Saudi Arabia’s investment management industry is on the cusp of massive and transformative change.
That was the key message to come out of the breakfast briefing event we hosted last week in Riyadh for investment management firms in Saudi Arabia, at which a number of industry experts gave their insights into developments in the kingdom.

 

MSCI inclusion

The briefing focused on two key developments that are set to reshape the market.

The first is Saudi Arabia’s prospective inclusion in the MSCI Emerging Markets Index. Inclusion would have an enormous positive impact, potentially bringing global investment inflows of around $38 billion from the passive funds that track that benchmark alone, according to State Street Global Advisors[1].

The move follows a range of initiatives that are being introduced to enhance the market accessibility – including improvements to the local Tadawul stock market’s efficiency and liquidity, and liberalisation of the rules for Qualified Foreign Investors.

MSCI could announce its decision on Saudi Arabia’s inclusion at its June 2018 meeting. Implementing the reclassification typically takes anywhere from three to five years though.

 

The big IPO

The second major topic of debate at the briefing was the planned float of a 5% stake in Saudi Aramco, the giant state-owned energy company.

Valuations have ranged widely, from as low as US$400 billion up to US$2 trillion. Much will obviously depend on the strength of the oil market at the time the listing goes ahead. Whatever Aramco’s valuation eventually proves to be, this will be the most eagerly anticipated, and potentially biggest, IPO in the world.

One of the key questions we discussed at the briefing was which market will win the listing. Tadawul, the local stock market, has requested an exclusive listing.

London, New York and Hong Kong have been mooted as options, with attendees at the briefing suggesting it will come down either to London or New York. Everyone agreed it will certainly be a complex decision. The hope is that decision will be made at some point in 2018. But timing will be vital if the project is to be a success.

 

A bright, but competitive future

If the Aramco listing goes well, the wave of market reforms proceed apace, and MSCI inclusion follows swiftly—all of which are key goals of the government’s Vision 2030 strategy—Saudi Arabia could be catapulted to the forefront of markets in the Middle East, and beyond, for global investors.

For the local investment managers that currently dominate the Saudi market, this offers huge opportunities. But, as our attendees pointed out, the market changes bring challenges too.

For instance, MSCI inclusion and the Aramco IPO will attract a new swathe of sophisticated foreign investors to the market. And they will come with equally sophisticated, and demanding, client servicing expectations. More onerous transparency and compliance requirements will also follow.

As the market opens and expands, more foreign asset managers will no doubt seek to get a foothold as well. Competition for assets will only intensify.

Investment firms will therefore need to differentiate themselves if they are to succeed in this changing landscape.

How?

The key to fostering long-term, trusted relationships with investors will be firms’ ability to deliver a high-quality and adaptable client experience. That means everything from offering attractive product ranges to maximizing portfolio performance, driving operational efficiencies, delivering comprehensive performance reporting, and providing responsive, digital client services.

Re-engineering processes and investing in modern technology capabilities will be crucial then if firms are to capture the emerging opportunities .

 

[1] Transforming Saudi Arabia’s Capital Markets, State Street Global Advisors, October 2017, https://www.ssga.com/investment-topics/general-investing/2017/transforming-saudi-arabias-capital-markets.pdf