April 2019

Coinciding with Saudi Arabia’s inclusion in the FTSE Russell Emerging All Cap Index, a Deutsche Bank-hosted webinar looked at how the country’s securities market has evolved in the lead-up to this upgrade

Implementation of dynamic regulatory reforms and the fervent adoption of consequential market liberalisation programmes inside Saudi Arabia have persuaded leading index providers – whose benchmarks are watched by global active and passive investment firms – to reclassify the country as an emerging market. On 14 March 2019, the first tranche of Saudi Arabian securities was added to the FTSE Russell Emerging All Cap Index 1.  Another four tranches will now follow over the next 12 months eventually leading to full inclusion, and giving Saudi Arabia an index weighting of 2.86% on the FTSE emerging markets benchmark.

Other leading equity index providers including MSCI and the S&P Dow Jones have also confirmed Saudi Arabia will be added to their benchmarks too. The decision by these indices to include Saudi Arabia, a country with a stock market capitalisation in excess of US$536bn 2 and whose bourse – the Tadawul – is the largest in the Gulf Co-operation Council (GCC) is an exciting development for global asset managers who are on the hunt for yield and diversification.

At present, international (i.e. non-GCC) investors own only 5.1% of the market, up from the 4.7% when benchmark inclusion had not yet been announced 3.  However, asset managers are confident this will rapidly change.

A promising market opens

Saudi Arabia is undergoing a massive transformation as it tries to diversify their economy from reliance on oil exports. Until 2015 – the point when Saudi Arabia first eased its entry rules for qualified foreign investors (QFIs) - overseas institutions could only trade listed equities through complex swap arrangements. Market access is now much easier, and between 2015 and 2018, AuM thresholds for QFIs have gradually been decreasing.

As a result, this enables a wider range of QFIs – including asset managers, banks, brokers and insurers, to transact in the local securities market. The authorisation process for QFIs is now much more straightforward too. Assessing Authorised Persons (AAPs) – such as providers of custody in the local market like Deutsche Bank – can now verify foreign investors in Saudi Arabia, replacing the CMA authorisation process. Again, this makes it is easier for QFIs to enter Saudi Arabia and should help attract more liquidity into the market. 

Furthermore, constraints on actual foreign investment in local securities have also been partially lifted. Overseas institutions in aggregate can now own 49% of most listed equities, after the CMA increased the cap from 10%. Fuad Aghabi, executive director at Dubai-based fund manager Ajeej Capital, pointed out the CMA’s decision to further open its market to foreign equity investment was already paying dividends. “As a result of these positive rule-changes, there are now 300 QFIs registered in Saudi Arabia and 200 more are on their way to becoming registered,” commented Aghabi.

We have catered to various QFI applications including Asset Managers from various jurisdictions, we have also released FAQs and case study especially for Asset Managers on  meeting the AUM and Foreign Portfolio Manager requirements”, Charles Cohen Head of Securities services head Deutsche Securities Saudi Arabia.

Best practices take shape

In addition to opening up its capital markets, Saudi Arabia is also embracing international best practices in post-trade.  Specifically the CMA and Tadawul have made improvements to the local securities market by introducing a number of reforms:

  • Conscious that foreign investors prefer international best practices, the CMA and Tadawul adopted the Independent Custodian Model, DVP along with a T+2settlement cycle in line with global best practices
  • Market intermediaries have worked together to agree on an Inter Custody settlement model which allows Clients to work with International Brokers and Local brokers without any restrictions. 
  • Enhancements to corporate governance standards have also been enacted by the CMA to protect shareholder rights. The standards now require companies to have proper investor relations processes in place, and demand that they publish annual reports in English. The integration of international best practices into the local securities market has been instrumental in Saudi Arabia’s index inclusion

The future

The combination of these best practices and the easing of entry rules for qualified foreign investors have already had an impact. QFIs, who three years ago were allowed to access the equity markets, showed their enthusiasm by buying up most of the stocks in the five days through March 14 4.   These investors are increasingly bullish on the country’s bright future.

“We are expecting an inflow of funds throughout 2019 and we continue to work closely with clients and market intermediaries to simplify access to the market for investors”, said Manoj Aidasani, head of securities services – Gulf Co-operation Council (GCC), Deutsche Bank.

__________________________________________

1 FTSE Russell (March 2019) Reclassification of Saudi Arabia FAQ
2 Financial Times (March 18, 2019) Saudi Arabia takes first step into foreign equity benchmarks
3 Financial Times (March 18, 2019) Saudi Arabia takes first step into foreign equity benchmarks
4 
https://www.bloomberg.com/news/articles/2019-03-18/foreigners-spend-record-on-saudi-shares-as-ftse-begins-upgrade

You might be interested in

This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume you agree with this. For more information about the cookies we use or to find out how you can disable cookies, click here.