Saudi- Foreign investments in Tadawul to bring in more innovative products 

(MENAFN - Arab News) There were a number of factors that were responsible for a rather subdued Saudi stock market last year. Most of them were related to the international happenings such as the euro zone debt crisis, regional turmoil and extreme uncertainty about the global economy.

Watching all these developments closely is Beshr Bakheet, the chairman of the Bakheet Investment Group. He feels that the stock market will grow moderately in 2012. In this exclusive interview with Arab News, he answers a wide range of questions relating to the stock market and the outlook for 2012. He also is upbeat about the appointment of Fahd bin Abdullah Al-Mubarak as the new Saudi Arabian Monetary Agency governor.



Following are the excerpts from the interview:



Q: The Saudi stock market did not perform up to the expectations in 2011, and the Tadawul index is still in the negative territory. What and which factors you think were responsible for keeping the market subdued? And what, according to you, is the outlook for 2012?

A: The TASI (Tadawul All-Share Index) index lost 3.1 percent in 2011; it was because of the uncertainty of the global economy and the turmoil in the region; they kept investors confused as to what direction the economy was heading into. All this was happening in spite of the rising oil prices. On the other side, fears about the European sovereign debt crisis and the crumbling US economy continued to dominate the marketplace in the last quarter of 2011. We have seen multiple ups and downs during the year. Although major global markets fluctuated intensely during 2011 ending in negative territory, nevertheless, the Saudi market still outperformed the GCC and global market in general. For example, the Bahrain All-Share Index decreased 20 percent and Abu Dhabi All-Share Index fell about 12 percent, German DAX 30 declined 17 percent and Nikkei 225 dropped about 12 percent.



Q: What is the impact of rising oil prices on the Saudi stock market?

A: It is obvious that the Saudi GDP (gross domestic product) and government budget are dependent mostly on oil revenues. Increase in oil prices from an average of 79 in 2010 to 95 in 2011, rising Saudi oil output and a 41 percent improvement in oil export revenue led to a 28 percent growth in Saudi GDP. This led the government to spend more last year ... All these factors positively affected sectors like retailers and should have positively affected the Saudi financial sector (mainly banks), but above mentioned international and regional factors absorbed the positive effects of rising oil prices. Also, increase in energy prices around the world usually improve profit margin for energy-intensive Saudi companies as these companies pay energy costs with preferable prices, make them more competitive and profitable.



Q: What impact you see of the euro zone debt crisis or geopolitical factors on Tadawul? Did the so-called 'Arab Spring' impact Tadawul?

A: The crisis caused the euro to depreciate in value, and that positively affected Saudi import from Europe. According to the Saudi Arabian Monetary Agency, the Saudi oil exports accounted for more than 90 percent of total Saudi exports of goods and the European Union accounted only for 9 percent of total Saudi exports. Hence, the Saudi market was barely affected by the euro zone debt crisis. But the impact of euro crisis on the world economy has shaken confidence even in the GCC markets and caused indirect impact on Tadawul index. The geopolitical tension also has dampened investors' confidence in the region, which then affected financial markets.



Q: After crossing the 22,000-mark, the Tadawul index has come down to just over 6,000 points. What is your expectation for the index in 2012? Which sectors are attractive for investors?

A: The Saudi government spending has continued to increase thus stimulating growth. Moreover, the government announced its budgets for 2012 fiscal year with a projected SR12 billion in surplus, which may be much higher if oil prices remain at current levels. The government allocated SR265 billion for new developments projects as well as for completing existing projects. Hence, the market is set to generate moderate growth rate as compared to 2011.



Q: Saudi Arabia has been considering opening up its stock market for several years. Currently, foreigners have only very limited opportunities to invest through indirect ownership and exchange traded funds that track indexes. What impact you expect after the wider market opening?

A: Allowing foreign investors to participate and invest in Saudi market will definitely increase the market liquidity in general which in turn minimize the transactions cost and increase the market efficiency. In essence, this will boost and generate new innovative investment products by foreign investors. Having said that foreign investors might also increase volatility and market risk thereby increasing the correlation between Tadawul and world indices.



Q: After the stock market opening there are fears that speculative money will pour in. Is there any way to stop speculative money entering into the market?

A: Speculation is buying a stock in the hope of selling it at higher prices in spite of any related fundamentals of the stock. The inherent risk in speculation rarely rewards the investor by sustainable return. Educating investors of the inherent risk related to speculation is the most important step that should be taken, and although foreigners may raise the efficiency in the market, they may raise speculation that can hurt the market in times of uncertainty. So regulators should watch the market at the beginning and take the necessary steps to smooth the process of foreign investments in the market in a way that build confidence in foreign investors and reduce side effects of opening the market.



Q: Fahd bin Abdullah Al-Mubarak was chosen recently as new SAMA governor. Do you think as former investment banker with financial markets experience, he will help open the Saudi stock exchange to foreign investment?

A: We believe Al-Mubarak, with his long term valuable experience and open-minded personality, will work to develop the financial markets, and will make them more innovative and advanced especially because he is a former investment banker and knows very well the weaknesses and strengths of the financial system (from a commercial and investment banking perspective). He is, therefore, in a unique position to be in such a regulatory role.



Q: SAMA could play an important role in any opening of the market because it would likely be involved in monitoring and regulating capital flows into and out of the country. Do you think SAMA's role is vital in further market opening?

A: Of course, its role is very vital. As SAMA may participate in preventive action for "hot money" and coordinate with the Ministry of Finance, Capital Market Authority and Tadawul to find solutions and put regulations that increase efficiency and mitigate side effects of entering foreigners to the market.



Q: Tadawul is widening its campaign to build up a generation of "smart investors." This program plans to build up the right financial culture among youngsters, between the ages 9 and 14, as they are future investors. Do you believe this program will help the budding Saudi investors?

A: Indeed we need this kind of education for all ages of investors, and it is better to start from early age as today's youth are tomorrow's adults and investors. As we can see in the advanced countries, they start awareness campaigns from very early age for the students where school curriculum contains topics like investment and financial management.



Q: CMA has also created pages on Facebook, Twitter and YouTube to provide latest information. Will this help enhance the stock market transparency?

A: Spreading the news among the widest range of investors will always improve market efficiency. And social networking websites are the fastest way to transmit information to the public.



Q: The IPO (initial public offering) market has not done well last year as Saudi Arabia saw only two to three IPOs in 2011. Do you think the IPO market will pick up in 2012?

A: In the second half of 2011 we witnessed an improvement in IPO market and we expect that to continue in the next year, as more private companies would want to go public. Although one company got listed in the first half of 2011, we had seen four more IPOs in the second half, which indicates that the primary market is getting better.



Q: The sukuk market continues to grow globally due to an increasing interest in Islamic modes of financing. What prospects you see for sukuk in the Kingdom?

A: Sukuk market size in Saudi Arabia is still modest compared to other markets like Malaysia, for example, but the need for different financing tools shall lead to a gradual development of sukuk market in the upcoming years. This is an area of great potential.



Q: What will be your advice to Saudi investors during this time of global financial crises?

A: We believe that investors must have wide investment knowledge. They should not just follow the crowd. They should take risks that suit them and focus on diversification. In time of crises, usually defensive stocks perform better than cyclical ones, and investors usually make profit when they invest at the last stage of market crash, when the market is at its bottom, when they can buy stocks that are much below their fair value.