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Saudi Arabia Stock Exchange Transformation Offers Exciting Opportunities for Investors

 


Saudi Arabia’s stock exchange, the Saudi Exchange, is looking to consolidate its infrastructure with the creation of a holding company called Saudi Tadawul Group. The group includes four subsidiaries of the stock exchange itself, a securities depository (Edaa), a securities clearing center (Muqassa) and a newly created technology services company called Wamid. The strategic rationale for this conversion is to establish a synergistically integrated group of companies that will operate effectively within and across the organization.

Ultimately, the transformation aims to provide a more solid platform for the group’s IPO, slated for later this year, according to Saudi Tadawul Group President Sarah Al-Suhaimi and CEO Khalid Al-. Hussan.

The new structure will allow us to provide high-quality services across all of our business lines, increase our competitiveness and align our capital market with the rapidly growing emerging markets, Al-Hussan said. I am confident that the Saudi Tadawul Group and its subsidiaries will shape the next stage in terms of capital market development in Saudi Arabia, serving as a bridge between global investors and regional economies.

Four underlying companies

A closer look at these affiliates gives some context to Al-Hussans’ optimism. The Saudi Stock Exchange is the largest stock exchange in the region and with a market capitalization of approximately $ 2.5 trillion, one of the top 10 exchanges in the world. Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund owns the stock exchange, which traded $ 557 billion in shares in 2020. This figure represents a 137%1 increase from 2019. The 204-member Tadawul All Share Index is up about 32% in 2021. And despite global concerns about the Covid pandemic, the 2020 IPO market has remained strong, with four publicly traded companies raising a combined total of $ 1.45 billion.2. In addition to its size, the market benefits from high liquidity.

In a discussion of the strategy, Mohammed Al-Rumaih, former head of markets and now CEO of the Saudi stock exchange, said in an article on STG’s website that the stock exchange plans to shape the future of capital market development. in Saudi Arabia by introducing best-in-class financial instruments across all asset classes, backed by an innovative and strong market infrastructure. This is an ambitious goal and directly aligns with the main mission of the Kingdoms Vision 2030 plan to modernize its economy and reduce its dependence on oil.

The second pillar of the Saudi Tadawul group is Edaa, its securities depository company. An entity established in the Saudi capital market, Edaa connects issuers and investors while offering transparent and secure transactions. It has also a proven track record of connecting with global deposit centers while functioning as a trusted liquidity hub in the region.

Edaa facilitates the procedures necessary for the execution of transactions on the stock markets in accordance with international standards. Its capabilities allow trading of stocks, debt, bonds, sukuk, ETFs, REITs, mutual funds and other financial instruments traded on the Saudi Stock Exchange. Edaa is headed by Raed Ibrahim Al-Humaid, who brings 20 years of capital markets experience to this role. He has held several senior positions at the Saudi Arabia Capital Market Authority and most recently served as Deputy CMA for Market Institutions.

Muqassa is the Group’s securities clearinghouse company. Its vision and mission are both aimed at providing reliability and stability in the market. In order to realize these initiatives, Muqassa strives to improve market efficiency, reduce counterparty risk and help introduce new products and services. The establishment of Muqassa is one of the key initiatives of the Vision 2030 financial sector development program and, notably, the Saudi Capital Markets Authority authorized the clearinghouse as the first qualified central counterparty in the Kingdom. The company will retain its existing management team under the new group structure, including CEO Wael Abdullah Al-Hazzani.

The Innovation unit seeks to create value

Wamid is a technology services company dedicated to the Saudi Tadawul group. It was created to strengthen the Group’s infrastructure and leverage data and creativity to solve problems and drive economic growth. The newly formed entity is led by market veteran Mohammed Al Nory, who has nearly 15 years of experience in banking and capital markets.

Wamid provides solutions for the financial industry and beyond through innovative solutions and digitization. Its strategic objective is to provide access to data and improve the technological offer available to current and future stakeholders.

New opportunities for global investors

While the Group’s transformation and potential IPO are expected to create varied opportunities for investors, analysts are watching specific sectors and niches. As retail investors make up the bulk of trading on the Saudi Stock Exchange, institutional investors should view the IPO as a gamble on financial services growth targeting middle and upper income households in Saudi Arabia, said Arthur Budaghyan, Head of Emerging Markets. Strategist at BCA Research.

In addition, the entire Saudi economy should benefit if the transformation initiatives and the IPO improve corporate governance and transparency, Budaghyan adds. This would really increase Saudi Arabia’s position as a destination for global equity flows and many international investors will be ready to invest.

It is precisely on this type of enthusiasm that the Group relies in its stock market listing process. President Al-Suhaimi calls the initiative an important achievement on the trade path to transform Saudi Arabia’s economy. Comprehensive capital market reforms are not only prudent, but essential to ensure higher economic growth, she said. And achieve the nationwide goal of the successful implementation of Saudis Vision 2030.

Create an investor-friendly nation

Indeed, several initiatives of the Kingdoms Vision 2030 plan aim to consolidate Saudi Arabia’s place as a world market leader and advanced capital market within a few decades. The high-level goal of Vision 2030 is to have an attractive and globally open capital market, Al-Hussan says. To achieve this, making Saudi Arabia a more investor-friendly entity has been a national priority.

We have listened intently to international investors during our growth transformation, Al-Hassan said, adding that the Kingdom is implementing seismic changes based on feedback, not just minor adjustments. Tapped into regulatory frameworks, operational aspects, promotions and much more across all industries and areas to support Saudi Arabia’s positioning as an attractive destination for investors.

Many smaller but equally important changes including the establishment of a dedicated team that caters to international investors, asset managers, index providers and brokers, in addition to managing the efforts of international awareness, make Saudi Arabia more attractive to global investors. The Exchange also plans to expand its team to operate in international locations, starting in London later this year.

Such efforts are already producing results, Al-Hussan says. We have seen a sharp increase in the number of qualified foreign investors in Saudi Arabia, he says, noting that this group has reached over 2,500 investors in early July 2021 and continues to grow every week. The cash flow to the Saudi capital market from foreign institutional investors who have recently joined the market is huge, he adds. Since the implementation of the Tadawuls Qualified Foreign Investor program in June 2015, their ownership reached a total of $ 60.9 billion by the end of August 2021. Most of the investment currently comes from the UK, Europe and the United States, and efforts to increase Asian participation are underway.

Nationally, Saudi Arabia’s small and medium enterprises will also benefit from efforts to simplify and facilitate the experience of doing business in the Kingdom. The Saudi government has launched numerous initiatives to enable and empower SMEs, including changing the regulation of finance and other critical areas, according to Al-Suhaimi. I think this will give SMEs a boost, she says.

Historic growth paves the way for 2030 goals

Saudi Tadawul Group is in the top 10 markets in the world today, and by 2030, I hope we can move up to the top five, Al-Suhaimi said. If this climb sounds ambitious, consider the growth of investment banking in the last few years alone. Investment banking hardly existed in Saudi Arabia in 2014, she notes. This is the year Al-Suhaimi takes the helm of SNB Capital (formerly NCB Capital), the largest asset manager in the Middle East. It was a very successful trip for us, she said. Going forward, the Saudi Tadawul Group’s transformation and restructuring efforts aim to empower the entire Saudi capital market to achieve a similar scale of growth over the coming decade.

Today, we feel much stronger and more robust in doing business and providing services in the investment world, Al-Hussan said. We believe this is the start of our new chapter and that Saudi Arabia’s capital market will be a very tough competitor in the region and globally.

Learn more about the Saudi Stock Exchange and the Saudi Tadawul Group.


1 Source: Bloomberg, April 2021
https://www.bloomberg.com/news/articles/2021-04-07/saudi-stock-exchange-revamps-corporate-structure-targeting-ipo

2 Source: Arab News, June 2021
https://www.arabnews.com/node/1877771/business-economy

Sources

1/ https://Google.com/

2/ https://www.institutionalinvestor.com/article/b1thz2xggr2lqj/The-Transformation-of-Saudi-Arabia-s-Stock-Exchange-Offers-Compelling-Opportunities-for-Investors

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