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Saudi Arabia has long zealously guarded its domestic market from foreigners. Overseas companies are forced to enter into joint ventures with local merchants, and its stock market, the largest and most liquid in the Arab world, was off-limits to anyone outside the Gulf.
That could be about to change. After allowing access indirectly through swaps in August 2008, the Saudi Capital Markets Authority is expected to allow large international asset managers to invest directly in the $340bn market some time this year.
“They want to do it sooner rather than later,” says Wafiq Nsouli, head of Middle East equities at Credit Suisse. “The local and international financial industry is working with the authorities to find the best solution.”
Some bankers remain sceptical – with some justification. Many a promised reform has been widely hailed, only to disappear without a trace in Saudi Arabia’s tangled bureaucracy. For example, a long-promised and much-needed mortgage law has been on the verge of introduction for years.
Others point out that even when reforms have political backing, they often take longer to be implemented than many expect. “There’s change afoot, but I would be cautious about saying how soon it will happen,” says Paul Gamble, head of research at Jadwa Investment, a local asset manager.
Yet unlike many other reforms, which often perish due to vested interests or social conservatism – the mortgage law has foundered due to social conventions against repossessions – liberalising international access to the stock market is widely seen as positive.
It was a dramatic stock market crash in 2006 that first spurred a rethink of Saudi Arabia’s strict access rules.
Almost $500bn evaporated from the market’s capitalisation, infuriating thousands of ordinary Saudis who had ploughed their savings into the Tadawul. The crash was widely blamed on richer investors’ insider trading and market manipulation, and the lack of investor protection and regulation became a major political issue.
As a result, the CMA was given a strengthened mandate directly by King Abdullah to reform the market. It has since emerged as one of the more respected regulators in the Middle East, publicly punishing investors and companies that breach its rules with an enthusiasm unheard of in the Gulf.
Allowing international investors to access the market is another prong in the strategy to tame the Tadawul stock market’s often wild fluctuations. The authorities hope that the likes of Fidelity, BlackRock and other large, long-term investors will erode the dominance of local retail investors.
“They’ve had some big bull and bear markets in recent years, so they hope that international institutional investors will bring some more stability,” says Sam Vecht, a senior emerging markets fund manager at BlackRock, and a frequent visitor to Saudi Arabia.
Interesting companies in Saudi Arabia include Sabic, the state-controlled petrochemicals giant and Almarai, a promising dairy company.
But any increased international access is unlikely to cause a sharp, immediate inflow of foreign capital. The Tadawul All-Shares Index (Tasi) is trading at a 2012 price-to-earnings ratio of 10.9 times, slightly higher than the MSCI Emerging Markets gauge, and the forward-looking dividend yield is modestly lower.
The market is also hamstrung by the fact that it is not part of MSCI’s EM or Frontier Markets indices, against which most fund managers benchmark their performance, after a spat between the Tadawul and the index provider.
Yet fund managers are attracted by the bourse’s potential, breadth and liquidity. Unlike other Gulf markets, which are dominated by financial and real estate stocks, Saudi Arabia’s boasts a wide range of companies from many sectors. Daily trading volumes averaged $1.1bn last year, which makes it far more liquid than many other comparable exchanges.
Indeed, despite its recent lacklustre performance – the Tasi edged down 3 per cent last year – one Middle East strategist argues that the market could enter a bubble over the next two years, due to negative real interest rates, heavy government spending, and increased foreign participation.
Mr Nsouli says: “Saudi Arabia is the Middle East’s largest market, and a lot of investors are waiting eagerly for it to open up . . . Cash access could be a game changer.”