the...

aranca.com

Market Liberalization in Saudi Arabia:

Opportunities Galore

for Foreign Investors

2014

2 // www.aranca.com

Market LiberaLization in Saudi arabia: opportunitieS GaLore for foreiGn inveStorS

Report Prepared by: Prahlad Bhanushali, Rishiraj Agrawal, Ati Ranjan

ContentsMulti-billion dollar investment opportunity in KSA 03

Importance of Saudi Arabia as an investment destination 07

Tadawul providing a level playing field among many G-20 economies 13

Other markets performed well after liberalization 19

Conclusion: Opening of market to lure huge foreign investments 23

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An ArAncA SpeciAl report 2014

Multi-billion dollar investment opportunity in KSA

In July 2014, authorities approved plans to fully open the Saudi stock

exchange (Tadawul) to foreign direct investments (expected by 1H 2015).

The move is believed to be a precursor to the much-coveted inclusion

of Tadawul in the MSCI EM Index (likely to take place in 2017). Following

the recent upgrade of the UAE and Qatar to emerging-market status, this

could enhance MENA’s visibility among global investors, increasing its

weightage to 5.35% (including Saudi Arabia’s 4%) vis-à-vis 1.35% currently.

Given the scenario, global portfolio managers are expected to allocate

around USD40bn to Saudi Arabia. In addition to passive investment, we

expect a lot of active money to begin flowing into the Kingdom, given the

fundamental strength of KSA’s economy and stock market.

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Saudi Arabia, the last G-20 country to open doors to foreign investors

Saudi Arabia, the largest country in MENA by market capitalization and GDP, is the last

of the G-20 countries to open its stock market to full foreign participation. Except China,

where there is a cap on investments for Qualified Foreign Institutional Investor (QFII), all

other G-20 markets are fully open to foreign direct investments. Saudi Arabia’s market cap

to GDP ratio currently stands at 0.71, lower than the G-20 average of 0.79 and significantly

below that of the US (1.14), Japan (0.94), the UK (1.34), Canada (1.28), Australia (0.97), South

Korea (1.07) and South Africa (2.93). We believe opening doors to foreign investors would

bring the ratio closer to 1; our back of the envelope calculation indicates that deepening

of the market would mean more than USD150bn addition to market capitalization if the

MCap/GDP ratio improves by just 10 basis points.

0

3,000

10,000

20,000

USD

bn

Figure 1: MCap to GDP ratio of just few G-20 countries greater than 1

Source: World Exchanges, IMF World Economic Outlook Database, April 2014

Inclusion in MSCI EM Index to attract significant inflows

Based on our preliminary calculations using funds benchmarked to the MSCI EM Index

and weightage based on market cap, we expect global portfolio managers to eventually

allocate about USD40bn to Saudi Arabia. According to the July 2014 MSCI EM factsheet,

funds aligned to MSCI indices totaled USD9trn. Considering the market cap approach

to calculate weightage, the MSCI EM has 12% weightage on MSCI; this translates to an

allocation of USD1trn. The MSCI Saudi Arabia Domestic Index has a free float market cap

of USD194bn from 45 constituents. Based on our calculation, this indicates roughly 4.7%

weightage on the EM Index; however, going by the market’s estimate, even if weightage

is around 4%, it represent a potential investment of around USD40bn.

Once included, Saudi Arabia would be among the top ten countries in the MSCI EM list of

23 nations, which is currently dominated by China (19.44%), South Korea (15.62%), Taiwan

(11.84%), Brazil (10.92%) and South Africa (7.51%).

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Figure 2: Expected structure of MSCI EM after inclusion of Saudi Arabia

Top country weightage in MSCI EM:

⊲ China – 19.44%

⊲ South Korea – 15.62%

⊲ Taiwan – 11.84%

⊲ Brazil – 10.92%

⊲ South Africa – 7.51%

⊲ India – 6.84%

⊲ Russia – 5.40%

⊲ Mexico – 5.12%

⊲ Saudi Arabia – 4% (expected)

FUND BENCH-MARKED

INV

ES

TM

EN

T O

PP

OR

TU

NIT

Y

IN S

AU

DI

AR

AB

IA

WEIGHTAGE ASSIGNED

Corpus allocation to MSCI Funds:

USD9.0trn

MSCI Index Market Cap: USD33.6trn

MSCI EM Index Market Cap: USD4.0trn

Corpus to MSCI EM aligned based on weightage i.e. 12%

Corpus allocation to EM Funds : USD1.0trn

Weightage allocated to KSA in MSCI EM

Index – 4%

USD40bn

Source: MSCI, Aranca research

Rapid strides toward inclusion in MSCI EM; likely by 2017

The three major criteria to enlist in the EM Index are economic development; having the

requisite size and liquidity; and market accessibility. Saudi Arabia is currently at par with

developed markets with regard to the first two parameters. However, it lags in terms

of market accessibility, particularly openness to foreign ownership and efficiency of

operational framework. In line with the aim to fully liberalize the Saudi market by 1H 2015

and bring it at par with international standards, authorities in KSA are taking steps aimed

at effective governance of market and building a trading technology framework, among

others. Therefore, we believe Saudi Arabia would be a part of the MSCI EM Index in 2-3

years, taking much lesser time than the UAE and Qatar (5–6 years).

CRITERIA FRONTIER EMERGING DEVELOPED SAUDI ARABIA

A. Economic development

Sustainability of Economic development No requirement No requirement GNI per Capita 25% > above World Bank High Income threshold

DEVELOPED

B. Size and Liquidity Requirements

No of companies meeting the below criteria:- 2 3 5 DEVELOPED

Company size USD 449 mn USD 898 mn USD 1796 mn DEVELOPED

Security size USD 33 mn USD 449 mn USD 898 mn DEVELOPED

Security Liquidity 2.5% ATVR 15% ATVR 20% ATVR DEVELOPED

C. Market Accessibility Criteria

Openness to foreign ownership At least some Significant Very high FRONTIER

Ease of capital inflows/outflows At least partial Significant Very high DEVELOPED

Efficiency of operational framework Modest Good and tested Very high FRONTIER

Stability of institutional framework Modest Modest Very high EMERGING

Opening up of the market illus-trates its commitment to attract foreign investors

2008: UAE and Qatar first sought for inclusion in MSCI EM

2013: Announced approval

2014: Finally included

Figure 3: Saudi Arabia standing on par with the developed markets requirements on several parameters

Source: MSCI, Aranca research

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Importance of Saudi Arabia as an investment destination

Saudi Arabia has come a long way in terms of developing its stock

market, a crucial determinant to achieving an ambitious target. The

country began to develop its stock market more than a decade ago,

focusing on fundamentals such as transparency, disclosures, insider

trading, and credit control, and recently switched gears focusing on

raising it to international standards. On the economic front, Saudi Arabia

remains the favorite among the G-20 nations, with stable GDP growth,

high fiscal surplus and low debt levels, among others. The Kingdom

scores high on other development parameters such as ease of doing

business, investor protection and raising credit. Moreover, given its

sovereign rating of AA- with positive outlook, the country is better than

many developed and emerging economies. Another interesting aspect

is that KSA is insusceptible to political crisis in the MENA region, as seen

during the Arab Spring.

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Evolution of investment regime in Tadawul indicates strong commitment to attract foreign capital

Robust institutional and regulatory framework and a proactive policy make Saudi

Arabia one of the most attractive markets for global investors. Since the handing over

of Tadawul’s supervision to a separate body (Capital Market Authority) in 2003, the

operational structure of the capital market has become robust, governance/transparency

has improved, and policymaking has become effective. The Capital Market Authority’s

strategy to transform the stock market, as it looks to gradually open the capital market to

foreign investments, can be summarized in three broad steps:

» Removing irregularities in procedure and operations of the stock market, and focusing

on the size and depth of the market

» Paving way for foreign investments, albeit indirectly

» Undertaking initiatives to complete the liberalization of Tadawul

Figure 4: Development of Tadawul

Source: Capital Market Authority, KSA, Aranca research

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

…Going forward

2014 1H2015 2016 1H2017

⊲ Authority of supervising the stock market handed over to CMA(Capital Market Authority) from SAMA

⊲ A lot of structural rigidities saw the index reaching an all time high

⊲ Major retail participation contributed to increased volatility

⊲ Increasingly stretched valuations led to a severe correction with TASI losing half its value

⊲ Post correction, CMA adopted 3-pronged strategy; increasing market size & depth, improving transparency and rooting out insider trading

⊲ FIIs allowed to participate directly through ETFs

⊲ CMA starts working on regulation to allow QFII

⊲ Full liberalization of Saudi Market and opening up for foreigners

⊲ Direct market access for foreign participation

⊲ Potential inclusion in MSCI Emerging Markets Index

⊲ Change in working days to Sunday-Thursday, brings it closer to international standards

⊲ Tightening regulations on loss-making companies to reduce speculations

⊲ Introduction of VWAP mechanism increases institutional participation

⊲ New corporate governance code launched

⊲ Foreigners allowed entry through swaps ⊲ Earnings disclosures made mandatory

⊲ FIIs allowed entry through swaps

⊲ IB licenses issued to foreign banks

⊲ SAMA introduced measures to reduce personal loan leverage

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Market begins to stabilize with the pick-up in reforms from 2009

The Tadawul witnessed two major instances of volatility during FY03–09. A number of

structural rigidities led to a run-up in prices which saw the Tadawul All Share Index (TASI)

reach a record high of 20,635, with heavy retail participation cited as one of the reasons

for the considerable volatility. Following the crash that wiped out nearly USD480bn and

reduced the TASI to less than half its value, the CMA wasted no time in adopting a three-

pronged strategy: increasing size and depth of the market, improving transparency and

rooting out insider trading. Having identified the need for foreign institutional participation

to reduce volatility, the authorities turned their focus on removing imbalances in the

market and attracting FIIs. Some of the steps included permitting foreign participation

through swaps, ETFs and changes in regulations to allow QFII. The second instance

was smaller in magnitude and related more to the global financial crisis of 2008. The

reforms that began with the partial opening of the market in 2009 decreased volatility

and culminated recently with the full liberalization of the Saudi market.

0

5,000

10,000

15,000

20,000

25,000

0

500

1,000

1,500

2,000

2,500

3,000

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14

SASEIDX Index - Volume (unit) SASEIDX Index - Last Price

Figure 5: Reduction in volatility from 2003 with the partial opening of the market in 2009

Source: Tadawul, Bloomberg

Saudi Arabia has sound economic fundamentals

Expected to continue growing at a decent pace

Saudi Arabia’s economy has grown at an impressive rate over the past few years.

Moreover, KSA is among the few countries that remained relatively immune to the global

financial crisis, clocking an average GDP growth of 6%, third only to India and China. The

IMF expects KSA’s real GDP to continue growing at a modest (4–4.3%) but higher rate

than advanced economies (2.3%).

416520

429527

670734 745 773 791 816 850 889

932

6.0%

8.4%

1.8%

7.4% 8.6%

5.8%

3.8% 4.1% 4.2% 4.2% 4.2% 4.2% 4.3%

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

Nominal GDP (USD bn) Real GDP % growth

Figure 6: Nominal GDP (USD bn) and Real GDP Growth % growth (2007–19E)

Source: IMF World Economic Outlook Database, April 2014



Favorable demographics key to sustained economic growth

With 65% of its total population below 34 years old (median age: 26 years), strong

demographics is an important underlying strength of Saudi Arabia; this, we believe, is the

key to sustained economic growth. Over the last few years, the Saudi government has

laid emphasis on tapping the potential of its burgeoning youth population by spending

on education and related areas (expenditure on education accounted for nearly 25% of

2013 budget; highest in the world) and simultaneously taking steps to boost employment

in the private sector through various labor reforms.

8.3 8.8 8.9 8.5 8.3 8.1 7.9 7.7 7.4

10.2 10.6 11.3 12.0 12.1 12.3 12.2 11.7 11.5

5.8 7.0 7.6 7.9 8.2 8.6 8.8 9.1 9.42.33.1 3.9 5.1 6.4 7.0 7.4 7.7 8.1

0.8 1.01.4 2.0 2.6 3.5 4.7 6.0 6.8

2010 2015E 2020E 2025E 2030E 2035E 2040E 2045E 2050E

Popu

latio

n in

Mn

0 to 14 15 to 34 35 to 49 50 to 64 65 & Above

Figure 7: Favorable demographics for sustained economic growth

Source: World Bank Database

Fiscal surplus, despite expansionary spending policy, led by influx of petrodollars

Saudi Arabia is expected to record a fiscal surplus for the fifth consecutive year in

2014 due to high oil prices and growth in oil production—oil revenues are expected to

total USD329bn. This has enabled the Saudi government to maintain an expansionary

fiscal policy to diversify the economy from oil. Therefore, despite the economy’s heavy

dependence on oil revenues, the non-oil sector’s contribution to GDP has risen steadily,

standing at 53% currently from 44% in 2008.

194

315

154

219

318

369331 329

131 151172

208238

262 269 274

2007 2008 2009 2010 2011 2012 2013 2014E

Government Revenue (USD bn) Government Expenditure (USD bn)

Figure 8: Government revenue and expenditure

101 109127

144 155

184

219

131151

172

208

238262 269

2007 2008 2009 2010 2011 2012 2013

Budgeted (USD bn) Actual (USD bn)

Figure 9: Budgeted vis-à-vis actual spending




Saudi Arabia’s current account balance (CAB) is one of the largest in the world due to

its dominance in oil export. The country’s CAB, as a percentage of GDP, of 17% is well

above that of developed economies such as the US (-2.7%) and UK (-3.8%) as well as

emerging markets such as Brazil (-2.4%), China (2.3%) and India (-4.9%). Saudi Arabia has

also brought down its debt to low single digit over the years; it currently stands at just

3% of GDP.

211233

313

192

251

365388 376

70 90115 96 107

132156 168

0%

5%

10%

15%

20%

25%

30%

2007 2008 2009 2010 2011 2012 2013 2014E

Exports (USD Bn) Imports (USD Bn) CAB (% of GDP)

Figure 10: KSA’s CAB one of the highest in the world

71

63 60

45

36

2620 20

17%

12%

14%

8%

5%

4%3% 3%

2007 2008 2009 2010 2011 2012 2013 2014E

Public Debt (USD bn) As % of GDP

Figure 11: KSA’s debt levels reduced drastically


Investor-friendly environment enhancing competitive strength

Saudi Arabia has a higher sovereign rating than most emerging markets; this reflects its

strong fundamentals. S&P has given Saudi Arabia an ‘AA-’ rating with a positive outlook,

just three notches below the maximum possible rating of ‘AAA’. Moreover, KSA scores

better in terms of ease of doing business, with strong investor protection laws and high

availability of credit, among a host of parameters. The raising credit parameter reflects the

collateral and bankruptcy laws that support lending and borrowing, whereas the investor

protection parameter indicates strength in three areas: extent of disclosure, extent of

director liability and ease of shareholder suits.

Prime – High Grade (AAA to AA-)

Medium Grade (A- to BB-)

Speculative Grade (B+ to CCC-)

Figure 12: KSA’s sovereign rating just two notches below highest

6 716 23 26

41 48 5371

92 96109 116

126134

Figure 13: KSA among the most business-friendly economies in EM

113

28 2842

55

73 73 7383 83 86

109 109

130

Figure 14: Getting credit in KSA easiest in MENA (rank 133)

4 1022

34 34

5268 70

80 8298 98 98

115128

Figure 15: KSA offers strong investor protection

Source: S&P, World Bank, Rankings taken from Ease of Doing Business Report 2014



Unaffected by social unrest in MENA

Saudi Arabia was largely unaffected by the Arab uprisings that swept the MENA

region. This was mainly due to the Saudi government’s ability to satisfy the needs of its

population. The Government of KSA implemented major labor reforms in 2011 that led to

an increase in employment as well as salaries of nationals, ensuring stability. Factors such

as economic development, satisfaction with the system of governance and emerging

nationalism have held the nation together during turmoil and otherwise; consequently,

investors are more confident about stability in the Kingdom.

Saudi Arabia

Oman

UAE

IraqIran

Jordan

Algeria

Lebanon

Kuwait

MoroccoBahrain

YemenEgyptLibyaTunisia

SyriaRegime dethrone

Civil war

Major protests

Governmental reforms

Minor Protest

No Impact

Figure 16: Impact of Arab Spring in MENA (Saudi Arabia vis-à-vis other countries)

Source: Aranca research



Tadawul providing a level playing field among many G-20 economies

Despite Saudi Arabia being an oil export economy, it offers investment

opportunities across several non-oil sectors such as petrochemical,

banking, telecom, food, retail, among others. We believe these

opportunities would continue to increase as the country diversifies its

economy further. The Saudi stock market (Tadawul) is fairly liquid and

the most active IPO market in the MENA region, both in terms of value

and listings. With just 169 listings, the market has an average monthly

turnover of USD49.5bn—over 68 stocks (or 40% of total) have a market

cap of more than USD1bn (and around 100 stocks with market cap of

USD0.5bn or more); this places it above the stock markets in several

G-20 nations. Furthermore, due to its low correlation with emerging

countries, the Saudi stock market provides investors with diverse options.

Therefore, we expect it to continue trading at a premium to the advanced

and emerging market group averages.

3



Economic diversification creating investment opportunities across sectors

Saudi Arabia is an oil-driven economy, with the oil segment contributing more than 85%

to total revenues and approximately 47% to the Kingdom’s GDP. However, all companies

in this space are unlisted. Hence, the Saudi stock market provides investors exposure to

only non-oil companies across diverse sectors such as petrochemicals, financial, food,

retail, among others. There are 169 listed companies in the Saudi stock market, with the

financial sector having the highest free flow weightage, followed by petrochemicals and

telecom. We believe further diversification of the economy would unlock more growth

potential in the non-oil segment and benefit investors.

Saudi stock market above several G-20 peers

With an average monthly turnover of USD49.5bn, the Tadawul is at par with most G-20

peers; in fact, it is competitively placed with the likes of Brazil, South Africa and Russia.

The Saudi stock market’s share turnover velocity ratio is 1.1 vis-à-vis Brazil’s 0.57 and South

Africa’s 0.23. Furthermore, the Saudi stock market is fairly deep, with over 100 companies

(or 59%) and more than 68 companies (or 40%) of the total 169 having a market cap above

USD0.5bn and USD1bn, respectively. This is higher than the peer group average of 34%

and 24%, respectively. Therefore, attractive blue-chip offerings and market depth make

Saudi Arabia a lucrative destination for investments.

Non-oil

Oil

KSA Oil and Non-oil GDP No of Listed Cos. Avg. TurnoverFree Float Wt.

Financial Services

Food & Retail

Industrial

Construction

Cement

Petrochemicals

Telecom/IT

Metrics of Key Sectors in TASI Banking Petrochemical Food & Retail Construction & Cement Telecom

Sector Revenue (USD bn) 14.7 80.9 19.2 9.9 20.7

MCap as % of GDP 15% 21% 7% 5% 3%

Free Float MCap (USD bn) 61.4 51.1 28.7 25.1 10

No of Listed Cos 11 14 30 30 5

Daily Turnover (USD mn) 247 373 352 211 160

Volume as % of Total TASI 13% 16% 9% 8% 12%

Figure 17: Non-oil segment provides ample opportunities for investors

Source: Tadawul, Bloomberg



Country Stock Exchange MCap (USD bn)

Avg turnover (USD bn)

Share turnover velocity ratio

No of Listed Cos

No of Cos MCap>USD 1

bn

No of Cos MCap>USD

500 mn

Italy Borsa Italiana 698 83.3 1.25 360 80 101

Brazil BM&F Bovespa 1,100 55.7 0.57 369 117 160

Saudi Arabia Tadawul SE 530 49.5 1.1 169 68 100

Turkey Borsa Istanbul 223 31.4 1.8 231 40 72

South Africa Johannesburg SE 1,028 28.3 0.23 375 86 118

Russia Moscow Exchange 735 23.3 0.33 251 52 71

Mexico Mexican Exchange 530 13.1 0.3 142 68 84

Indonesia Indonesia SE 408 8.3 0.19 496 75 124

Argentina Buenos Aires SE 56 0.3 0.09 104 11 20

Average 590 32.6 0.65 277 66 94

Figure 18: Tadawul – Provides an excellent depth to investors

Source: Bloomberg, Aranca research

Robust IPO activity

Saudi Arabia is the largest IPO market in MENA, with 37 listings over the last five

years (2009–13), followed by Tunisia (23) and Oman (8). It is also the biggest in terms

of proceeds raised (USD5bn vis-à-vis USD0.5bn in Tunisia and USD1.2bn in Oman). Al

Hammadi Company for Development and Investment (in the retail sector) was the last

of the four IPOs in 2014 raising a total USD533mn (higher than USD523mn last year).

We believe the potential remains strong, with more than 35 family-owned businesses

in discussions with advisors for IPOs, and National Commercial Bank (NCB), the largest

Saudi bank, likely to go public later this year. Al Rajhi, the second largest bank after NCB,

has a market capitalization of USD30bn.

Figure 19: Saudi Arabia, largest IPO market in MENA (2008–14 YTD)

Source: Zawya, Aranca research

9,705

1,035 1,022460

1,420523 533

13

11

9

5

7

54

2008 2009 2010 2011 2012 2013 YTD 2014

Size of Offerings (USD mn) No. of IPOs

2008 2009 2010 2011 2012 2013 YTD 2014

Construction Consumer Goods Financial Services Food and Beverages Health Care Industrial Manufacturing Leisure and Tourism

Mining and Metals Petrochemical Real Estate Retail Telecommunications Transport



An attractive alternative to riskier emerging markets

Saudi Arabia’s stock exchange provides significant diversification-related benefits to

global investors due to its low correlation of 27% and 47% (1-year and 3-year) with the

MSCI EM Index. Separately, Tadawul has a negative to low correlation with Russia, China,

Brazil and South Korea. However, its correlation with the US market is high at 87–94%,

given the dollar peg; we believe this bodes well for investors willing to bet on safe-haven

dollar-denominated investments, as seen during the emerging market currency turmoil.

96.8% 96.1%

92.8% 90.9% 86.7%

61.6%47.3%

-62.0% -53.4%

13.7%22.3%

90.0% 93.4%

94.6% 95.9%

93.9% 93.7% 91.3%83.1%

26.8%

-53.6% -60.5%-43.2%

54.2%

90.8% 92.5%

Qatar Dubai Abu Dhabi S&P DJIA FTSE MSCI EM Russia China Brazil Korea Taiwan South Africa

1 Yr Correlation 3 Yr Correlation

Figure 20: Diversification benefits due to low correlation with MSCI EM




Strong fundamentals, growth potential warrant premium valuation

The Saudi stock market’s return on equity (ROE) currently stands at 13%, higher than

that of MSCI EM and MSCI ACWI (12% each). Furthermore, according to the consensus

estimate, the earnings of listed Saudi firms would grow 13% in 2015, at a higher pace than

the expected 11% average for both emerging as well as advanced economies. Also, at

3%, the Tadawul’s dividend yield is higher than the 2.5–2.7% range for both MSCI EM and

MSCI ACWI. We believe these factors, coupled with strong macroeconomic fundamentals,

justify the premium valuation of 20x for the Saudi stock market versus 17x for MSCI ACWI.

US

China

Japan

Germany

France

UK

Brazil

Russia

India

Canada

Australia

Mexico

Korea

IndonesiaTurkey

Saudi Arabia

Argentina

South Africa

3%

6%

9%

12%

15%

18%

3.0x 6.0x 9.0x 12.0x 15.0x 18.0x 21.0x 24.0x 27.0x

RO

E

P/E multiple

Figure 21: Saudi Arabia’s position among key developed and emerging countries


Size of the bubble represents MCap



Other markets performed well after liberalization

Emerging markets such as India, Dubai and Qatar have witnessed positive

results in the form of increase in market capitalization, investments and

market activity after being opened to foreign institutional investors (FIIs).

While the Indian market benefited from improved trading infrastructure

and better corporate governance, which attracted a lot of FIIs, trading

activity across the UAE and Qatar indices surged following their inclusion

in the MSCI EM Index. Nine UAE and Ten Qatari stocks were included

in the MSCI EM Index, which witnessed higher foreign participation in

related sectors as well as increased foreign ownership in these stocks.

The Government of Qatar raised the FOL to 49%; this is expected to

result in higher foreign inflows and increase the weightage of Qatari

stocks on the MSCI EM Index.

4



India: Stock market mainly driven by FIIs

Like Saudi Arabia, other emerging markets witnessed a boom in investments and market

capitalization after opening their doors to FIIs. India’s Sensex moved up to 26,000 from

merely 2,000 in two decades due to huge foreign participation. The Indian market

rose significantly after 2003 owing to the massive inflow of FII money following the

development of trading infrastructure and improvement in corporate governance.

4-Jan-93 3-Mar-95 29-Apr-97 26-Jun-99 22-Aug-01 19-Oct-03 15-Dec-05 11-Feb-08 9-Apr-10 5-Jun-12 2-Aug-14

Volume (mn) Sensex

1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12 2013-14Turnover (INR cr) FII stake (%)

Figure 22: India: FII driving movement in index and volumes

Source: Bloomberg, Bombay Stock Exchange, National Stock Exchange, Aranca research

UAE and Qatar: Included in MSCI EM Index in May 2014

Trading activity surges, foreign ownership rises in selected stocks in UAE

The UAE index rose significantly, while trading activity increased nearly fourfold after the

country was included in the MSCI EM Index, the process for which began a year earlier

in June 2013. Notably, Dubai Financial Market (DFM) reached a five-year high in May

following the news of inclusion. In June 2014, four stocks of the Abu Dhabi Securities

Exchange (ADX) – First Gulf Bank, National Bank of Abu Dhabi, Abu Dhabi Commercial

Bank and Aldar Properties – and five stocks of DFM – Arabtec, DP World, Dubai Financial

Market, Dubai Islamic Bank, and Emaar Properties – were included in the MSCI EM

Index; this led to higher foreign participation in banking, financial services and real estate

sectors.



01-Jan-12 01-Apr-12 01-Jul-12 01-Oct-12 01-Jan-13 01-Apr-13 01-Jul-13 01-Oct-13 01-Jan-14 01-Apr-14 01-Jul-14

Volu

me

in m

n

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

ADSMI DFMGI

Volumes quadrupled after including in MSCI EM

Figure 23: UAE: Trading improves significantly after MSCI EM inclusion

Source: Bloomberg, UAE Stock Exchange websites, Aranca research

13.96%15.41%16.02%15.88%16.54%

20.52%20.82%21.13%

Jan-13Apr-13Jul-13

Oct-13Jan-14Apr-14Jun-14

08-08-2014

2.76%2.74%

4.26%6.33%

6.89%8.49%

8.98%9.90%

Jan-13Apr-13Jul-13


08-08-2014

5.54%5.73%

5.02%4.96%

3.72%3.66%

5.40%5.31%

Jan-13Apr-13Jul-13


08-08-2014

8.66%7.91%

9.62%9.07%

8.78%9.23%

11.07%10.57%

Jan-13Apr-13Jul-13


08-08-2014

2.35%3.10%

3.02%3.03%3.05%3.03%

3.61%3.68%

Jan-13Apr-13Jul-13


08-08-2014

11.96%10.72%

13.09%12.25%

13.67%14.53%

17.35%17.98%

Jan-13Apr-13Jul-13


08-08-2014

14.73%14.90%

15.18%15.19%

15.06%14.65%14.64%

14.96%

Jan-13Apr-13Jul-13


08-08-2014

7.32%7.04%

7.39%7.71%

8.79%8.76%9.00%9.19%

Jan-13Apr-13Jul-13


08-08-2014

Abu Dhabi Commercial Bank

National Bank of Abu Dhabi

Dubai Islamic Bank

First Gulf Bank

Arabtec

Emaar Properties

Aldar Properties

Dubai Financial Market

Figure 24: UAE: Increase in foreign shareholding in companies included in the MSCI EM Index

Source: Bloomberg, Stock Exchange website, Aranca research

Qatar performs on similar lines

The Qatar Exchange (QE) index reached a lifetime high of 13,910 after inclusion of 10 stocks

in the MSCI EM Index in June 2014. Furthermore, foreign ownership grew significantly in

selected stocks. Recently, the government’s decision to raise the foreign ownership limit

(FOL) to 49% from 25% for listed companies strengthened investor sentiment. The rise

in FOL is expected to not only help the country witness foreign inflow of approximately

USD440mn but also increase the weightage of the index from 0.47% to 0.62% (higher

than the UAE’s 0.58%) on the MSCI EM Index in the near future.



Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14

Volu

me

in m

n

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

DSM

Before the announcement, volumes averaged 90mn

After the announce-ment, volumes surged to 201mn

Figure 25: Qatar: Rise in trading value and volume after inclusion in MSCI EM


4.31%5.39%5.26%5.44%

5.82%5.73%

7.44%7.87%

Jan-13Apr-13Jul-13


08-08-2014

14.67%13.07%

12.86%12.72%

14.75%15.22%

14.72%15.00%

Jan-13Apr-13Jul-13


08-08-2014

14.33%14.22%

14.06%14.10%

13.96%13.43%

16.11%16.05%

Jan-13Apr-13Jul-13


08-08-2014

4.24%4.52%

5.17%5.22%

6.00%6.53%6.51%6.58%

Jan-13Apr-13Jul-13


08-08-2014

7.04%8.46%8.65%9.08%8.92%8.58%8.79%8.48%

Jan-13Apr-13Jul-13


08-08-2014

3.94%3.75%

3.56%3.46%3.71%

4.35%5.61%

6.06%

Jan-13Apr-13Jul-13


08-08-2014

7.23%7.20%7.08%7.10%7.37%

8.21%9.33%9.62%

Jan-13Apr-13Jul-13


08-08-2014

3.78%3.73%3.98%4.08%

4.76%4.33%

6.82%6.91%

Jan-13Apr-13Jul-13


08-08-2014

6.05%6.79%

7.40%8.81%

10.61%13.32%

12.00%12.51%

Jan-13Apr-13Jul-13Oct-13Jan-14Apr-14Jun-14

08-08-2014

Doha Bank

Qatar Islamic bank

Al Rayan Bank

Vodafone Qatar

Qatar Industries

Commerical Bank of Qatar

Qatar Electricity & Water

Qatar National Bank

Barwa Real Estate

Figure 26: Qatar: Foreign shareholding in companies following inclusion in MSCI EM Index




Conclusion: Opening of market to lure huge foreign investments

5

Saudi Arabia took a landmark decision in July 2014 to allow direct

foreign investment in Tadawul, the largest exchange so far restricted to

outsiders. The Tadawul has a market cap of USD530bn, but a relatively

lower MCap to GDP ratio of 0.71. On one hand, we expect the country’s

solid fundamentals to continue advancing on high oil prices, aided by the

government’s plan to diversify into the lucrative non-oil avenues. Capital

Market Authority, on the other hand, is laying emphasis on bringing up

its stock market reforms/policies/infrastructure at par with international

standards.

The Tadawul’s high credit rating, low correlation with peers in emerging

markets, and relatively higher earnings have made it a favorite among

investors. With monthly turnover averaging USD49.5bn and a velocity

ratio of 1.1, the Tadawul is at par with exchanges in several G-20 countries.

Moreover, more than 40% of companies listed on the Tadawul have a

market cap of above USD1bn (59%+ with MCap > USD0.5bn). It is, in fact,

the most active IPO market in the MENA region. The Saudi stock market



is also fairly diversified across non-oil sectors, and this is expected to

grow as it continues to focus on economic diversification.

Capital Market Authority expects the new rule to take effect some time

in 1H 2015; our back of the envelope calculations suggest that the

market cap could increase by USD150bn if MCap/GDP ratio improves

by just 10bps. In our opinion, this is very significant, especially given

that the Saudi market is likely to be included in the MSCI EM Index in

2017. A quick analysis of India, UAE and Qatar reveals that these nations

significantly benefited – in terms of market activity (volumes, turnover,

index movement) as well as rise in foreign ownership – after opening

their stock market to foreign investors. We foresee the same results for

Saudi Arabia.

Europe, Middle East & AfricaLondon93-95 Gloucester PlaceLondon W1U 6JQT: +44 (0) 207 487 8214

AmericasNew York275 Madison Avenue, 6th Floor,New York, NY 10016T: +1 212 878 8826

Asia & Rest of WorldIndiaSupreme Business Park,Hiranandani Gardens, PowaiMumbai 400 076T: +91 (22) 3937 9999

www.aranca.com

[email protected]

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