Saudi Arabia’s Capital Market Authority (CMA) said in July that, Inshallah, it will open its $560 billion stock market to foreign financial institutions in the first half of next year. The announcement (which can be found here, but you may want to use Google Translate if your Arabic is as rusty as mine) spurred investors’ enthusiasm.
“This move by Saudi Arabia could be one of the most important catalysts for attracting significant flows of global institutional capital into this region,” said Zak Hydari, CEO of European Islamic Investment Bank-Rasmala, which manages more than $1.1 billion of assets in the Middle East.
“The size and liquidity of the Saudi market, coupled with the strong regulatory framework of the CMA, will be extremely appealing to global investors, who have been waiting a long time for such a development to take place. It could be a real game changer for the region’s investment and capital markets,” noted Hydari.
The stock market of Saudi Arabia, the world’s largest oil producer, stands out for its size and breadth. In comparison, Dubai and Qatar—which have been attracting attention in the past couple of years and have been promoted to emerging (from frontier) markets status on the MSCI index by Morgan Stanley—are much smaller. Dubai has a market cap of $101 billion; Qatar, $191 billion.
“To put that in context, [the Saudi market is] just under 10% [of] the size of the Nasdaq, half the size of South Africa’s stock exchange and more than twice the size of Israel’s market,” said Shane Leonard at Stockflare (www.stockflare.com), an investment blog. “Saudi stocks have the potential to become a major part of the MSCI Frontier Indexes, which could drive significant foreign interest in the Tadawul,” said Leonard. “Though the devil will be in the details, and retail investors shouldn’t expect to be able to buy Saudi shares directly, as there may be a requirement to be a large long-term investor.”
The Tadawul All Share Index has appreciated a healthy 20% since the beginning of the year, compared with a nearly 6% rise in the MSCI Emerging Markets Index and 7% in the MSCI GCC Countries Index.
Fund manager Ashmore, which had assets under management of $75 billion at the end of June, said that the Saudi Arabian market has been overlooked for too long, stressing its breadth. “Investing in Saudi equities can offer the same risk-reward benefits as Emerging Markets or developed markets—but with far less correlation. This means that adding allocation to Saudi equities within an equity strategy can lower overall risks without necessarily sacrificing returns,” Ashmore said in a report dated August 5.
Details on how the opening will take place will be available at the end of August. There will then be a 90-day period for comment on the rules, before they are implemented from January onward.
International investors, currently allowed to take positions in this market only with equity swaps, mutual funds and ETFs, will probably come in hordes.