Foreigners welcome opening of $500 bln Saudi stock market

Excitement is growing internationally as Saudi prepares to open its $500 billion-plus bourse.

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As Saudi Arabia’s $500 billion-plus bourse prepares to open its doors to foreigners in June, outside investors appear ready to finally get access to a market that rivals Brazil and Russia’s.

The move is likely to start the process of incorporating Saudi Arabia into major equity indices by the likes of MSCI, and this could attract as much as $24 billion in foreign capital, according to one estimate.

Foreigners will still not have unfettered access and definitive rules have yet to be published. And yet the prospect of market opening has already helped the Saudi stock index to outperform its Gulf peers over the past 12 months.

“Everyone wants to have a crack at Saudi Arabia,” said Nick Smythie, chief investment strategist at Emerging Global Advisors.

“It’s the biggest market in the Middle East and a substantial country which offers exposure not just to energy but also to infrastructure, financials and other sectors.”

While market capitalisations vary with stock prices and currency rates, the Saudi bourse is currently worth $528 billion compared with $600 billion for Brazil and $491 billion for Russia. It features the world’s largest chemicals producer, Saudi Basic Industries Corp, and Saudi Telecom Co, the Gulf’s biggest telecoms operator.

At the moment foreigners have access to the market only through swaps and exchange-traded funds, and the opening has been slower than many investors expected.

In August last year, the Capital Markets Authorities (CMA) published draft rules governing the opening of its bourse to so-called qualified foreign investors and started consultations.

These proposed foreign ownership be capped at 10 percent of the market’s total value and 20 percent of any particular stock. A single foreign investor could own no more than 5 percent of any listed company.

Final rules will be published on May 4 and the market will open by June 15, the CMA said on Thursday.

“We have been excited about Saudi Arabia for 10 years so we are not holding our breath — they will move at their own speed and requirement,” said Smythie.

The process could take a minimum of two years, said Pavlo Taranenko, vice president and senior researcher at MSCI, adding that the company could make announcements at any time.

“We have to make sure that market is sufficiently acceptable in terms of a number of parameters and that our index is investable and replicable,” said Taranenko.

MSCI launched a provisional Saudi index based on the draft rules. If this were used as the basis for incorporation into its emerging markets index, Saudi Arabia would have a 1.5-2 per cent weighting, meaning it would at least match Turkey’s current weighting and be bigger than Poland and Chile’s.

Weightings depend not only on overall market size, but also other factors including access for foreign investors.

Brazil currently has a 7.7 percent weighting and Russia 3.9 percent.

HSBC estimates that Saudi joining the MSCI’s or FTSE’s emerging index at a weighting of almost 2 percent could generate inflows of $4 billion from funds tracking such benchmarks.

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