Restoring MSCI ties with Saudi Arabia to benefit investors

A reconciliation between MSCI and the Saudi Stock Exchange might signal a new openness in the Arab world’s most liquid market, says Insparo investment analyst Teeja Boye.

Rumour has it that the Saudi Stock Exchange, the largest and most liquid in the Arab world, may finally be opened for direct investment by foreign institutional investors, after MSCI announced that it would ­reintroduce coverage of the Saudi Arabian equity market with a range of indices.

MSCI has reached an agreement with the Tadawul – as the exchange is locally known – for the provision of market data after dropping the country from its indices in 2010, ­following a dispute over the licensing of data to third parties.

Until now foreign investors have had to rely on swaps, which were introduced by the Capital ­Markets Authority in 2008 and which must be held by locally authorised brokers.

Saudi Arabia has long been wary of allowing foreign investors access their markets, due to the possible destabilising effects of ‘hot money flows’.

But the swaps, which expose ­investors to counterparty risk via the brokers and run up against derivative caps imposed by large funds, have proved more popular with hedge funds than the stable ­institutional investors, who might be able to reduce the Tadawul’s volatility.

Teeja Boye (pictured), i­nvestment analyst at Insparo, which runs an Africa and Middle East fund that invests in Saudi Arabia, believes the reintroduction of the MSCI indices may be indicative of a shift in approach.

He says: “The return of the MSCI Saudi Arabia Domestic Indices is definitely a sign that the new people in charge are much more open and more receptive to investment. The MSCI deal is not a game changer, but it shows a shift of approach.”

Cautious optimism

The appointment at the end of last year of Fahad al-Mubarak as head of the Saudi central bank, which is also the financial regulator, has been seen as another positive development. Boye said: “He is the former head of Morgan Stanley Saudi Arabia, and is seen as more market friendly.”

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