A closer look at Saudi Arabia's Tadawul stock market | Singularis …

A closer look at Saudi Arabia's Tadawul stock market | Singularis …

Interview with Haitham Mubarak at Saudi Fransi Capital.

Saudi Fransi Capital (SFC) is the investment arm of Banque Saudi Fransi with a capital of SR 500 million. The Company is licensed by the Capital Market Authority to conduct the full-range of investment activities.

Saudi Arabia’s Tadawul stock market is the largest in the Gulf region. Why does it stand out?

You would say that this is the part or it’s derived from the fact that the Saudi economy is the largest within the region. Hence the stock market is partly a reflection of the size of the economy, not to mention that it is one of the most active ones because the history of the stock market, i.e. people trading in the stock market and people trading stocks goes back probably more than some of our neighbours in the region. Hence the fact that the stock market is larger.

When we speak about investments in GCC equities in the region many times investors have the concern about correlation to oil. What is the current situation in Saudi Arabia?

You’re right this is an historical, I would say, notion that the Saudi stock market is correlated with oil. Actually it has been the case until about the breakout or the breakaway came towards the late ‘90s, early 2000s. Now the correlation between the returns of Tadawul stock index and the returns of oil on a monthly basis are around 32 to 33%. So the correlation is quite low. Quickly we see that oil over the last, maybe two and a half years or so, hasn’t traded relatively good in range. However the Saudi stock market as represented by TASI has had double digit returns over the last two years and even year to date, in 2013 and year to date. So the correlation in general is lower than what is perceived.

From your answer I deduct as well that maybe the correlation was higher in the past and now it has gone down. If that’s the case…

Absolutely, absolutely, and one reason why is most, I wouldn’t say all, but a large part of the companies that are listed in the market are not directly correlated to oil. For example oil, at least, as I said directly correlated to oil, there is a knock off effect that transcends and goes down to the entire economy. In terms of direct correlation a lot of the companies are not directly correlated, for example banks, telecommunications, retail, some of the industrial names are not directly correlated. One area of the market which is directly correlated in a sense to oil prices is Petro Chemicals but that’s around 28 to 29% of market cap.

Now if we speak about the market in general we have read news about big IPOs being planned for 2014. What can you say about the market developments that we will witness during the rest of the year?

I think over the last maybe year and a half now and we think it will continue for 2014 and maybe even 2015, and when we talk about the stock market the inflow of IPOs into the market is healthy. We think probably 2014 would be one of the healthiest years for primary listings in the market or initial public offerings.

The highlight is National Commercial Bank (NCB) with us at Saudi Fransi Capital. We are the lead advisors for two major organisations that hopefully will be listed in the market before the year-end. We’re talking about Sulaiman Al-Habib Medical, one of the largest hospital operators in Saudi Arabia and also Aqua Power, one of the largest power producers in actually the region. We believe that, for example, these two companies and these are quite large companies in addition to National Commercial Bank will be a large addition to the stock market. So we are in a very healthy primary offering period these days.

That sounds very promising, so what can you say about foreign investor participation in this growth?

Currently foreign investors are investing in the markets through swaps, through return swaps. We’ve been hearing for a while that the market will be open for direct participation of qualified financial institutions. Our understanding is that at least the operational side of that is almost ready. Now it becomes more of just a decision for the authorities in Saudi Arabia to implement the idea. If that comes in we believe it will be very healthy news for the Saudi market because of its size and also the liquidity. Nowadays the average value traded in the market is around $3b. So this is quite a liquid market for international investors. Also it’s quite a diverse market especially when compared to other GCC markets.

So from an international investor’s perspective, looking at Saudi Arabia in particular, it’s a liquid market you say. Are there any other aspects that stand out why investors should choose Saudi Arabia before other frontier markets?

Yes, the valuation on expected returns for 2014 the market is now trading at a 15 times multiple. So valuations in terms of an emerging market and in terms specifically of Saudi are still at a reasonable level. Historically the market has been trading within a band of 15 to 18 forward multiples. So it’s within the historical band of multiples. The market is not stressed yet. So valuation is reasonable, liquidity is very good for a market and also one exceptional, or actually two exceptional aspects of the Saudi market is the relative cheapness of the brokerage commissions. Once somebody goes directly into the market the market only charges a very low commission compared to other markets. Also the liquidity where today settlement is actually in the same day. This is a very liquid market, settlement is very quick and it’s actually a cheap market to transact in. So it’s a very effective market to look at.

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A closer look at Saudi Arabia's Tadawul stock market | Singularis …

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