Investors are expected to pump billions into the Saudi bourse, known as the Tadawul, if the Kingdom is included in the key MCSI-emerging markets index in 2019. The decision is expected on Wednesday.
Analysts interviewed by Arab News gave a unanimous thumbs up to KSA’s widely anticipated inclusion that will see huge US “trackers” run by the likes of BlackRock and Vanguard, sign off on multi-billion dollar cheques on behalf of investors in their pension, insurance and savings funds in North America and elsewhere.
There is about $2 trillion in global emerging (EM) market funds, according to EFG-Hermes in Cairo, a huge pool of capital that could be tapped for future IPOs, with state-owned Saudi Aramco a prime target when it floats in what is expected be the world’s biggest listing of all time.
The macro-story is important, too.
“The positive narrative around reforms being pushed by Crown Prince Mohammed bin Salman makes for a compelling backdrop,” said Charles Robinson, global chief economist at London-based Renaissance Capital.
One of the main advantages of inclusion in the index is that it would herald “a more efficient allocation of capital” in that foreign cash would find its way to those Saudi Arabian-listed companies that offer the best prospects, said Robinson.
Currently, 95 percent of Tadawul investors are made up of smaller retail or private shareholders. But Robinson added: “You would hope that there would be an increasingly professional approach in the Saudi stock market by professional investors who are going to influence the price/earnings ratios of the better companies, pushing up their share prices, allowing them to raise more capital and therefore enabling them to become bigger companies in the future.”
Those doing less well, which currently might be attractive to retail investors, could end up getting less cash, he suggested.
The inclusion of Saudi Arabia in the MSCI EM index may help to “turbocharge” the Vision 2030 plan that aims to reduce the Kingdom’s reliance on oil, and boost the private sector, he added.
In turn, this would pave the way for greater employment of Saudi nationals, especially young people who make up a large proportion of the potential and actual workforce.
Hootan Yazhari, head of Middle East and global frontier markets research at Bank of America Merrill Lynch, told Arab News: “Global Emerging Market fund managers will effectively be forced to have a view on Saudi Arabia, especially as it will be a material part of the MSCI index (more than 2.6 percent weighting). Therefore, Saudi Arabia’s profile and awareness among fund managers globally will increase,” he said.
Others were equally enthusiastic. Mohammed Al-Hajj, Middle East equities strategist at EFG-Hermes, told Arab News that an upgrade to emerging market status meant that from 2019 Saudi Arabia would be part of global emerging market (GEM) benchmarks followed by GEM investors which he expected would lead to inflows of $30 billion-$45 billion into the Kingdom by the end of 2019 (excluding Aramco).
He said: “Ownership of Saudi businesses by foreign financial institutions is only 1.8 percent of total (Tadawul) market value versus an emerging market (EM) average of 17 percent, as such we see big potential for inflows into the country,” said Al-Hajj.
Importantly, analysts said MSCI inclusion would make the Kingdom a more sophisticated market as seasoned investors exerted greater influence on its corporates. KSA companies would be increasingly compared to international peers by investors, it was suggested, making management teams more likely to focus on improving strategy, efficiency and overall performance as they seek to compete for capital. “Accountability to shareholders will increase,” said Al-Hajj.
EFG-Hermes has highlighted the appeal of KSA-listed banks and petrochemical companies, tipping Samba, Kayan, SABB, SABIC and Al-Rajhi.
Hajj saw scope for about $10 billion of inflows to the market from passive MSCI EM index trackers and a similar amount from active managers. “With FTSE having elected to include the country in its EM benchmark in 2019, this necessitates another $6 billion of passive flows taking potential total inflows close to $30 billion.
“We see these flows providing tail winds to the market and supporting the country’s FX position,” he said.
Foreign ownership limits in KSA have been capped at 49 percent, and a few companies are fully closed to foreign investors, but the Tadawul embarked on a modernization and reform program in 2015 to make the market more transparent and accountable.
Historically, Saudi Arabian shares have traded at a premium to the average for emerging markets, but with excitement building ahead of MSCI’s decision this week, there are some concerns that stock values have become a bit too toppy.
Bloomberg said in a report that the buying had pushed the capitalization of Riyadh’s market beyond that of South Africa in dollar terms for the first time in 11 months.
“As the gains pile up, Saudi stocks have become increasingly more expensive than the group the country is poised to join,” claimed the report.
As markets anticipated an MSCI upgrade, “valuations have gone so much ahead of fundamentals,’’ Aarthi Chandrasekaran, vice president at Shuaa Capital, said in an interview with Bloomberg TV.
“I’m sure there will be a cool-off period post the decision announcement, when valuations will start catching up more with reality on the ground.’’
Another analyst cited by Bloomberg advised investors to be more selective and go for ‘bottom-up’ names.
There are, of course, disadvantages to being included in the index. In the good times, capital flows would pour in, but in less benign periods, outflows were possible, depressing market values, damaging sentiment and knocking balance sheets.
Timothy Ash at Blue Bay Asset Management in London told Arab News: “It’s a story about managing success: Portfolio managers, for a variety of reasons, could decide they don’t like the KSA story any more and they can leave … look at Argentina.”
Al-Hajj said: “What we have seen in previous upgrades is that multiples expand, making markets expensive on a fundamentals basis, which could make it prone to weakness (short-term) in the post-implementation period (after May 2019).
“In addition, once a market is part of EM indices it will be more prone to EM outflows and risk-off periods that lead to EM weakness.”
He also said: “However, the benefits far outweigh the negatives in our view. As the inclusion will increase the institutional share in the Saudi market, and offer companies access to funds during capital raising by Saudi companies (new listings) in the future.”
The MSCI proposal, which was laid out in a document published in February, is to implement the potential reclassification in two steps in May and August 2019.
Saudi shares-index upgrade likely to ‘turbocharge’ private sector growth
Saudi shares-index upgrade likely to ‘turbocharge’ private sector growth
- $2 trillion in global emerging market funds
- Saudi bluechips set to gain from inflows
Meituan looks to hire in Saudi Arabia, indicating food delivery expansion
SHANGHAI: Chinese food delivery giant Meituan is seeking to hire staff for at least eight positions based in Riyadh, in a sign it may be looking to Saudi Arabia to further its global expansion ambitions, according to Reuters.
The jobs ads, which is hiring for KeeTa, the brand name Meituan uses for its food delivery operations in Hong Kong, is seeking candidates with expertise in business development, user acquisition, and customer retention, according to posts seen by Reuters on Linkedin and on Middle Eastern jobs site Bayt.com.
Meituan did not immediately respond to a request for comment by Reuters on its plans for Saudi expansion.
Bloomberg reported earlier on Friday that the Beijing-based firm would make its Middle East debut with Riyadh as the first stop.
Since expanding to Hong Kong in May 2023, Meituan’s first foray outside of mainland China, speculation has persisted that its overseas march would continue as the firm searches for growth opportunities, with the Middle East rumored since last year to be one area of possible expansion.
“We are actively evaluating opportunities in other markets,“ Meituan CEO Wang Xing said during a post-earnings call with analysts last month.
“We have the tech know-how and operational know-how, so we are quietly confident we can enter a new market and find an approach that works for consumers there.”
IMF opens first MENA office in Riyadh
RIYADH: The International Monetary Fund has opened its first office the Middle East and North Africa region in Riyadh.
The office was launched during the Joint Regional Conference on Industrial Policy for Diversification, jointly organized by the IMF and the Ministry of Finance, on April 24.
The new office aims to strengthen capacity building, regional surveillance, and outreach to foster stability, growth, and regional integration, thereby promoting partnerships in the Middle East and beyond, according to the Saudi Press Agency.
Additionally, the office will facilitate closer collaboration between the IMF and regional institutions, governments, and other stakeholders, the SPA report noted, adding that the IMF expressed its appreciation to Saudi Arabia for its financial contribution aimed at enhancing capacity development in its member countries, including fragile states.
Abdoul Aziz Wane, a seasoned IMF director with an extensive understanding of the institution and a broad network of policymakers and academics worldwide, will serve as the first director of the Riyadh office.
Saudi minister to deliver keynote speech at Automechanika Riyadh conference
RIYADH: Saudi Arabia’s Deputy Minister of Investment Transaction Saleh Al-Khabti is set to deliver the keynote speech at a global automotive aftermarket industry conference in Riyadh.
Set to be held from April 30 April to May 2 in the Saudi capital’s International Convention and Exhibition Center, Automechanika Riyadh will welcome more than 340 exhibitors from over 25 countries.
Al-Khabti will make the marquee address on the first day of the event, which will also see participation from Aftab Ahmed, chief advisor for the Automotive Cluster at the National Industrial Development Centre, Ministry of Industry and Mineral Resources.
Saudi Arabia’s automotive sector is undergoing a transformation, with the Kingdom’s Public Investment Fund becoming the major shareholder in US-based electric vehicle manufacturer Lucid, and also striking a deal with Hyundai to collaborate on the construction of a $500 million-manufacturing facility.
Alongside this, Saudi Arabia’s Crown Prince Mohammed bin Salman launched the Kingdom’s first electric vehicle brand in November 2022.
Commenting on the upcoming trade show, Bilal Al-Barmawi, CEO and founder of 1st Arabia Trade Shows & Conferences, said: “It is a great honor for Automechanika Riyadh to be held under the patronage of the Saudi Arabian Ministry of Investment, and we’re grateful for their continued support as the event goes from strength-to-strength.
“The insights and support we’ve already received have been invaluable, and we look forward to continuing this relationship throughout the event and beyond.”
This edition of Automechanika Riyadh will feature seven product focus areas, including parts and components, tyres and batteries, and oils and lubricants.
Accessories and customizing, diagnostics and repairs, and body and paint will also be discussed, as well as care and wash.
Aly Hefny, show manager for Automechanika Riyadh, Messe Frankfurt Middle East, said: “The caliber of speakers confirmed to take part at Automechanika Riyadh is a testament to the event’s growth and prominence within the regional automotive market.
“We have developed a show that goes beyond the norm by providing a platform that supports knowledge sharing and networking while promoting the opportunity to engage with key industry experts and hear the latest developments, trends and innovations changing the dynamics of the automotive sector.”
Aramco-backed S-Oil expects Q2 refining margins to remain steady then trend upward
SEOUL: South Korea’s S-Oil forecast on Friday that second-quarter refining margins will be steady, supported by regular maintenance in the region, then trend upward in tandem with higher demand as the summer season gets underway, according to Reuters.
Over the January-March period, the refiner said it operated the crude distillation units at its 669,000-barrel-per-day oil refinery in the southeastern city of Ulsan at 91.9 percent of capacity, compared with 94 percent in October-December.
S-Oil, whose main shareholder is Saudi Aramco, plans to shut its No. 1 crude distillation unit sometime this year for maintenance, the company said in an earnings presentation, without specifying the time.
Venture investments spark renaissance of Saudi innovation
RIYADH: In Saudi Arabia, a dynamic transformation is unfolding within the entrepreneurial landscape, powered by the robust growth of venture capital, which achieved an impressive 86 percent compound annual growth rate from 2019 to 2023.
This financial infusion has been a game-changer, propelling the Kingdom past the $1 billion mark in venture capital investment last year and igniting a wave of innovative thinking among Saudi entrepreneurs.
Simply put, VC is a category of private market investment and financing. A VC firm raises capital from investors, referred to as Limited Partners, and uses that capital to fund promising startups they have determined as likely to have high growth potential in an emerging category.
A vibrant scene
“The rise of venture capital in Saudi Arabia is fueling a vibrant entrepreneurial scene,” said the founder of Saudi-based VC firm Nama Ventures.
Offering a unique perspective on this financial phenomenon, Mohammed Al-Zubi shared his insights with Arab News about how venture capital is energizing the entrepreneurial scene in the Kingdom.
Al-Zubi described this financial influx as a vital nutrient, fostering a fertile ground for innovation and growth within the Kingdom.
Ripple effects
“Startups get crucial funding, expert guidance, and exit pathways, attracting and retaining ambitious talent. This creates a ripple effect — successful ventures generate high-quality jobs, attracting more skilled professionals and expertise,” Al-Zubi told Arab News.
However, he explained that challenges like limited seed funding and skill mismatch require more attention.
“By fostering a diverse ecosystem and addressing these gaps, Saudi Arabia can harness the power of VC to build a thriving and sustainable entrepreneurial powerhouse,” Al-Zubi added.
Echoing Al-Zubi’s remarks, Tariq bin Hendi, senior partner at Global Ventures, told Arab News that the Kingdom’s VC growth reflects its booming economy.
“Saudi Arabia is a large market with compelling macroeconomics and significant funding, which in turn is re-shaping the regional startup landscape,” Hendi said.
“Increased investment has helped start-ups to digitize, scale and accelerate their business operations — with many success stories: Tarabut, Zension, RedSea, Zid and Hakbah being among the most well-known,” Hendi added.
An innovative economy
Hendi emphasizes the crucial role of venture capital in the economic diversification of Saudi Arabia.
He notes that sectors like agritech, fintech, and cleantech are attracting significant investments, aligning with Saudi Arabia’s Vision 2030 goals.
“The increase in investment saw Saudi Arabia secure MENA’s (Middle East and North Africa) highest VC funding in 2023, which is also aligned with the country’s Vision 2030 objectives,” he stated
“Venture capital’s investment in nascent technologies and innovative ventures allows for early-stage experimentation and for new start-ups to respond to analogue-based problems previously difficult to navigate through digitalization,” Hendi added.
According to him, this synergy between venture capital and startups not only drives technological progress but also offers insights into the regulatory landscape, promoting economic diversity and innovation within the region.
He also highlights the broader impact of venture capital, noting how it enables local businesses to scale and address global challenges, creating job opportunities and demonstrating the Kingdom’s potential in leading sustainable startup growth.
Moreover, Hendi points out that venture capital stimulates international collaboration, attracting global investors and reducing investment risks, further bolstering Saudi Arabia’s position as a dynamic hub for economic activity and innovation.
Furthermore, in his article “Venture Capital Fundamentals: Why VC Is A Driving Force Of Innovation,” Mark Flickinger, general partner and chief operating officer at US-based BIP Ventures, describes VC as a critical factor for economic innovation.
“VC is a rewarding form of private market investment that gives innovators a real chance to transform their ideas into businesses. It connects founders and investors, driving progress and successful outcomes for both,” Flickinger said.
“And for everyone who is part of this virtuous cycle of funding, building, and scaling market-changing businesses, VC is a way to support the impact of the innovation economy – which is the economy today,” he added.
The challenge
Hendi underscores the significant transformation underway in Saudi Arabia, driven by the nation’s economic diversification and digitalization, which is fueling a burgeoning demand for talent and innovation.
With a young, tech-savvy population, the Kingdom is ripe for entrepreneurial ventures, evidenced by success stories like Tabby, he explained.
The growing ecosystem, supported by incubators and successful exits, showcases the country’s potential as a hotbed for technology-driven businesses catering to consumers, enterprises, and government sectors.
The challenge now, according to him, is to further enhance this vibrant environment, making Saudi Arabia even more appealing for entrepreneurs.
He advocates for continued deregulation and the creation of conditions that encourage innovation, enabling entrepreneurs to develop products and services that resonate with consumers and drive economic growth.
The goal is to not only maintain the momentum but to elevate Saudi Arabia’s status as a premier destination for starting and scaling innovative ventures.
How to utilize funding
As VC growth continues to expand, startups are pressured to find efficient ways to use their funding to boost the overall ecosystem.
Al-Zubi shares his advice stating: “Imagine your funding as rocket fuel – you have to blast off without burning it all at once, right?”
“To fly long and far, focus on essentials. Build a stellar team, fuel growth with customer love, and lay a strong financial groundwork,” Al-Zubi added.
“Track your rocket’s path with data, experiment with new maneuvers, and stay tuned to the space weather. Be open with your investors, listen to wise advisors, and don’t be afraid to adjust your trajectory if the wind changes. Remember, long-term success is a marathon, not a sprint. Spend smart, learn fast, and keep your eyes on the stars,” he added.
Furthermore, Hendi advocates for meticulous planning in resource allocation, emphasizing the importance of understanding the market, timing for product launches, and strategic deployment of capital.
According to Hendi, startups must have a clear grasp of their financial roadmap, with a detailed understanding of expected expenditures over set timelines, to ensure sustained growth and success in the evolving economic environment.
