Saudi Stock Exchange is a Top Destination for Foreign Equity Flows

Established in 2007, the Saudi Stock Exchange (Tadawul) — the largest equity market in the Middle East and North Africa (MENA) — continues to modernize and attract global investors.

Tadawul’s inclusion in the MSCI Emerging Market Index in August, along with other global indexes, is expected to be a game-changer in fulfilling its aspirations to become a diversified and integrated exchange.

The clear ambition is to further attract investors from around the world and advance Saudi Arabia’s capital market.

Tadawul has been working with the Capital Market Authority (CMA) and other Saudi government entities and has engaged with leading emerging-market investors and financial intermediaries around the world.

Together, they seek to implement the most valuable and effective enhancements to strengthen and augment the exchange’s infrastructure, create an attractive investment environment for local as well as international investors, align regulatory and market frameworks with international best practices and foster a diversified economy through a vibrant capital market.

Sebastien Lieblich, Global Head of Index Management Research at MSCI, stated in a 2018 interview: “...international investors were impressed by the speed of change in the accessibility of the Saudi Arabian equity market and the level of commitment that the Capital Market Authority (CMA) and the Saudi Stock Exchange (Tadawul) have demonstrated”.

A diversified and integrated financial ecosystem

Tadawul believes the fast pace of change can be credited to all stakeholders working together with one goal: to open up the market.

“Our goal is to create a seamless financial ecosystem that benefits all of our stakeholders, both local and international. This has propelled us to implement a series of market enhancements and develop a full range of products and services that makes listing and investing easier, faster and more secure,” says Sarah Al-Suhaimi, Chairperson of Tadawul.

“Our fully digital infrastructure enabled us to transform rapidly while expanding investor access, which paved the way for inclusion in major emerging-market indexes. We are delighted to have successfully completed the inclusion of Tadawul into the MSCI Emerging Markets Index, and we are well into the implementation phase of our inclusion on the FTSE Russell Emerging Markets Index, S&P Dow Jones Emerging Market Indices and global benchmark indexes.”

Tadawul has implemented many enhancements over the past two years to bring the exchange in line with international best practices and norms. This has included the establishment of Muqassa, an independent central clearinghouse that will act as a cornerstone in the future derivatives market; adoption of a T+2 settlement cycle, delivery-versus-payment settlement model and independent custody model; and the introduction of securities lending and short selling.

Earlier this year, Tadawul and MSCI jointly launched the MSCI Tadawul 30 Index, which provides investors with a benchmark of the largest and most liquid securities in the Saudi Arabian equities market.

The index will allow investors to trade derivatives and exchange-traded financial products, thereby providing them with risk management tools and further investment options—another measure taken to improve market efficiency, enhance liquidity, bolster investor security, mitigate risk and reduce price volatility. 

Today, investors can look to Tadawul—which accounts for half of the market capitalization and more than three-quarters of the trading value of all Gulf Cooperation Council (GCC) markets combined—for access to a broad and growing range of investments including equities, corporate and government bonds and sukuks, REITs and ETFs.

Attracting international investors

Tadawul, in its bid to increase market accessibility to the international investor community, works with the CMA to regularly update the Kingdom’s Qualified Foreign Investor (QFI) program. Since the program’s introduction in June 2015, regulators have relaxed the rules related to QFI qualification, permitted QFIs to participate in all domestic IPOs and eased foreign ownership restrictions.

Today, the number of QFIs has grown exponentially to more than 1,300, with a 428% increase YTD, and that number is expected to grow further by the end of 2019.

“International investors are an important component of Tadawul’s growth, and we are in continuous dialogue with them as we consider further market enhancements,” says Khalid Al Hussan, Chief Executive Officer of Tadawul. “We will continue to move forward with initiatives to strengthen the exchange and create an attractive climate for domestic and foreign investors and issuers alike.”

Advancing the Saudi capital market

Tadawul’s transformation is an integral part of Saudi Arabia’s Financial Sector Development Program, which is tasked with developing a resilient and diversified domestic capital market as a key initiative of the Kingdom’s ambitious Vision 2030 blueprint to bring Saudi Arabia within the circle of developed nations.

Tadawul supports the Vision 2030 goals by increasing the private sector’s contribution to the economy, diversifying the economy through reduction of dependence on oil, drawing in more foreign investment and growing the SME sector.

Index inclusion is a milestone that supports Vision 2030 through a virtuous cycle because it further bolsters the profile and visibility of Saudi companies to investors around the world, supports their liquidity and broadens their shareholder base. This enhances the value of listing on Tadawul as a public company and expands opportunities for international investors to invest in the MENA and GCC regions.

Encouraging results

With each new initiative actioned, Tadawul has leapfrogged its peers to take its current role as the leading capital market within the region. Today it is home to 202 listed companies, with a total market capitalization of US$548 billion and an average daily trading value of US$1.0 billion.

The influx of foreign funds is further diversifying the market’s investor base. Total trading activities of foreign investors, including QFIs, reached USD56 Billion in the first seven months of 2019, representing 21% of total market trading activities. As of today, foreign ownership reached 8.0% reflecting a 68% increase YTD.

“The results are encouraging,” shares Mohammed Al Rumaih, Chief of Markets of Tadawul, “Inclusion into these preeminent indices and a palpable increase in international investor confidence reflect Tadawul’s development into a full-fledged financial ecosystem that is increasingly recognized around the globe.”

Increasingly global outlook

Tadawul’s determination to earn the confidence and trust of the international investor community continues unabated. The exchange aims to create new opportunities to build upon its current position as the regional hub and leading capital market in the GCC and MENA regions, with the objective of becoming an increasingly active player in the global capital markets, a source of capital and an investment destination.