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Foreign investor interest ‘will widen Tadawul trade’

Kingdom-based analysts yesterday supported a fresh call by the Securities and Exchange Committee in the Riyadh Chamber of Commerce and Industry (RCCI) to widen the investor base of the Saudi stock market (Tadawul).
The suggestion came as banking shares led declines on the bourse yesterday. The Tadawul All-Share Index (TASI) dropped 0.98 percent to 7,018.52 points, down for a third session since Saturday's four-month high.
Riyadh chamber officials made the proposal during a meeting with the members of the Finance Committee in Shoura Council.
"The complete opening of the Saudi stock market to foreign investors will be healthy especially for institutional long-term investors," said Basil Al-Ghalayini, CEO OF BMG Financial Group, commenting on the committee's suggestion.
But he warned: "The last thing we want is to have high volatility of daily trading, driven by the herd mentality of foreign traders."
Abdulrahman Al Tuwaijri, chairman of the Capital Market Authority, announced three months ago that the market would open to foreigners in a cautious manner to ensure that there are no negative impacts on trading.
He, however, pointed out that foreigners were already involved in the Saudi market via mutual funds investing in stocks, index funds and through swap agreements.
He stressed that the presence of foreign investors in the stock market is estimated currently between 3 to 4 percent.
Tamer El Zayat, senior economist at the National Commercial Bank (NCB), said: "I do believe it is about time for Tadawul to open up not only to be part of international indices such as the MSCI, but to diversify away from individual investors that certainly lack medium-term investment horizons, let alone the long-term side."
El Zayat also said: "If low volatility and stability were the premises for closure, a quick look at TASI since February's 2006 precipitous fall illustrates range-bound movement and relatively subdued average trading volumes that don't do justice to a resilient economy and a double-digit growing corporate Saudi."
He added: "It is Important to note that China, renowned for its capital controls, have decided in April last year to expand the Qualified Foreign Institutional Program QFII to $80 billion and there are news that the government might increase by 10 times the size of this fund in addition to a renminbi denominated one. This attests to the importance of opening up to increase the breadth and depth of the market."
El Zayat said: "Foreigners will surely benefit from an undervalued stock market with the PE ratio currently standing at 12.16 compared to Europe's STOXX 600 19.1x and the US's S&P 500 17.39x."
The RCCI committee officials said in a recent report that the CMA is finally convinced to open the market to foreigners after a long study and the issue was being considered now by the Supreme Economic Council.
Jarmo T. Kotilaine, a regional analyst, told Arab News that the case for opening the market had been discussed for a number of years and the arguments in favor of it are widely known and understood.
"As the authorities have highlighted repeatedly, a stepwise progression toward greater openness is a logical way to develop the market and something that many other countries have gone through. There is obviously not unequivocal answer to the question of when is the right time and arguably it matters less when the process is in any event going to be gradual," he said.
Kotilaine, however, added: "There is unequivocally greater foreign interest in the region at a time when it has repeatedly demonstrated its economic resilience and growth potential during the global crisis. GDP growth has continued throughout and in recent years has reached some of the highest rates globally. This creates compelling, non-speculative investment case for the region."
At the same time, Kotilaine said: "Valuations are reasonable, which enhanced the appeal of Saudi Arabia. And, of course, the market has developed to a point where it now offers a diverse array of sectors through more than 150 established companies and significant value opportunities."
The report pointed out that the Securities and Exchange committee was one of the parties that studied the system that allows foreigners to trade in Saudi stock market through QFI (Qualified Foreign Investor) system, but the problem might be with its application.

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