On 15 June foreigners were given direct access to the Saudi stock market for the first time, allowing them to buy and sell shares in listed Saudi companies.
Although hopes that the Gulf’s largest stock market would attract a wave of foreign capital were short-lived after a subdued response from foreign investors, there is room for significant optimism in the longer term.
The influx of foreign investment hoped for was largely absent because of tough restrictions on foreign equity ownership. However it is likely that the bourse will see a gradual easing of these restrictions, allowing more investors to tap into Saudi companies with strong long-term growth potential.
The potential for investors is clear—the Saudi stock market’s (or Tadawul) market capitalisation is around $580 billion, making it one of the largest emerging market bourses. The Tadawul is home to some of the largest and most profitable companies in the Middle East. Allowing foreigners voting rights is also expected to strengthen corporate governance.
However currently all Qualified Foreign Investors can own no more than 5% of the shares of any company. Only financial institutions with $5 billion or more of assets under management which have been in operation for longer than five years are eligible to invest in the stock market. This shuts out a range of smaller firms.
These rules are however unlikely to be long-term hindrances to greater foreign involvement. As restrictions are rolled back opportunities will open up. Furthermore, the Tadawul will be boosted once it is allowed to join the MSCI’s frontier- or emerging-markets indices.
Meanwhile, the inclusion of foreign investors could also have a positive impact on Saudi companies hoping to raise financing in the kingdom. The market regulator, the Capital Markets Authority, indicated last month that foreigners would be allowed to participate in initial public offerings (IPOs).
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