Interpreting Middle East Economic News and Analyzing Market Trends

Saudi Tadawul set to open up to foreign investors… in time!

The Middle East’s largest stock exchange, with a market capitalization of $387 billion according to Bloomberg, is planning on opening up to foreign investors.  Currently, foreigners are only allowed to invest through equity swaps and exchange-traded funds.  This is not ideal if for foreign institutional investors and international money managers.  The Saudi stock market, known as Tadawul, is dominated by local retail investors and some local institutional investors.  Bringing international investors into the Saudi market will greatly improve the market’s liquidity.  Some institutional investors have become optimistic lately that Tadawul will soon open up to them.  Here’s more from Bloomberg BusinessWeek:

Deutsche Bank AG, Europe’s biggest bank by assets, expects Saudi Arabia will soon allow foreigners to invest directly in local company shares, joining hedge fund Passport Capital LLC in predicting the market is set to open.

“I am convinced that the market will open up to foreign investors and part of me is very optimistic it’s going to be soon,” Jamal Alkishi, chief executive officer of Deutsche Securities Saudi Arabia, said in an interview in his Riyadh office Feb. 11. “I think the leadership sees the benefits of doing so, but they just want to make sure that every facet is examined and thoroughly understood before plunging into this.”

While this is good news for the market, foreign investors may not be very happy with the pace of opening up.  One thing Saudi Arabia is known for is moving cautiously.  We do not expect the Capital Market Authority (CMA), the Saudi market regulator, to move as quick as these investors expect.  And there’s another certainty, which will not bode well with foreign investors.  Here’s more from the article:

Overseas investors find Saudi petrochemicals, banking and telecommunication stocks attractive, according to Alkishi. The benchmark Saudi Tadawul All Share Index includes Saudi Basic Industries Corp., the world’s largest petrochemicals company, as well as Saudi Telecom Co., the Middle East’s largest phone company by revenue and market value.

“The place that we probably have by far the biggest weight relative to other people would be Saudi Arabia, Burbank said in an interview with Bloomberg Television. The nation is the fund’s “favorite emerging market,” he said. Passport has invested 17 percent of its capital in the bourse and sees a potential opening in the next year, he said.

You can read the full article here from Bloomberg BusinessWeek.

It is highly unlikely that the CMA will open up all sectors equally.  The sectors which foreign investors find attractive are the sectors the CMA will consider too important to let foreigners control.  Therefore, in these sectors expect limits on foreign ownership or expect the share swaps in these firms to remain in place.  The CMA may let foreigner participate in the rise or fall in the value of these shares, but they will not allow foreign shareholders to have a meaningful vote.  Hedge funds may not mind these stipulations, but longer-term money managers will prefer to have equal access to the market.  In time, Tadawul is expected to open up to foreign investors, but the key word here is in time.