Saudi stock market correction sparks buying interest from foreign investors

The Tadawul is the largest stock market in the Mena region and the seventh-largest in the global emerging market, with a market capitalisation of $570 billion. Hasan Jamali / AP Photo

Saudi stocks last week attracted their biggest inflow of foreign funds since opening to overseas investors as institutions made their move after the most severe sell-off in nearly seven years.

Three months after the momentous opening of Saudi Arabia’s stock market to non-nationals, foreigner investment in Saudi equities has finally begun to gather momentum.

Qualified Foreign Investor (QFI) flows into Saudi equities rose to US$98 million for the week to the end of Wednesday, the largest weekly figure since foreign investors were allowed to buy in mid-June, according to John Sfakianakis, the Middle East director of the Ashmore Group in Riyadh.

Mr Sfakianakis, whose firm was one of the first to be granted QFI status, said that the recent slump in Saudi equities had proved attractive to previously reticent international investors.

“Big international investors and pension funds are only starting to do their entry studies now, and will only really move when Saudi Arabia is included in the MSCI Emerging Market Index,” he said.

“But the significant corrections we’ve seen recently offer more buying opportunities, so we have seen increased foreign interest as a result.”

Despite rallying 4.5 per cent last week, Saudi shares have slumped 20 per cent in the three months since QFI trading was launched on June 15, prompted by anxieties over the long-term impact of low oil prices on the kingdom’s economy.

Taking advantage of lower valuations, in which price-to-earnings ratios have fallen to their lowest level since late-2013, QFIs have now invested in 23 out of the 165 Saudi equities open to them, according to stock market data.

The Petrochemicals company Alujain Corporation has thus far been the main beneficiary of investment from QFIs, who have bought about 2.7 million shares – equivalent to 3.94 per cent of its total share capital.

The banking heavyweights NCB and Al Rajhi are next on the list, with foreign investors acquiring 1.6 million and 1.3 million shares in the respective banks, equivalent to 0.08 per cent of share capital in both cases.

International investors have long craved the ability to invest directly in the Saudi stock market – the largest in the Middle East and North Africa region – which was previously only available through equity swaps and exchange-traded funds.

However, as recently as the end of last month, QFIs had invested in fewer than 10 Tadawul listed equities.

“The opening up of the market to QFIs came at the start of the summer months and just days before the beginning of Ramadan, which meant that there was a natural slowdown in getting business moving forward,” said Tim Plews, the head of regional financial services and markets at Clifford Chance.

While the country’s Capital Markets Authority published detailed draft rules for QFIs as early as August last year, Mr Plews said that investors had only begun conducting market entry studies when the regulations were finalised in May this year.

A spokesman for the Tadawul declined to say how many QFIs had been registered by the exchange over the past three months.

“The original view on the part of international investors was that it would take some time for the flows to come in significant volumes,” said Mr Sfakianakis.

“As we get closer to the country’s inclusion in the MSCI Emerging Market Index we’ll see more attention paid.”

MSCI said in June that it would begin consultations with international institutional investors regarding their experience as QFIs, with mid-2017 the earliest likely date for a possible inclusion in the closely tracked index.

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