Saudi Arabia says to launch new bourse improvements on Sunday

Tue 22 May 2018
Tadawul announces changes to the methodology for determining opening and closing prices

Tadawul, the Saudi Stock Exchange, on Tuesday announced that previously disclosed improvements to its opening and closing price mechanism will be implemented on May 27.

Changes to the methodology for determining opening and closing prices apply to both the main market and the Nomu – Parallel Market, a statement said.

The enhancements include moving from a volume weighted average price (VWAP) to an auction method for determining closing prices.

The previous VWAP methodology for determining closing prices has been replaced by a 10-minute auction after the end of continuous trading. During this, investors determine the price of securities through participating in the auction by placing bid and ask orders.

“These enhancements to price mechanisms further align Tadawul with international best practices and the processes used by other major markets,” said Khalid Abdullah Al Hussan, CEO of Tadawul.

“The result is expected to be greater price efficiency, increased liquidity, reduced market volatility and enhanced security for both investors and intermediaries, and thus creating a more attractive investment climate for domestic and international investors.”

Opening prices will continue to be determined by auction but market orders shall be displayed unpriced at the top of the order book during the auction period, and a single index opening value will be published after all order books have uncrossed, the statement said.

It added that both the market open and market close times will be randomized within 30 seconds after official open and close times to further enhance investor protection and market soundness.

The planned changes to the opening and closing price mechanism were first announced by Tadawul in January as part of a series of significant measures to improve market access and efficiency, enhance liquidity, bolster investor security, mitigate risk and further align market practices with global best practices.

This article was first published in  Arabian Business

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New Saudi Arabia-focused ETF aims to woo international investors

Time: May 16, 2018

  • Investors have few avenues to invest in the booming market.
  • To meet this gap, the United Arab Emirates financial firm launched an exchange-traded fund (ETF) Wednesday which will be listed on the Abu Dhabi Securities Exchange.
FTSE Russell and ADS Investment Solutions launch Saudi Arabia index  

Saudi Arabia is transforming economically as the kingdom moves from its traditional heavy reliance on oil, but investors have few avenues to invest in the booming market.

“There aren’t many channels of investments towards the capital market in Saudi Arabia…so international investors are really asking for exposure to Saudi Arabia — no stock picking, just some ETFs or an index to go in passively and through a systematic strategy,” said Ryan Lemand, senior executive officer at ADS Investment Solutions.

To meet this gap, the United Arab Emirates financial firm launched an exchange-traded fund (ETF) Wednesday which will be listed on the Abu Dhabi Securities Exchange. The FTSE Ads Custom Saudi Minimum Variance Index was developed in collaboration with FTSE Russell.

“Saudi Arabia today is reforming, it is changing and generally investors who look at emerging markets, they look at emerging markets that are reforming, not the static emerging markets,” Lemand told CNBC’s “Capital Connection.” “Today, Saudi Arabia is not only changing, it is literally transforming.”

In 2016, Saudi Arabia’s government unveiled a long-term economic blueprint for life in a low-oil-price world.

Titled “Saudi Vision 2030,” the plan includes regulatory, budget and policy changes that will be implemented in the hope of making the kingdom less reliant on crude. It aims to build a “prosperous and sustainable economic future” for the kingdom.

In March, index compiler FTSE Russell decided to add Saudi Arabia to its emerging market index starting in March 2019, and index giant MSCI will decide whether to take the same action in June.

This article was first published in CNBC

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Why Saudi equities are global winners in 2018

May 6, 2018

I had written an article entitled “Six reasons to be bullish Saudi equities in 2018”, published in Khaleej Times on January 28. Yet I was surprised to see Saudi equities become the world’s second best-performing stock market in 2018 after Egypt.

The Saudi equity index fund I recommended in my column is up 18 per cent at a time when the MSCI emerging markets is down 7 per cent and small GCC stock exchanges remain mired in vicious bear market downtrends. The reasons I was so bullish on Saudi equities late last year was my conviction that the kingdom’s liquidity and credit cycle had bottomed. Bull markets are born in despair and die in greed – and all the ingredients of a bull market in Saudi equities seemed in place to me.

The spectacular rise of Brent crude from below $30 a barrel in February 2016 to $74 now is a testament to the kingdom’s policy U-turn it resumed the role of the Opec’s swing producer and brokered an output cut pact with Russia that has removed 1.8 million barrels a day of crude oil from the wet-barrel market a time of tightening global inventories, robust Asian demand and geopolitical risk/supply shocks in Venezuela, Libya, Nigeria, Iran and Yemen. As the world’s largest oil producer, Saudi Arabia is the ultimate beneficiary of $74 Brent, a price both the House of Saud and the Kremlin needed to ensure in 2018.

Saudi Arabia is one of the most underleveraged economies in the Arab world, with a public debt/GDP ratio of only 17 per cent, in contrast to above 100 per cent for regional states as diverse as Libya, Bahrain, Sudan and Morocco. While the kingdom has borrowed heavily on the Saudi money markets, it can easily float sovereign debt on the international debt market to ease its domestic credit crunch. This is exactly what has happened in 2018.

I was amazed at the scale of the 2018 state budget announced by the Royal Court in Riyadh. The $261 billion in spending makes it the most expansionary fiscal budget in the modern history of the Saudi kingdom. Fiscal stimulus at a time of sharply higher oil prices argued for an embryonic bull market in Saudi equities. The planned privatisation IPO of Aramco (and even the Tadawul index itself) is a game-changer for the Saudi capital markets. This prospect was simply not priced into Saudi equities in January, particularly since the MSCI and FTSE decision to upgrade Saudi Arabia from frontier to emerging guaranteed at least $35 billion in index “tracker” money earmarked to buy Saudi equities.

Financials are 40 per cent of the Tadawul index and the economic reforms envisaged by Crown Prince Mohammed bin Salman has led to a valuation rerating of Saudi bank shares. The petrochemical/materials sector, 32 per cent of the index, benefits from the white hot world commodities market. The $20 billion joint venture between Saudi Aramco and Dow Chemical or the $9 billion deal with Total signed in the Élysée Palace during the Crown Prince’s last state visit to France are only the tip of the iceberg in the kingdom’s pipeline of transformational economic initiatives in technology, finance and even entertainment.

Saudi Arabia is the economic superpower of the Middle East but foreign direct investment has been a miniscule 1 per cent of the kingdom’s GDP, far below major emerging markets norms. The Saudi private sector also needs to dramatically increase its share of national output.

The Vision 2030 economic reform agenda aims to boost both FDI and entrepreneurship, while the anti-corruption crackdown, the new bankruptcy law and cuts in petrol/electricity subsidies will consolidate state power, marginalise minor rent-seeking elites and control wasteful extravagance in resource consumption.

Since I expect oil prices to rise and MSCI to include Saudi Arabia in its indices next month, I expect the bull run in Saudi equities has room to run, though valuations are no longer cheap at 18 times earnings. Geopolitics is another risk factor in Saudi Arabia. Tensions in parts of the region or Argentina/Turkey’s currency crises could also threaten the kingdom’s bull market.

This article was first published in  Khaleej Times

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Bahrain’s GFH hires GIB for Saudi stock listing

May 6, 2018

The company also announced that it plans to increase assets under management to $30bn by the end of 2020

Bahrain-based GFH investment firm has hired Gulf International Bank to cross-list its share in Saudi Arabia, the company said in a statement on Sunday.

The statement noted that the move is subject to the approvals of the Bahrain Central Bank and Saudi Arabia’s Capital Market Authority.

GFH’s plans to seek a listing on Tadawul [the Saudi stock exchange] were first disclosed in 2017, with the company saying the listing would be part of a larger effort to be involved in the kingdom’s privatization programme.

The GFH statement also noted that the company aims to increase assets under management to $30 billion by the end of 2020 “through organic and non-organic growth”. Currently, the company $6.2 billion of assets under management, according to its website.

Additionally, the company said it had received an offer to sell its real estate portfolio, which is currently under study and subject to approvals from regulators and the GFH board.

Last week, GFH announced it had acquired an 85 percent stake in the Entertainer hospitality discount app, which the company expects will give it returns of over 20 percent a year for the next five years.

This article was first published in  Arabian Business

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Saudi Arabia aims to be regional benchmark in global bond markets

Time: May 03, 2018

RIYADH: Saudi Arabia wants to be the “regional benchmark and safe haven” in global bond markets, according to Fahad Al-Saif, the president of the Ministry of Finance debt management office.

The Kingdom successfully raised $11 billion on international capital markets last month with an issue that was five times oversubscribed and in which 15 percent of investors were first time buyers of Saudi debt, Al-Saif said.

The capital raising was achieved without the need for a roadshow, he pointed out, in what he took as a sign that the Kingdom was now regarded as a “reliable and credible issuer” by international markets.

“The target is to become the regional benchmark and safe haven in fixed interest markets,” he said.

The debt raising is the third successive year Saudi Arabia has gone to the markets for multi-billion dollar sums, following the record breaking $17.5 billion debut sovereign bond in 2016 and $21.5 billion last year.

Both those rounds came toward the end of the year, whereas the most recent one came comparatively early in 2018. “We did not want to be tagged a final quarter issuer,” Al-Saif said.

But two bankers at the conference — who did not want to be named because they were currently working on bond sales in the Kingdom — said that the timing meant that Saudi Arabia could go back to the markets again this year.

“Saudi Arabia has become one of the biggest issuers in the world and it has a track record of proven quality. They (Saudi policymakers) might think it makes sense to go back to the markets while their reputation is flying high and interest rates are still comparatively low,” said one.

Faisal Qadri, head of debt capital markets for HSBC in Saudi Arabia, said: “Previously, Saudi Arabia was closed in terms of transparency and disclosure. Now they have produced a prospectus and are out there.”

Al-Saif said that he took encouragement from the kind of questions he was being asked by potential creditors: “They are asking normal questions about the economic progress of the Vision 2030 strategy and the fiscal balance targets. It is more technical inquiries and less focused on the oil price and geopolitics.”

He added that Saudi Arabia had the ability to issue a “super-long” bond of up to 100 years, but such a move seems unlikely at the moment.

“Are we able to issue 50 or 100 year bonds, yes. Are we able to issue in different currencies other than dollars, yes. Are we keen to take that step at the moment, I don’t think so,” he said.

Last month 45 government-linked securities were launched on the Tadawul financial market in a move aimed at deepening the domestic credit markets.

This article was first published Arab News

Saudi Arabia is the hottest emerging market right now

Time: March 15, 2018

Investors are committing millions in new money to Saudi Arabia as they shrug off uncertainty about its giant oil IPO and a recent corruption crackdown.

Equity funds investing in Saudi Arabia saw net inflows of $110 million between the start of the year and March 7, according to EPFR Global, a financial market data provider. That’s equivalent to 7% of their net assets, representing much stronger growth than other emerging market funds.

The Saudi stock market, the Tadawul, has gained more than 7%, outpacing many other indexes.

Investors were initially rattled last year when Saudi authorities rounded up dozens of senior officials, wealthy businessmen and investors in a bid to stamp out corruption.

But confidence has rebounded: Oil prices have risen, growth is returning to the economy, and the kingdom’s diversification plan — Vision 2030 — is starting to take effect.

“Strong underlying fundamentals, supported by the government’s efforts to diversify the economy, will translate into increased investment activity in the kingdom,” Sammy Kayello, CEO of Morgan Stanley Middle East and North Africa, told CNN.

The centerpiece of the reform effort — selling shares in oil behemoth Saudi Aramco — should generate billions for the government to invest in other sectors, as well as transforming the Tadawul in the eyes of foreign investors.

Saudi officials have yet to decide when to launch the IPO, and whether to choose a big global exchange for a secondary Aramco listing, but some investors aren’t waiting for the details.

Initiatives driven by Vision 2030 are already spurring activity in the kingdom, especially in the private sector. And analysts say the crackdown on corruption — which the government says it already recovered $107 billion as a result — is now being seen in a positive light.

“Fighting corruption was taken positively especially by bringing back sizable funds,” said Tariq Qaqish, managing director of asset management at Menacorp in Dubai. “The young leadership is taking bold decisions to do positive changes to the lifestyle of Saudi nationals that will create lots of business opportunities,” he added.

Reform of the Saudi stock market is helping too. Index compiler MSCI is due to review the most recent changes in June, and could grant the stock exchange emerging market status. Another index compiler, FTSE, is conducting a similar review at the end of this month.

If they’re satisfied, the new status could attract tens of billions of dollars in foreign money.

HSBC estimates that an upgrade by MSCI could trigger flows of more than $17 billion into Saudi Arabia. A move by the FTSE could lead to inflow of at least $7 billion.

“It’s not a question of yes or no. It will happen,” HSBC Saudi Arabia CEO Majed Najm told CNN. “Since the beginning of the year, Saudi Arabia topped major emerging and frontier markets for equity liquidity and flow,” he said, adding that some funds were already likely allocating cash to Saudi Arabia in anticipation of good news.

Opening up markets is a pillar of Vision 2030, a blueprint for what the economy will look like over the next decade. Spearheaded by Crown Prince Mohammed bin Salman, the kingdom wants to break what the prince once called its “addiction” to oil.

Ratings agency Moody’s said in a report on Wednesday that higher public spending and stimulus will allow the country to return to growth this year, after the economy shrank in 2017.

Banks are expecting more business in Saudi Arabia as a result.

“A number of major equity and debt transactions took place in 2017 and we expect this trend to continue this year. Stabilizing oil prices should also support the growth and attract international institutional investors as a result,” said Kayello at Morgan Stanley.

This article was first published in CNN

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History suggests Saudi’s MSCI upgrade will attract long-term uptick in foreign investment

Time: March 12, 2018

In January, planet Earth witnessed the “supermoon”, an astronomical effect of seeing a “brighter” full moon from earth as it aligns directly with the sun.

While a supermoon brightens up the night sky, its effect on earth’s inhabitants and by extension their financial markets is a somewhat less exact science.

But if the record inflows we saw into Mena equities in January are anything to go by, one might argue that the supermoon’s existential powers were in full effect.

While one month does not make a trend, we believe the massive equity inflows in January on a relative basis are reminiscent (at least anecdotally) of the big pick-up in inflows we saw in the UAE in early 2013, the year the local market was included in MSCI’s widely-tracked Emerging Markets index. As Saudi Arabia gears up for potential EM inclusion, with a decision to be announced in June, it might be useful to look back at the flows, liquidity and market performance of UAE equities when it went through the same consultative process ahead of its own inclusion.

January 2013 saw a notable pickup in incoming money, specifically $183 million in UAE foreign inflows compared to $272m in the entire preceding year. In Saudi Arabia’s example, we saw $619m inflows in January 2018.

These flows were no less than 3.3 times greater than those seen in the preceding year alone.

In the first six months of 2013, the UAE attracted $450m, twice the inflows seen in the preceding six months. The Saudi bourse (Tadawul) witnessed outflows (prior to January 2018) of $294m.

Looking deeper into liquidity, we note a substantial improvement in this same period in the UAE, where liquidity levels increased around 3.5 times to $202m on a monthly basis. Following MSCI EM index inclusion in June 2013, liquidity jumped to $334m, around 5.5 times that seen at prior levels.

Tadawul is already the most liquid market in the region at $950m in January, with the caveat that liquidity is less than half of what it averaged during the years 2011 to 2015.

Finally, in addition to strong inflows and improved liquidity, UAE stocks rose 67 per cent that January, a 55 per cent outperformance compared with MSCI EM.

In 2017, Saudi equities were flat compared with MSCI EM, which rose 34 per cent. For the year-to-date however, we are seeing Saudi equities at levels slightly above MSCI EM prices, the Tadawul is up about 4.7 per cent, with MSCI EM up 4.1 per cent.

There are some in the market who believe that January’s record equity inflows mark the beginning of a longer-term upswing in foreign institutional money interest in Saudi Arabia. Consequently, we could see interest in the entire region increase, with further inflows expected as we approach MSCI’s decision in June.

More sceptical market commentators could point out that this is a story we have seen before, specifically where Mena equities have seen a spike in foreign inflows in anticipation of a positive market catalyst being announced, only to see a reversal in these flows upon the realisation that this catalyst may not happen.

We in Deutsche Bank are in the first camp, and continue to believe in the Saudi MSCI inclusion story. We see a strong possibility of the Tadawul’s inclusion into the MSCI index in 2019. We also have firsthand experience of a good deal of international institutional and real-money interest in the Saudi equity story; our recent client meetings with Saudi Arabia’s Capital Market Authority and Tadawul in London in late 2017, followed by meetings with the Saudi Arabian General Investment Authority in Davos in January, saw packed rooms of international investors keen to hear more about Saudi Arabia.

As the kingdom’s authorities continue their focus on the broad set of economic and social reforms via the National Transformation Programme, this only makes us more positive in our outlook for the future of the Saudi stock exchange.

History is not always necessarily a fair guide when predicting stock market flow. But given the similarities – both geographically and economically – between regional markets, we’ve argued before that market participants would be advised to at least consider the implications of the Tadawul’s ascension to the MSCI EM Index.

Who knows, by the time the next supermoon comes around we might just see another market jolt that’s “out of this world”.

Aleksandar Stojanovski is an equity research analyst with Deutsche Bank

This article was first published in The National

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EFG Hermes upgrades Saudi Arabia ahead of anticipated EM index inclusion

Time: February 19, 2018

EFG Hermes has revised its outlook for Saudi Arabia upwards to overweight status, ahead of the country’s anticipated inclusion in the MSCI and FTSE emerging market indexes, which will generate flows of up to $45 billion into local equities, according to the investment bank’s projections.

EFG Hermes expects the total return from Saudi stocks to be around 30 per cent by mid-2019 on the back of foreign inflows, boosted by increasing earnings per share and dividend growth, it said in a strategy note issued on Monday.

“We expect the [emerging market] upgrades to drive [approximately] $30 to 45bn total foreign inflows (of which $14bn would be passive) into Saudi Arabia,” the bank said in a note. “Our market call is supported by an expansionary budget in 2018, which our economics team expects will lead to a gradual pick-up in economic growth from 2Q18.”

In December, Saudi Arabia unveiled a 978bn Saudi riyal annual budget – its largest ever – for 2018, priming the country for economic growth following a period of fiscal tightening brought on in the wake of a three-year oil slump.

The government forecasts the country’s economy will grow by 2.7 per cent in 2018, after shrinking by 0.5 per cent in 2017, following a stabilisation of oil prices.

Banks, insurance companies, FMCG firms and healthcare providers stand to benefit the most from Saudi Arabia’s anticipated upgrade, said EFG, with firms such as Al Rajhi Bank, Tawuniya, Abdullah Al Othaim Markets and Mouwasat particularly favoured.

Index provider MSCI will announce a decision on whether to upgrade Saudi stocks to EM status in June, after the index provider put the country’s stocks on a watchlist for inclusion last year.

The anticipated upgrade follows a series of market reforms initiated by Saudi Arabia, designed to attract international institutions, easing requirements for the ownership of equities by foreign investors, reducing settlement cycles and introducing short-selling.

Saudi stocks are also widely expected to be upgraded to EM status by rival index provider FTSE in March.

The upgrade announcements, together with the prospect of the listing of shares in Saudi Aramco later in the year, would make 2018 “a very good year for Saudi and GCC equities”, according to Tariq Bin Hendi, acting chief investment officer at Emirates NBD Group.

“We think it will have a tremendous impact on the region when the announcement [Saudi inclusion in MSCI] is made,” Mr bin Hendi told a media briefing on Monday in Dubai. “From the historical context, if you look at what happened in the UAE in 2013, the time when the announcement was made and the time the inclusion happened, we saw 100 per cent increase in the value and the up movement of the market.”

“If Saudi mimics with what happened in the UAE,” said Mr bin Hendi, “you could see massive inflows into Saudi market as it is a substantially larger market that the UAE.”

An upgrade for the kingdom would have a positive spillover effect for equity markets across the Arabian Gulf, according to Bassel Khatoun, director of portfolio management for Frontier and Mena, at Franklin Templeton Emerging Markets Equity.

“Given Saudi Arabia’s economic output and the size of its equity market, we believe the kingdom, when eventually included, will account for around 2.3 per cent of the MSCI EM Index, resulting in roughly $50 billion of fund flows. This weighting could also double to about 5 per cent with the IPO of Saudi Aramco,” said Mr Khatoun in an emailed statement to The National.

“We are excited about the positive impact the country’s inclusion in the MSCI EM Index and eventual IPO of Saudi Aramco will have on the development of the region’s capital markets.”

A sharp correction in oil prices and renewed geopolitical concerns are the key risks for Saudi equities in the coming years, according to EFG.

But the kingdom may be less impacted by such events than regional neighbours, the bank said.

“Local institutions supported by GREs have played a stabilising role in the Saudi market at key inflection points,” said EFG.

“Foreign ownership in Saudi Arabia is low, which limits the scope of foreign selling around negative developments.”

Aramco’s IPO, currently likely to happen in the second half of the year, could impact valuations in the short-term, as local investors may sell down other stocks to fund their participation in the IPO, the bank said.

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