It is now widely anticipated that the Kingdom’s stock market, the Tadawul, is going to be opened to direct foreign investment as early as next year. Until now overseas investors have only been able to enter into the Saudi market indirectly through funds.
There are many positives to this development but inevitably there will be some downsides. Two of the most prominent will be the capriciousness of outside investors and the likelihood that outside participation in the market will drive our listed companies toward short-term goals. With the exception of the few sectors with long lead times on capital expenditures, such as the oil and gas industry, equity analysts are impatient of businesses that set out long-term plans, who take a conservative view on the speed of their Return on Investment (ROI). Such an approach does not suit the international investment community.
By the 1980s, half yearly reporting had virtually disappeared with companies, particularly in the United States all switching to quarterly explanations of how well they had performed and how they expected to do in the following three months. The quarterly reports now often have a significant impact on share price movements, which from the point of view of the brokers who execute buy and sell orders, is all to the good. They do not care if a share is going up or down, since they earn their money from their transaction fees. And the greater part of the analyst community is associated with the brokers.
Many Chief Financial Officers of major companies now say, if only in private, that the quarterly reports have become a tyranny, tying up important finance function resources on a pretty-well permanent basis. No sooner has one report been got away than it is almost time to start work on the next. In the mid-1980s, there were even moves to have companies start reporting their results on a monthly basis, and a few did try, but this proved a step too far.
Saudi companies will therefore discover that once foreign investors have direct access to their shares and bonds, the international analyst community will be imposing extra pressure on the corporate finance function, maybe causing managements to begin to be influenced by short-term results to an extent that they are not at present.
Then there is the question of the rapidity with which foreign money can enter and then leave a market. The Capital Market Authority says it is working on strategies to avoid this and curb “speculation.” This unfortunately does not compute. Though beneath the razzmatazz of rising and falling indexes and the breathless reporting of business journalists, stock markets are still basically about capital formation and the channeling of funds into productive investment, their over-riding characteristic in a world of high frequency trading, is speculation. If the CMA imposes any limits on overseas investment, then bar a limited number of specialist funds, it is very probable that the bulk of the international investment community will stay away.
Talk that Saudi Arabia wants only big institutional investors with a long-term view, is surely wide of the mark. In truth, such creatures hardly exist any more. A few multinationals may take “strategic” positions in Saudi companies which they will hold, but the majority of the funds that will flow into the Tadawul will be looking for rapid returns based on capital appreciation rather than dividend income.
There will be those that will argue that the Saudi market does not need such foreign participation. It is already highly liquid and if fresh capital injections are required, there is now a willing and experienced investor base to provide them.
CMA Chairman Mohammed bin Abdulmalik Al-Sheikh however pointed out this week at the Euromoney conference in Riyadh that the arrival of large institutional investors on the Tadawul would boost disclosure and transparency and would allow Saudi equities to be included on emerging market indices. There would also, he said, be a boost in technical expertise and a broadening of the talent base. It would in addition open the way for the listing of more sophisticated derivative products.
Thus when the Tadawul moves to its new home in the King Abdullah Financial City, the Kingdom could be looking to a market, which is set fair to reflect its position as the pre-eminent Arab economy. In time indeed, links between the Tadawul and other GCC exchanges will very probably see the seamless cross-border trading of a wide range on investments.
Editorial: Tadawul and international investors
