Saudi stocks slide on lack of foreign inflows

Dubai

Saudi Arabia's bourse fell yesterday as modest trading volumes indicated there were no big fund inflows from abroad on the first day that the market opened to direct foreign investment.

After rising as much as 0.5 per cent in the opening minutes, the main Saudi stock index closed 0.9pc lower as most blue chips in MSCI's provisional Saudi benchmark tumbled.

Saudi Basic Industries, the biggest petrochemicals firm in the kingdom, lost 1.5pc and top lender National Commercial Bank retreated by 1.1pc.

Only one foreign institution, HSBC, declared that it had obtained a licence to invest and traded shares on Monday, although stock exchange chief executive Adel al-Ghamdi told Reuters on Monday that regulators were processing six applications.

Previously, foreigners could only buy stocks in the $564 billion market, largest in the Arab world, indirectly through channels such as swaps. Riyadh is opening the market as a way to expose companies to market discipline and diversify its economy beyond oil.

Local retail investors, who dominate activity in the Saudi market, bid it up in anticipation of its opening to foreigners. The index is up 14.7pc year-to-date, outperforming all other Gulf markets.

But hopes for a quick flood of foreign money are likely to be disappointed. Many barriers to entry remain in place, such as a same-day settlement requirement and tight ceilings on foreign ownership of individual stocks and the overall market.

Also, Saudi Arabia's market is currently richly valued, trading at a forward price-to-earnings ratio of 16.8 times, well ahead of all other Gulf markets and roughly on a par with Britain's FTSE 100 and the US S&P 500, which are valued at 16.1 and 17.3 times respectively.

Although Saudi Arabia's entry into international indexes could eventually attract tens of billions of dollars of additional foreign money, MSCI this month chose not to start a formal review to include the bourse in its emerging markets benchmark, saying it would monitor the market first. Even if it chooses later to fast-track the procedure, inclusion is very unlikely before mid-2017, analysts say.

"We harbour concerns that the market could correct downwards as fundamentals again come to the fore" after the run-up due to the opening to foreigners, Bank of America Merrill Lynch said in a report.