Tadawul attracts SAR 50 bln inactive funds upon MSCI inclusion: CEO

Saudi Arabia has attracted inactive funds of nearly SAR 50 billion upon its inclusion into the MSCI emerging markets index (SAR 25 billion for each phase), Khalid Al Hussan, chief executive officer of the Saudi Stock Exchange (Tadawul), told Argaam in an exclusive.

Tadawul has also attracted active inflows since its upgrade to MSCI and FTSE Russell EM indices. The total turnover of foreign investors on the Saudi market hit over SAR 200 billion upon completion of the second phase of MSCI inclusion.

The number of qualified foreign investors (QFIs) registered at Edaa reached 1,300 participants. QFIs’ ownership crossed SAR 100 billion, of which inactive equity inflows accounted for 60 percent, with the remaining 40 percent for active inflows.

In addition, strategic investors’ ownership stood at nearly SAR 55 billion in earlier periods.

Foreign investors in Tadawul rose to 8 percent from 2 percent two years earlier. Active investors also increased to 4 – 4.5 percent last year.

“Only two phases are remaining for Tadawul to join FTSE Russel index. Inactive inflows are expected to near SAR 10 billion in both phases. The Saudi market will have a weight of 25% in the next tranche, which will be implemented on Sept. 22,” Al-Hussan said.

Its weight will also stand at 25 percent in the final phase of FTSE inclusion, he added.

The market’s price indices were not hit by the sudden outflows of active investors, as the investor qualification mechanism on Tadawul takes into account the investor type.

The regulations governing QFIs were updated by the Saudi market regulator, reassuring the market about the type of participants. 

“Compared to hot money in other markets, those markets are almost open to foreign investors without regulations,” Al-Hussan noted.

Active foreign investors meet high liquidity requirements, as well as other regulatory conditions in Saudi Arabia. Such requirements do not prevent those investors from market participation.

Accordingly, they are classified as active investors, based on their strategies and the opportunities available for shifting between markets.

Over the last 12 months, the foreign investor participation saw a significant rise. So, if active foreign investors are obviously exiting the market amid absence of market opportunities, the Saudi market would have not attracted SAR 40 billion active inflows. 

When compared to inactive funds, such inflows are “very high”, Al Hussan explained.

The Saudi equity market aims to draw additional active inflows, when inactive investments become complete following the market inclusion into EM indices.

“We will continue to attract fresh active funds to the market. These processes will reduce risks from sudden outflows,” he added.

Meanwhile, coordination between the capital market and providers of foreign indices is ongoing to raise the awareness of Saudi-listed firms about the upgrade requirements.

A rise in the number of Saudi securities and free float percentages will boost the Saudi market weight on the EM indices amid higher direct inactive inflows to the market.

“Tadawul is completing the regulatory procedures required for introducing a new derivatives product – a key investment instrument – by the end of this year,” Al Hussan said.

He also urged financial firms to market short selling – being one of the requirements for market upgrade. It is also commonly used by foreign investors.

Elsewhere, Al Hussan said the date of Tadawul’s planned initial public offering (IPO) will be set soon following the implementation of major legislative and operating amendments in the capital market.

He shrugged off the listing of Edaa and the Central Counterparty Clearing House (CCP), wholly-owned subsidiaries of Tadawul, as independent firms on the market, adding both entities play a vital role in the planned IPO.

The Saudi Stock Exchange Company (Tadawul) has an exclusive right to operate the equity market, based on the Capital Market Law. 

No other party is authorized to operate the market, but this could change going forward at the sole discretion of the market regulator, Al Hussan concluded.