A new dawn for Saudi market, scepticism on Dubai

August 4, 2014 2:14 pm

By Philip P. Merrell

Saudi Arabia announces plans to open its bourse to foreigners leading experts to expect a bullish response from investors.

Following last month’s news that the Tadawul exchange will open up to direct foreign investment, more than two thirds of leading investors have expressed their interest in increasing their stakes in the $550 billion valued stock market, a Reuters survey has found.

Although there has been no official indication, the move is set to pave the way for Saudi Arabia’s inclusion in the MSCI Emerging Markets index.

Speaking to AMEInfo’s sister publication TRENDS, head of Mena Equities, Bassel Khatoun, explained: “Entry into the MSCI EM index would likely boost trading volumes, enhance market liquidity and potentially bring down transaction costs through improved scale effects.”

The benefits to the Saudi economy will be vast, as the government attempts to revamp its non-oil industries. Namely, the introduction of foreign investors is also likely to accelerate M&A activity, as its private sector will be monitored more closely. Anum Saleem of the Eversheds Saudi Arabia office says “this will bode well for the Saudi private sector as their business valuations are likely to increase serving as an impetus to entrepreneurship and employment opportunities for the local population.”

Moreover, according to Mena Equities, “such measures are likely to lead to an increase in initial public offerings (IPOs), thus leading to a much-needed deepening of the equity market in the region and improved sentiment from global investors.”

While sentiments and investor confidence in the region may well boom with this development, concerns have been raised that companies and shareholders from around the GCC may redirect much of their capital to Riyadh.

According to the Reuters survey, investment managers have responded bearishly to the UAE’s market forecast, with only seven per cent willing to increase their equity allocations and 47 per cent expected to slow down their UAE activity. Citing overheated prices and inadequate regulation, particularly brought to light throughout Arabtec’s market rollercoaster in previous months, the opening of Tadawul to foreign investors may redefine the appeal of the Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX).

In saying this, experts remain adamant that there will be no mass outflow of funds from other GCC markets into the Tadawul. Instead, new capital will be created. Moreover, with development giants Damac and Emaar’s retail branch, Emaar Malls, expected to be listed on the DFM in the coming weeks, with a total market capitalisation of $12.5 billion, Dubai’s market is also set for an exciting H2.