Nigeria faces competition as Saudi opens bourse to foreign investors

Foreign investors may reduce their exposure to frontier/emerging markets like Nigeria in favour of Saudi Arabia’s $530 billion stock market which takes off in the first half (H1) of 2015.

After several years of discussions, the Saudi Arabian government has given approval to its Capital Market Authority to allow foreign investors to buy and sell shares in their local market.

Though doubtful of its immediate impact on Nigeria’s equities space, analysts believe that this positive coming from the best macro country in the Gulf Cooperation Council (GCC) may mean less exposure to competing frontier/emerging region markets like Nigeria.

Saudi Arabia’s GDP is $745 billion, according to the International Monetary Fund’s (IMF) April World Economic Outlook (WEO), well above that of the largest frontier market, Nigeria, at $510 billion.

“This is long awaited and is likely to see a surge of foreign inflows into the Saudi market, particularly if/when it joins an MSCI index. It is rival for money that might otherwise be invested in Russia, which is one reason RenCap is opening up in MENA in 2014. Our MENA team is very excited,” said Charlie Robertson, global chief economist, Renaissance Capital (RenCap).

“Based on our strategist, Daniel Salter’s estimates, if Saudi was to join the Frontier universe, it would become 64 percent of the index. If it joined the MSCI EM index, it would be 4.4 percent, similar to Russia. It may well remain an off-index market (example like Georgia),” said Robertson.

He further said there were 78 stocks that traded over $10 million a day in their report and Saudi Arabia had 57 of them. “Daily trading volume, based on 3-moving average data to April 2014, was $2 billion, against $26 million for Nigeria in 2013. Retail investors make up about 92 percent of daily volume – foreigners own no more than 5 percent,” he said.

The implication is that if the Nigerian Stock Exchange (NSE) fails to rev up its efforts at attracting quality companies to list, the take-off of this market could pose grave rivalry for foreign investors’ money into its equities.

“As Saudi Arabia opens up its stock market (to a certain level) to international investors in the first half of 2015 to trade equities in the Tadawul All Share Index, we estimate over $40 billion of funds inflow into the region’s biggest stock market,” said Kayode Omosebi, analyst at UBA Capital.

“The likely implication of this is portfolio reclassification by fund managers with more exposure to Saudi’s stock market and a big possibility that Saudi will be included in MSCI index, as being the biggest stock market outside China. Saudi Arabia’s economy is relatively stable and strong, with less risks, compared to some emerging and frontier markets. We therefore expect some level of funds in other emerging/frontier markets moving to this region, with Nigeria being a possible victim; as political and security risk of the country heightens, foreign investors will begin to price this risk into their business exposure to Nigeria, and the Nigerian equities market will be hit,” he said.

Omosebi added that as the Saudi Arabian authorities intend to use a tight regulatory framework to control inflows and prevent speculative activities, they do not a see a major shock of this reform to other emerging/frontier markets in the near term.

But there are already indications that some fund managers plan to double or triple their investment in Saudi Arabia if authorities allow direct foreign access.

Rasaq Abiola, analyst at Associated Discount House Limited, said, “I do not think this will affect the Nigerian market, as Saudi Arabia falls within the GCC region with less correlation with the Nigerian market.”

He, however, admitted that foreign investors may increase allocation to the Gulf Cooperation Council region on the back of the reform, which may mean less exposure to competing frontier/emerging region markets like Nigeria.

“I do think that the probable shift will be negligible (if any), given that foreign investors with interest in Saudi Arabia have always had exposure to the Tadawul market through Linked Notes (even so such derivatives limits capital flows to Saudi corporates and overall liquidity of the Exchange),” Abiola said.

“Given the fundamentals of the Nigerian economy and markets vis-a-vis Saudi Arabia, I think foreign investors will remain upbeat on Nigeria, thus limiting the probable impact of increased openness of the Tadawul market on the NSE. Perhaps markets like the Johannesburg Stock Exchange, and more likely the Egyptian Stock Exchange (EGX, which has more similarities to the Tadawul market in composition and rules), may be more vulnerable to likely liquidity switch on the back of the reform on the Saudi Stock Exchange,” he added.

He further said the Tadawul market valued at about $337 billion, with relatively strong liquidity, almost 4x the NSE market capitalisation, reinforces “our view that flows to the NSE have less bearing for the Tadawul Exchange and vice versa, especially as both markets fall in different regions, thus offering foreign investors alternative geographical diversification benefits”.

Iheanyi Nwachukwu