CEO’s Sudden Departure Hits Saudi Plans

Theories fall in to two camps. One side believes he was ousted for some sense of not being Saudi enough: being perceived as too much of a figurehead for the whole process of the opening of the markets, too direct in his communication. This camp says that the higher ranks of the Saudi establishment were somewhat divided on him and that he was not universally favoured.

The other camp believe the departure is a genuine resignation and came from Al-Ghamdi’s side, pointing to the fact that he was on leave at the time his departure was announced, and that he is known to miss his family who live not in the Kingdom but Oman.

Both domestic and international commentators describe it as a loss, however: that an extremely adept public face and a trusted communicator to international investors has gone and that replacing that sense of trust will be difficult. “From the QFI perspective it’s still the CMA driving the process so hopefully it will have limited impact,” says one western investor. “But it was unexpected.” Another: “This doesn’t help.”

Euromoney, it now appears, conducted the last interview with Al-Ghamdi as CEO during his roadshow, and his views on the challenges and opportunity ahead are interesting (and certainly didn’t suggest a man preparing to leave). As our main feature explains, inflows of capital through QFI to date have been negligible, and many fund managers are still holding back from switching to the new scheme.

Partly, Al-Ghamdi said this was a question of patience, communication and timing. “Having documents on a website to explain the QFI framework is all well and good, but reaching out to the international community to tell them more, to ensure that they understand and that we honour them as our international stakeholders – that’s important.” Hence the roadshow had been considered vital for some time. But the regulations only came into effect in June, there was no point in doing it during the northern summer, Hajj fell this year in September, and only in late October did the right dates start to align. “That’s why it’s been slow in terms of numbers, but certainly not in quality.”

Before the roadshow, Al-Ghamdi had been in Tokyo holding one-on-ones, “with asset managers and securities firms, but more importantly than that, the pension funds,” he said. This is exactly the sort of capital the exchange wants to attract: committed, long-term, predictable, stable, sticky. “They are extremely important, especially those who are now evaluating their asset allocation from more developed markets to emerging markets. The slowdown in emerging markets has only created opportunities. These are value investors, investing for the long term, who can withstand volatility for long-term gain.”

But, he said, “it takes time to explain this.”

The fact that it was taking a while didn’t bother Al-Ghamdi provided the right money eventually came in. “The framework is designed for long term institutional value investors,” he said. “Had the objective not been that, it would have been a much more liberal kind of approach.”

The reason for this somewhat regimented set of policies on who can come in is  the notorious boisterousness of the Saudi retail market. “We know, with the amount of retail individual investors we have in our market, the only way to counteract the volatility they bring is by having long-term value investors,” he said. “Our regulator and policymakers are looking to foster an investment and savings culture in the Kingdom. That means migrating our retail audience from actively trading the secondary market, to investing in mutual funds and discretionary portfolios.” He talked about the creation of ETFs, IPO investment vehicles, and a long-term aim to shift to a market that ends up being 90% institutional and 10% retail.

Armed with statistics to two decimal places of clarity about pretty much every market dynamic you can think of, he spelled out how urgent the transition is. Saudi individuals make up 32.48% of stock market ownership, he said, but account for 89.6% of trading activity. And ‘Saudi individuals’ includes high net worth and individual professional investors: true retail account for just 4.41% of stock market ownership, but 47.3% of trading activity in September 2015. Numbers as lopsided as this aren’t healthy, and breed volatility.

Possibly the single most discussed technical point about the Saudi market opening has been about settlement. Retail-dominated Saudi (in trading terms) is one of the world’s few T plus zero markets, whereas international norms trend towards T plus 2 or 3. The only way for a multinational fund manager to be able to handle T plus zero is to pre-fund, which is anathema to many of them. Is it putting people off lodging for QFI?

“Well, most investors are used to a settlement cycle of T plus 2 or 3, so T plus zero is very alien to them,” said Al-Ghamdi. “As a result, they have to change the way they do things to be able to transact within our market.” SAMA, the central bank, has allowed registered QFIs to be able to settle their transactions on the exchange rather than requiring sign-off on every transaction, which makes things a little easier, though some distance from convenient.

But he appeared to be open to at least discussing change. “People do have an issue with it, there’s no doubt about that. We keep saying: this is an evolution, a continuing story.” He said it is the intention to align with international norms and IOSCO principles on financial market infrastructure, including central securities depositary and clearing and settlement processes. “We are a member of the global community, and key stakeholders in it, and we have a duty to harmonize with infrastructure and processes to be a more conducive investment environment for both local and international participants.”

So the system could be changed? “I’m not saying it will be. I’m saying there is room in finding the pros and cons of either remaining T plus zero, or going to T pus x. Hopefully we will take the right approach that is beneficial to both our local and international audience.”

This point is crucial, because it’s all well and good saying international investors want a change to the settlement model, but Saudi must also demonstrate some loyalty to the domestic investors who dominate and support it today. How does one strike the right balance?

“The thing is, local and international objectives are one and the same, quite honestly. There is a difference, though, in terms of information and awareness, and that’s the issue.” Al-Ghamdi’s pitch to retail investors was that even if the settlement model did change, it wouldn’t greatly alter the way those small investors interact with the market. “The liquidity remains, their purchasing power remains, their ability to go in and out of the market in the same day remains,” he said. “But it [changing the settlement cycle] allows us to develop our market, and to develop more products and services that will allow them to interact with our market in different ways,” such as derivatives.

Retail, he said, need to understand not just the risk classifications of different investments, but also the rudimentary basics of the difference between a stock exchange and a regulator. “I’m saying we have to prepare the landscape for this evolution, including any potential changes in the settlement cycle.”

The other most popular subject about Saudi opening is progress towards MSCI Emerging Markets index inclusion, discussed in detail (with the MSCI perspective) in the main feature. “Getting classification as emerging markets, whether in MSCI or S&P or Footsie, is a means to an end,” he said.

“One of our objectives is to enhance the sophistication of our market, and instill a high level of shareholder activism,” he said. “We want investors to start shaping the direction of the companies they invest in. How do you achieve that? By getting a critical mass of investors into your market.

“Therefore getting classified as an emerging market is a way of attracting higher flows of investment into our market, therefore increasing shareholder convergence, which accelerates convergence to best practices.” MSCI classification, he said, is just a means of getting there.

The last thing Al-Ghamdi said in the interview was that on two occasions the previous week he had been able to help sort out issues between a major international institution and the Saudi authorities, by relaying the problem to the CMA chairman. “We had it solved overnight,” he said.

That’s what’s lost with Al-Ghamdi’s departure: the approachable go-to man with the ear of the CMA, able to smooth the entry of foreign capital into the market. His replacement, Khalid al-Hussan, has something of the same open nature, but still, it seems counterintuitive in the extreme that after a global roadshow for which Al-Ghamdi was the public face, that element of familiarity should immediately be removed, whichever side the departure came from.

It’s true that it is the CMA, not the exchange, that is ultimately in charge of Saudi’s market opening. But now it is going to have to prove all over again that it wants to communicate and to listen.