Barings Says Saudi Stocks Attractive, Access Still Complex: Q&A

  • Easier to trade in other markets: Barings’ Abu Leil-Cooper
  • Reaction to any inclusion in indexes likely to be short term

While Saudi Arabia is progressing in its efforts to open its stock market to international investors, gaining access remains harder compared with other regional and developing economies, according to Barings LLC.

Ambitious plans announced by the kingdom last week, including building a new city on the country’s Red Sea coast, are “consistent” with Vision 2030’s economic and social reforms and show a “renewed commitment to economic reform,” Ghadir Abu Leil-Cooper, global head of equities at Barings in London, said in an emailed response to questions. Even so, the “complex, rule-based, resource and time-intensive process” of participating in its equity market remains an obstacle to non-Saudi investors, she said.

Saudi Arabia is pursuing improvements to its capital markets with the aim of attracting local and foreign investors and helping to diversify its economy away from oil. Among the potential rewards for the changes is classification as an emerging market by index compilers such as MSCI Inc. and FTSE Russell next year, which could unlock billions of dollars of inflows to the Saudi equity market.

Here are some of Abu Leil-Cooper’s views on investing in Saudi Arabian equity markets.

Are Saudi plans announced last week too ambitious?

This economic reform agenda is key for the long-term success of the Saudi economy and the government’s attempt to reduce the country’s reliance on hydrocarbons. The promotion of economic reform will create opportunities for private-sector companies in several areas, including but not limited to healthcare, education and financial services. We welcome the reform agenda and the investment and growth opportunities that will be created for equity investors.

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Foreigners still own below 5% of the stock market. Why?

Foreign investors weigh both the investment case for companies in the market as well as ease of market access. Investor rights and protection are also considered before allocating capital to markets and individual companies within a market. Despite strong efforts to implement capital market reform by the regulator, access to Saudi public equity remains a complex rule-based, resource and time-intensive process. We at Barings acknowledge that there have been a lot of constructive changes to the access rules since the process of market opening to foreign participants was initiated, but it still remains harder to gain access the Saudi market relative to other regional markets, as well as the broader emerging market universe. Notwithstanding these complexities, Barings has exposure to the Saudi equity markets via p-notes and we remain committed to assessing the most appropriate way to invest in the exciting Saudi investment opportunity.

Would inclusion in major indexes bring dramatic change?

Markets react to indexation changes on a short-term basis. Long-term active investors, such as Barings, assess opportunities on a continuous basis in order to implement investment opportunities in our client portfolios irrespective of index inclusion. We are focused on a broad-based universe of investment opportunities not limited to benchmarks and, as experienced investment managers in emerging markets equities, we have researched and invested in the Saudi market for several years.

How do investors view Saudi Arabia’s macroeconomic plans?

Long-term structural reforms are needed to unlock the Saudi capital markets’ potential. We acknowledge that any macroeconomic reform is necessary for the long-term success of the country and, by implication, is supportive for companies in the market.

Why is short-selling not yet active in the Saudi market?

Long-term equity capital is essential for the future development of the market and economy and short-selling is normally a mechanism for short-term price discovery. Short-selling practices have only been introduced recently and are yet to be established. At Barings, we are long-term active investors. We believe that having a disciplined investment process to identify mispriced investment opportunities based on fundamental bottom-up analysis is the key to unearthing opportunities in markets such as Saudi Arabia.

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