Dubai:

Saudi Arabia along with other Gulf Cooperation Council (GCC) markets could witness a flush of liquidity from foreign investors after the biggest economy in the region opens its $500 billion stock exchange later in the year.

Saudi Arabia, which contributes to 50 per cent of the GDP of Middle East and North Africa (Mena) and 50 per cent of market capitalisation of the region, is keen on removing impediments for foreign investors in one of the world’s most-restricted major stock exchanges as it pursues a $130 billion spending plan to boost non-energy industries. The opening up of stock market could boost inflows of up to $40 billion, industry participants say.

This move would come even as the world’s biggest exporter of oil budgeted a deficit of 145 billion Saudi riyals due to falling crude oil prices.

“The MSCI upgrade of the UAE and Qatar was an important event to bring the entire region on the radar of international investors. The big question for us now is Saudi Arabia. The opening of Saudi market would be a milestone event for the region and would attract much more foreign capital and pave the way for a bigger component of the widely followed benchmarks like MSCI emerging market index,” said Bassel Khatoun, head of Mena equities Asset Management at Franklin Templeton.

Khatoun expects a soft opening and hopes the restrictions would become less stringent gradually.

“This will be the very important transition and this would bring more transparency, more IPO’s and better corporate governance,” said Khatoun.

Foreign investors with a minimum of 18.75 billion riyals of assets under management and at least five years experience in the business will be eligible to trade Saudi stocks, according to draft regulations issued by the capital markets regulator last year.

The regulator also plans to cap foreign ownership in single stock to 49 per cent, with certain limits for Qualified foreign investors.

Talking of the UAE, which witnessed an upgrade by the MSCI and the S & P Dow Jones Indices last year, Khatoun said international flows were up $4.3 billion in 2014 in the country, compared to $3.7 billion in 2013.

The opening up of sector would also enable more of institutional players to come to the market with long-term money, in a way eclipsing the retail participation.

Currently, 80 per cent of trading is cornered by retail investors, which makes the market prone to more volatility.

New group:

“It will be a new group of investors, which were not earlier present previously, that would be coming to the market,” said Saleem Khokhar, head of equities at National Bank of Abu Dhabi’s asset management group.

“We will tend to see more of institutional money, which is relatively there for longer term. The institutional investors would look at valuations and prices,” said Khokhar.

Broker Mubasher also agreed that more institutional participation would lead to longer term capital.

“We should transform the market to move from retail or regional investors to institutional. Local investors should understand that irrespective of how astute they think of themselves there are certain things that are better left for professionals to manage,” said Abdul Malek Kanawati, the chief executive at Mubasher.

“Today the market is minimum 100 per cent higher than it was since the beginning of bull cycle in 2012. How many retail investors are up 100 per cent. You would lucky to find a few. They would have lost money,” said Kanawati.

UAE capital market reforms:

“We haven’t done enough to push non-bank financial services, insurance companies, pension funds or asset management companies. There should be more efforts to undertake capital markets development. If you have more institutions operating in the market and more integrated with global financial markets you would have long-term money and one benefit would be that we would be less volatile than we are today,” said Mohieddine Kronfol, chief investment officer global sukuk and Mena fixed income, at Franklin Templeton told Gulf News.

The GCC region is under-represented as an equities asset class, which Franklin Templeton expects to change overtime.

“I would like to see pension reform. Anything to help develop private pension system will go a long way to develop and institutionalise the market. We would also like to see we would like to see more tangible steps to develop domestic bond market in terms of increased issuance and promotion and making people aware,” said Kronfol.