#MESF16

By Charles Gubert

The Macroeconomics:

 

Liberalisation:

Saudi Arabia is home to a number of untapped treasures. Its stock market capitalisation is bigger than Russia’s yet it has been a notoriously tough market to access for foreign investors. This is changing following reforms by the Capital Market Authority (CMA), Saudi Arabia’s financial services regulator. New rules introduced in 2015 permit large foreign investors to gain limited exposure to securities listed on the Tadawul. This liberalisation is a first step, and it is likely future reforms will be forthcoming. The rules only apply to large institutions with assets in excess of $5 billion and five years track record. It is hoped this will be eased to permit nimbler market participants to invest. Trading volumes since the rules’ inception have increased although there has not been a flood of net new capital. Most MESF delegates are confident trading volumes will only go north, particularly if the country is upgraded by MSCI to its Emerging Market Index from Frontier Market Index.

 

The Infrastructure:

GCC economies including Saudi Arabia, Oman, Kuwait and Bahrain are building market infrastructures such as central securities depositories (CSDs) as a means to attract foreign investors. Issues do, however, remain around highly manual corporate actions processes, pre-funding of trades and dual account structures in certain markets which is a continual headache for global custodians. The creation of an independent custody model in some markets negating the requirement for investors to use local brokers (whose balance sheet and risk management controls may be spurious) is a welcome boost, particularly for 40’ Act mutual funds in the United States and UCITS. There is a dilemma about building central counterparty clearing houses (CCPs) in GCC markets as there is minimal OTC derivatives trading activity. Proponents of building CCPs are adopting “The Field of Dreams” approach in that if you build it, they will come. As such, an OTC market will not be created in GCC markets without a CCP propping it up.

 

Fund Managers:

Domestic fund managers in the GCC have struggled to grow assets despite the sheer wealth in the region. Investors – such as high net worth individuals, sovereign wealth funds and family offices – are in abundance in the GCC. The lack of harmonised regulation in GCC markets makes distribution a challenging proposition for all fund managers. Different markets have wildly conflicting or confusing rules making pan-GCC distribution difficult. Some have called for more uniformity or even a fund passport similar to UCITS or the Alternative Investment Fund Managers Directive (AIFMD). The creation of a passport is, however, a long-distant prospect.