Cerulli: Saudi Opening a Landmark for International Asset management

Cerulli Associates, February 2016

Key points:

• Saudi Arabia is now open to selected foreign institutional investors through its Qualified Foreign Investment scheme
• Initial use of the scheme has been limited, for a combination of reasons including the low oil price, uncertainty about a key regulation, and time
• It is widely believed international capital will really start to engage with Saudi Arabia once it achieves MSCI Emerging Markets index inclusion

In years to come, the opening of the Saudi Arabian stock market to international capital last June will be seen as a landmark in the evolution of international asset management: the moment when the last major frontier world market was ushered in to the global fold. There will, in time, be many knock-on effects for international management, much of it no doubt through UCITS structures. But the data available so far reminds us that this is a theme that is going to take many years to play out.

In June, the Capital Markets Authority of Saudi Arabia introduced its new Qualified Foreign Investors (QFI) regime. If that sounds similar to China’s QFII programme, the two have a lot in common: it’s a way of attracting foreign institutional capital while being very picky about exactly what capital comes in, by setting a series of barriers to entry.

Saudi wants only the big money – QFI applicants have to have at least $5 billion of assets under management (though this is likely to come down to $3 billion), a five-year track record, and must be licensed by an authority the CMA considers suitably well-regarded – and even then, the money isn’t the point, so much as the effect these investors should have on the market. Saudi Arabia is heavily dominated by retail turnover, making it volatile: the hope is that the presence of institutional capital will calm that volatility, while also bringing improvements in corporate governance, transparency and market practice, and paving the way for Saudi to build a domestic pension fund industry ready for its aging population.

To anyone who covers emerging markets, it’s a very big deal. At the time of launch, the Saudi market had a market capitalization of $590 billion, right up there with Russia, for example. It also has a considerable impact on other Gulf markets like the UAE, Kuwait and Qatar, which have been largely ignored by international fund managers; once Saudi becomes open, it will be much harder to ignore the region.

That said, early numbers show that international professionals have not exactly battered down the door. Shortly before stepping down from his role as CEO of the Saudi Stock Exchange, Adel Al-Ghamdi shared some numbers with the author. By December, nine QFIs and a further two QFI clients were registered for the scheme, and between them, they had more than $5.65 trillion under management, he said. That sounds very impressive, but is a bit misleading: $4.5 trillion of that is Blackrock, which is licensed but so far has only set up a New York-listed Saudi ETF.