JEDDAH – Amid sound fundamentals - strong economy and robust banking system - the Saudi Capital Market Authority is expected to allow foreign institutional investors to invest in Saudi stock market directly. Al Rajhi Capital, in its latest research on Tadawul, said Monday that "there are apparent benefits of foreign investors investing in a stock market as generally, they bring in liquidity, efficiency, transparency and practice of better portfolio management. These benefits (though) are not guaranteed and depend on how market evolves in medium to long term." "Moreover, entry of foreign investors in stock market is believed to cause higher volatility due to flow of hot money and can potentially create an issue of liquidity management for the central bank," it noted. Although the number of companies listed on Saudi Arabia's Tadawul stock exchange is 152, the market capitalization is significantly high. Market is liquid and most of stocks are traded daily. "Long-term market strength comes from robust economic fundamentals. Moreover, the stock market is backed by technology driven strong banking system," the report said. The largest in the MENA region, Tadawul is comparable to many emerging markets. Volume and value traded are also comparable to many emerging markets when measured as percent of market capitalization of the stock market. The accrual of benefits of allowing foreign investors, outweighs the concerns in medium to long term, it pointed out. "Therefore, we believe that Saudi Arabian equity market is ready for foreign investors. However, it should be done in a calibrated manner so that the advent of large investors does not destabilize existing stakeholders," Al Rajhi Capital said. The interest of foreign investors in Saudi Arabian economy is also reflected through strong flow of foreign direct investments. Foreign institutional investors (FIIs) help domestic capital markets improve their functioning in many ways. FIIs not only provide liquidity and enhance efficiency of the market but also provide discipline and know-how. The opening up of the market is likely to lead to a change of status of Tadawul in global equity index such as MSCI. It is likely to get frontier market status at MSCI index which can be upgraded to emerging market status over a period of time depending on how market institutions evolve. Frontier market will provide the visibility among global investors who look for higher return. Moreover, the Saudi capital market will reap the benefit once it is classified as emerging market. This will allow the capital market to be part of investment targets by the large pool of global institutional investors who will actually bring institutional changes. Expected benefits come with certain issues which need to be taken care by CMA and SAMA, Al Rajhi Capital said. Among these issues, some are general issues such as flow of hot money which most of countries face when they open up their markets for foreign investors. These issues require continuous surveillance and proper safeguards. On the other hand, some issues are specific to Saudi Arabia and structural in nature such as lack of independent monetary policy. "Even some of these structural issues such as managing liquidity in the absence of independent monetary policy and lack of government bond market could be managed by active intervention by SAMA," it said. – SG
