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Abu Dhabi, UAESunday 23 September 2018

Foreign money strains at leash ahead of 'inevitable' Saudi MSCI listing

HSBC says overseas investors are readying to enter the kingdom as soon as upgrade happens

HSBC says foreign investors are all set to enter Saudi Arabia after it is listed as an emerging market. Hamad I Mohammed/Reuters
HSBC says foreign investors are all set to enter Saudi Arabia after it is listed as an emerging market. Hamad I Mohammed/Reuters

HSBC, which has the biggest investment bank in Saudi Arabia, says foreign investors are getting ready for their first significant stock purchases in the kingdom as an upgrade to emerging-market status looks likely.

It’s “inevitable” that MSCI, whose classifications can influence billions of dollars of asset allocations, will add Saudi Arabia to its emerging-market benchmarks, said Majed Najm, the chief executiveof the British lender’s Saudi unit.

In June, MSCI put Saudi Arabia, which currently stands alone from broader groupings, on the watchlist for a potential upgrade in 2018. Another index provider, FTSE Russell, last month said the kingdom would soon meet the criteria to be promoted from its current unclassified status to a secondary emerging market, but refrained from doing so for now.

“There’s been a spate of registrations after the MSCI announcement” as firms seek Saudi approval as qualified foreign investors, said Rajiv Shukla, the head of global banking and markets for HSBC Saudi Arabia. “People are registering and getting ready, and when the next announcement comes about FTSE or MSCI we expect the active investors to start positioning.”

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HSBC has estimated that an upgrade could prompt inflows of US$9 billion from passive investors such as index funds. That would be a win for a Saudi bourse that has had little to show after two years of regulatory efforts to attract foreigners, seeking the stability of more institutional money for an exchange driven by local individuals’ trading.

Total foreign ownership is below 5 per cent, according to data on the Tadawul exchange’s website.

The market is “on the path of fulfilling all the requirements” for an upgrade, Mr Najm said. Among its efforts to satisfy MSCI, Saudi Arabia moved from same-day settlement to a T+2 settlement cycle, the international standard where ownership of stock is transferred two days after the transaction date.

HSBC, the top adviser for initial public offerings in the kingdom according to data compiled by Bloomberg, says it executed the first trades by foreign investors in May 2015 and the first under the new settlement rules, introduced in April.

Mr Najm said that when the local food maker Savola sold a 2 per cent stake in the dairy company Almarai in the kingdom’s first accelerated book-build, foreign investors were among the largest buyers. The deal “demonstrated that a lot of international investors are ready and waiting to come into the Saudi market”, he said.

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