Saudi stock market opens to foreign investors

Saudi Arabia is the biggest economy in the GCC, and the 19th largest economy in the world, with a nominal GDP of $753 billion

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Saudi Arabia on Monday opened its stock market to direct foreign investment, in a move to allow approved foreign investors to invest in the kingdom.

Foreign banks, brokerage houses, fund managers and insurance companies based outside the Gulf can now invest directly provided they meet the requirements.

In a notice issued Sunday, the exchange confirmed that "as of Monday... Qualified Foreign Investors can commence dealing in listed shares."

Infographic: Saudi stock market opens to foreigners
Infographic: Saudi stock market opens to foreigners

With a value of around $532 billion - the bourse is the Arab world's biggest stock market and one of its most diverse. Analysts expect the stock market opening will bring large volumes of capital into the country.

Clayton Kimpton, regional director of New Zealand Trade and Enterprise: India Middle East and Africa, and New Zealand Consul General to Dubai said: “The opening of the Tadawul to foreign investors affords significant opportunities for institutional investors and the retail fund industry.

“There will likely be significant demand to invest in the larger blue-chip Saudi companies (with their large cash reserves and activity in attractive markets such as oil and petrochemicals). Fund Managers of emerging market focused funds, can now benefit from gaining exposure to this dynamic market.”

Saudi Arabia had made the initial announcement on April 16 after the kingdom had said last July that it would permit direct foreign purchases of shares in the first half of 2015, as a way to expose companies to the market, and diversify the economy beyond oil and boost employment.

Commenting on the news today in an exclusive column for Al Arabiya News, the Australian Minister for Trade and Investment Andrew Robb said: “I wish to commend Saudi Arabia’s economic policy-makers and investors for this significant economic reform.

“It presents new opportunities to consolidate economic and financial ties between Australia and Saudi Arabia.

“By enhancing international linkages with foreign institutional investors, Saudi Arabia is able to increase the depth and liquidity of its stock market, and take advantage of a wide range of professional and technical skills available worldwide – including in Australia,” Robb added.

Qualified Foreign Investor

To be registered as a Qualified Foreign Investor (QFI) an overseas institution must have a five-year track record, with at least 18.75 billion riyals ($5 billion) under management.

Each QFI can hold no more than five percent of a stock, and QFIs and their clients together are limited to 20 percent of any one listed company.

Charles Robertson, global chief economist at Renaissance Capital in London, said there would be widespread interest in the open market.

“The interest is there - people are going to want to trade this,” Robertson told Al Arabiya News. “You’ve got a top-20 global economy - and it is a market that has suddenly opened up.”

But he warned that the take-up would be more a ‘trickle’ rather than a ‘gold rush’.

Robertson highlighted Saudi Arabia’s healthier economy, $750 billion in foreign currency reserves, lack of debt and continued spending as reasons for international interest in local shares.

He added: “Saudi [Arabia] has got cash to spend at a time when many other emerging markets can’t or won’t. Saudi Arabia can, and is spending. And that then supports the domestic growth story even when the oil price is in the 60s.”

Earlier this month, it was reported that shares in five listed Saudi companies will not be open to investment by foreigners when the market permits direct stock purchases by foreign institutions this month.

The five are Jabal Omar Development, Taiba Holding Co, Knowledge Economic City, National Shipping Co of Saudi Arabia (Bahri), and Makkah Construction & Development Co. There are about 170 companies listed on the exchange.

According to Agence France-Presse, analysts estimate foreign investment in the market, whose capitalization is more than $500 billion, could eventually reach $40-$50 billion but say the new rules are not about boosting investment.

Nahed Taher, CEO of Bahrain-based Gulf One Investment Bank, told Al Arabiya News back in April that with the predicted new wave of foreign investment would advance the market beyond short-term trades - and further stability.

“The international long term investment mentality I believe will reflect on the market and they [foreign investors] will not come just for quick trades, which is happening now,” said Taher, who is known as the first Saudi woman to head up a regional financial services firm.

“Also, having international money will mean a lot of diversity with the stock market and give it more depth, and maybe bring more good regulations and better financial indicators,” she added.

But Mutlaq al-Buqmi, editor in chief of Saudi business newspaper Maaal, told Al Arabiya News “it’s clear that foreign companies will not rush into trading in shares for several reasons.”

“They [foreign investors] need to acquaint themselves with the [Saudi] market, to know what is available, and to understand the regulations. This needs time,” al-Buqmi said.

“Their entry would be gradual with smaller sums,” he added.

But he said there would be an increase in foreign investments in the coming two years.

“There are predictions that the Saudi market will enter the MSCI emerging markets index,” he said.

Previously, foreigners based outside the GCC were only allowed to invest in the local market through equity swaps and exchange-traded funds.

Al-Buqmi said the real goal behind opening market was “to help the market mature through attracting international expertise and investors.”

He added: “Another goal is to enhance the role played by the institutions in the market.”

“The Saudi market until now suffered from being dominated by individuals. More than 90 percent of owners in the market were individuals therefore the decision of buying and selling was taken by an individual rather than institutions,” he explained.

He said Saudi Arabia had to open its market since it was the only member of G20 that was not open until now.

Saudi Arabia, the world’s leading oil exporter, is the biggest economy in the GCC, and the 19th largest economy in the world, with a nominal GDP of $753 billion in 2014.

(Additional reporting by Amanda Fisher and agencies)