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Quite a QFI

Investors on Saudi Arabia’s stock exchange, the Tadawul, had a rocky start to 2016, though by the end of the first half of the year most of the falls had been recovered. With lower oil revenues and more targeted government spending taking the gust out of the sails of investors, many must be looking back to the heady days of mid-2014 in a misty-eyed fashion. Back then, strong oil revenues and government-backed infrastructure plans saw the Tadawul All Share Index (TASI) climb to 11,069 points in September 2014, a figure not seen since before the global financial crisis hit. However, the onset of lower crude oil prices soon took the index for a tumble, down some 21% to close the year at 8,749 points.

The roller coaster did not end there, with the market rebounding on news that qualified foreign investors (QFIs) would be allowed to trade in stocks on the Tadawul in mid-June 2015. The TASI peaked on April 30, 2015 at 9,835 points as local players speculated on a foreign investment bounce. However, the index soon began to go sideways following the release of the definition by the Capital Market Authority (CMA) of who would be eligible to become a QFI. And the definition was not as generous as some had hoped. QFIs were required to have at least $5 billion under management, and have a minimum of five years’ experience in managing funds in foreign markets under their wings. Equally, a QFI could only have up to a 5% stake in an equity on an individual basis, while QFIs as a collective could take up to 20% of outstanding shares in a single stock, dependent on the bylaws applicable to the company in question. While most of the big end of town would not be overly affected by the restrictions—indeed firms like Ashmore Group and Blackrock would make their presence felt—the $5 billion under management cap kept most medium-size and below emerging markets funds on the sidelines.
When too few QFIs were perceived to have turned up to the party, local investor sentiment soured, seeing the TASI close 2015 at 6,912 points, down around 17% in YtD terms. But worse was to come in January 2016. In three short weeks, the TASI slumped to 5,460 points, coinciding with the Brent crude oil price hitting a multi-year low of $27.88 per barrel. Regardless, just as the oil price began to recover, so did the Tadawul over 1Q2016, closing the quarter at 6,223 points, though this was still down 9.8% in QoQ terms. Over 2Q2016, the TASI performed steadily, ending at 6,500 points, up 4.3% QoQ, but not fully reflecting the surge in the price of crude oil, with Brent nearly doubling to $49.68 per barrel. Clearly, the market was looking for more direction.


The search to encourage increased foreign investment in the Tadawul took a significant step forward in May 2016, as the CMA decided to widen the scope of who could be a QFI. As of May 2016, only around 0.09% of the index had been taken up by QFIs. The new regime announced by the CMA will come into play by end-June 2017, very much in line with the authority’s cautious approach to bringing foreign investment into the local market. The global assets under management level for QFIs will be sharply reduced from $5 billion to $1 billion, while sovereign wealth funds (SWFs) and university endowments will join the banks, brokerages, investment funds, and insurance companies that could previously invest in companies listed on the Saudi stock exchange. QFIs will also now be able to own up to 10% in a single stock, if allowed by the listing rules, while as a collective the combined ownership level will be increased from 20% to 49% by the middle of 2017.

Opening up the market also allows the state to be able to strategically privatize a portion of its prize assets, with some still ruminating on the possibility of a 5% stake sell off of Saudi Aramco, which could see $100 billion being raised. Such big-ticket potential sell offs (at nearly one-quarter of mid-2016 Tadawul market capitalization) require more than local investor awareness; they need the large flows that foreign investor interest can supply to ensure fair pricing at the IPO stage and beyond.

There are other targets that the CME and Tadawul are after, with acceptance into the MSCI Emerging Market Index being just one. Some of the other reforms announced by the CMA include extending settlement from the current T+0 system (same-day settlement) to a more market-friendly T+2 (trade day plus two-day settlement). Even more intriguing is that securities borrowing and covered short selling will also be supported under the new regulations, moving the Tadawul into direct competition with the only other two major exchanges in its approximate same time zone that have a comparative weight: Moscow and Istanbul.


Also on the newswire was the announcement by the Capital Market Authority Board that as of July 17, 2016 all trades on the Tadawul would incur higher transaction fees. The previous fee, split between the Tadawul, CMA, and “authorized persons” (i.e. your local broker), was set at 12 basis points (bps), and following the change this will rise to 15.5 bps. However, there is one caveat: there will be no fixed fee for transactions under SAR10,000 ($2,670) in size, meaning brokerage houses are free to set their own rates for small traders. The CMA’s bps change “took into consideration the anticipated approval of fees for the deposit, transfer, settlement, clearing, and registration of ownership of securities traded on the exchange,” as it outlined in a public statement on the matter. As a matter of course, part of the transaction fee rise will be devoted to a national “investment awareness” campaign to encourage increase trading activity on the Tadawul.


In terms of initial public offerings (IPOs), four were undertaken in 2015, with another three of a smaller nature launched in 1H2016, bringing the index in full force up to 174 listed companies. In 2015, some 99.6 million shares worth SAR4.15 billion ($1.11 billion) were offered, with their combined market capitalization at end-2015 coming in at SAR12.17 billion ($3.25 billion). The biggest of the four IPOs on offer in 2015 was Saudi Ground Handling Services, which was 172.2% oversubscribed, with the company offering up some 30% of its shares to the public, and raising some SAR2.82 billion ($752 million). The offering was roughly split 60% for institutional shareholders, with the rest mopped up by retail buyers. Over the first half of 2016, some $643 million in three new listings was offered up, spread over Middle East Hardware ($369.31 million), Al Yamameh Steel Industries ($146.53 million), and Lazurde Company for Jewelry ($127.44 million). While the local investment community still has the ability to jump into the smaller IPOs on offer, its ability to jump into the multi-billion dollar IPO category at present remains limited. And hence, while the QFIs may be off to a slow start in the Saudi market, the future when looking at potential government privatization plans ahead looks potentially profitable.

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