State Street Global Advisors (SSGA), the investment firm with US$2.61 trillion in assets under management, is keeping close watch on the pace of capital market reforms in Saudi Arabia and the kingdom’s expected inclusion into the major emerging market indexes next year as it continues to improve foreign investors’ access to its US$440 billion exchange.
"The pace [of the reforms] certainly has been very impressive, compared to some of the other countries that tried to open up their markets to foreign investors," Richard Lacaille, an executive vice president and global chief investment officer at SSGA said in Riyadh. "The interest in what is going on in Saudi Arabia from an economic reform perspective is going to attract more interest from investors."
The Saudi stock exchange, or Tadawul as the Arab world’s biggest bourse is known, first allowed foreign qualified investors limited access to listed firms in 2015. It has since amended rules, easing restrictions on foreign investor. Changes already made or about to be introduced include new corporate governance rules; adoption of the industry standards used to group companies by industry; amendments to settlement cycles; and enabling foreign investors to participate in share floats.
The exchange also plans to set up a clearing house that will allow it to introduce more sophisticated products including derivatives trade in the second half of 2019, Tadawul chief executive Khalid Al Hussan said last week, adding that an announcement to that effect could be made within weeks.
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The market has done well so far in terms of reforms, but there are still issues that needironing out, according to Mr Lacaille.
"What's remaining is administrative issues for global investors like us with thousands of clients," he said, adding that Tadawul understands complex needs of global investors who have different investment time horizons and need multiple accounts for the ease of investing and divesting.
“Issues like central counterparty clearing process and account setup are very important for global investors like us,”
Tadawul has come a long way from being a closed market to become a strong contender for inclusion in the MSCI Emerging Markets Index, a gauge tracked by investors with trillions of dollars under management. While it tries to tick all the boxes to get the status upgrade by MSCI in June next year, FTSE Russell, another global index compiler will consider Saudi Arabia’s inclusion in its emerging market gauge in March 2018.
“We are mostly focused on the reforms in the equity market because the prospects of Saudi Arabia entering the indices is significant for us,” Mr Lacaille said. “It [Saudi Arabia] is potentially a good diversifier. It is of great interest to us.”
The investors, he said, however will have to be cautious in the terms of the valuations of Saudi equities.
“We will have to be careful about the valuations because there are other markets that have the same characteristics of being great diversifiers and we don’t want to overpay,” he said. The index inclusion, if it happens, will have to be handled very carefully, he added.
Saudi Arabia, Opec's biggest crude producer that relies heavily on sale of hydrocarbons for revenues, is facing a budget deficit as oil prices remain low.
The kingdom, which had to the resort to the international borrowing, has also issued local currency bonds, which Mr Lacaille said is of interest s to SSGA clients globally.
"This is another important development in Saudi Arabia which we think could be beneficial," he said. "Saudi has been successful in issuing dollar bonds and we think the development of a local currency bond market is going to be pretty important in terms of Vision 2030 - in developing the local capital market institutions. This is the pattern we have seen in many emerging countries, especially in Asia."
The kingdom, which resorted to belt-tightening measures and spending cuts is transforming its the economy with privatisation of state assets as the centre piece of its overhaul agenda. Saudi Aramco, the world's top crude producer, is lined up to be part-privatised through a public float next year while a number of other companies from health, education and transportation sectors are also being prepared for similar deals.