March 18, 2019 / 12:57 PM / a year ago

Mideast's biggest exchange expects foreign investment to grow, CEO says

RIYADH (Reuters) - Saudi Arabia’s listed companies could see holdings by foreign investors rise to 10 percent when their shares are included in index providers MSCI and FTSE’s emerging-market indices, the chief executive of Tadawul told Reuters on Monday.

FILE PHOTO: Chief Executive Officer of the Saudi Stock Exchange (Tadawul) Khalid al-Hussan attends a signing ceremony with Japan Exchange Group (JPX) Chief Executive Officer Akira Kiyota (not in picture) at Tokyo Stock Exchange (TSE), Japan March 14, 2017. REUTERS/Issei Kato

Tadawul is the Middle East’s largest exchange and Saudi Arabia’s main exchange. It has a total market capitalization of around $541.3 billion, with a free float of about 40 percent.

Saudi shares on Monday joined the FTSE Emerging All Cap Index with a weighting of 2.9 percent. In May, Saudi shares will join the MSCI Emerging Markets Index.

Khalid al-Hussan said he expected equities on Tadawul to attract $5 billion of passive fund inflows after the FTSE Russell inclusion. Foreign investors currently hold 5.9 percent of Saudi shares.

Active foreign investors in the market have been increasing since the beginning of the year, and the number of qualified foreign investors registering to trade on the Saudi exchange is increasing everyday.

Hussan said he estimates the Saudi exchange to see “around $5 billion of passive inflows coming from FTSE and around $10-11 from MSCI and some inflows from S&P.”

Foreigners have been net buyers of Saudi stocks since the start of the year, plowing more than $2.1 billion year-to-date into the Saudi market. The Saudi index is up nearly 9.6 percent, outperforming its Gulf peers.

“You have to applaud the Saudis for what they’ve done over the past year in relation to opening up the market, said Fadi Al Said, managing director and head of the MENA investment team at Lazard Asset in Dubai.

“I think the opening up the market, the QFI process, has gone through an evolution of simplifying the process,” Al Said said.

Index provider MSCI incorporated shares of United Arab Emirates and Qatar companies into its emerging market index in 2014.

Foreigners excluding strategic investors own less than 2 percent of Saudi stocks, analysts have said. Currently, foreign ownership of listed stocks is capped at 49 percent.

Hussan said it was too early to discuss raising the cap, given current ownership levels and size of the market.

“We would love that challenge to happen in the market and it will show that our market is very attractive, but until then I don’t see that the 49 percent is an obstacle to international investments, taking into the account the size of the Saudi market.”

The Saudi main equities index closed up 1 percent on Monday.

Tadawul is expected to introduce index futures this year, pending the feedback it receives from investors to the rules and regulations of trading derivatives, which will be offered for public consultation over next two weeks, he said.

Reporting By Marwa Rashad; additional reporting by Nafisa Eltahir, editing by Hadeel Al Sayegh, Larry King

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