QFI Trading at TASI: Trends and Analysis

Published on 28 Sep, 2015

QFI Trading TASI

Saudi Arabia opened its capital markets in June 2015 in a bid to attract foreign investments. The move allows foreign institutions to directly invest in shares listed on the Saudi stock exchange after obtaining a Qualified Foreign Investor (QFI) status from the Capital Markets Authority (CMA). The registered QFIs started participating in the capital market from June 15, 2015.

Tepid Start by QFIs with Negligible Contribution in Trading Turnover

Despite the immense opportunities for the market and investors alike, high expectations from QFIs were misplaced as evident from their tepid initial response. On the first day of trading, only seven Saudi stocks attracted investments from the QFIs. The average traded value in June was just SAR 13.8mn, quite insignificant compared to the exchange average trade of SAR 112.8bn over the same period.

TASI total traded value

TASI total traded value

After the tepid start in June, trading activity ramped up in July and August as the total traded value rose from SAR 27.5mn in June to SAR 92.3mn in August. The upside could be attributed to the resumption of the stock market after the Eid-break, which was preceded by Ramadan, when trading activity is generally subdued.

QFI total trade

QFI total trade

Although QFIs were net buyers (SAR 18.2mn) at the end of June, they turned into net sellers in July (SAR 21.3mn) and August (SAR 3.5mn), respectively. We believe this was primarily on account of Ramadan.

QFI Turned to Net Sellers

QFI Turned to Net Sellers

Main Factors Restraining Investments by QFIs are as follows:

Limitations of Investment

Certain restrictions by the CMA limit the QFI’s participation in the market. One of those restrictions states that QFIs can only hold up to 5% individually (and 20% collectively) of the shares of any traded company. Also, in total, foreign investors may hold a maximum of 49% of the shares of any traded company. Furthermore, total investment by QFIs is limited to only 10% of the TASI market cap.

Oil Played Spoilsport

The performance of the Saudi exchange has been weak since June 2015 (crashed from 9,700 points in early June to below 7,600 points in August). The downside was a result of the continuous dip in oil prices, with Brent declining over 50% Y-o-Y in August 2015 from more than USD 100/barrel. Despite being a predominantly oil-based economy, historical data suggests low correlation between oil price and TASI. However, the scenario has changed in the recent past and the correlation has peaked (YTD 2015 correlation stands at 0.82), fueled by the dip in oil prices. This has eventually affected TASI’s performance.

Dropped Oil prices impact TASI

Dropped Oil prices impact TASI

Budget Cuts are Evident

Saudi Arabia’s fiscal breakeven oil price has increased over the years to USD 106/bbl in 2015 from USD 69/bbl in 2010 mainly due to expansionary government spending. Saudi Arabia’s breakeven price is the highest among the Gulf nations. Therefore, oil price shock is likely to trigger cuts in spending and its transmission to other areas of economy which is of immense importance to Saudi Arabia.

KSA Fiscal Breakdown 2015

KSA Fiscal Breakdown 2015

Premium Valuation "Unwarranted"

The high valuation of the stocks trading in Saudi Arabia’s exchange dissuaded QFIs from participating in trading activities. TASI was the best performer among the Gulf markets until 2Q15. The index traded at a blended forward P/E multiple of 15.5x compared with 11.8x for the key Gulf markets and 12.3x for the MSCI global emerging markets. Given the changing fundamentals of the economic scenario in Saudi Arabia, we believe this does not warrant a premium valuation especially with the sustained weakness in oil price.

TASI Valuation vs other GCC Exchanges

TASI Valuation vs other GCC Exchanges

Outlook

Despite the restrained start to the foreign investment activity in TASI, the framework set is a big step toward the development of the market. Factors such as the large size of the Saudi market and initiatives by the government to make investment opportunities for QFIs even more attractive could boost participation in the future.


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