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ANALYSIS

Sachin Mohindra

Saudi petchem, retail stocks to drive investor appeal

Abu Dhabi, August 10, 2014

Saudi Arabia’s energy-related stocks such as petrochemicals as well as underpenetrated consumer markets such as retail will see immediate investor interest when the kingdom opens its $700 billion equity market to foreigners in early 2015, an industry expert said.

 All petrochemicals should see a boost but there will also be interest in Saudi Arabia's due to the country’s large 29 million population, added Sachin Mohindra,  a portfolio manager at Invest AD - Abu Dhabi Investment Company, and manages the SICAV - GCC Focus Fund.

“We also expect Saudi banks to benefit from higher foreign institutional interest,” he noted.

At present, only Saudi and GCC citizens and institutions can buy stocks directly and foreign investors can only access stocks through expensive derivative instruments issued by Saudi domiciled entities approved by the Saudi regulator.

Saudi Arabia is taking this action now against a backdrop of huge growth plans for its economy. Saudi Arabia is likely to continue with its plans to diversify its economy away from oil. This entails continuing investments in infrastructure and providing incentives for the growth of the private sector.

Saudi Arabia also needs to provide jobs for its large and growing youth population which requires continuing investments in projects by public and private sector companies. The equity markets are a key source of growth capital.

“As of now, Saudi companies can only raise money through Saudi investors. When the market opens up to international investors, Saudi companies will have access to a huge pool of funding that will come in for well managed companies to successfully implement their growth plans,” said Mohindra.

“From a Saudi perspective the opening up of capital markets is likely to provide them with a new and large source of capital.”

Another advantage is that as international institutional money flows into the Saudi market it will eventually lead to greater market maturity and better price discovery mechanisms, Mohindra said.

As a market matures, corporate governance will improve, and transparency will improve. Currently the Saudi market is dominated by retail investors, so institutionalization will lead to greater maturity, less speculation and better price discovery of securities.

“In our opinion, all major emerging market investors will be attracted to the Saudi market regardless of their geographical location.  It is expected that Saudi Arabia should qualify for inclusion in the MSCI Emerging markets index once it fully opens up its market. The MSCI Emerging Markets Index is followed by most emerging markets investors,” explained Mohindra.

A number of analysts expect Saudi Arabia to have a weight of approximately 4 per cent once it is included in the index - which is substantial as UAE and Qatar only, have a 0.5 percent weight. Saudi’s inclusion in the MSCI emerging market index will result in large flows of passively managed money into the Saudi market.

Moreover active investors, whether from North America, Europe or Asia will be interested in the Saudi market as it is the largest country in the GCC with a number of attractively valued growth companies. Before, Saudi Arabia was largely ignored because it was not open to foreign investors unless they choose to invest through high cost derivatives.

“Our Invest AD GCC SICAV Fund, which currently has an approximate exposure of 50 percent to Saudi Arabia, is domiciled in Luxembourg and is treated as a foreign investor,” said Mohindra.

“Therefore, our exposure to the Saudi market is through complex derivative instruments. When the market opens to foreign institutions, our fund will get direct access and so reduce our costs and time to invest. Our current strategy to raise our exposure to Saudi Arabia at present will be facilitated by the opening up of the market as it will give us direct access,” concluded. – TradeArabia News Service




Tags: Saudi Arabia | petrochemicals | foreign investment |

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