Door Slightly Ajar

Capital Markets

Saudi Arabia's bourse, Tadawul, just got more interesting, and in 2014—at $6 billion—saw the world's second largest IPO for that year.

Saudi Arabia’s stock exchange (Tadawul) is a vast market in search of tomorrow’s opportunities. Meanwhile, in the past year oil has seen a price decline of 50%—oil accounts for around 80% of GDP. Interestingly enough for a major oil-producer, however, the Saudi bourse is not determined by energy stocks. Oil giant Aramco remains state-owned, and roughly one third of the benchmark index is comprised of financial-services companies, with a third being materials and infrastructure-related stocks, and 25% telecom and consumer businesses. Yet the Tadawul is subject to a certain investor ratio that the kingdom is keen to reverse, of which more later. Meanwhile, radical times call for radical measures; none more so than the bourse’s opening of its door to qualified foreign institutional investors (QFIs) by mid-2015 as confirmed by the Capital Markets Authority (CMA) earlier this year. A government entity, the CMA reports directly to the Prime Minister.


In roller-coaster aspect, over the past year the benchmark Tadawul All Share Index (TASI) has weathered plummeting oil prices and consequent jaded investor sentiment and departure. Yet it has also seen the 2014 initial public offering (IPO) of the National Commercial Bank (NCB), which at $6 billion, was the second largest globally that year. And as Tadawul CEO Adel Al Ghamdi, put it in a TBY interview; “In 2014, we had the honor of being voted Euromoney’s Best Managed Financial Exchange in the Middle East for the third consecutive year.”

In terms of actual performance, The Tadawul All Share Index (TASI) bid farewell to 2014 at 8,333.30, down 2.4% YoY from 8,535.60. The year-high of 11,149.36 points came on September 9. Official data reveals overall market capitalization at year-end of $483.44 billion, up 3.4% YoY. A much steeper YoY climb of 56.7% was observed in the total value of shares traded in 2014 of $572.41 billion, up from $365.25 billion. The total transaction number for the year was 35.8 million, up 23.5%. The total number of shares traded for 2014 reached 70.80 billion compared to the 53.5 billion shares traded during the previous year, up 32.3%. The daily average number of transactions realized during 2014 rose 22.5%, while the daily average number of shares traded rose 31.2% YoY to 283.21 million shares. By number of shares traded during 2014, real estate developer Dar Al-Arkan ruled the roost on 7.60 billion shares, followed by Alinma Bank and mobile and data services giant Zain KSA with respective volumes of 6.79 billion and 4.99 billion shares.


While the TASI had declined by end-2014 on oil woes, the bourse points out the index’s fractional correlation to oil prices over the past five years, having instead maintained a slender positive correlation with the US dollar and US and EU markets. Today, Tadawul’s market’s capitalization is at $554.5 billion (as of April), comprising two thirds of the kingdom’s GDP, and thus by comparison, is larger than the Mexican bourse. Meanwhile, on a regional comparison it virtually equates to all other Gulf equity markets put together. Now that the Tadawul has opened to QFIs, sector participants anticipate its inclusion in the MSCI emerging market index by mid-2017; total foreign inflows are anticipated at by then at $40-50 billion diversifying the offering for local investors as liquidity sloshes through the system. Indeed, right after the announcement back in July 2014 the TASI surged by 14% in under two months, marking a seven-year high of 11,149 in September 2014. And on Sunday April 19th, the TASI soared 4% once the CMA announced that QFIs would commence trading on June 15. The index’s largest gain of the year saw a close of 9,620 points thus above the 200-day average, at the time, of 9,572 points.


Final rules governing QFIs were published on May 4 just ahead of the June 2015 opening to QFIs. The move is part of the economic diversification the kingdom needs to mitigate oil fluctuations, and is intended to promote transparency and spur employment. While a radical move in the local context, the Saudi bourse is actually among the last major global entities to permit direct foreigner investment. And while the foreign investor will need to conform to a rigorous framework of regulations that cap participation, the very prospect has seen the Saudi bourse outperform its peers over the past year.


Among Tadawul’s resident equities are Saudi Basic Industries Corp, the world’s largest chemicals producer, and Saudi Telecom Co, the biggest telco in the Gulf region. Those wishing to join their ranks will conform, among others, to the following stipulations: According to the bourse announcement of May 4, QFIs require minimum assets under management (AUM) of $5 billion (potentially to be reduced to $3 billion at CMA discretion) and need to have been operational for a minimum of 5 years. QFIs—including affiliates—may hold a maximum of 5% of the issued shares of any listed company. QFIs together may own a maximum of 20% of issued stock in a listed company. As anticipated, the Capital Market Authority confirmed opposition to a potentially destabilizing rush of liquidity into the market. Additionally, QFIs face Saudi income tax, with a 5% tax levied on dividends paid by listed companies. Trades thus far are limited to indirect investment through swaps and exchange-traded funds. Jadwa Investment’s April 2015 Update report references one specific and useful comparison—China. Like the Tadawul, the Shanghai Stock Exchange (SSE) is around 80% comprised of retail investors, which nonetheless account for just about 25% of total MCap. While the SSE opened to foreign investors back in 2003, by 2013 market data reveals that they held just 1.6% of total MCap. This is likely to reach 4% by 2016, and the Tadawul’s opening to QFIs is clearly be just as cautious in nature. One thing is clear though, namely that the current investor ratio finds the Tadawul’s benchmark TASI index subject to volatility as retail investors tend to make shorter-term investment decisions.


In light of the provisional rules set to govern QFIs issued in August of 2014, financial index provider MSCI released a provisional Saudi index. It calculated that were Saudi Arabia to be incorporated into the MSCI emerging markets index it would have a 1.5-2% weighting, putting it on par with Turkey. As market participants are aware, such weightings are the fruit of several factors beyond overall market size, notable among which is foreign investor access. As of June 2014, the $1.7 trillion benchmarked against MSCI’s emerging market index implies that the addition of a heavy-hitter like Tadawul could prove irresistible to prominent investment funds.


According to Albawaba, despite oil’s southbound trajectory the GCC witnessed $7.3 billion raised at IPOs in 4Q2014, dwarfing the $179 million raised during 4Q2013. Meanwhile, the Saudi bourse confirms that over the past two years more than 250 companies have signaled interest in joining the current 170 listed companies. “Looking ahead,” said the bourse CEO, “…we expect a minimum of eight IPOs in 2015 as a number of company filings approach the end of their regulatory review cycle.” Moreover, in 2014 it announced tentative plans for its own IPO at a time deemed apt by the government’s Public Investment Fund, the outright owner of Tadawul. Last year six IPOs were realized. And according to Zawya, while IPOs have hit the back burner in the UAE, one reason why they seem active in Saudi Arabia is that the kingdom’s regulator, the Capital Market Authority (CMA), can require between six and 12 months to approve potential listings. Thus, would-be companies may feel less concerned with short-term index shenanigans. Middle East Paper Company (MEPCO) received CMA approval for its IPO of 15 million shares accounting for 30% of its share capital. The company’s book building process attracted 1,035% over-subscription in the following configuration: 245% by investment funds, 351% authorized persons (AP), and 439% by listed companies on Tadawul. Reportedly 90% of offered shares were allotted for investment funds, while the offering was priced was set at SAR30 per share, with a cap of 6 million shares for retail investors, representing 40% of the total offered.


The entry of QFIs in June will also have a catalytic effect on trading turnover at the bourse. Let’s, then, leave the final word to Tadawul CEO Adel Al Ghamdi, who points out that despite the kingdom’s exposure to oil fluctuation, the national economy; “…has been, to a large degree, insulated from economic instability felt in many parts of the world.” You can call it protectionist, conservative, or lucky, but in considering these adjectives, you may also consider calling it wise.”

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