Parking funds
The growing incidence of foreign participation on the MSM has started to have a bearing on the stock market. Mayank Singh reports

Foreign (non-GCC and non-Arab) shareholding on the Muscat Securities Market (MSM) has steadily grown from 6.7 per cent in 2005 to 10.1 per cent in 2006 to 11.98 per cent in 2007. Foreign shareholding on the MSM 30 index for this year stands at 17.44 per cent. According to the latest figures from MSM, the number of foreigners investing on the MSM stood at 9,515 in April 2008.

Though GCC participation on the MSM has been happening since 2003, investments by FIIs (foreign institutional investors) and foreign portfolio investors from Europe and the US is a relatively new trend. Says Hari Varma, vice president, research, Vision Securities, “The Galfar listing saw a lot of participation from FIIs and the trend has strengthened subsequently. Large global funds like Goldman Sachs and Franklin Templeton have started taking positions on the MSM.” Market sources state that Algebra Capital in the UAE, which manages three Franklin Templeton funds has been given the mandate to invest a certain part of these funds on the MSM.

Prime drivers
The 62 per cent and 14.1 per cent return given by the MSM in 2007 and 2006, respectively, has been instrumental in attracting foreign investors. Says V Gowribalan, vice president–asset management, Fincorp, “In 2006, when almost all the markets in the region were down, MSM was the only stock market that gave a good return. It followed this up in 2007 by becoming the best performing index in the world, forcing foreign investors to take note.”

Apart from Galfar, frontline stocks like Raysut Cement, Oman Cables Industry, Omantel and BankMuscat have attracted foreign portfolio investment lately.

The increasing liquidity and depth of shares is another factor giving a fillip to foreign portfolio investment. There are times when a large fund like Merrill Lynch or Goldman Sachs demand market capitalisation criteria before taking a call. “They may invest only in shares, which have a market capitalisation of US$100 million and above. Today, there are 10-15 companies on the MSM, which have a market capitalisation of US$100 million making the exchange more attractive,” says Varma.

If market capitalisation is a criteria for some, others may come in simply lured by the prospect of good returns. Says Gowribalan, “Most foreigners initially take speculative positions of one-and-a-half years as compared to value investors, who may remain invested for five to six years.” As a rule of thumb, foreign funds usually come into markets like Oman through another regional fund. On the regulatory side, a foreign fund needs a membership on the local bourse and a custodian to take care of its shares. Once these two are in place, a foreign player can start trading on the MSM.

Risk quotient
As foreign investments increase there are concerns about the sudden flight of capital. Most analysts, however, discount this possibility. “It is unlikely that this will happen. In January, when there was a global meltdown in the wake of the sub-prime crisis, the MSM fell by 8 per cent in one day. But the index recovered immediately the next day proving its resilience,” says Hari.
While this may not pose an immediate issue, there are chances that large foreign participation may create other problems. “As these are large players, they mop up a lot of free float of a share and these go into safe custody. If these get offloaded in one go, it can create a lot of volatility,” says Gowribalan. The introduction of hedging mechanisms like derivatives and a bond market will add to foreign participation on the MSM. With foreign portfolio investment bringing in large sums of fresh capital, such a trend is sure to add depth to the local stock market.