Saudi Arabia’s decision to open its stock market to foreign institutions is being heralded as a “game changer”.

Under the new rules, qualified foreign investors (QFIs) with at least $5bn in assets under management and a five-year investment record will be able to buy up to 10 per cent of the shares of any listed Saudi company from next month.

“Saudi Arabia is the last large international capital market that remains closed to international investors. The opening is an exciting and important development,” says Arindam Das, head of securities services for the Middle East and north Africa at HSBC, the bank.

Mr Das adds that interest from clients has been “absolutely phenomenal”.

Saudi Arabia’s $576bn equity market is larger than those in Russia, Malaysia, Mexico and Indonesia. Trading volumes average around $2.4bn a day, making it more liquid than bourses in Abu Dhabi and Qatar.

Foreign investors have been able to access the local equity market via swaps (derivatives) and participatory notes since 2008. But foreign holdings remain extremely low, estimated at only 1.6 per cent of the value of the Saudi market.

Opening the market to QFIs is widely expected to stimulate inflows but the bulk of the buying interest is likely to come after Saudi Arabia’s inclusion in the main emerging markets indices, a change that is not expected before mid-2017.

Sébastien Hénin, head of asset management for The National Investor, the oldest fund manager in Abu Dhabi, describes Saudi Arabia’s decision as “a game changer” for the region.

He says there is “a wealth of under-researched investment opportunities” across the Gulf and expects more asset managers to develop a local presence to take advantage of these.


The size of Saudi Arabia’s equity market, which is larger than those in Russia, Malaysia, Mexico and Indonesia

HSBC Saudi Arabia, the custodian, says it has been assisting a range of clients with their applications for QFI status ahead of the June deadline.

But concerns exist over corporate governance standards. Slim Feriani, chief executive of Mena Capital, a Middle East-focused boutique, says the introduction of sophisticated foreign investors will gradually raise Saudi governance standards and lead to improvements in research and analysis of local companies.

Investors will also be positively surprised by the quality of Saudi regulators, he adds.


Average trading volumes per day, making it more liquid than bourses in Abu Dhabi and Qatar

Index providers are already moving to take advantage of the new rules. MSCI has created a range of indices aimed at capturing the investable opportunities in Saudi Arabia.

Jan Dehn, head of research at Ashmore, the emerging markets specialist that opened an office in Riyadh last year, says Saudi Arabia’s stock market is “not just about oil”, as not a single oil company is listed on the exchange. He describes Saudi petrochemical businesses as “exceptionally profitable”, given their access to low costs of production.

Ashmore also likes Saudi consumer-facing stocks as they trade on more attractive valuation multiples than their peers in Africa and Asia.


Percentage of the Saudi market owned by foreign investors

“The population has a very low average age, which points to sustained consumer demand for years to come,” says Mr Dehn.

This is echoed by Mr Henin who says that the opening of Saudi’s equity market will allow access to a favourite theme of emerging market investors — the increasing prosperity of a growing middle class.

Some have questioned whether the size and liquidity of Saudi’s equity market might make international investors scale back positions elsewhere in the Gulf and Middle East.

Mr Das acknowledges the concerns regarding the possible cannibalisation of assets from the UAE and Qatar. “But our view is that Saudi’s opening will have a positive impact, attracting many investors that were not looking at the region before,” he says.

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