Interview: Rajiv Shukla
In what ways will futures and exchange-traded funds (ETFs) help broaden investors’ exposure?
RAJIV SHUKLA: ETFs are an increasingly popular way of investing globally. Assets under management (AUM) for US-based ETFs passed $4trn in 2019. The growth of ETFs has been much more pronounced in recent years, with net flows of over $1trn since 2018 as compared to the eight years it took for the AUM to reach $1trn in assets. In Saudi Arabia ETFs have also been slow to garner attention, with total AUM currently standing at only $10.5m, with the first ETF being launched in early 2010. Global ETFs focused on Saudi Arabia have fared slightly better, with current AUM of $1.5bn following the first ETF launch in early 2018. With Saudi Arabia having been included in emerging market indices of MSCI and FTSE, ETFs are likely to become increasingly important, especially for foreign investors looking to get exposure in the Saudi market.
Derivative instruments such as futures are extremely versatile securities that can be used in a variety of different ways. These instruments can be used to express investment views at lower upfront costs, to hedge investment positions, reduce the risk of holding an asset, as well as to determine the price of an underlying asset. The availability of futures will allow investors, both domestic and foreign, to explore strategies that would not otherwise be possible, making the market more efficient.
How do Saudi US dollar-denominated bonds and the sukuk (Islamic bonds) market compare to global sovereign bond market prices?
SHUKLA: Saudi US dollar bonds and sukuk perform quite well relative to emerging market sovereign issuers. The Saudi US dollar curve, however, has tightened significantly since the beginning of 2019, reducing the spread between Saudi Arabia and its higher-rated regional counterparts. Outside of the region Saudi US dollar bonds stack up well against other emerging market issuers. Saudi Arabia trades tighter than many other emerging market comparables such as Mexico, Malaysia and Indonesia due to its superior credit profile. Saudi Arabia is seen by investors as the best value A-rated issuer in emerging markets due to its strong credit profile and attractive yields. The Kingdom is well positioned as an issuer in the global sovereign bond market, with investors very well versed with the Saudi credit story and comfortable with Saudi risk. Since October 2016 Saudi Arabia has become a major player among emerging bond market, issuing $70.3bn of bonds and sukuk, by far the most by any emerging market issuer (in US dollars). Investors like Saudi credit, as Saudi Arabia is a transparent issuer in the region relative to comparables and provides excellent value relative to its credit profile.
To what extent does the Kingdom’s secondary market encourage all types of private sector players to participate in the capital market?
SHUKLA: Saudi Arabia is by far the largest and most liquid market in the GCC, with market capitalisation that is approximately four times the market capitalisation of all other GCC countries combined, at $2.4trn as of end-2019, and liquidity that is the highest in the GCC, with an average daily traded value of roughly $880m for the year 2019.
The Financial Sector Development Programme, along with Tadawul and the Capital Markets Authority, are promoting private sector participation in the capital markets by increasing its liquidity and depth, as well as incentivising the private sector to list. With regard to supporting the deepening of the capital markets, the 2017 launch of Nomu – a secondary, parallel market with less stringent requirements – supported the listing of small and medium-sized enterprises while also introducing new measures that will facilitate the entry of foreign issuers as well as the planned launching of a derivatives market.
