Increased participation from international financial institutions is primarily designed to help to enhance the sophistication and stability of the market.
The additional reforms to open the Exchange to QFIs aim to enhance corporate governance among firms by enabling international institutions to have an active voice as shareholders in listed businesses.
These investors are also expected to enhance research coverage and improve local knowledge and expertise, bringing benefits to all market stakeholders, listed companies, investors and financial intermediaries.
The introduction of direct investment by foreign institutions is predicted to improve stability in the market. This will come
alongside moves to encourage a rebalancing of current stock market participants from individual investors – who account for approximately 34% of market ownership and 90% of monthly trading activity – to institutional investors.
Since the introduction of the swap framework in 2008, non-resident foreign investors have been net buyers in the market, providing greater stability to prices at a time when local individual investors have been net sellers.
It is notable that the correlation in investment behaviour between these two investor classes has been negative over the last five years and nearly inverse over the last 3 months as local individual investors sold nearly SAR14bn worth of shares in the market whilst foreign investors did the reverse, buying SAR1.7bn of shares through the swap framework over the same period.
The impact of these foreign investors on the diversity and stability of the Saudi stock market is expected to grow as a consequence of the new QFI framework, which increases the degree of openness of the market to foreign investors.
The new rules ensure that only the largest and most experienced foreign investors are allowed to enter the stock market, with foreign institutional investors being forced to prove they have a recognized investment track record and assets under management of at least $5bn, amongst other conditions which will inhibit smaller investors. This reduces the risk of poor decisions being made by inexperienced foreign investors.
This was a big step forward for the Saudi shares market, according to Adel Al-Ghamdi, CEO of the Saudi Stock Exchange.
‘This is an important first step in a longer journey. Over the medium to long term, this journey will benefit all our stakeholders, from investors and listed companies, to authorized persons and qualified foreign investors. As the market landscape improves, not only can the Saudi Stock Exchange look to take its rightful position in global markets but also
act as a means to develop, promote and fuel the vibrant Saudi economy and its future prospects as a whole. Saudi is home to some world-leading businesses and many that have the potential to become world leading – the participation of
experienced international investors can play a role in helping these businesses reach their full potential.’