Saudi ETF lure seems to have landed big one

What's up Saudi Arabia's latest effort to stimulate investor interest seems to be working.

Saudi Arabia's latest effort to stimulate investor interest seems to be working. The Saudi stock exchange has experienced a 32 per cent increase in the value of traded shares since last week, when the Tadawul All Share Index announced plans to launch exchange-traded funds (ETFs) by the end of the month to try to entice foreign investment.

It didn't take that long. The bourse announced yesterday it had approved plans for an ETF from Falcom Financial Services, a Sharia-compliant bank based in Riyadh. It's no coincidence that the index closed yesterday at a 17-month high. "The appetite is really there. Saudi Arabia is perceived as a fantastic growth story," said John Sfakianakis, the chief economist at Bank Saudi Fransi. Mr Sfakianakis added that global investors were "tired of looking at the same countries in the region and seeing Saudi Arabia outside of that".

As recently as 2008, foreign investors did not have access to Saudi markets at all, even though it is the world's largest oil exporter. Then the bourse began allowing indirect foreign ownership through swaps with local intermediaries, which was considered a small step forward but still too unwieldy to attract many institutions. The addition of ETFs falls just short of allowing direct equity ownership.

But it is still not clear exactly when ETFs will begin trading on the Saudi exchange. The surge in trading since the announcement is due to local investors sensing that the incoming foreign investment will lift share prices. While that is no certainty, analysts say foreigners should at least reduce the market's volatility. "One can say foreign money also brings greater transparency in stock markets, and historical experience also shows a tendency for markets not to be so volatile when there's foreign investment," said Mr Sfakianakis.

The recent optimism among traders was supported by positive signs about the Saudi economy. A report produced this week by the Dubai company Cityscape Intelligence showed Saudi property prices escaped the housing downturn, returning 8 per cent each year on average since 2007. @Email:[e-mail]