July 2018

Saudi Arabia-watchers are predicting large inflows into the country’s equity market following its inclusion by the MSCI in its emerging market index. A Deutsche Bank-hosted webinar took stock of this change

Ever since Saudi Arabia first welcomed foreign institutional investment into domestic equities in 2015, the country has accomplished a number of material market transformations and introduced more liberalisation policies consistent with international best practices. After three years of extensive, market-wide reforms, which were among the key pillars of the country’s Vision 2030 Programme, MSCI confirmed in June 2018 that Saudi Arabia would be upgraded from a “Standalone Market” to “Emerging Market” on its index.

As Saudi Arabia begins its historic entry into capital markets, Deutsche Bank hosted a webinar, which brought together a number of industry experts and foreign institutional investors, to discuss some of the opportunities that this transition may bring. With Saudi Arabia watchers predicting large inflows into the country’s equity market following the upgrade, this webinar provides an insight into the steps investors should be taking.

The events leading to Saudi Arabia’s MSCI inclusion

The MSCI announcement is a resounding endorsement of the changes that have been implemented inside the country by the Tadawul, the domestic stock exchange and the Capital Market Authority (CMA), the local regulator. “International investors have been impressed with the level of commitment that the CMA and Tadawul have demonstrated. We have enacted a number of measures to ensure the Saudi Arabian market is attractive to investors,” said Khalid Algheriri, Head of Member Relations at Tadawul.

Reforms have included the establishment of an independent CSD (Securities Depository Center, also referred to as the Edaa); alterations to its settlement cycle from T+0 to T+2; the enablement of DVP (delivery-vs-payment); eased pre-funding obligations; and the introduction of securities borrowing and lending in addition to covered short-selling. “We are planning to launch a CCP, which should be fully operational in 2019,1 in parallel with a functioning derivatives market in 2020,” said Algheriri.

Institutional money starts moving to Saudi Arabia

Saudi Arabia’s inclusion onto the index will be a two-pronged process, concurring with the benchmark provider’s May 2019 Semi-Annual Review and its August 2019 Quarterly Index Review. Experts estimate the country’s MSCI weighting could be as high as 2.6%, putting it ahead of the 1.52% collective weightage of the UAE, Egypt and Qatar.2 Saudi Arabia, however, remains relatively un-tapped by global investors with foreign ownership of locally listed securities comprising less than 5% of the total.3

Nonetheless, Deutsche Bank predicts this will change as inflows could reach $35 billion post-MSCI inclusion on top of the $5 billion already projected following FTSE Russell’s market upgrade of Saudi Arabia in March 2018. These simultaneous upgrades and the expected IPO of ARAMCO will provide an injection of liquidity into the country,4 with flows primarily driven by the entry of active and passive fund managers.

Firstly, its stock market capitalisation stands at $520 billion (at June 2018), making it the largest and one of the most diverse equity markets in the region by a significant margin. Manoj Aidasani, head of securities services for GCC at Deutsche Bank, noted that Saudi Arabia’s foreign ownership has been increasing steadily, with QFIs and swaps at almost 1% respectively and strategic partners at 3% dominating the foreign investor split. 

Getting into the market

Qualified Foreign Investor (QFI) applicants must be financial institutions located in a CMA approved jurisdiction and have assets in excess of $500 million. The yardstick was originally set at $5 billion, it was reduced to US$3 billion in 2016 and subsequently reduced further to US$1 billion in 2017. The latest revised entry benchmark took effect in January 2018. A requirement that QFIs have a minimum of five years’ investment experience was also removed from the rules at the beginning of 2018.

The registration process has been significantly simplified; Assessing Authorised Persons [AAPs] (i.e. custodian banks such as Deutsche Bank) are now responsible for assessing whether an  investor meets the minimum conditions for QFI status, a role traditionally performed by the CMA, but one which it has since delegated.

The ABCD test

Charles Cohen, head of securities services for Saudi Arabia at Deutsche Bank, acknowledged the latest iteration of the QFI rules had made it easier for foreign investors to access domestic securities. Deutsche Bank has had a presence in Saudi Arabia since 2010, and as a fully licensed sub-custodian and AAP, it can help clients gain exposure to the local market and support their ongoing operations. “Deutsche Bank has played a major role in encouraging reform in Saudi Arabia through its market advocacy efforts and regular dialogues with local exchanges and regulatory authorities,” said Cohen.

To help investors seeking to gain exposure to this market, Deutsche Bank has introduced an ABCD test for QFI applications:

A. Assets under management greater than or equality to $0.50 billion;

B. Basis of regulatory approval – regulatory license or registration;

C. Category of applicant - proof of legal form such as constitutional documents;

D. Domicile – demonstrate applying from a CMA approved jurisdiction;

Saudi Arabia demystified

The inclusion of Saudi Arabia in the MSCI Emerging Market Index has led to a flurry of queries from potential investors. Where some of those questions raise certain myths about the Saudi market, Deutsche Bank provides the facts (Click the image below).
Ask your Relationship Manager for a copy of the ABCD test and the QFI application form. Deutsche Bank has also published a comprehensive guide to the Saudi capital markets for existing and potential investors. To obtain your copy of the Marhaba booklet, please click on the button below.

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Sources

1 Tadawul PDF Briefing (July 2018)
2
Deutsche Securities Saudi Arabia (July 2018) Saudi Arabia Market Update (PDF)

3 Deutsche Securities Saudi Arabia (July 2018) Saudi Arabia Market Update (PDF)

4 Bloomberg (June 20, 2018) Saudi Arabia wins coveted emerging market status in MSCI upgrade 

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