Opening Up Saudi’s Bourse to Foreigners Will “Transform” Market

Saudi Arabia’s decision to open up its stock market, the Tadawul, to direct foreign investment has predictably received strong support from industry players.

Earlier this week, the Kingdom revealed the news in a one-line statement: “The cabinet authorised the Capital Market Authority – at a time it sees as appropriate – to allow foreign financial institutions to buy and sell stocks on the Saudi stock market, according to rules to be laid down by the CMA.”

The CMA later clarified that the move is likely to be implemented in the first half of 2015. The financial regulator said it plans to publish draft regulations for the move in August, and that there would then be a 90-day consultation period on the draft.

The opening up of the $530 billion stock market – the Arab world’s biggest bourse – boosted market sentiment, pushing the Tadawul to a fresh six-year closing high of 10,025 points on July 22, the day the news was announced.

“The opening of the Saudi Arabian equity market to foreign direct investment is a massive step forward for the region,” said Bassel Khatoun, head of MENA Equities at Franklin Templeton Investments.

“As the largest equity market in MENA, this will certainly put the region back on international investors’ radar and is likely to be transformative for regional equities.

“Saudi Arabia’s economic output, the size of its equity market and its demographics all vastly outstrip those in the remainder of the GCC countries. The market gives investors exposure to emerging market-type growth coupled with low-risk sovereign credit quality,” he said.

At present, the Tadawul is dominated by local retail investors, who account for over 90 per cent of volumes traded, while foreigners represent just over one per cent of the total. Foreign investors are only allowed to enter the Tadawul indirectly through mutual funds, corporate portfolios and swap arrangements – which allow an authorised local firm to trade on the market on behalf of a foreign client.

“The introduction of swap agreements came at a time in September 2008 when the Tadawul All Share Index had dropped 23 per cent since the beginning of the year and was described by many as a way to buoy the falling market in the short term with the injection of foreign cash,” explained Muhammad Anum Saleem, senior associate, D&P Dhabaan and Partners. 



“However, this time around the Saudi Arabian authorities are under no financial pressure. The Tadawul All Share Index has risen 46 per cent over the past two years and the stock market has seen greater liquidity and broader diversity of sectors.”

The decision to allow investors to own the shares directly and exercise voting rights will “spur the concept of activist shareholders” in the Kingdom, as opposed to a purely monetary participation, said Saleem.

“Companies will benefit by receiving management, accounting or legal guidance in keeping with the best practices practiced by their foreign shareholders. They can also take advantage of the latest technology, innovations in operational practices, and new financing tools that they might not otherwise be aware of.”

Salah Shamma, head of Investments – MENA Equities at Franklin Templeton Investments agrees: “The opening up of the market will likely bring with it a higher degree of institutionalisation that will add sophistication and maturity to the market in time.”

The move is also likely to cause an increase in initial public offerings (IPOs) in the medium term, leading to a deepening of the equity market in the region and improved sentiment from global investors, said Shamma.

Opening up the Kingdom’s market can also help it find a place on the MSCI Emerging Market index, following the recent inclusion of the UAE and Qatar.

“Liberalisation of the Saudi market may pave the way for future inclusion of the Saudi market in the MSCI Emerging Market index,” said Khatoun.

“Entry into the MSCI EM index would likely boost trading volumes, enhance market liquidity and potentially bring down transaction costs through improved scale effects,” he added.