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$564bn MARKET

Saudi bourse readies for flurry of foreign investor licences

RIYADH, June 16, 2015

A flurry of foreign licences for Saudi Arabia's stock exchange could be awarded in the coming weeks after the first investors have been allowed direct entry to the $564 billion market, the bourse's chief executive said.

The Riyadh stock exchange is one of the last major bourses to open to foreigners and its opening up is one of the most hotly anticipated changes in the region, holding similar promise to China's stock markets reform.

Speaking on the day the exchange opened its doors to foreigners to invest directly into shares and HSBC Holdings received a qualified foreign investor (QFI) licence, Adel Al-Ghamdi said other institutions would follow suit - although some investors remained sceptical of the impact yet.

"As we evolve, there might be a spike of involvement from foreign investors over the next two or three months, but that will stabilise as we go forward," he said.

"We have six applications under process from very large institutions." It was not immediately clear who the other five were from after HSBC said it had been licensed.

Until now, investors have had to trade via Saudi banks who have held proxy holdings. For those granted a QFI licence, those proxy holdings will be converted into the underlying equities.

The direct access could prove attractive, as the exchange features one of the world's largest petrochemicals producers, Saudi Basic Industries Corp, and Saudi Telecom Co , the Gulf's biggest telecoms operator.

But regulatory obstacles and uncertainty about the size of fund inflows have deterred foreign firms from piling in. One restriction, criticised by fund managers, limits foreigners to owning a maximum of 10 percent of the market by value.

Ghamdi expected the framework to be adapted as needed.

"This is a start of the framework, this is certainly not the end," he said. "(Foreign stakeholders) will be providing us with feedback as to the limitations that they might see in the Qualified Foreign Investor framework - we will be listening to them. This is a living framework that will evolve over time."

Language has been another barrier. Only around 45 percent of company announcements in the Saudi market are in English as well as Arabic, making it tricky for some outside investors.

The bourse's gradual opening will likely provide a catalyst for index providers such as MSCI to include Saudi Arabia in emerging equity benchmarks which are tracked by trillions of dollars worldwide.

Franklin Templeton's Mark Mobius, a veteran emerging market equities investor, said last week rules were too restrictive, adding he would stick to the current system that allows foreigners to invest through exchange-traded funds, swaps and participatory notes.

Ghamdi said investors holding swaps and obtaining a QFI licence will see a mandatory conversion of their holdings into the underlying stock.

"It is a one-for-one rule," he said, adding the swap system would continue to exist for non-QFI licensed investors.

"There are certain people who cannot qualify under the QFI framework, others will not be able to, so that access channel will remain over time," he said, though did not give details of the planned conversion mechanism.

The market fell 0.8 percent on Monday, weighed down by a 2 percent drop in oil prices and with no clear sign of new inflows of funds from abroad as trading remained dominated by local retail investors.

However, the prospect of market opening has helped the Saudi stock index to outperform its Gulf peers over the past 12 months. http://link.reuters.com/cun29t

But the index is down almost two per cent in the period as revenue from the Saudi Oil Industry, which accounts for more than 90 percent of government income, has shrivelled.

Ayham al-Yousef, CEO of Albilad Capital, the investment banking arm of Saudi Arabia's Bank Albilad, said he expected little impact for foreign investors in the short term.

"A lot of investors who have shown interest in this market have already invested through the swap agreement," Yousef told Reuters, adding he expected the possible inclusion of Saudi Arabia in emerging market indices to be the game changer.

"That would be add a further depth to the market and that would then attract a much bigger liquidity," he said.

MSCI last week did not add Saudi Arabia to its watchlist for countries likely to join its emerging or frontier market indexes. Getting on the watchlist would be a first step in the at least two-year process for Saudi Arabia join the emerging markets index, which has $1.7 trillion benchmarked against it.

Asked about the pipeline for initial public offerings, Ghamdi said with five offerings since the start of 2015 the bourse was on track to beat its average of nine debuts a year since 2004.

"We will be above average this year," he said. "There will be a target that is set for the number of IPOs over the next five years that policymakers are expecting from us. That target will potentially be set in Q3 2015."-Reuters




Tags: Saudi | Licences | bourse | Foreign investor |

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