Index to its highest level since May 2008 yesterday, and the strongest level since February 2008 today.

The world’s biggest crude exporter is opening one of the most restricted major stock exchanges as King Abdullah pushes to diversify the economy from oil and create new jobs. Entry to MSCI Inc.’s benchmark emerging-markets index could mean $40 billion of inflows to Saudi stocks, said Rami Sidani, the head of frontier markets investing at Schroder Investment Management in Dubai. Buying shares may be restricted initially to long-term institutional investors, according to Shuaa Asset Management.

“They have been very clear about what they are looking for, which is very large institutional investors, sticky money with long investment horizons,” Amer Khan, a senior executive at Shuaa in Dubai, which oversees more than $300 million in assets, said by telephone yesterday. “They have seen what happened during the financial crisis and they want to limit hot money.”

Overseas Holders

While avoiding the kind of market collapse seen elsewhere in the region during the crisis, Saudi Arabia lost as much as $73 billion of foreign reserves in the 10 months through September 2009. The nation’s holdings have rebounded since to over $700 billion, the third highest in the world after China and Japan.

The kingdom currently only allows non-residents to invest indirectly in shares, through equity swaps or exchange-traded funds. Overseas money managers account for about 2 percent of investments in the bourse, according to John Burbank, the founder of San Francisco-based hedge fund Passport Capital LLC. Burbank last year said Saudi Arabia was his favorite market and predicted its opening to direct foreign investment would attract as much as $30 billion in inflows.

Debt Market

“The market at the moment is very much retail-dominated, so it will bring a great degree of sophistication and maturity,” Bassel Khatoun, the Dubai-based head of Middle East and North Africa equities at Franklin Templeton Investments (ME) Ltd., said by phone yesterday. The $275 million Franklin MENA Fund has 30 percent of its assets under management in Saudi Arabia, Khatoun said.

The government’s approval of overseas financial institutions to trade equities may herald a similar relaxation of rules in the local-currency primary debt market, according to Mashreq Capital DIFC Ltd. and Rasmala Investment Bank Ltd.

Saudi Arabia’s 90-year-old monarch has kept the economy expanding at an average rate of 6.4 percent in the past four years as Arab neighbors from Egypt to Iraq and Dubai grappled with political and financial-market turmoil. Growth slowed to 3.8 percent last year and will probably be 4.2 percent in 2014, economist estimates compiled by Bloomberg show.

Economic Plan

The government’s economic plan includes spending $130 billion to boost non-oil industries. Saudi Arabia’s riyal, like most currencies in the six-member Gulf Cooperation Council, is pegged to the dollar.

The Saudi stock exchange’s market capitalization of $548 billion compares with $227 billion for gauges in the U.A.E. and $273 billion for Turkey, according to data compiled by Bloomberg. The index’s 19 percent gain so far this year is more than double the 7.5 percent advance in developing-nation equities.

Ten-day volatility in the Tadawul index tumbled to a decade low of 2.98 on July 17, data compiled by Bloomberg show, before rising to 16.7 today. By contrast, price swings in Dubai’s DFM General Index rose to the highest in almost five years in July amid concern the emirate’s property market is overheating.

MSCI, whose gauges are tracked by investors managing $9 trillion, resumed Saudi coverage in 2012 and said it would consider including the nation in frontier or emerging-market indexes if it allowed direct access to foreigners.

More Liquid

Saudi Arabia may be added to MSCI’s emerging-markets gauge in 2017 at the earliest, according to Sebastien Lieblich, executive director at MSCI Index Research. It could account for about 4 percent of the measure, he said.

“The market is larger and more liquid than several of the well-established markets within the emerging markets index,” Sidani at Schroder, whose whose parent company oversees about $291 billion, said in a phone interview from Dubai. “Even if it opens up with restrictions, it is liquid enough to be included eventually.”

About 349 million shares changed hands on the Saudi exchange yesterday, compared with the 12-month average of 249 million, data compiled by Bloomberg show.

“It changes the landscape in the sense that region becomes a much more serious contender for the emerging-market fund managers to allocate money here,” Saleem Khokhar, head of equities at NBAD Asset Management Group, which oversees about $2.5 billion, said by phone from Abu Dhabi yesterday.

(An earlier version of this story corrected volume figures in the penultimate graph.)

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