#Saudi Stock Market Reforms Seen Boosting Flows to Smaller Names - Bloomberg

Saudi Stock Market Reforms Seen Boosting Flows to Smaller Names - Bloomberg

Saudi medium-size companies are likely to attract flows alongside banks on the back of the kingdom’s plan to loosen foreign ownership limits for public companies.

Saudi Arabia’s Tadawul stock index surged 5.1% on Wednesday after a board member of the Capital Market Authority told Bloomberg News that majority foreign ownership could come into effect by the end of the year.

The proposal would provide a boost to liquidity, an issue that has held back some investors, said Frances Ames, director and head of research at Ajeej Capital. That would see increased foreign inflows extend beyond the market’s biggest names.

“Active managers globally are still pretty underweight Saudi Arabia,” Ames said in an interview with Bloomberg Television. The news could attract investors to some smaller and mid-cap companies, “which we view as very high quality businesses, where sometimes the only thing lacking is market liquidity,” she said.

A decision by the CMA to allow majority foreign ownership isn’t a foregone conclusion and it’s unclear how big a stake foreigners could eventually be able to own in Saudi equities if approval goes ahead. The Tadawul fluctuated on Thursday, slipping 1% after initially extending Wednesday’s gains.

Ames said investors are giving greater focus to Saudi Arabia’s non-oil sectors, as the economy diversifies. This evolution in the market over the past five to six years could support fresh interest once the ownership rules are eased, she said.

The kingdom’s pipeline of initial public offerings, already among the busiest globally, may accelerate as companies move forward with listing plans. Positive regulatory changes can influence their timing, and some high-quality firm are preparing to come to market, Ames said.

Ames agreed that banking stocks would attract the largest slice of increased inflows, with Al Rajhi Bank standing out because of the size it already commands in global benchmark indexes.

Al Rajhi Capital estimated that $9.7 billion could flow into Saudi stocks if the foreign ownership limit was raised to 100%. Bank shares would be the key beneficiary, the firm said in a note.

JPMorgan Chase & Co. sees a potential capital influx of $10.6 billion should the CMA lift the ownership limit to 100%. EFG Hermes also anticipates about $10 billion of inflows. Both firms said they expect Al Rajhi Bank to be the biggest beneficiary of the possible change.

Junaid Ansari, director of investment strategy at Kamco Investments Co., is another who sees broad market benefits should the reforms proceed.

The move “would drive a broader relook at Saudi stocks that have traded at depressed levels due to the decline in crude oil prices as well as due to regional geopolitical issues,” he said. “The removal of the limits would surely help to increase the overall trading activity on the exchange from both active and passive investors.”