Overseas funds hunt Saudi swap deals (Update 1)

International investors more than trebled their purchases of Saudi Arabian stock swaps last month, as a global equity rally sparked appetite for shares in the world’s largest oil exporter.

The kingdom allowed international investors to buy exposure to local equities for the first time last August through “total return swaps”, which give overseas investors the economic rights of a stock but no voting rights.

At the time, bankers hailed it as a significant step towards opening up the country’s equity market, the largest in the Arab world.

But the deepening of the financial crisis last autumn meant that demand was initially low as the Saudi stock market tumbled along with global bourses.

As the swaps can only be bought and held through brokers authorised by the Saudi Capital Market Authority, they entailed taking significant third-party risk at a time when previously imperious investment houses were failing and the global financial system buckled.

But the global equity rally has spurred institutional investors to enter the Saudi bourse. According to the Tadawul, the country’s stock exchange, overseas-based investors bought SR1.23bn ($328m) of swaps last month, up more than three-fold from March, when only SR269m of swaps were sold.

“There has been a noticeable improvement in sentiment, and April was a very good month, the best since the swaps were introduced,” Jamal Al Kishi, chief executive of Deutsche Securities Saudi Arabia, told the Financial Times. “If things continue to go as they have, May will be another good month.”

While only a tiny part of trading on the Saudi stock exchange, this inflow of international capital helped the Saudi stock exchange gain nearly 20 per cent last month, and pared its 12-month loss to 44.8 per cent.

“We’ve seen a lot more interest from institutional investors that want to get exposure to this market recently, mostly from emerging market fund managers and hedge funds,” said Habib Achkar, chief executive of Morgan Stanley Saudi Arabia.

Bankers say investors have bought swaps in companies across all industries in Saudi Arabia, but hydrocarbon-related industries have proved particularly popular with overseas funds.

“We have seen particular interest in areas where Saudi Arabia has a comparative advantage, such as petrochemicals,” says Osama Shaker, managing director and head of investments at HSBC Saudi Arabia, the largest swaps dealer. END